More annual reports from American Financial Group:
2023 Report2019
ANNUAL REPORT
Contents
11. Directors’ Report
35. Auditor’s Independence Declaration
36. 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
90. Directors’ Declaration
91.
Independent Audit Report
96. Shareholder Information
99. Corporate Directory
2
2019 ANNUAL REPORT
2019 ANNUAL REPORT
3
1 in 11
Australian residential mortgages are arranged by an AFG broker
30.2M¹
33.3M
33.0M
26.2M
28.1M
28.6M
FY17
FY18
FY19
FY17
FY18
FY19
AFG reported NPAT has decreased to
33.0M FY19 from 33.3M FY18 ▼
¹ FY17 NPAT is normalised due to the recognition
of AFG Home loans book.
Lender Market Share
Non Majors
42%
58%
Majors
AFG underlying NPAT has increased to
28.6M FY19 from 28.1M FY18 ▲
42% of flows to non-majors FY19
▲ up from 41% FY18
AFG Broker numbers grew to
over 2,975 nationally
Increased from 2,950 at FY18 ▲
4,000+
individual products
55+
lenders
203
employees
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2019 ANNUAL REPORT
FY18
FY19
510M
FY18
1.37B
1.06B
FY19
2.06B
AFGS Settlements has increased to
1.06B FY19 from 510M FY18 ▲
AFGS Loan Book has increased to
2.06B FY19 from 1.37B FY18 ▲
59%
FY17¹
FY18
FY19
59% of Australian mortgages
are written through a broker2
² Mortgage and Finance Association of Australia (MFAA)
5.9
5.7
4.7
4.7
5.5
4.2
FY17
FY18
FY19
Dividends (cents per share)
Interim
Final
Up to
10,000
customers
per month
31%
33%
33%
AFG reported return on equity
remains at 33%
¹ FY17 NPAT is normalised due to the recognition
of AFG Home Loans book.
FY19
Residential Settlements of
$31.3B
FY19
Commercial Settlements of
$2.33B
Trail book now up
6.9% to $155.45B ▲
Asset Finance up 3%
to $553M ▲
2019 ANNUAL REPORT
5
Chairman’s
Message
Tony Gill
Chairman
In presenting our results for the 2019 financial year I am pleased to report the company has emerged from
a difficult year as a stronger and more sustainable business that continues to generate solid returns to
shareholders, and positive outcomes for Australian borrowers.
While there is no doubt the past year was a
challenging period for both AFG and the entire
financial services sector, the volatile lending
landscape has in fact reinforced the company’s
value proposition, created growth opportunities and
ensured mortgage brokers remain the dominant
channel for home loans in Australia, rising to nearly
60% of all mortgages written by the close of the
financial year.
Despite significant pressures on the wider financial
services industry AFG has remained focused,
delivering a strong financial performance and profit
result as our diversification strategy gains momentum.
We finished the financial year in great shape and
remain optimistic about the future of our industry.
Healthy growth in our diversified earning streams
including AFG Securities, AFG Home Loans, AFG
Business and our strategic investment in Thinktank
generated significant contributions, complementing
the core residential and commercial aggregation
businesses.
AFG’s strong cash flows and balance sheet provides
a financial bedrock for the future of the business, that
provides management with the flexibility to pursue
opportunities.
AFG’s proposed merger with mortgage aggregator
Connective, announced in August 2019 after the
close of the financial year, demonstrates the Board’s
ambitions in growing our business. The prospect of
complementing our existing business with the cultural
fit and shared customer-focused philosophy of
Connective represents a compelling opportunity for
AFG shareholders.
The transaction remains subject to a number
of conditions, including legal, regulatory and
shareholder approvals, but on completion the group
would represent a significant mortgage distribution
network, with more than 6,575 brokers and residential
settlements of $70 billion a year. The merged
business will continue to drive competition and
choice in Australia’s $1.8 trillion home loan market.
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2019 ANNUAL REPORT
We anticipate the transaction will complete in the
second half of the 2020 financial year and remain
committed to keeping shareholders updated as the
transaction progresses.
The AFG Board is committed to positive customer
outcomes as the best approach to enhancing long
term shareholders returns, per share fully franked.
Total dividends for FY19 were a healthy 10.6 cents per
share, representing a dividend yield of 6.8 per cent
(based on share price at 30 June 2019).
AFG is gaining increasing recognition from investors
about the benefits of its sector-leading capabilities.
As both a mortgage originator and distributor, AFG
has a deep insight into mortgage behaviours and
trends. This expertise helps frame our credit policies
and lending practices, underpinning our diversified
earnings business model.
In any discussion of financial year 2019, the Banking
Royal Commission looms large. The sector has been
the subject of intense scrutiny from Government,
regulators, the media, and the community generally,
but as we look ahead the company is well positioned,
having experienced the scrutiny and proved its
resilience.
AFG is rightly acknowledged as an industry leader
and is respected in Canberra. Our industry has now
been handed an opportunity to continue to influence
future policy direction and we will continue to step up
our industry and regulatory engagement to ensure
our message is heard for the benefit of borrowers
and brokers.
Finally, I offer my gratitude to the entire AFG team
and every one of our brokers who have displayed
immense dedication and commitment in delivering
for customers, shareholders and employees over
the past 12 months. Our financial results and the
underlying strength of the business reflect their hard
work and expertise.
We will continue to ensure AFG remains the partner
of choice for lenders and broking groups for the
benefit of all Australian borrowers. We have an
exciting period ahead and will continue to offer
our brokers a truly world-class and market-leading
experience.
continue to provide the sound leadership required
to support great customer outcomes, continued
shareholder returns, market leadership and growth
in the years ahead.
I would like to thank my fellow directors for
their significant contributions as we continue to
strengthen AFG. With governance and compliance an
increasingly scrutinised element of corporate activity,
I can assure shareholders and other stakeholders
our board is painstakingly scrupulous in going above
and beyond in ensuring AFG is more than meeting
its responsibilities. I am confident your board will
Tony Gill
Chairman
2019 ANNUAL REPORT
7
Chief Executive
Officer’s Message
David Bailey
CEO
It is my pleasure to report the delivery of a strong financial result for the past year. Despite a backdrop of
regulatory uncertainty and ongoing regulator intervention into the mortgage market AFG has demonstrated real
resilience and cemented our track record of delivering sustainable quality earnings.
Actions we have been undertaking since 2016 to
strengthen our business and diversify our earnings
streams have AFG well positioned to meet the
challenges facing the sector and capitalise on any
emerging opportunities.
Despite a credit downturn, slowing property market
and regulatory uncertainty taking place under the
shadow of the Banking Royal Commission, AFG
reported an annual underlying profit of $28.56 million
up 1.8 per cent for the 12 months to 30 June 2019.
The 2019 financial year, which marks my third
year as CEO, represents a defining moment in the
development of AFG.
For the first time, more than half of AFG’s gross
margin was generated from outside our mortgage
broking aggregation business. A weaker domestic
credit market did not stop our diversified earnings
streams continuing to record solid growth over the
past year.
Our core residential business continues to perform
well despite enduring a tumultuous past 12 months.
The tough lending environment contributed to
residential settlements being down 11.5 per cent
compared to last year. Our AFG Home Loans
business also felt the impact, settlements were
$3.15 billion, down 2.2 per cent. AFG Home Loans
now services more than 23,000 retail customers.
The broker channel entrenched the importance of
the role it plays in delivering competition to Australia’s
home loan market. The flow of business to non-major
lenders increased to a record 42 per cent during the
year, as AFG’s national distribution network of almost
3000 active brokers extended its reach across the
nation through growth in regional areas.
AFG’s combined residential and commercial trail book
was $155.45 billion, up 6.9 per cent.
Our strategic foray into the small to medium
enterprise market - through both the AFG Business
platform and our investment in Thinktank - is gaining
momentum.
Thinktank has affirmed its status as a competitive
non-major commercial property lender, building its
reputation in the sub-$3 million market. It now boasts
a loan book of $1.09 billion.
Through Thinktank, we are delivering competition
to an SME marketplace that has demonstrated its
appetite for greater choice and lending flexibility.
With Thinktank’s lending expertise combined with our
distribution network and securitisation capability, we
are already generating healthy returns. Our 30.4 per
cent (fully diluted) investment in Thinktank contributed
$1.5 million towards net profit before tax in FY19.
After a soft launch into the market in FY18, settlements
on the AFG Business platform recorded growth
in its first full year of operation, driven by product
improvements and a prudent approach to our
expanding product range. We recorded settlements
of $129.7 million, up 30.9 per cent on the previous six
months. Our loan book, originated in full by brokers
and underpinned by our market knowledge, expertise
and relationships remains an outstanding performer.
The AFG Business platform allows brokers to lodge
applications in a common format across all lenders,
backed up by a simple accreditation process and
embedded training and sales tools. Commercial
mortgages remain the staple offering, with 22 lenders
now on the platform.
It was particularly pleasing to see the excellent growth
in our own Residential Mortgage-Backed Securities
(RMBS) program which passed the $2 billion under
management milestone on the back of growth of 50
per cent over the previous year.
During the year we successfully priced our $500
million AFG 2019-1 Trust RMBS issue. After receiving
strong oversubscription, the deal was upsized from
$350 million. It was our largest RMBS transaction
since the initial 2013 deal, and the first time the deal
8
2019 ANNUAL REPORT
has been upsized, and received increased investor
participation.
Both domestic and international institutional investors
increasingly recognising that AFG’s value proposition
as an issuer in the Australian RMBS market is unique.
the day-to-day efficiency of our brokers. Over the
next two years we have earmarked further investment
in our technology platform as we believe innovative
technology remains a critical area of focus as we
transform the way AFG and our brokers work.
We are very confident growth from both AFG
Securities and AFG Commercial will provide
additional contributions to earnings over the coming
12 months. Reflecting the increasing importance of
AFG Securities as an earnings contributor, we have
established a new role on the executive team to lead
the business.
A prime indicator of how we have built a stronger
company in the past 12 months is our Return on
Equity, which is one of the financial highlights from
the past year. Our ROE was 33 per cent in FY19 in line
with prior year.
Despite our strong underlying business, we are all
continuing to work hard to implement fundamental
changes, making the necessary investments to
improve AFG for the inevitable challenges facing the
sector as we strive to deliver on our commitment
to shareholders, customers, brokers, partners and
employees.
While we have made great progress in recent
years, much work remains as we position ourselves
to enhance our value proposition, optimise our
operations and build our market share. It is the
responsibility of management to ensure AFG is
resilient, efficient and positioned for the future.
With these goals in mind, we will continue to explore
ways to improve customer experiences and improve
It promises to be an exciting period ahead and
represents a real step-change in the way AFG and
our brokers do business. There is one goal in mind,
the improved outcomes for customers.
I described FY19 as a defining year for AFG, which
is to take nothing away from the next 12 months. In
FY20, we will be working hard to finalise the merger
with Connective Group announced in August 2019.
Whilst we remain confident about the value AFG
stands to generate from our existing ongoing growth
plans, we felt successfully participating in the sale
process undertaken by Connective absolutely aligned
to our strategy.
The proposed transaction offers exposure to an
alternative mortgage broker aggregation model
with strong ongoing brand recognition whilst also
providing access to a broader distribution channel.
On a pro forma basis, the combined business would
have FY19 reported NPAT of $44 million.
Under the plan, Connective brokers will have access
to AFG’s securitisation program and the opportunity
to grow scale in both asset finance and commercial
lending through the combined network.
Expanded distribution channels and broader
diversification of products provide greater choice for
both brokers and consumers.
2019 ANNUAL REPORT
9
Importantly, the businesses are highly complementary
and up to $4 million in run-rate cost synergies are
expected to be realised over a four-year period post
completion. It’s an undeniable opportunity for AFG
shareholders to benefit from the diversification and
flexibility of the merged group.
We will keep shareholders informed as we work
through the transaction with Connective and progress
the approval processes.
In his message, our Chairman has referenced the
Banking Royal Commission and its significant impact
on AFG, the mortgage broking sector and Australia’s
finance industry more generally but it is important
for me to touch on management’s approach to the
issue. AFG staff and our brokers played a vital role in
our proactive engagement strategy to explain how a
customer-first mantra dominates our sector.
Coming out of the federal election, there is less
ambiguity and we will be using the three-year
review process overseen by ASIC and the Council
of Financial Regulators to educate Australians about
the role we, and our brokers, play in the home
loan market and how effective we are in adding to
competition, choice and lower borrowing costs.
industry and regulatory engagement required in
today’s post-Royal Commission environment.
Looking ahead, AFG’s customer-first approach
and agile operating model presents enormous
opportunities for our business and we enter financial
year 2020 confident of another successful year. Our
business is primed for ongoing strong cash flow
generation, leaving AFG set up for sustained growth.
I would like to thank our brokers across Australia
that form the backbone of our national distribution
network and acknowledge the commitment and
energy of all AFG employees for their contributions
in FY19.
We have built up an engaged team with a strong
culture that prioritises the customer and our
long-term strategy. We are well positioned to deliver
in the coming year.
With this process in mind, we have reshaped our
executive team in preparation for the heightened
David Bailey
CEO
10
2019 ANNUAL REPORT
Directors’ Report
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 2019 and the auditor’s report thereon.
Directors
The Directors and Company Secretary of the
Company at any time during or since the end of
the financial year are:
Anthony (Tony) Gill
(Non-Executive Chairman)
Mr Gill has been the Chairman of the Board since
2008. Mr Gill has extensive experience across
Australia’s finance industry, mostly with Macquarie
Bank. Mr Gill is a Director of First Mortgage
Services and First American Title Insurance. He
sits on the Board of the Butterfly Foundation for
Eating Disorders, the Pinchgut Opera and is also
a member of ASIC’s External Advisory Panel. Mr
Gill is a former member of the Board of Genworth
Mortgage Insurance Limited (GMA.AX). Mr Gill
holds a Bachelor of Commerce and is a Chartered
Accountant (retired).
Brett McKeon
(Executive Director) Resigned 1 July 2019
(Non-Executive Director) Appointed 1 July 2019
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.
Malcolm Watkins
(Executive Director)
Founding Director Mr Watkins plays a key role in
the strategic direction of AFG. Across the past 25
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.
2019 ANNUAL REPORT
11
Directors’ Report (Continued)
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
family business interests across a portfolio of
equities, agriculture and property. 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 commercial 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 CEO of Good Samaritan Industries.
Prior to this, she has held senior roles with Silver
Chain, HBF Health Fund, nib health funds, MBF
and was an Associate Partner at global consulting
firm 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
(cid:0)(cid:1)
2019 ANNUAL REPORT
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 and governance
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
Malcolm Watkins
19,602,689
Kevin Matthews
15,079,516
Craig Carter
Melanie Kiely
Jane Muirsmith
500,000
67,164
65,000
-
41,374
52,003
-
-
-
-
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.
Directors’ Report (Continued)
Dividends
Total dividends paid during the financial year ended 30 June 2019 were $22,340k (2018: $47,690k),
which included:
⊲ A final fully franked ordinary dividend of $12,244k (5.7 cents per fully paid share) was declared out of
profits of the Company for 2018 and paid on 27 September 2018.
⊲ 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 2019 and paid on 28 March 2019.
A final fully franked ordinary dividend of $12,755k (5.9 cents per fully paid share) has been declared out of
profits of the Company for the financial year ended 30 June 2019 and is to be paid on 3 October 2019.
Principal Activities
The Group’s principal activities in the course of the financial year continued to be:
⊲ Mortgage origination and management of home loans and commercial loans; and
⊲ Distribution of own branded home loan products, funded via traditional mortgage management
products, white label and its established RMBS programme.
2019 ANNUAL REPORT
(cid:2)(cid:3)
Directors’ Report (Continued)
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 2019 the Group recorded a net profit after tax of $33,029k, 0.8% below FY18
($33,309k). Underlying results from continuing operations, excluding changes in value of future trailing
commissions was up 1.8% to $28,565k (30 June 2018: $28,052k). The change in trailing commissions net
receivable for 30 June 2019 includes the growth of the loan book as well as longer loan lives as a result of
tightening credit conditions. Revenue from continuing operations was up 6.6% to $659,999k (30 June 2018:
$619,271k) driven by growth in AFG Securities and longer loan lives.
The result was underpinned by the following:
⊲ AFG Securities loan book growing by 50% to $2.06B (2018: $1.37B) and 108% ($549.8M) increase in
settlement volumes in the securitisation programme to $1.06B (2018: $509.8M);
⊲ Offset by higher BBSW being absorbed by the business for a period to focus on AFG Securities loan
book growth;
⊲
Increased residential trail book of 7% to $147.4B (2018: $137.8B) and longer loan lives;
⊲ Decreased residential settlements of 11% to $31.3B (2018: $35.3B); and
⊲ Decreased commercial settlements of 11% to $2.33B (2018: $2.62B).
Net cash flows from operating activities $27,831k (2018: $32,486k) was in line with underlying profit whereas
FY18 included the positive impact of working capital movement. The increased AFGS loan book provides
a strong platform to generate increased ongoing cashflow and earnings in future years. AFG continues to
generate strong cash flows and maintains a capital light business model. This enables AFG to continue to invest
to generate future growth.
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
Underlying results from continuing operations
Change in the carrying value of trailing
commissions receivable and payable
30 June 2019
30 June 2018
Operating
income
548,235
94,604
Profit
after tax
28,565
4,464
Operating
income
Profit
after tax
533,053
70,343
28,052
5,257
Total result from continuing operations
642,839
33,029
603,396
33,309
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.
14
2019 ANNUAL REPORT
Directors’ Report (Continued)
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.
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.
Subsequent Events
On 12 August 2019, the Group announced it had
entered into a binding conditional implementation
deed to merge with the mortgage aggregation
business of Connective Group Pty Ltd. Under the
transaction, Connective Group Pty Ltd will receive
$60 million in cash and 30,886,441 AFG shares
valuing the acquisition at $120 million, with AFG to
primarily fund the cash component through a new
corporate debt facility. The transaction is conditional
upon a court validating the transaction as not being
unlawful or able to be set aside (a non customary
condition), in addition to ACCC, AFG shareholder
(if required), Connective Group shareholder approval
and other customary approvals.
On 22 August 2019, the Directors declared the
payment of a dividend of 5.9 cents per fully paid
ordinary share, fully franked based on tax paid at
30%. The dividend has a record date of 9 September
2019 and a payment date of 3 October 2019.
The aggregate amount of the proposed dividend
expected to be paid out of retained earnings at 30
June 2019 is $12,755k. The financial effect of this
dividend has not been brought to account in the
financial statements for the year ended 30 June 2019.
There has not been any matter or circumstance, other
than that referred to in the financial statements or
Share options
There were no options issued or exercised during the
financial year (2018: 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.
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.
2019 ANNUAL REPORT
15
Directors’ Report (Continued)
The Directors met as a Board 13 times during the year. 11 meetings were main meetings and 2 meetings were
convened to consider special business. Special meetings are convened at a time to enable the maximum number
of Directors to attend and are generally held to consider specific items that cannot be held over to the next
scheduled main meeting. Apologies were received from Directors in all instances where they were unable to
attend a meeting.
Directors’ Board Meetings
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
9
11
11
11
11
11
2
2
2
2
2
2
2
2
2
2
2
2
2
2
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
Remuneration and Nomination
Risk and Compliance
Melanie Kiely (C)
Craig Carter
Jane Muirsmith
Jane Muirsmith (C)
Craig Carter
Melanie Kiely
Notes
(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
Audit
Remuneration and
Nomination
Risk and Compliance
Attended
Maximum
Possible
Meetings
Attended
Maximum
Possible
Meetings
Maximum
Possible
Meetings
Attended
Craig Carter
Melanie Kiely
Jane Muirsmith
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
5
(cid:4)(cid:5)
2019 ANNUAL REPORT
Directors’ Report (Continued)
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
$
97,500
97,500
Auditor’s Independence declaration
The auditor’s independence declaration is included on page 35 of this financial report for the year ended
30 June 2019.
This report is made in accordance with a resolution of the Directors.
2019 ANNUAL REPORT
(cid:6)(cid:7)
Directors’ Report (Continued)
(cid:8)(cid:9)
2019 ANNUAL REPORT
Directors’ Report (Continued)
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 FY19.
The AFG Board remains committed to an Executive
Remuneration structure that drives a strong
performance culture in line with our strategy and
delivers satisfactory and sustainable returns for
shareholders in the short term and over time. At the
same time, it is important that conduct, responsible
lending and ensuring positive customer outcomes
remain front of mind.
Feedback from shareholders, stakeholders and proxy
advisors is valuable to our remuneration process.
The Board has actively sought feedback and where
appropriate, revised the Executive remuneration
framework over previous years. The structure for
FY19 and FY20 is largely consistent with FY18, given
the changes made and the outcomes delivered
for shareholders and considering the challenging
regulatory and economic environment, stability in
remuneration structures was considered important.
I am pleased to note that following strong EPS and
TSR performance the FY17 LTI plan has vested at
30 June 2019. This is the first plan that has vested
since AFG listed in May 2015 and reflects the returns
generated for shareholders over the last 3 years.
The focus of our executive remuneration structures
remains a mixture of short and long term targets
designed to drive both earnings growth and the
development of key strategic initiatives to deliver
continued and sustainable returns for shareholders.
FY19 Performance
& Remuneration
Outcomes Summary
FY19 was a challenging year for the financial
services sector with both regulatory and economic
headwinds. Notwithstanding this, the group delivered
a solid result in FY19 which reflects the earnings
diversification strategy and robust nature of the
business. NPAT of $33.0M was achieved in FY19, in
line with FY18 $33.3M and representing an
EPS CAGR of 13.4% since FY16.
Over the Total Shareholder Return (TSR) LTI
performance period of 1 July 2016 to 1 July 2019 AFG
has delivered TSR performance at the 80th and 85th
percentile of the Diversified Financials and Small
Industrials Indexes respectively.
While the residential mortgage market was
particularly challenging during FY19 with tightened
credit driving an 11% reduction in residential
settlements, AFGHLs settlements performed well
finishing the year 2% below FY18. Importantly, AFG
Securities showed continued growth in settlements
up 108% to $1.06B (FY18: $509.8M) and positions the
business well to continue delivering earnings growth
for shareholders.
The AFG Business platform is beginning to achieve
traction with brokers. An expanded lender panel has
delivered more competition and choice for customers
with settlements of $129,677k in FY19 (FY18: $11,792k).
Performance against other KPI measures was also
strong with the Group’s loan book ending the year
at $155.45B up 6.9% from FY18. This demonstrates
growth in the core business, generating ongoing
stability for future investment and growth.
A 5-year history of AFG’s NPAT, Residential, AFGHLs
and AFG Securities loan books, AFG Securities
Settlements, ROE and Dividends is provided below:
Net Profit After Tax
0
$5
$10
$15
MILLIONS
$25
$20
$30
$35
$40
$45
FY15
FY16
FY17
FY18
FY19
* Grey shading of FY17 NPAT shows the initial recognition of AFGHL
white label trail book relating to loans settled in prior periods.
2019 ANNUAL REPORT
(cid:10)(cid:11)
Directors’ Report (Continued)
Reported Return on Equity
AFGS Settlements
MILLIONS
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
$200
$400 $600 $800 $1,000 $1,200
FY15
FY16
FY17 1
FY18
FY19
FY15
FY16
FY17
FY18
FY19
Dividends (c/share)
AFGS Loan Book
MILLIONS
0
5
10
15
20
25
0
$200
$400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800
FY15
FY16
FY17
FY18
FY19
Interim
Final
Special
FY15
FY16
FY17
FY18
FY19
Residential Loan Book
0
$20
$40
$60
BILLIONS
$80
$100
$120
$140 $160
FY15
FY16
FY17
FY18
FY19
AFGHL Settlements
MILLIONS
0
$500
$1,000 $1,500 $2,000 $2,500 $3,000 $3,500
FY15
FY16
FY17
FY18
FY19
AFGHL Portfolio
0
$1
$2
$3
$4
BILLIONS
$5
$6
$7
$8
$9
$10
FY15
FY16
FY17
FY18
FY19
20
2019 ANNUAL REPORT
1
FY17 Return on equity is normalised due to the recognition of AFG Home
loans book.
In line with this performance, the key remuneration
outcomes, which are detailed further in the
Remuneration Report include:
⊲
⊲
⊲
Total FY19 STI payments made at 77%, reflecting
solid performance for FY19 in a challenging
market. The STI targets individually were
assessed as follows, NPAT (102%), AFGHLs
(80%) and AFG Business (0%).
Performance rights associated with the EPS
target vested at 150% reflecting the strong EPS
CAGR of 13.4% since FY16
Performance rights associated with TSR targets
vested at 113% (Diversified Financials – 80th
percentile) and 126% (Small Industrials – 85th
percentile)
We believe this remuneration outcome reflects an
appropriate balance between shareholder returns and
the ability to attract and incentivise a high performing
management team. This balance is something we will
continue to review with shareholder return paramount,
while recognising that highly motivated talent drives that
performance.
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
Directors’ Report (Continued)
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
Anthony Gill
Kevin Matthews
Craig Carter1
Melanie Kiely2
Jane Muirsmith3
Executive Directors
Brett McKeon4
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.
4 Brett McKeon transitioned to Non-Executive Director effective 1 July 2019.
Other than Kevin Matthews and Brett McKeon, 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.
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.
2019 ANNUAL REPORT
21
Directors’ Report (Continued)
AFG Business Strategy
To provide customers choice and lead the market by continuing to build on the
strengths of our core wholesale mortgage broking business while developing
our significant distribution network to access other areas of the finance market.
Executive Remuneration Strategy
Remuneration component Performance measure
Strategic objective/performance link
Fixed annual
remuneration (FAR)
Comprises base
salary, superannuation
contributions and other
benefits
Key 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 FY19 &
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 FY20.
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
FY19 & FY20 grant:
• 65% of a KMPs 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 KMPs entitlement
allocated to relative TSR
targets, 50% measure against
the ASX Diversified Financials
Index and 50% against the
ASX Small Industrials Index.
Both TSR targets include
a gateway requirement for
absolute TSR to be positive
• A key indicator of the creation and
growth in shareholder value over the
long term.
• Provides a reliable measurement
of the creation of shareholder
value and has been given a higher
weighting than the individual TSR
measures due to the difficulty in
identifying appropriate peer groups
or comparison indices for comparison
against Company performance.
• TSR was chosen as a performance
hurdle as it:
• 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.
22
2019 ANNUAL REPORT
Directors’ Report (Continued)
3.1) Executive Remuneration Outcomes
STI award outcomes FY19
The combined cash bonus pool available to be paid to the Executives for on target performance in the 2019
financial year was $536,128 and the minimum is nil. For the 2019 financial year, 77% of the target STI bonus
amount was achieved by the Executives as outlined below.
Target
NPAT ($’000)
AFGHL settlements
AFGB settlements
FY18
000’s
$33,309
$3,223
$11,792
FY19
000’s
$33,029
$3,153
$129,677
Growth
Payment
(0.8%)
(2%)
1000%
102%
80%
(0%)
Target STI
opportunity
As a % of fixed
remuneration
STI outcome
% Achieved
% Forfeited
D. Bailey
B. McKeon
M. Watkins
L. Bevan
B. Jenkins
J. Sanger
Total
$224,500
$22,114
$22,114
$86,400
$71,000
$110,000
$536,128
40%
17%
17%
33%
26%
34%
$172,668
$17,008
$17,008
$66,452
$54,608
$84,603
$412,347
77%
77%
77%
77%
77%
77%
23%
23%
23%
23%
23%
23%
LTI award outcomes FY19
For the 2019 financial year, 136% of the target LTI bonus (granted in FY17) was achieved by the Executives as
outlined below. This is reflective of stretch performance against target for CAGR EPS and TSR.
Measure
CAGR EPS
TSR Small Industrials
TRS Diversified Financials
Target
7.5%
75th Percentile
75th Percentile
Achieved
% Achieved
13.4%
85th Percentile
80th Percentile
150%
126%
113%
D. Bailey
B. McKeon*
M. Watkins
L. Bevan
B. Jenkins
Total
Target LTI
opportunity
164,688
176,452
35,291
84,697
58,818
519,946
LTI outcome
% Achieved
% Forfeited
224,410
240,440
48,089
115,412
80,148
708,499
136%
136%
136%
136%
136%
136%
0%
0%
0%
0%
0%
* B. McKeon was MD of AFG at the commencement of the LTI period (1 July 2016) and as he continued to be employed as an Executive Director
his rights were not forfeited.
2019 ANNUAL REPORT
23
Directors’ Report (Continued)
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 38% fixed and 62% variable (at risk): and
⊲ Other members of the Executive team are in the range of 34% to 48% fixed and 52% to 66% variable
(at risk).
3.3) STI Plan
AFG Executives are entitled to participate in AFG’s STI plan. The amount of the STI award each participant
may become entitled to (if any) will be determined by the Remuneration and Nomination Committee based on
achievement against set performance targets.
Objective
The AFG STI plan rewards Executives for the achievement of objectives directly linked to
AFG’s business strategy that is focused on earnings diversification and providing choice
and competition to consumers.
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 FY19 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 at least one
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. 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) FY20 STI Opportunity
Offers to participate in STI awards for 2020 were made to Executives under the STI Plan on the terms set out
below.
The amount of the STI award each participant may become entitled to (if any) will be determined by the
Remuneration and Nomination Committee and approved by the Board based on achievement against the
targeted NPAT as approved by the Board (60%), 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.
24
2019 ANNUAL REPORT
Directors’ Report (Continued)
3.5) The LTI Plan – 2018, 2019 and 2020 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.
2018 & 2019 LTI Grant
2020 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 relative TSR targets
35% of an Executive’s annual LTI entitlement
weighted to relative TSR targets
Grant date
1 July 2017, other than those approved at the
2017 AGM; and
1 July 2019 other than those subject to
approval at the 2019 AGM
1 July 2018 other than those subject to
approval at the 2018 AGM
Grant date fair
value
TSR Small Industrials Index 2018 $0.77;
2019 $0.84
TSR Small Industrials Index $1.04
TSR Diversified Financials Index $0.98
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)
EPS $1.58 (being the 20-day Volume
Weighted Average Price leading up to
30 June 2019)
EPS $1.36 (being the 20-day Volume
Weighted Average Price leading up to
30 June 2019)
Gateway
performance
measure
TSR – Absolute TSR must be positive
TSR – Absolute TSR must be positive
EPS – 5.0% CAGR EPS
EPS – 2.5% CAGR EPS
The CAGR targets for the FY20 grants
have been revised down in line with market
expectations in a significantly depressed
residential mortgage market and broader
economy. This is evidenced by the RBAs
decision to cut the cash rate in both June
and July 2019 to a record low of 100bps.
2019 ANNUAL REPORT
25
Directors’ Report (Continued)
Key
performance
measure
2018 & 2019 LTI Grant
TSR
2020 LTI Grant
TSR
Relative Total Shareholder Return (pro-rata
vesting between hurdles) 50% measured
against the Diversified Financials Index, 50%
against Small Industrials
Relative Total Shareholder Return (pro-rata
vesting between hurdles) 50% measured
against the Diversified Financials Index, 50%
against Small Industrials
50th Percentile – 50% vesting
50th Percentile – 50% vesting
75th Percentile – 100% vesting
75th Percentile – 100% vesting
85th Percentile – 125% vesting
(stretch target)
90th Percentile – 150% vesting
(stretch target)
85th Percentile – 125% vesting
(stretch target)
90th Percentile – 150% vesting
(stretch target)
EPS accretion
EPS accretion
5.0% CAGR – 50% vesting
2.5% CAGR – 50% vesting
10% CAGR – 100% vesting
5% CAGR – 100% vesting
Performance &
Service period
Performance
assessment
12.5% CAGR – 150% vesting (stretch target)
7.5% CAGR – 150% vesting (stretch target)
1 July 2017 – 30 June 2020
1 July 2019 – 30 June 2022
1 July 2018 – 30 June 2021
30 June 2020 and 30 June 2021
30 June 2022
Performance period not yet complete.
Performance period not yet complete.
Common LTI Plan Rules & Design Considerations
Link between
performance
and reward
TSR
TSR encapsulates performance across the underlying key performance measures
throughout the business aimed at achieving targeted business outcomes that will result in
increased shareholder wealth through share price growth and dividends.
Stretch targets are available giving Executives the opportunity to increase the number of
performance rights by up to 50% for exceptional performance.
EPS
Long term EPS accretion targets are set at levels that are challenging yet achievable in a
sustainable manner. EPS directly links creation of shareholder wealth to the delivery of the
businesses strategy over a long term period.
Stretch targets are available giving Executives the opportunity to increase the number of
performance rights by up to 50% for exceptional performance.
Cessation of
employment
If the participant ceases employment for cause or resigns, unless the Board determines
otherwise, any unvested Performance Rights will automatically lapse.
Generally, if the participant ceases employment for any other reason, all of their unvested
Performance Rights will remain on foot and subject to the original performance condition.
However, the Board retains discretion to determine that some of their Rights (up to a pro
rata portion based on how much of the Performance Period remains) will lapse.
The Performance Rights do not carry dividends or voting rights prior to vesting.
Dividends &
voting
26
2019 ANNUAL REPORT
Directors’ Report (Continued)
Common LTI Plan Rules & Design Considerations
Clawback and
preventing
inappropriate
benefits
Change of
control
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.
This would include circumstances where there is a material financial misstatement, or
AFG is required or entitled under law or Company policy to reclaim remuneration from
the participant, or the participant’s entitlements vest as a result of the fraud, dishonesty
or breach of obligations of any other person and the Board is of the opinion that the
incentives would not have otherwise vested.
In a situation where there is likely to be a change of control, the Board has the discretion
to accelerate vesting of some or all of the Performance Rights. Where only some of the
Performance Rights have vested on a change of control, the remainder of the Performance
Rights will immediately lapse. If the change of control occurs before the Board exercises its
discretion:
• a pro-rata portion of the Performance Rights equal to the portion of the relevant
Performance Period that has elapsed up to the expected or actual (as appropriate) date
of the change of control will immediately vest; and
the Board may, in its absolute discretion, decide whether the balance should vest or lapse.
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.
The rules of the LTI Plan include specific provisions dealing with rights issues, bonus
issues, and corporate actions and other capital reconstructions. These provisions are
intended to ensure that there is no material advantage or disadvantage to the participant in
respect of their Performance Rights as a result of such corporate actions.
Reconstructions,
corporate action,
rights issues,
bonus issues,
etc.
2019 ANNUAL REPORT
27
Directors’ Report (Continued)
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28
2019 ANNUAL REPORT
Directors’ Report (Continued)
5) Non-Executive Director Remuneration
5.1) Remuneration Policy
The Board seeks to set aggregate remuneration at a level that provides the Company with the ability to attract
and retain Directors of the highest calibre, whilst incurring a cost that is acceptable to shareholders. The amount
of aggregate remuneration sought to be approved by shareholders and the fee structure is reviewed annually
against fees paid to NEDs of comparable companies. The Board may consider advice from external consultants
when undertaking the annual review process as appropriate.
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 2019 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.
The table below outlines the NED remuneration for the years ended 30 June 2019 and 30 June 2018:
Year
$
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
T. Gill
K. Matthews
C. Carter
M. Kiely
J. Muirsmith
Total
Total
Board and
Committee Fees
Short-term benefits
(non-monetary)
Superannuation
Total
$
136,986
136,986
82,192
82,192
82,192
82,192
82,192
82,192
82,192
82,192
465,754
465,754
$
-
-
-
-
-
-
-
-
-
-
-
-
$
13,014
13,014
7,808
7,808
7,808
7,808
7,808
7,808
7,808
7,808
44,246
44,246
$
150,000
150,000
90,000
90,000
90,000
90,000
90,000
90,000
90,000
90,000
510,000
510,000
2019 ANNUAL REPORT
29
Directors’ Report (Continued)
Additional Disclosures Relating to Rights and Shares
5.3) Rights awarded, vested and lapsed during the year
The table below discloses the number of rights granted to Executives as remuneration during FY17, FY18 and
FY19 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 vested on 30 June 2019 as detailed below.
KMP
Year /
Tranches
(T)
No. of
rights
awarded
during the
year
Grant
date
Fair value
per rights
at award
date $
Vesting
date
Exercise
price
Expiry
date
B.
McKeon
M.
Watkins
L.
Bevan
2017 / T1
2017 / T2
2017 / T3
2018 / T1
2018 / T2
2018 / T3
2019 / T1
2019 / T2
2019 / T3
2017 / T1
2017 / T2
2017 / T3
2018 / T1
2018 / T2
2018 / T3
2019 / T1
2019 / T2
2019 / T3
97,500
1-Jul-16
$1.00 30-Jun-19
39,179
1-Jul-16
$0.67 30-Jun-19
39,773
1-Jul-16
$0.66 30-Jun-19
11,274
1-Jul-17
$1.25 30-Jun-20
5,059
4,927
1-Jul-17
1-Jul-17
$0.75 30-Jun-20
$0.77 30-Jun-20
10,608
1-Jul-18
$1.36 30-Jun-21
4,899
1-Jul-18
$0.79 30-Jun-21
4,607
1-Jul-18
$0.84 30-Jun-21
19,500
1-Jul-16
$1.00 30-Jun-19
7,836
7,955
1-Jul-16
1-Jul-16
$0.67 30-Jun-19
$0.66 30-Jun-19
16,910
1-Jul-17
$1.25 30-Jun-20
7,588
7,391
1-Jul-17
1-Jul-17
$0.75 30-Jun-20
$0.77 30-Jun-20
10,608
1-Jul-18
$1.36 30-Jun-21
4,899
1-Jul-18
$0.79 30-Jun-21
4,607
1-Jul-18
$0.84 30-Jun-21
2017 / T1
46,800
1-Jul-16
$1.00 30-Jun-19
2017 / T2
2017 / T3
2018 / T1
2018 / T2
2018 / T3
2019 / T1
2019 / T2
2019 / T3
18,806
1-Jul-16
$0.67 30-Jun-19
19,091
1-Jul-16
$0.66 30-Jun-19
43,680
1-Jul-17
$1.25 30-Jun-20
19,600
1-Jul-17
$0.75 30-Jun-20
19,091
1-Jul-17
$0.77 30-Jun-20
41,255
1-Jul-18
$1.36 30-Jun-21
19,051
1-Jul-18
$0.79 30-Jun-21
17,916
1-Jul-18
$0.84 30-Jun-21
- 30-Jun-19
- 30-Jun-19
- 30-Jun-19
- 30-Jun-20
- 30-Jun-20
- 30-Jun-20
- 30-Jun-21
- 30-Jun-21
- 30-Jun-21
- 30-Jun-19
- 30-Jun-19
- 30-Jun-19
- 30-Jun-20
- 30-Jun-20
- 30-Jun-20
- 30-Jun-21
- 30-Jun-21
- 30-Jun-21
- 30-Jun-19
- 30-Jun-19
- 30-Jun-19
- 30-Jun-20
- 30-Jun-20
- 30-Jun-20
- 30-Jun-21
- 30-Jun-21
- 30-Jun-21
No.
forfeited
during
the year
No.
vested
during
the year
- 146,250
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
44,076
50,114
-
-
-
-
-
-
29,250
8,816
10,023
-
-
-
-
-
-
70,200
21,157
24,055
-
-
-
-
-
-
30
2019 ANNUAL REPORT
Directors’ Report (Continued)
KMP
Year /
Tranches
(T)
No. of
rights
awarded
during the
year
Grant
date
Fair value
per rights
at award
date $
Vesting
date
Exercise
price
Expiry
date
2017 / T1
2017 / T2
2017 / T3
91,000
1-Jul-16
$1.00 30-Jun-19
36,567
1-Jul-16
$0.67 30-Jun-19
37,121
1-Jul-16
$0.66 30-Jun-19
2018 / T1
143,000
1-Jul-17
$1.25 30-Jun-20
D.
Bailey
2018 / T2
2018 / T3
64,167
1-Jul-17
$0.75 30-Jun-20
62,500
1-Jul-17
$0.77 30-Jun-20
2019 / T1
134,557
1-Jul-18
$1.36 30-Jun-21
2019 / T2
2019 / T3
2017 / T1
2017 / T2
2017 / T3
2018 / T1
2018 / T2
2018 / T3
2019 / T1
2019 / T2
2019 / T3
2018 / T1
2018 / T2
2018 / T3
2019 / T1
2019 / T2
2019 / T3
B.
Jenkins
J.
Sanger
62,136
1-Jul-18
$0.79 30-Jun-21
58,138
1-Jul-18
$0.84 30-Jun-21
32,500
1-Jul-16
$1.00 30-Jun-19
13,060
1-Jul-16
$0.67 30-Jun-19
13,258
1-Jul-16
$0.66 30-Jun-19
44,200
1-Jul-17
$1.25 30-Jun-20
19,833
1-Jul-17
$0.75 30-Jun-20
19,318
1-Jul-17
$0.77 30-Jun-20
40,775
1-Jul-18
$1.36 30-Jun-21
18,830
1-Jul-18
$0.79 30-Jun-21
17,708
1-Jul-18
$0.84 30-Jun-21
37,987
6-Mar-18
$1.54 30-Jun-20
14,189 6-Mar-18
$1.11 30-Jun-20
14,063 6-Mar-18
$1.12 30-Jun-20
43,174
1-Jul-18
$1.36 30-Jun-21
19,937
1-Jul-18
$0.79 30-Jun-21
18,750
1-Jul-18
$0.84 30-Jun-21
- 30-Jun-19
- 30-Jun-19
- 30-Jun-19
- 30-Jun-20
- 30-Jun-20
- 30-Jun-20
- 30-Jun-21
- 30-Jun-21
- 30-Jun-21
- 30-Jun-19
- 30-Jun-19
- 30-Jun-19
- 30-Jun-20
- 30-Jun-20
- 30-Jun-20
- 30-Jun-21
- 30-Jun-21
- 30-Jun-21
- 30-Jun-20
- 30-Jun-20
- 30-Jun-20
- 30-Jun-21
- 30-Jun-21
- 30-Jun-21
No.
forfeited
during
the year
No.
vested
during
the year
- 136,500
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
41,138
46,772
-
-
-
-
-
-
48,750
14,693
16,705
-
-
-
-
-
-
-
-
-
-
-
-
* T1 – Earnings Per Share allocation
T2 – TSR (Diversified Financials) allocation
T3 – TSR (Small Industrials) allocation
2019 ANNUAL REPORT
3(cid:12)
Directors’ Report (Continued)
5.4) Shareholdings of KMP*
Ordinary shares held in Australian Finance Group Limited ASX:AFG (number)
30 June 2019
Balance
1 July 2018
Granted as
remuneration
Sold during
the period
Net change
other
Balance 30
June 2019
Held
nominally
Directors
T. Gill
B. McKeon
M. Watkins
1,125,000
21,179,773
19,602,689
K. Matthews
15,029,516
C. Carter
M. Kiely
J. Muirsmith
Executives
L. Bevan
D. Bailey
B. Jenkins
J. Sanger
500,000
67,164
65,000
1,533,333
1,066,666
-
35,000
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,125,000
1,125,000
21,179,773
21,179,773
19,602,689
19,602,689
50,000
15,079,516
15,029,516
-
-
-
-
-
-
-
500,000
500,000
67,164
65,000
1,533,333
1,066,666
-
35,000
67,164
65,000
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
B. McKeon*
No expiry, continuous agreement
12 months (or payment in lieu of notice)
M. Watkins
No expiry, continuous agreement
12 months (or payment in lieu of notice)
D. Bailey
L. Bevan
B. Jenkins
J. Sanger
No expiry, continuous agreement
12 months (or payment in lieu of notice)
No expiry, continuous agreement
12 months (or payment in lieu of notice)
No expiry, continuous agreement
6 months (or payment in lieu of notice)
No expiry, continuous agreement
3 months (or payment in lieu of notice)
12 weeks
12 weeks
12 weeks
12 weeks
12 weeks
12 weeks
* Agreement terminated 30 June 2019 on transition to Non-Executive Director
32
2019 ANNUAL REPORT
Directors’ Report (Continued)
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 2019 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 2019.
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 2018 AGM
The 30 June 2018 Remuneration Report was presented to shareholders and was approved at the 2018 Annual
General Meeting.
2019 ANNUAL REPORT
33
Directors’ Report (Continued)
8) Other Transactions and Balances with KMP and their Related Parties
(i) During the year, the Group made payments to Genworth Mortgage Insurance Australia Limited, one of
our providers of Lenders Mortgage Insurance (LMI). Mr T. Gill was a Non-Executive Director of Genworth
Mortgage Insurance Australia Limited until 31 August 2018. 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
up to 31 August 2018 were $326k (2018: $706k). These payments are not considered to be material to the
financial results of the Group and therefore do not impact on Mr T. Gill’s independence as a Director.
(ii) Mr T. Gill is an Independent Director of First Mortgage Services (FMS), one of our providers of loan
settlement services. During the year, the Group made payments to FMS. These dealings were in the
ordinary course of business and were on normal terms and conditions. The payments made for the
provision of the settlement services were $464k (2018: $333k). These payments are not considered to be
material to the financial results of the Group and therefore do not impact on Mr T. Gill’s independence as
a Director.
(iii) Establish Property Group Ltd (EPG) was created as part of the demerger of the property business on 22
April 2015. 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 $1,126k which has been paid to Qube. (2018: $1,583k). In addition to the
above McCabe Street has an outstanding loan owing to AFG amounting to $218k (2018: $209k), this loan
is on commercial terms at arms-length. EPG and McCabe Street share some common directors with AFG.
Independent Audit of Remuneration Report
9)
The Remuneration Report has been audited by Deloitte. Please see page 91 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
22 August 2019
34
2019 ANNUAL REPORT
Directors’ Report (Continued)
Independence declaration under Section 307C of the Corporations Act 2001
2019 ANNUAL REPORT
35
Consolidated Statement of Financial Position
As at 30 June 2019
In thousands of AUD
Assets
Cash and cash equivalents
Trade and other receivables
Contract assets
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
Contract liability
Deferred Income
Deferred tax liability
Total liabilities
Net assets
Equity
Share capital
Share-based payment reserve
Other capital reserves
Retained earnings
Total equity
Note
14(a)
15
16
18
19
20
17
21
22
13(b)
23
24(a)
24(b)
13(c)
26(a)
2019
2018
96,818
5,409
899,727
2,072,004
6
14,341
849
806
88,710
810,117
-
1,379,857
15
12,815
1,379
516
3,089,960
2,293,409
874,076
2,073,772
783,676
1,381,761
5,234
2,808
3,129
4,296
-
21,823
2,985,138
4,543
2,074
2,855
-
4,123
21,053
2,200,085
104,822
93,324
43,541
1,630
(96)
59,747
104,822
43,541
814
(87)
49,056
93,324
The Consolidated Statement of Financial Position should be read in conjunction with the Notes to the Financial Statements.
36
2019 ANNUAL REPORT
Consolidated Statement of Profit or Loss
and Other Comprehensive Income
For the year ended 30 June 2019
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 fair value change on equity instruments designated at FVOCI
Other comprehensive loss for the year, net of income tax
Note
2019
2018
7
8
9
12
12
13(a)
569,702
73,137
642,839
(514,091)
(53,513)
75,235
15,132
(4,947)
(42,515)
42,905
2,028
-
1,526
3,554
46,459
(13,430)
33,029
33,029
-
33,029
-
-
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)
Total comprehensive income for the year
33,029
33,294
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)
27
27
33,029
-
33,029
15.38
15.24
33,321
(27)
33,294
15.50
15.41
The Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the Notes to the Financial Statements.
2019 ANNUAL REPORT
37
Statement of Changes in Equity
For the year ended 30 June 2019
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 2017
43,541
(14)
(77)
408
63,410 107,268
27
107,295
33,336
33,336
(27)
33,309
-
4
-
4
33,336
33,340
(27)
33,313
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
-
-
-
-
-
-
-
-
-
-
-
-
-
4
4
-
-
-
-
-
-
-
(47,690)
(47,690)
406
-
406
406
(47,690)
(47,284)
Balance at 30 June 2018
43,541
(14)
(73)
814
49,056 93,324
Balance at 1 July 2018
43,541
(14)
-
Adjustment to retained
earnings for impact of
AASB 15 and 9
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
-
-
-
-
-
-
-
-
-
-
-
-
-
(73)
-
-
(9)
(9)
-
-
-
814
49,056
93,324
-
-
-
-
-
-
-
33,029
33,029
-
(9)
33,029
33,020
(22,338)
(22,338)
816
-
816
816
(22,338)
(21,522)
Balance at 30 June 2019
43,541
(14)
(82)
1,630
59,747 104,822
The Consolidated Statement of Changes in Equity should be read in conjunction with Notes to the Financial Statements.
38
2019 ANNUAL REPORT
-
-
-
-
-
-
-
-
-
-
-
-
-
(47,690)
406
(47,284)
93,324
93,324
-
33,029
(9)
33,020
(22,338)
816
(21,522)
104,822
Statement of Cash Flows
For the year ended 30 June 2019
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
Note
2019
2018
483,933
496,851
(463,800)
(467,799)
73,137
52,313
(53,513)
(36,875)
(11,926)
(12,004)
Net cash generated by operating activities
14(b)
27,831
32,486
Cash flows from investing activities
Net interest received
Acquisition of property, plant and equipment
Investment in intangible assets
Investment in Thinktank
Contingent consideration Thinktank
Decrease/(increase) in other loans and advances
Loans and advances to customer borrowings
Net cash used in investing activities
Cash flows used in financing activities
Proceeds from/(repayments) of warehouse facilities
Proceeds from securitised funding facilities
Decrease in loans from funders
Dividends paid to equity holders of the parent
Net cash generated by financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 July
Cash and cash equivalents at 30 June
The Statement of Cash Flows should be read in conjunction with the Notes to the Financial Statements.
2,014
(291)
(529)
2,429
(178)
-
-
-
(11,141)
(992)
270
(3,267)
(690,655)
(224,763)
(689,191)
(237,912)
509,557
(67,225)
182,272
284,340
(21)
(90)
26(c)
(22,340)
(47,690)
669,468
169,335
8,108
(36,091)
88,710
124,801
14(a)
96,818
88,710
2019 ANNUAL REPORT
39
Notes to the
Financial Statements
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Reporting entity
Basis of preparation
Significant accounting policies
Determination of fair values
Financial risk management
Segment information
Commissions and other income
Other income
Other expenses
Employee costs
Auditors’ remuneration
Finance income and expenses
Income tax
Cash and cash equivalents
Trade and other receivables
16. Contract assets
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
Trade and other payables
Loans and advances
Investment in associate
Property, plant and equipment
Interest-bearing liabilities
Employee benefits
Provisions
Contract liability
Operating leases
Capital and reserves
Earnings per share
Share based payments
Financial instruments
Group entities
Parent entity
Capital and other commitments
Contingencies
Related parties
Subsequent events
40
2019 ANNUAL REPORT
42
42
46
59
59
61
63
64
64
64
65
65
65
66
68
68
68
69
70
71
71
74
74
75
75
76
77
77
78
86
88
88
88
89
89
2019 ANNUAL REPORT
41
Notes to the Financial Statements (continued)
1 Reporting entity
The Consolidated Financial Statements for the
financial year ended 30 June 2019 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
23 August 2019.
(b) Basis of measurement
The consolidated financial statements have been
prepared on a historical cost basis except for the
following material items:
•
•
•
Payables relating to trailing commission
are initially measured at fair value and
subsequently at amortised cost;
Contract assets relating to trailing commission
are measured at amortised cost;
Financial instruments at fair value through profit
42
2019 ANNUAL REPORT
or loss are measured at fair value; and
•
Non-traded equity investments have been
designated at fair value through other
comprehensive income.
(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:
•
•
•
Note 3(a)(i) – Consolidation of special purpose
entities
Note 3(b)(i) – Impairment of financial assets
held at amortised cost being customer loans
and advances
Note 3(i) – Expected value of trailing income
contract assets
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 3(i) and 29(d) - Determination of
assumptions used in forecasting and
discounting future trail commissions
Note 28 - Measurement of share-based
payments
Note 29 - Valuation of contract assets and
financial instruments
Notes to the Financial Statements (continued)
Taxation
The Group’s accounting for taxation requires
Management’s judgement 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. Judgements
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
New and revised Standards and amendments thereof
and interpretations effective for the current year end that
are relevant to the Group include:
•
•
•
•
AASB 9 Financial Instruments;
AASB 15 Revenue from Contracts with Customers;
AASB 2017-1 Amendments to Australian
Accounting Standards - Transfers of Investment
Property, Annual Improvements 2014- 2016 Cycle
and Other Amendments;
AASB 2016-5 Amendments to Australian
Accounting Standards - Classification and
Measurement of Share-based Payment
Transactions;
•
•
•
AASB 2015-10 Amendments to Australian
Accounting Standards – Effective Date of
Amendments to AASB 10 and AASB 128;
AASB 2017-7 Amendments to Australian
Accounting Standards – Long-term Interests in
Associates and Joint Ventures;
AASB 2018-1 Amendments to Australian
Accounting Standards – Annual Improvements
2015-2017 Cycle.
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 Group has adopted
AASB 9 and AASB 15 using the cumulative effect
method, with the effect of initially applying this
standard recognised at the date of initial application (1
July 2018). Therefore, comparative periods have not
been restated. The adoption of these amendments
has not resulted in any material changes to the
measurement or disclosure of the amounts reported
for the current or prior periods, and therefore the
Group has made no adjustment to opening retained
earnings on initial adoption of these standards.
AASB 15 ‘Revenue from Contracts with Customers’
A full assessment of AASB 15 on all revenue
streams has been performed. As a result of the
adoption of AASB 9 and AASB 15, the Group’s
trail commission receivable no longer meets the
definition of a financial asset, as the Group’s right to
receive the trail consideration is not unconditional.
This is because the Group’s entitlement to the
trail commission is contingent on the customer
not discharging or refinancing the loan with the
lender. The trail commission receivable is therefore
no longer presented in the statement of financial
position within “trade and other receivables” under
AASB 139 as it is now recognised and disclosed as
a “contract asset” under AASB 15. Consequently, the
Group applies the AASB 15 variable consideration
guidance to the measurement of the contract asset.
The variable consideration guidance does not
have any impact on the measurement of the trail
commission receivable or associated revenue
at initial recognition nor subsequently as the
valuation model currently used by the Group is an
expected value method and complies with AASB 15.
All revenue streams were considered, and no
impact was noted. Refer to note 3(i) for updated
accounting policy.
2019 ANNUAL REPORT
43
Notes to the Financial Statements (continued)
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.
All recognised financial assets that are within the
scope of AASB 9 are required to be measured
subsequently at amortised cost or fair value on the
basis of the Group’s business model for managing
the financial assets and the contractual cash flow
characteristics of the financial assets. On 1 July 2018
(the date of initial application of AASB 9), the business
models which apply to the financial assets held by
the Group were assessed and classified its financial
instruments into the appropriate AASB 9 categories.
Key changes include:
•
•
•
the Held to Maturity (HTM) and Available for
Sale (AFS) asset categories were removed;
a new asset category for non-traded equity
investments measured at Fair Value through
Other Comprehensive Income (FVOCI)
was introduced. The Group has elected to
present subsequent changes in FV of equity
investments in Other comprehensive income;
and
all other financial assets and financial liabilities
will continue to be measured on the same
basis as is currently adopted under AASB 139.
Refer 3(b)(i).
The classification and measurement of financial
liabilities has remained largely unchanged. The
Group’s trade receivables and loans and advances
(securitised assets) are classified and measured at
amortised cost due to the contractual cashflows being
solely payments of principal and interest (SPPI) and
are held for collection of principal and interest.
The AASB 9 impairment requirements are based
on a general approach expected credit loss model
(ECL) that replaces the incurred loss model under
the current accounting standard. The Group is
generally required to recognise either a 12-month’
or lifetime ECL, depending on whether there has
been a significant increase in credit risk since initial
recognition. The ECL model under AASB 9 applies
to debt instruments accounted for at amortised cost
and AASB 15 contract assets. AASB 9 has changed
the Group’s current methodology for calculating the
provision for doubtful debts, in particular for collective
provisioning. AASB 9 also introduces a simplified
approach for measuring the ECL of trade receivables
and contract assets that do not contain a significant
financing component, which uses a provision matrix
to measure the loss allowance at an amount equal to
lifetime expected loss.
The Group has applied the ‘general approach’
ECL model to its loans and advances to measure
expected credit losses under AASB 9. Trade
receivables are not material to the Group, no
historical losses have been incurred and outstanding
balance is aged within the Groups normal payment
terms, therefore the simplified approach ECL for trade
receivables is not material. Applying this revised
methodology for calculation of impairment did not
result in a material impact on the Group’s results on
initial transition, however, has resulted in additional
disclosures.
As the Group’s future trail commission contract assets
and cash and cash equivalents are held with major
financial institutions and there has been no historical
instances where a loss has been incurred, therefore
ECL is not material.
The following table and the accompanying notes
below explain the original classification under AASB
139 and the new classification under AASB 9 for each
class of the Group’s financial assets as at 1 July 2018.
There has been no change in the measurement
categories with each class of the Group’s financial
assets remaining at amortised cost under AASB 9.
44
2019 ANNUAL REPORT
As at 1 July 2018
Financial Assets
In thousands of AUD
Cash and cash
equivalents
Restricted cash
Trade receivables
Future trail commissions
contract asset
Loan and advances
Notes to the Financial Statements (continued)
Original
Classification under
AASB 139
New
Classification
under AASB 9
Original
Carrying amount
under AASB 139
New
Carrying amount
under AASB 9
Loans and
receivables
Loans and
receivables
Loans and
receivables
Loans and
receivables
Loans and
receivables
Financial Asset
at amortised cost
Financial Asset
at amortised cost
Financial Asset
at amortised cost
Contract
assets (AASB 15)
Financial Asset
at amortised cost
Equity Investments
at FVOCI
49,640
49,640
39,070
39,070
5,064
5,064
805,053
805,053
1,379,857
1,379,857
15
15
Other financial assets
Available-for-sale
Total Financial Assets
2,278,699
2,278,699
Trail commission receivables have been reclassified from financial assets held at amortised cost to contract
assets. Trail commission payables are still recognised as financial liabilities. Refer to Note 3(b) for the updated
accounting policies on the Group’s non-derivative financial assets and liabilities, including impairment of the
Group’s financial assets and contract assets
Hedge accounting changes arising from AASB 9 do not apply to the Group.
(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 16 ‘Leases’
AASB 2017-4 Amendments to Australian Accounting Standards –
Uncertainty over Income Tax Treatments
*Reporting period commences on or after the application date.
Application date*
Application date
for Group
1 January 2019
30 June 2020
1 January 2019
30 June 2020
2019 ANNUAL REPORT
45
Notes to the Financial Statements (continued)
AASB 16 Leases will replace AASB 117 Leases,
Interpretation 4 Determining whether an Arrangement
contains a Lease, Interpretation 115 Operating Leases
– Incentives and Interpretation 127 Evaluating the
Substance of Transactions Involving the Legal Form of
a Lease. The Standard will provide a comprehensive
model for the identification of lease arrangements
and their treatment in the financial statements of both
lessees and lessors.
Key requirements of AASB 16:
AASB 16 distinguishes leases and service contacts on
the basis of whether an identified asset is controlled
by a customer. Distinctions of operating leases
(off balance sheet) and finance leases (on balance
sheet) are removed for lessee accounting and is
replaced by a model where a right-of-use asset and
a corresponding liability must be recognised for all
leases by lessees (i.e. all on balance sheet) except for
short-term leases or leases of low value assets.
The right of use asset is initially measure at cost and
subsequently measure at cost (subject to certain
exceptions) less accumulated depreciation and
impairment losses, adjusted for any remeasurement
of the lease liability. The lease liability is initially
measured at the present value of the lease payments
that are not paid at that date. Subsequently, the lease
liability is adjusted for interest and lease payments,
as well as the impact of lease modifications, amongst
others. Furthermore, the classification of cash flows
will also be affected as operating lease payments
under AASB 117 are presented as operating cash
flows; whereas under the AASB 16 model, the lease
payments will be split into a principal and an interest
portion which will be presented as financing and
operating cash flows respectively.
As at the reporting date, the Group has non-
cancellable operating lease commitments of $9,175k,
refer to Note 25.
These operating leases will result in the recognition of
right of use assets and corresponding liabilities upon
initial transition of AASB 16. The Group has performed
a full assessment which resulted in no significant net
impact to the Group’s results. Additional disclosures
will be prepared under the new standard.
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.
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2019 ANNUAL REPORT
(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.
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 9,
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
Notes to the Financial Statements (continued)
•
•
short term warehouse facilities provided by
reputable lenders
AFG 2016-1 Trust, AFG 2017-1 Trust, AFG 2018-1
Trust and AFG 2019-1 Trust (SPE-RMBS) to
hold securitised assets and issue Residential
Mortgage Backed Securities (RMBS)
AFG 2010-2 Pty Ltd to hold and fund
investments in some of our Residential
Mortgage Backed Securities (RMBS) to meet
risk retention requirements
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.
(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 19).
2019 ANNUAL REPORT
47
Notes to the Financial Statements (continued)
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)
Financial assets
Initial recognition and measurement
With the exception of trade receivables that do not
contain a significant financing component, the Group
initially measures a financial asset at its fair value,
plus in the case of a financial asset not at fair value
through profit or loss, transaction costs that are
directly attributable to the acquisition of the financial
asset. Transaction costs of financial assets carried
at fair value through profit or loss are expensed in
profit or loss. Trade receivables that do not contain
a significant financing component are initially
measured at the transaction price determined under
AASB 15 (see Note 3(i) Revenue from contracts with
customers).
Subsequent measurement
Financial assets at amortised cost
A financial asset is measured at amortised cost if it
meets the following conditions:
•
it is held within a business model whose
objective is to hold assets to collect contractual
cash flows;
•
•
its contractual terms give rise on specified
dates to cash flows that are solely payments
of principal and interest (SPPI) on the principal
amount outstanding; and
it is not designated at Fair Value through Profit
and Loss (FVPL).
The amortised cost of a financial asset is:
•
the amount at which the financial asset is
measured at initial recognition;
•
•
minus the principal repayments;
plus the cumulative amortisation using the
effective interest method of any difference
between that initial amount and the maturity
amount; and
•
adjusted for any loss allowance.
Equity investments at FVOCI
A financial asset is measured at FVOCI if the
Group has made an irrevocable election to classify
and measure financial assets as FVOCI at initial
recognition on the basis that they are held for
strategic purposes. Gains and losses relating to
these financial assets will be recognised in other
comprehensive income. Dividends from such
investments are recognised as income in profit or loss
when the Group has the right to receive payments
unless the dividend clearly represents a recovery of
part of the cost of the investment. The accumulated
fair value reserve related to these investments will
never be reclassified to profit or loss.
Derecognition of financial assets
The Group derecognises a financial asset when the
contractual rights to the cash flows from the asset
expire, or when it transfers the financial asset and
substantially all the risks and rewards of ownership
of the asset to another entity. If the Group neither
transfers nor retains substantially all the risks and
rewards of ownership and continues to control the
transferred asset, the Group recognises its retained
interest in the asset and an associated liability for
amounts it may have to pay.
(ii)
Impairment
AASB 9 replaces the ‘incurred loss’ model in AASB
139 with an Expected Credit Loss (“ECL”) model.
This applies to financial assets and contract assets
measured at amortised cost and debt investments at
FVOCI, but not to investments in equity instruments.
ECLs are a probability-weighted estimate of credit
losses. Credit losses are measured as the present
value of all cash shortfalls (i.e. the difference between
the cash flows due to the entity in accordance with
the contract and the cash flows that the Group
expects to receive). It consists of 3 components:
a) probability of default (PD): represents the
possibility of a default over the next 12 months
and remaining lifetime of the financial asset;
b) a loss given default (LGD): expected loss if a
default occurs, taking into consideration the
mitigating effect of collateral assets and time
value of money;
Interest income, foreign exchange gains and losses
and impairment are recognised in profit and loss.
c) exposure at default (EAD): the expected loss
when a default takes place.
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2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
The Group measures the loss allowance for a
financial instrument at an amount equal to the lifetime
ECL if the credit risk on that financial instrument has
increased significantly since initial recognition, or if
the financial instrument is a purchased or originated
credit-impaired financial asset. If the credit risk on a
financial instrument has not increased significantly
since initial recognition (except for a purchased
or originated credit-impaired financial asset), the
Group measures the loss allowance for that financial
instrument at an amount equal to a 12-month ECL.
The Group has reviewed and assessed the Group’s
existing financial assets for impairment in accordance
with the requirements of AASB 9 to determine the
credit risk of the respective items at the date they were
initially recognised, and compared that to the credit
risk as at 1 July 2018. The impact to the Group was
insignificant and therefore no adjustment to opening
retained earnings was required. The Group has
assessed the loans and advances (securitised assets)
and recognised the ECL for these assets.
Impairment of Loans and Advances
The Group has applied the three-stage model based
on the change in credit risk since initial recognition
to determine the loss allowances of its loans and
advances.
Stage 1: 12-month ECL
At initial recognition, ECL is collectively assessed and
measured by classes of financial assets with the same
level of credit risk based on the PD within the next 12
months and LGDs with consideration to forward looking
economic indicators. Loss allowances for financial
assets measured at amortised cost are deducted from
the gross carrying amount of the assets.
Stage 2: Lifetime ECL
When the Group determines that there has been a
significant increase in credit risk since initial recognition
but not considered to be credit impaired, the Group
recognises a lifetime ECL calculated as a product
of the PD for the remaining lifetime of the financial
asset and LGD, with consideration to forward looking
economic indicators. Similar to Stage 1, loss allowances
for financial assets measured at amortised cost are
deducted from the gross carrying amount of the assets.
Stage 3: Lifetime ECL - credit impaired
At each reporting date, the Group assesses whether
financial assets carried at amortised cost are credit
impaired. A financial asset is ‘credit-impaired’ when
one or more events that have a detrimental impact
on the estimated future cash flows of the financial
asset have occurred. For financial assets that have
been assessed as credit impaired, a lifetime ECL is
recognised as a collective or specific provision, and
interest revenue is calculated in subsequent reporting
periods by applying the effective interest rate to the
amortised cost instead of the carrying amount.
When determining whether the credit risk of a
financial asset has increased significantly since initial
recognition and when estimating ECLs, the Group
considers reasonable and supportable information
that is relevant and available without undue cost or
effort. This includes both quantitative and qualitative
information and analysis, based on the Group’s
historical experience and informed credit assessment
including forward-looking information.
As part of the forward-looking assessment, the Group
has considered:
•
•
•
•
•
actual or expected adverse changes in
business, financial or economic conditions that
are expected to cause a significant change to
the borrower’s ability to meet its obligations
such as market interest rates, unemployment
rates or property growth rates are incorporated
in the model;
external (if available) credit ratings;
significant changes in the value of the collateral
supporting the obligation or in the quality of
third-party guarantees or credit enhancements;
significant changes in the quality of the
underwriter;
S&P assumptions such as first homebuyer,
occupancy, employment type, geographical
concentration, principal and interest and
interest only.
A summary of the assumptions underpinning the
Groups ECL model is as follows:
2019 ANNUAL REPORT
49
Notes to the Financial Statements (continued)
Category
Definition of Category
Performing
Customers have a low risk of default and a strong
capacity to meet contractual cash flows
Doubtful
Loans for which there is a significant increase in credit
risk; as significant increase in credit risk is presumed if
interest and/or principal repayments are 30 days past due
Basis for recognition of ECL
provision
12 month expected losses.
Lifetime expected losses
In default
Interest and/or principal repayments are 90 days past due Lifetime expected losses
Write off
Interest and/or principal repayments are past due and
there is no reasonable expectation of recovery
Asset is written off
The group assumes the credit risk on a financial instrument has not increased significantly since initial
recognition if the financial instrument is determined to have a low credit risk at the reporting date. A financial
instrument is determined to have a low credit risk if:
1)
2)
3)
the financial instrument has a low risk of default;
the debtor has a strong capacity to meets its contractual cash flow obligation in the near term; and
adverse changes in economic and business conditions in the longer term may, but will not necessarily,
reduce the ability of the borrower to fulfil its contractual cash flow obligations.
Impairment of Contract Assets and Cash and Cash Equivalents
The Group’s contract assets relate to trail commission receivable mainly from high credit quality financial
institutions who are the members of AFG’s lender panel (Refer to Note 5(a)). There have been no historical
instances where a loss has been incurred, including through the global financial crisis and therefore ECL would
not be material. There have been no historical instances where a loss has been incurred and therefore any ECL
has been determined not material.
Impairment of trade receivables
Trade and other receivables from other customers are rare given the nature of the Group’s business. The Group
has assessed its history of losses as well as performing a forward-looking assessment, both of which have
not resulted in any historical or expected material forward looking losses. Group does not require collateral in
respect of trade and other receivable (refer to Note 5(a)).
Write off policy
The Group writes off a financial asset when there is information indicating that the debtor is in severe financial
difficulty and there is no realistic prospect of recovery, e.g. when the debtor has been placed under liquidation
or has entered into bankruptcy proceedings. Financial assets written off may still be subject to enforcement
activities under the Groups recovery procedures, taking into account legal advice where appropriate. Any
recoveries made are recognised in profit or loss.
Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no
reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment
plan with the Group, and a failure to make contractual payments.
(iii) Financial Liabilities
Initial recognition and measurement
Financial liabilities within the scope of AASB 9 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.
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2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
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.
recognition minus the principal repayments, plus the
cumulative amortisation using the effective interest
method of any difference between that initial amount
and the maturity amount, adjusted for any loss
allowance. The gross carrying amount of a financial
asset is the amortised cost of a financial asset before
adjusting for any loss allowance.
The Group’s non-derivative financial liabilities
include interest-bearing liabilities and trade and
other payables.
Subsequent measurement
Subsequent to initial recognition, interest-bearing
liabilities are measured at amortised cost using the
effective interest rate method.
Derecognition
A financial liability is derecognised when the
obligation under the liability is discharged or
cancelled or expires. When an existing financial
liability is replaced by another from the same
lender on substantially different terms, or the terms
of an existing liability are substantially modified,
such an exchange or modification is treated as
the derecognition of the original liability and the
recognition of a new liability. The difference in
respect of the carrying amounts is recognised in
the income statement.
(iv) Amortised cost and effective interest method
The effective interest method is a method of
calculating the amortised cost of a debt instrument
and of allocating interest income over the relevant
period. For financial assets other than purchased or
originated creditimpaired financial assets (i.e. assets
that are creditimpaired on initial recognition), the
effective interest rate is the rate that exactly discounts
estimated future cash receipts (including all fees and
points paid or received that form an integral part
of the effective interest rate, transaction costs and
other premiums or discounts) excluding expected
credit losses, through the expected life of the debt
instrument, or, where appropriate, a shorter period,
to the gross carrying amount of the debt instrument
on initial recognition. For purchased or originated
creditimpaired financial assets, a creditadjusted
effective interest rate is calculated by discounting the
estimated future cash flows, including expected credit
losses, to the amortised cost of the debt instrument
on initial recognition.
The amortised cost of a financial asset is the amount
at which the financial asset is measured at initial
(v) Share capital
Ordinary shares
Ordinary shares are classified as equity. Incremental
costs directly attributable to the issue of ordinary
shares and share options are recognised as a
deduction from equity at the time of issuance, net of
any related income tax benefit.
Repurchase of share capital
When share capital recognised as equity is
repurchased the amount of consideration paid,
including directly attributable costs, is recognised as a
reduction in equity.
Dividends
Dividends are recognised as a liability in the period in
which they are declared.
(c) Cash and short-term deposits
Cash and short-term deposits in the 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.
2019 ANNUAL REPORT
51
Notes to the Financial Statements (continued)
Where parts of an item of property, plant and
equipment have different useful lives, they are
accounted for separately.
economic benefits they are written-off as an expense
in the profit or loss.
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) 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)).
(ii) Subsequent costs
(iii) Subsequent expenditure
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.
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:
a) Capitalised software
development costs
2.5 - 5 years
b)
Software licenses
2.5 - 5 years
The estimated useful lives for the current and
comparative periods are as follows:
a)
b)
plant and equipment 2 - 5 years
fixtures and fittings
5 - 20 years
Depreciation methods, useful lives and residual
values are reassessed at each reporting date.
(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.
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.
For the purpose of impairment testing, assets are
grouped together into the smallest group of assets
that generates cash inflows from continuing use that
are largely independent of the cash inflows of other
assets or groups of assets (the “cash-generating
unit”).
An impairment loss is recognised if the carrying
amount of an asset or its cash-generating unit
exceeds its recoverable amount. A cash-generating
unit is the smallest identifiable asset group that
generates cash flows that largely are independent
from other assets and groups.
The 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
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
52
2019 ANNUAL REPORT
reflects current market assessments of the time value
of money and the risks specific to the asset.
Impairment losses recognised in prior periods are
assessed at each reporting date for any indications
that the loss has decreased or no longer exists.
An impairment loss is reversed if there has been
a change in the estimates that have been used to
determine the recoverable amount. An impairment
loss is reversed only to the extent that the assets
carrying amount does not exceed the carrying
amount that would have been determined, net of
depreciation or amortisation, if no impairment loss has
been recognised.
(g) Employee benefits
(i)
Long-term employee benefits
The Group’s liability in respect of long-term
employee benefits is the amount of future benefits
that employees have earned in return for their
service in the current and prior periods; that benefit
is discounted to determine its present value, and
the fair value of any related assets is deducted.
Consideration is given to the expected future
wage and salary levels, and periods of service.
The discount rate is the yield at the reporting date
on government bonds that have maturity dates
approximating the terms of the Group’s obligations
and that are denominated in the same currency as
the Group’s functional currency.
(ii) Short-term benefits
Short-term employee benefits are measured on an
undiscounted basis and are expensed as the related
service is provided.
A liability is recognised for employee benefits such
as wages, salaries, annual leave and sick leave if
the Group has present obligations resulting from
employees’ services provided to reporting date.
A provision is recognised for the amount expected to
be paid under short-term and long-term cash bonus
or profit-sharing plans if the Group has a present legal
or constructive obligation to pay this amount as a
result of past service provided by the employee and
the obligation can be estimated reliably.
(iii) Share-based payment transactions
The grant date fair value of options and shares
granted to employees is recognised as an employee
expense, with a corresponding increase in equity
over the period in which the employees become
unconditionally entitled to the options or shares.
Notes to the Financial Statements (continued)
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 from contracts with Customers
The Group adopted AASB 15 Revenue from
contracts with customers 1 July 2018. The standard
has introduced a single principle based five step
recognition measurement model for revenue
recognition:
1)
Identifying the contract with a customer;
2)
Identifying the separate performance
obligations;
3) Determining the transaction price;
4) Allocating the transaction price to the
performance obligations;
5) Recognising revenue when or as performance
obligations are satisfied
Revenue is recognised either at a point in time or over
time, when (or as) the Group satisfies performance
obligations by transferring the promised goods or
services to its customers. The Group recognises
contract liabilities (see note 24) for consideration
received in respect of unsatisfied performance
obligations and reports these amounts as other
liabilities in the statement of financial position. Similarly,
if the Group satisfies a performance obligation before
it receives the consideration, the Group recognises
either a contract asset or a receivable in its statement
of financial position, depending on whether something
other than the passage of time is required before the
consideration is due.
2019 ANNUAL REPORT
53
Notes to the Financial Statements (continued)
Under AASB 15, revenue is recognised when
the Group satisfies performance obligations by
transferring the promised services to its customers.
Determining the timing of the transfer of control - at a
point in time or over time - requires judgement. Below
is a summary of the major services provided and the
Group’s accounting policy on recognition as a result
of adopting AASB 15.
The Group’s significant income streams under AASB
15 include:
•
•
Commissions – origination and trail
commissions and associated interest income
Other income – sponsorship income and fees
for services.
The Group often enters into transactions that will
give rise to different streams of revenue. In all cases,
the total transaction price for a contract is allocated
amongst the various performance obligations based
on their relative stand-alone selling prices. The
transaction price for a contract excludes any amounts
collected on behalf of third parties.
Commissions – origination and trail commissions
The Group provides loan origination services and
receives origination commission on the settlement of
loans. Additionally, the lender normally pays a trailing
commission over the life of the loan.
Commission revenue is recognised as follows:
Origination commissions: Origination
•
commissions are recognised upon the loans
being settled and receipt of commission net
of clawbacks. Commissions may be clawed
back by lenders in accordance with individual
contracts. These potential clawbacks are
estimated and recognised at the same time
as origination commission and included in
origination commission revenue.
•
•
Trailing commissions: The Group receives trail
commissions from lenders on settled loans
over the life of the loan based on the loan
balance outstanding. The Group also makes
trail commission payments to brokers when
trail commission is received from lenders.
The future trail commission receivable is
recognised upfront as a contract asset. Trailing
commissions include revenue on residential,
commercial and AFGHL white label trail books.
Interest income: This is the financing
component of the trail commission contract
asset which brings into consideration the
time value of money. Recognised in line with
effective interest rate in line with AASB 9.
54
2019 ANNUAL REPORT
Trail commissions – significant estimates and
judgements
Given AASB 15 has been adopted at the same time as
AASB 9, trail commission receivables are determined
to be contract assets under AASB 15. Consequently,
the Group applies the AASB 15 variable consideration
guidance to the measurement of the contract asset.
On initial recognition, the Group recognises a contract
asset which represents management’s estimate of
the variable consideration to be received. The Group
uses the ‘expected value’ method of estimating
variable consideration which requires significant
judgement. A corresponding expense and payable
is also recognised, initially measured at fair value
being the net present value of expected future trailing
commission payable to brokers.
The 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. Key assumptions
underlying the calculation include the average
loan life, discount rate and the percentage paid to
brokers. Refer to Note 29(d) for details on these key
assumptions.
Other income
Sponsorship income is the income received in
advance from sponsorship payment arrangements
with Lenders. The income is brought to account once
the sponsored event has occurred.
Fees for services relates to providing marketing,
compliance and administration services to the
brokers. This revenue is recognised with reference to
the stage of completion for the contract of services.
Impact of application of AASB 15 Revenue from
Contracts with Customers
Determining performance obligations are satisfied
(over time or a point in time) requires judgement.
The below table illustrates a summary of the impact
of AASB 15 on the Group’s significant revenue from
contracts with customers.
Payment for upfront commissions and fees for
services are all typically due within 30 days of
satisfying performance obligations.
Notes to the Financial Statements (continued)
“Point in
time” or
“Over time”
Types of
Service
Nature and timing
of satisfaction
of performance
obligations
Revenue
recognition
policy under
AASB 118
Revenue
recognition
policy under
AASB 15
Nature of
change in
accounting
policy
Point in
time
Commissions
– origination
commissions
At the point in
time when the
loan is settled
with the lender.
Point in
time
Commissions
– trail
commissions
At the point in
time when the
loan is settled
with the lender.
AASB 15 did
not have a
significant impact
on the Group’s
accounting
policies.
With the
introduction of
AASB 15, trailing
commission is
now accounted for
under the revenue
standard, instead
of the financial
instruments
standard.
However, no
change occurs
from AASB 139
to AASB 15 as
the approach to
estimating the
expected value
of the trailing
commission is
in line with the
approach under
AASB 139.
Origination
commissions
received by
the Group are
recognised as
revenue upon
settlement of
the loan, net
of estimated
clawbacks.
The Group
recognises
revenue at the
point in time when
the loan is settled
with the lender.
The transaction
price is adjusted
for any expected
clawbacks.
Trailing
commissions
revenue has
historically been
recognised under
AASB 139.
The Group
recognises this
revenue at the
point in time, when
the loan is settled
with the lender.
On initial
recognition at
settlement, trailing
commission
revenue and the
related receivable
are recognised
at fair value
being the net
present value
of the expected
future trailing
commissions to
be received.
The carrying
amounts of
the receivable
and payable
are adjusted to
reflect actual and
revised estimated
cash flows by
recalculating the
net present value
of the estimated
future cash flows
at the original
effective interest
rate.
On initial
recognition a
contract asset
is recognised,
representing
managements
estimate of
the variable
consideration to
be received.
The Group uses
the “expected
value” method
of estimating
the variable
consideration,
which includes
significant
financing
component, by
recalculating the
net present value
of the estimated
future cash flows
at the original
effective interest
rate.
The carrying
amounts of the
receivable and
payable are the
same under both
revenue standards.
2019 ANNUAL REPORT
55
Notes to the Financial Statements (continued)
“Point in
time” or
“Over time”
Types of
Service
Nature and timing
of satisfaction
of performance
obligations
Revenue
recognition
policy under
AASB 118
Revenue
recognition
policy under
AASB 15
Nature of
change in
accounting
policy
Interest income
has changed
from the effective
interest rate on
financial assets
under AASB 139
to the financing
component
of the trailing
commission
contract asset
under AASB
15. There is no
change in timing
of recognising
the revenue, this
remains over time.
Funds are
received in
advance and
initially recognised
as contract
liability (deferred
income). Revenue
is recognised at a
point in time when
the sponsored
event has
occurred.
Revenue is
recognised
with reference
to the stage of
completion for
the contract of
services.
AASB 15 did
not have a
significant impact
on the Group’s
accounting
policies.
AASB 15 did
not have a
significant impact
on the Group’s
accounting
policies.
AASB 15 did
not have a
significant impact
on the Group’s
accounting
policies.
Over
time
Revenue arising
from the discount
rate applied to the
trail commission
contract asset.
Revenue is
recognised
at the time of
valuation of the
trail commission
contract asset.
Interest
income –
discount
unwind on
the NPV trail
commission
contract
asset
Point in
time
Other
income –
sponsorship
income
The performance
obligation is that a
sponsored event
has occurred.
Revenue is
recognised as
the events are
undertaken.
Over
time
Other income
– Fees for
services
Revenue is
recognised as
the services are
performed.
The performance
obligation is
the provision
of services to
brokers, including
marketing,
compliance and
administration
services. The
income is
recognised
with reference
to the stage of
completion for the
contract of the
services.
In summary, the Group notes no adjustments are required to the amounts recognised in the balance sheet at
the date of initial application, 1 July 2018.
56
2019 ANNUAL REPORT
(j)
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.
(k) 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.
(l) Securitisation interest income and expense
Interest income is the key component of this revenue
stream and it is recognised as it accrues using the
effective interest method in accordance with AASB 9.
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.
Interest income is recognised using the effective
interest method for debt instruments measured
subsequently at amortised cost and at fair value
through other comprehensive income.
For financial assets other than purchased or
originated creditimpaired financial assets, interest
income is calculated by applying the effective interest
rate to the gross carrying amount of a financial asset,
except for financial assets that have subsequently
become credit-impaired.
Notes to the Financial Statements (continued)
For financial assets that have subsequently become
credit impaired, interest income is recognised by
applying the effective interest rate to the amortised
cost of the financial asset. If, in subsequent reporting
periods, the credit risk on the creditimpaired financial
instrument improves so that the financial asset is no
longer creditimpaired, interest income is recognised
by applying the effective interest rate to the gross
carrying amount of the financial asset.
For purchased or originated creditimpaired financial
assets, the Group recognises interest income by
applying the creditadjusted effective interest rate to
the amortised cost of the financial asset from initial
recognition. The calculation does not revert to the
gross basis even if the credit risk of the financial asset
subsequently improves so that the financial asset is
no longer creditimpaired.
Securitisation expense comprises interest payable
on borrowings and changes in fair value of financial
assets at fair value through profit or loss.
(m)
Income tax expense
Current tax assets and liabilities for the current and
prior periods are measured at the amount expected
to be recovered from or paid to the taxation
authorities. The tax rates and tax laws used to
compute the amount are those that are enacted or
substantively enacted by the balance sheet date.
Deferred income tax is generally provided on all
temporary differences at the balance sheet date
between the tax bases of assets and liabilities
and their carrying amounts for financial reporting
purposes.
Deferred tax assets are recognised where
management consider that it is probable that future
taxable profits will be available to utilise those
temporary differences. The carrying amount of
deferred income tax assets is reviewed at each
balance sheet date and reduced to the extent that
it is no longer probable that sufficient taxable profit
will be available to allow all or part of the deferred
income tax asset to be utilised.
Unrecognised deferred income tax assets are
reassessed at each balance sheet date and are
recognised to the extent that it has become probable
that future taxable profit will allow the deferred tax
asset to be recovered.
Deferred income tax assets and liabilities are
measured at the tax rates that are expected to apply
to the year when the asset is realised, or the liability
2019 ANNUAL REPORT
57
Notes to the Financial Statements (continued)
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.
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.
(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
(n) Contract liability
Sponsorship income, lease incentives and
professional indemnity insurance income is received
in advance and is recognised as a contract liability
in accordance with AASB 15. Income is deferred
until the performance obligations are satisfied, with
sponsorship income being recognised when the
sponsorship event has occurred (refer to Note 3(i)).
58
2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
(o) Borrowing costs
Other financial instruments
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.
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 payables that are
initially recognised at fair value and subsequently
carried at amortised cost.
5 Financial risk management
4 Determination of fair values
Overview
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 payable
The Group receives trail commissions from lenders
on settled loans over the life of the loan based on
the loan book balance outstanding. This is initially
recognised as a contract asset and is measured
using the ‘expected value’ method under AASB
9 (refer to Note 3(i) Revenue from Contracts with
Customers). The corresponding payable to brokers
is also recognised, initially measured at fair value
being the net present value of expected future trailing
commission payable to brokers.
The contract asset 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 runoff
information. Refer to Note 29(d) for details on the key
assumptions.
Trade and other payables
All trade and other payables have a remaining life
of less than one year and the notional amount is
deemed to reflect the fair value.
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 below risks, the objectives,
policies and processes for measuring and managing
risk, and the management of capital. There have been
some changes this reporting period to impairment
regarding loans and advances as a result of AASB 9
implementation and the development of an ECL model.
Refer to note 3(b)(i) for details. 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.
Investments in equity instruments
(a) Credit risk
The fair value of financial assets at fair value through
profit or loss and non-traded equity investments
designated at fair value through other comprehensive
income is determined by reference to their quoted
closing bid price at reporting date.
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. Refer to Note 29(a) for details.
2019 ANNUAL REPORT
59
Notes to the Financial Statements (continued)
Trade and other receivables
The Group’s exposure to credit risk is influenced
mainly by the individual characteristics of each
customer. The demographics of the Group’s customer
base, including the default risk of the industry and
country in which customers operate, has less of an
influence on credit risk.
Excluding financial institutions on the lender panel, trade
and other receivables from other customers are rare
given the nature of the Group’s business. The Group
has assessed its history of losses as well as performing
a forward looking assessment, both of which have not
resulted in any historical or expected material forward
looking losses. Group does not require collateral in
respect of trade and other receivables.
Contract assets
The Group’s contract assets 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 prior to joining the panel.
The Group bears the risk of non-payment of future trail
commissions by lenders (contract assets) 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. The group has applied the low credit risk
exemption to contract assets and as such no impairment
has been identified. Refer to note 29(a)(ii) for details.
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 2014
all residential loans with a loan to value ratio of greater
than 80% are subject to a lenders mortgage insurance
contract.
60
2019 ANNUAL REPORT
The Group has applied an ECL model to determine
the collective impairment provision of its loans and
advances. Refer note 3(b)(i)) and 29(a)(iii) for details.
(b) 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.
(c) Market risk
Market risk is the risk that changes in market prices,
such as foreign exchange rates, interest rates and
equity prices will affect the Group’s income or the value
of its holdings of financial instruments. The objective
of market risk management is to manage and control
market risk exposures within acceptable parameters,
while optimising the return.
Currency risk
The Group is exposed to foreign currency risk on
cash assets that are denominated in a currency other
than AUD. The currencies giving rise to this risk are
denominated in US dollars (USD) 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.
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
p(cid:14)(cid:15)(cid:16)(cid:14)(cid:17)(cid:18)(cid:18)(cid:19). 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 contracts assets and future trail commissions
payable. The Group uses regression models to project
the impact of varying levels of prepayment on its net
income. The model makes a distinction between the
different reasons for repayment and takes into account
the effect of any prepayment penalties. The model is
back tested against actual outcomes.
For the loans and advances within the SPE and SPE-
RMBS, the Group minimises the prepayment risk by
passing back all principal repayments to the warehouse
facility providers and bondholders.
Other market risk
The Group is exposed to an increase in the level
of credit support required within its securitisation
programme arising from changes in the credit rating
of mortgage insurers used by the SPE, and the
composition of the available collateral held. The Group
regularly reviews and reports on the credit ratings of
those insurers as well as the Company’s maximum
cash flow requirements should there be any adverse
movement in those credit ratings.
(d) 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
Notes to the Financial Statements (continued)
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
of the covenants or funding terms imposed by the
warehouse and RMBS transactions 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.
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.
2019 ANNUAL REPORT
6(cid:13)
Notes to the Financial Statements (continued)
•
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 and commercial 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 below.
Performance is measured based on segment profit before tax, as included in the internal management reports
that are reviewed by the Board of Directors.
AFG Wholesale
Mortgage Broking
AFG Home
Loans
Other /
Unallocated
Total
Year ended 30 June 2019
In thousands of AUD
Income
External customers
Inter-segment
Other operating income
Interest income
Timing of revenue recognition
At a point in time
Over time
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
Total segment income
563,320
111,321
530,095
31,622
1,603
-
111,288
-
-
33
563,320
-
37,335
73,986
1,456
(31,622)
13,529
1,995
(14,642)
(25,306)
10,664
33,223
16,728
(3,492)
642,839
-
15,132
2,028
659,999
575,349
84,650
46,459
(13,430)
33,029
880,616
868,931
2,184,060
2,115,354
25,284
853
3,089,660
2,985,138
Depreciation and amortisation
(149)
(21)
(855)
(1,025)
62
2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
Year ended 30 June 2018
In thousands of AUD
Income
External customers
Inter-segment
Other operating income
Interest income
Total segment income
Timing of revenue recognition
At a point in time
Over time
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
AFG Wholesale
Mortgage Broking
AFG Home
Loans
Other /
Unallocated
508,670
29,152
3,230
-
541,052
541,052
-
93,301
-
-
25
93,326
40,883
52,443
1,425
(29,152)
10,182
2,438
(15,107)
(25,123)
10,016
33,357
18,729
(4,377)
Total
603,396
-
13,412
2,463
619,271
556,812
62,459
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)
(999)
(3)
7 Commissions and other income
In thousands of AUD
Timing of revenue recognition
At a point in time
Commissions
Securitisation transaction fees
Over time
Interest on commission income receivable
Mortgage management services
Securitisation transaction fees
Total commissions and other income
2019
2018
514,124
1,263
500,955
516
53,466
49,040
213
636
132
441
569,702
551,084
Commission and other income is accounted for in accordance with AASB 15 – Revenue from contracts with
customers. Refer to Note 3(i) for accounting policy. The expected value of the commercial trail book was
recognised for the first time during the current year and as a result commission revenue and commission
expense includes additional trail commissions related to prior period commercial settlements with no material
impact on the relevant financial statement line items.
2019 ANNUAL REPORT
63
Notes to the Financial Statements (continued)
8 Other income
In thousands of AUD
Timing of revenue recognition
At a point in time
Sponsorship and incentive income
Quality and other bonuses income
Over time
Professional indemnity insurance(i)
Software licence fees (ii)
Fees for services
Other(iii)
Total Other income
2019
2018
3,605
834
2,321
2,883
4,996
493
2,107
1,289
2,213
2,755
4,482
566
15,132
13,412
(i) Professional indemnity insurance is the income generated from professional indemnity insurance cover. AFG purchases a third-party professional
indemnity insurance policy for which it pays a premium and offers AFG’s brokers the option to be included under AFG’s policy cover. If this offer is
taken up, brokers will be charged a fee. This revenue from this fee is brought to account over time
(ii) Software Licenses is the income generated from FLEX & SMART. This revenue relates to AFG software used by brokers and is recognised over time as
the software license service is provided.
(iii) Other income is accounted for in accordance with AASB 15 – Revenue from contracts with customers. Refer to Note 3(i) for accounting policy.
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
64
2019 ANNUAL REPORT
Note
2019
3,977
2,148
3,433
423
2018
1,840
1,451
3,296
426
10
29,391
26,905
1,026
1,609
508
999
2,030
182
42,515
37,129
2019
20,344
6,268
(13)
772
2,020
29,391
2018
18,572
5,837
229
385
1,882
26,905
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
Other non-audit services
12 Finance income and expenses
Recognised in profit or loss
In thousands of AUD
Interest income on loans and receivables
Interest income on bank deposits
Net foreign exchange gain
Finance income
Net change in fair value of financial assets designated at fair
value through profit or loss
Interest expense
Finance expense
Notes to the Financial Statements (continued)
2019
2018
205,000
205,000
97,500
97,500
210,000
210,000
162,600
162,600
2019
599
1,415
14
2,028
-
-
-
2018
337
2,096
30
2,463
(15)
(3)
(18)
Net finance income and expense
2,028
2,445
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
Other adjustments
Deferred tax expense
Origination and reversal of temporary differences
Income tax expense reported in the statement of profit or loss
2019
2018
12,853
(126)
(26)
729
13,430
12,938
(111)
-
1,573
14,400
2019 ANNUAL REPORT
65
Notes to the Financial Statements (continued)
Numerical reconciliation between tax expense and pre-tax accounting profit
In thousands of AUD
Profit before tax from continuing operations
Income tax using the Company’s domestic tax rate of
30% (2018: 30%)
Non-deductible expenses
Over provision in prior periods
Other adjustments
2019
46,459
13,938
(356)
(126)
(26)
2018
47,709
14,313
211
(111)
(13)
13,430
14,400
Current tax assets and liabilities
(b)
The current tax liability for the Group of $2,808k (2018: $2,074k) 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:
Assets
Liabilities
Net
In thousands of AUD
Property, plant and
equipment and intangibles
Trade and other receivables
Contract asset
Employee benefits
2019
(34)
-
-
2018
2019
-
-
-
-
-
263,014
(1,459)
(1,237)
Trade and other payables
(237,881)
(211,281)
Other items
(1,817)
(1,669)
2018
120
2019
(34)
2018
120
235,120
-
235,120
-
-
-
-
263,014
-
(1,459)
(1,237)
(237,881)
(211,281)
(1,817)
(1,669)
21,053
-
-
-
-
Tax (assets) / liabilities
(241,191)
(214,187)
263,014
235,240
21,823
Set off of tax
Net tax liabilities
241,191
214,187
(241,191)
(214,187)
-
-
-
21,823
21,053
21,823
21,053
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
2019
48,297
1,276
49,573
30,611
16,634
47,245
96,818
96,818
2018
48,364
1,276
49,640
22,055
17,015
39,070
88,710
88,710
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
66
2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
The effective interest rate on short term deposits in 2019 was 2.32% (2018: 2.27%). The deposits had an
average maturity of 73 days (2018: 65 days).
The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are
disclosed in Note 29.
(b) Reconciliation of cash flows from operating activities
In thousands of AUD
Cash flows from operating activities
2019
2018
Profit for the period from continuing operations
33,029
33,309
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 in receivables and prepayments
Increase in trade and other payables
(Decrease)/Increase in contract liability
Increase/(Decrease) in employee entitlements
Increase/(Decrease) in provisions
Cash generated from operations
Income tax paid
Net cash generated by operating activities
13,430
1,026
(2,015)
773
(1,526)
(94,674)
88,298
10
38,351
(2,576)
3,205
(178)
681
274
39,757
(11,926)
27,831
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
2019 ANNUAL REPORT
67
Notes to the Financial Statements (continued)
15 Trade and other receivables
In thousands of AUD
Current
Trade receivables
Other receivables1
Accrued income
Net present value of future trail commissions receivable2
Prepayments
Non-Current
Net present value of future trail commissions receivable2
2019
239
1,256
375
1,870
-
3,539
5,409
-
-
5,409
2018
337
992
-
1,329
170,191
3,735
175,255
634,862
634,862
810,117
1 Other receivables include the Thinktank Pty Ltd term deposit. Refer Note 19.
2 The trail commission receivable is now classified as a contract asset upon transition to AASB 15 (refer Note 3(i) and the new contract asset Note 16).
16 Contract Asset
In thousands of AUD
Current
Net present value of future trail commissions contract asset1
Non-current
Net present value of future trail commissions contract asset1
2019
2018
194,283
705,444
899,727
-
-
-
1 The trail commission receivable is now classified as a contract asset upon transition to AASB 15. Refer to Note 3(i) for accounting policy and Note 29(d)
for assumptions related to contract asset expected value. Impairment on contract assets is immaterial and therefore not recognised. The expected
value of the commercial trail book was recognised for the first time during the current year and as a result a trail commission contract asset and
corresponding liability has been recognised for the first time with no material impact on the relevant financial line items.
The Group’s exposure to credit and currency risks and impairment losses related to contract assets are
disclosed in Note 29.
17 Trade and other payables
In thousands of AUD
Current
Note
2019
2018
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
172,430
63,282
3,981
239,693
634,383
634,383
150,340
62,632
2,529
215,501
568,175
568,175
874,076
783,676
68
2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
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 29.
18 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 expected credit loss3
2019
2018
353,870
331,372
1,574
73
1,916
205
355,517
333,493
2019
2018
1,710,714
1,042,477
2,703
3,827
(757)
555
3,755
(423)
1,716,487
1,046,364
2,072,004
1,379,857
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 10.70% p.a. (2018: 11.06% p.a.).
b) Loan and advances to McCabe St Limited (related party) are secured over its land and assets. Interest is charged on average at 4.13% p.a.
(2018: 4.08% p.a.).
3 Refer to Note 29(a)(ii) for a reconciliation of opening and closing expected credit losses on loans and advances including movements between credit
risk stages.
At the end of the reporting period, the balance of the Group’s securitised assets includes a provision for
expected credit loss of $757k (2018: $423k).
During the financial year, new loans issued in the Group’s securitisation programme were $1,059,513k
(2018: $509,753k).
The Group’s exposure to credit, currency and interest rate risks related to loans and advances is disclosed in
Note 29.
2019 ANNUAL REPORT
69
Notes to the Financial Statements (continued)
19 Investment in associate
In thousands of AUD
Non-current
Cost of investment1
Contingent consideration liability
Share of post-acquisition profit
1
Includes transaction costs
2019
2018
11,141
1,488
1,712
14,341
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 $10.9M in cash consideration, with additional contingent consideration payable of
$1,488k (a portion of this is held in a term deposit). 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
Balance Sheet
Current assets
Non-current assets
Total Assets
Current liabilities
Non-current liabilities
Total Liabilities
Net assets
Income Statement
Profit after tax
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.
70
2019 ANNUAL REPORT
2019
2018
31,907
1,086,100
1,118,007
8,066
1,094,453
1,102,519
29,300
838,170
867,470
6,669
850,363
857,032
15,488
10,438
4,639
5531
14,341
12,815
1,712
11,141
1,488
14,341
186
11,141
1,488
12,815
20 Property, plant and equipment
In thousands of AUD
Consolidated
Balance at 1 July 2017
Acquisitions
Disposals and write-offs
Depreciation
Balance at 30 June 2018
Balance at 1 July 2018
Acquisitions
Disposals and write-offs
Depreciation
Balance at 30 June 2019
Notes to the Financial Statements (continued)
Plant and
equipment
Fixtures and
fittings
210
201
(50)
(115)
246
246
254
(3)
(185)
312
1,688
55
-
(610)
1,133
1,133
11
-
(607)
537
Total
1,898
256
(50)
(725)
1,379
1,379
265
(3)
(792)
849
21 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 29.
In thousands of AUD
Current
Securitisation warehouse facilities
Loans from funders
Securitised funding facilities1
Non-current
Securitised funding facilities1
Loans from funders
1 Securitised funding facilities include RMBS and risk retention facilities. Refer Note 21 (a) (ii).
2019
2018
962,444
-
191,722
1,154,166
496,896
20
261,795
758,711
919,606
623,049
-
1
919,606
623,050
2,073,772
1,381,761
2019 ANNUAL REPORT
(cid:20)(cid:21)
Notes to the Financial Statements (continued)
Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
2019
2018
In thousands
of AUD
Weighted
Average
Effective
interest
rate
Year of
maturity
Face
value
Carrying
amount
Weighted
Average
Effective
interest
rate
Year of
maturity
Face
value
Carrying
amount
Warehouse
facilities
Securitised
funding
facilities
Loans from
funders
3.13% 2019-2020
962,444
962,444
3.12% 2018-2019
496,896
496,896
3.17% 2019-2024 1,106,674 1,111,328
3.00% 2018-2023
883,425
884,844
6.00% 2019-2020
-
-
6.00% 2018-2020
21
21
2,069,118 2,073,772
1,380,342 1,381,761
(a) Warehouse and Securitised funding facilities
(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 being loans and advances to customers. 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.
As at the reporting date the unutilised securitisation warehouse facility for all Series is $44,356k (2018:
$93,346k). The interest is recognised at an effective rate of 3.13% (2018: 3.12%).
The Group has secured an extension to the term of both of its residential warehouse facilities. The NAB
residential warehouse facility has been extended to 10 December 2019 and the ANZ facility has been extended
to 10 May 2020. AFG expects this warehouse facility to be rolled post December 2019 given AFG has
historically been able to extend by 12 months at a time.
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 drawn down (2018: not drawn down).
Additional credit support includes subordinated credit enhancement held by the Company of $21,500k (2018:
$20,740k).
72
2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
(ii) Securitised funding facilities
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 3.17% (2018: 3.00%).
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 $5,940k (2018: $2,460k).
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.
Other Securitised funding facilities
Securitised funding facilities are secured only on the assets of each of the individual securitisation trusts. During
the year NAB issued $21,323k which has been used for security over the net assets of AFG 2019-1 Trust.
2019 ANNUAL REPORT
73
Notes to the Financial Statements (continued)
(b) 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
The facilities are subject to annual review.
22 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
23 Provisions
In thousands of AUD
Provision for Clawbacks1
Provision for Contingent Payment2
Provision for make good
2019
2018
200
276
476
118
276
394
82
82
2019
2,491
1,444
1,181
5,116
118
118
200
276
476
113
276
389
87
87
2018
1,788
1,405
1,235
4,428
115
115
5,234
4,543
2019
1,291
1,488
350
3,129
2018
1,206
1,488
161
2,855
1 Provision for clawbacks relates to commissions that maybe clawed back by lenders in accordance with individual contracts. These potential clawbacks
are estimated, and a provision raised (see note 3(i)).
2 Provision for contingent payment to Thinktank (see note 19).
74
2019 ANNUAL REPORT
24 Contract liability and Deferred Income
(a) Contract Liability
In thousands of AUD
Current
Sponsorship income
Lease incentives
Unearned professional indemnity insurance
(b) Deferred income
In thousands of AUD
Current
Sponsorship income
Lease incentives
Unearned professional indemnity insurance
Notes to the Financial Statements (continued)
2019
2018
3,936
10
350
4,296
-
-
-
-
2019
2018
-
-
-
-
3,352
369
402
4,123
Deferred income in prior period, however from 1 July 2018 the new AASB 15 became effective, changing the
classification to Contract Liability. Refer Note 2(e)(i).
25 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
After five years
2019
1,703
5,969
1,503
9,175
2018
2,223
2,041
-
4,264
The Group leases a number of office facilities under operating leases. The leases run for a period of up to 8
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 year ended 30 June 2019 the West Perth lease was extended for an additional 7 years.
During the financial year ended 30 June 2019 $1,609k was recognised as an expense in the Consolidated
Statement of Profit or Loss and Other Comprehensive Income in respect of operating leases (2018: $2,030k).
The Group has performed a full assessment of the impact of applying the new AASB 116 Leases standard. The
Group has a limited number of operating leases which will result in the recognition of right of use assets and
corresponding liabilities. No significant net impact has been identified. Additional disclosures will be prepared
under the new standard when adopted and effective 30 June 2020. See Note 2(e)(ii) for more information.
2019 ANNUAL REPORT
75
Notes to the Financial Statements (continued)
26 Capital and reserves
(a) Share capital
The Company
On issue at 1 July
On issue at 30 June – fully paid
Share Capital
($’000)
Ordinary shares
(’000)
2019
43,541
43,541
2018
2019
43,541 214,813
43,541 214,813
2018
214,813
214,813
The Company does not have authorised capital or par value in respect of its issued shares. All issued shares
are fully paid and rank equally with regard to the Company’s residual assets.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled
to one vote per share at meetings of the Company.
(b) 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:
Cents per
share
Total amount
($’000)
Franked /
unfranked
Date of
payment
2019
Final 2018 ordinary
1st interim 2019 ordinary
2018
1st interim 2018 ordinary
Final 2017 ordinary
Special dividend
Declared and unrecognised as a liability:
2019
Final 2019 ordinary
5.7
4.7
4.7
5.5
12.0
5.9
12,244
10,096
22,340
10,096
11,816
25,778
47,690
12,755
12,755
100%
100%
27/09/2018
28/03/2019
100%
100%
100%
29/03/2018
28/09/2017
29/03/2018
100%
3/10/2019
Dividends declared or paid during the year or after 30 June 2019 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
2019
15,114
35,267
2018
12,763
29,780
50,381
42,543
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 $50,381k (2018: $42,543k) franking credits.
76
2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
27 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 2019
30 June 2018
Profit attributable to ordinary equity holders of the Company
33,029
33,336
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
1,956
216,769
214,813
1,289
216,102
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.
28 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.
The following table outlines performance rights that are conditionally issued under LTIP:
Offer Date
Vesting
date
Balance at
start of the
year
Granted
during the
year
Vested
during the
year
Expired
during the
year
Forfeited
during the
year
Balance at
end of the
year
1/07/2016
30/06/2019
-
1/07/2017
30/06/2020
593,136
1/07/2018
30/06/2021
1,288,532
593,136
695,396
667,373
-
-
593,136
-
-
-
-
-
-
593,136
1,288,532
1,362,769
2019 ANNUAL REPORT
(cid:22)(cid:22)
Notes to the Financial Statements (continued)
29 Financial instruments
(a) Credit risk
Exposure to credit risk
The carrying amount of the Group’s financial assets represents the maximum credit exposure.
(i)
Contract assets
The majority of the Group’s net present value of future trail commission receivables 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. There has been no historical instances where a loss has been incurred,
including through the global financial crisis and therefore ECL would not be material.
In thousands of AUD
Current
Non-Current
Current
Non-Current
Standard & Poor’s Credit rating
AA+
AA-
A+
A
A-
BBB+
BBB
BBB-
Not rated
2019
-
142,095
16,154
4,177
8,654
6,461
8,401
-
8,341
194,283
2019
-
2018
10
2018
37
515,948
128,253
478,420
58,656
15,169
31,422
23,460
30,503
-
30,286
705,444
7,262
2,076
7,411
3,481
11,940
2,097
7,661
27,088
7,746
27,644
12,986
44,541
7,823
28,577
170,191
634,862
(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
2019
2018
2,064,586
1,373,849
5,183
2,235
5,462
546
2,072,004
1,379,857
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 $3,729,217k (2018: $2,551,566k). During the year ended
30 June 2019 the Group took possession of five additional residential securities and also managed two further
securities as assisted shortfall sales loans. The carrying amount of the repossessed residential properties,
at date of repossession, was $2,289k (2018: $287k). Of the 7 securities sold as mortgagee in possession or
(cid:23)(cid:24)
2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
assisted shortfall sale - one returned a surplus sale figure, three properties have been sold before the end of
the financial year, with the shortfall repaid by our lender’s mortgage insurance and three remains unsold.
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. The ECL model considers the
different risk profiles across the different loan portfolios full doc, near prime and low doc. The assumptions
applied are the same across the portfolios.
In thousands of AUD
Loan to value ratio
Greater than 95%
Between 90%-95%
Between 80%-90%
Less than 80%1
Carrying amount
2019
2018
2,188
43,971
319,534
1,698,893
2,064,586
1,324
51,734
204,896
1,115,895
1,373,849
1 LVR less than 80% is required to have Lenders Mortgage Insurance (LMI), resulting in 100% of this balance being insured.
A summary of the assumptions underpinning the Groups ECL model is as follows:
Category
Definition of Category
Performing Customers have a low risk of default and a strong capacity to meet
contractual cash flows
Doubtful
Loans for which there is a significant increase in credit risk; as
significant increase in credit risk is presumed if interest and/or
principal repayments are 30 days past due
Basis for recognition
of ECL provision
12 month expected
losses
Lifetime expected losses
In default
Interest and/or principal repayments are 90 days past due
Lifetime expected losses
Write off
Interest and/or principal repayments are past due and there is no
reasonable expectation of recovery
Asset is written off
ECL rate
Basis of recognition
of ECL provision
Estimated gross carrying
amount at default
Carrying amount (net of
impairment provision)
Basis for calculation of
interest revenue
In thousands of AUD
Performing
0.02%
12 month expected losses
2,059,376
2,058,927
Gross carrying amount
Underperforming
3.62%
Lifetime expected losses
Non-performing
8.84%
Lifetime expected losses
Write off
Total Loans
-
Asset is written off
2,919
2,291
174
2,813
Gross Carrying amount
2,089
-
2,063,829
Amortised cost
None
2019 ANNUAL REPORT
(cid:25)(cid:26)
Notes to the Financial Statements (continued)
In thousands of AUD
Closing loss allowance as at 30 June
2018 (calculated under AASB 139)
Amounts restated through retained
earnings
Opening loss allowance as at 1 July
2018 (calculated under AASB 9)
Individual financial assets transferred
to under-performing (lifetime expected
credit losses)
Individual financial assets transferred
to non-performing (credit-impaired
financial assets)
New financial assets originated or
purchased
Write-offs
Recoveries
Other changes
Closing loss allowance as at 30 June
2019 (calculated under AASB 9)
In thousands of AUD
Performing
Underperforming
Non-performing
Loans written off
Total gross loans and advances
Less Loan loss allowance
Less Write off
Performing
Under
performing
Non-
performing
Write off
Total
74
-
74
-
-
-
-
-
375
449
-
-
-
-
-
-
-
-
106
106
175
174
423
-
-
-
175
174
423
-
-
-
-
(175)
202
202
-
-
-
(174)
-
-
-
-
-
-
(174)
(175)
683
757
30 June 2019
2,059,376
2,919
2,291
174
2,064,760
(757)
(174)
2,063,829
Loans and advances net of ECL as at 30 June 2019
The reconciliation of opening and closing expected credit losses on loans and advances are as follows:
In thousands of AUD
30 June 2018
Movement
30 June 2019
Stage 1
Stage 2
Stage 3*
Total Provision for ECL
74
-
349
423
375
106
(147)
334
449
106
202
757
80
2019 ANNUAL REPORT
In thousands of AUD
Opening loss allowance as at 1 July 2018
Stage 1
Stage 2
Stage 3*
Closing loss allowance as at 30 June 2019
Notes to the Financial Statements (continued)
30 June 2019
423
375
106
(147)
757
* Amount was written off in the reporting period ended 30 June 2019. The Group has written off the financial asset due to the fact that there is
information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery.
Securitisation assets
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 2019 (2018: Nil).
Other secured loans
The Group has minimal exposure to credit risk for loans made during the year. No impairment loss was
recognised during 2019 (2018: Nil).
(b) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its
financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to
managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities
when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage
to the Group’s reputation. The Board of Directors reviews the 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.
2019 ANNUAL REPORT
8(cid:27)
More
than 5
years
-
-
Notes to the Financial Statements (continued)
2019
In thousands
of AUD
Carrying
amount
Contractual
cash flows
6 months
or less
6-12
months
1-2 years
2-5 years
Securitisation
warehouse facilities
Securitised
funding facilities1
Net present
value of future
trail commissions
payable
Trade and other
payables
962,444
983,944
778,678
205,266
-
-
1,111,027
1,128,618
96,723
96,722
160,289
774,884
806,813
959,597
112,221
102,067
175,934
349,582
219,793
64,612
64,612
64,612
-
-
-
-
2,944,896
3,136,771 1,052,234
404,055
336,223 1,124,466
219,793
1 Excludes set up costs amortisation
2018
In thousands
of AUD
Carrying
amount
Contractual
cash flows
6 months
or less
6-12
months
1-2 years
2-5 years
Securitisation
warehouse facilities
Securitised
funding facilities
496,896
517,636
517,636
-
-
-
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
Trade and other
payables
718,515
862,335
98,906
90,676
157,501
315,903
199,349
65,161
64,612
64,612
-
-
-
-
2,166,479
2,354,084
845,531
191,581
312,888
804,735
199,349
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.
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.
82
2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
On 7 May 2019, the Group secured an extension to the term of the jointly funded ANZ residential warehouse
facility to 10 May 2020. 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 to ANZ, mezzanine notes to Deutsche Bank
and the subordinated notes to AFG.
On 9 April 2019, the Group secured a short-term extension of the NAB residential warehouse facility that was
due to expire on 11 June 2019 to 10 December 2019. The 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.
Securitised funding facilities
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 17.
(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 a material impact on the Consolidated Statement of Profit or Loss and
Other Comprehensive Income and equity of the Group and have therefore not formed part of the disclosures.
(ii)
Interest rate risk
The table below summarises the profile of the Group’s interest-bearing financial instruments and contract assets
at reporting date.
In thousands of AUD
Fixed rate instruments1
Contract assets
Financial liabilities
Variable rate instruments
Loans and advances
Financial liabilities
Carrying amount
2019
2018
899,727
806,813
92,914
2,168,749
2,073,772
94,977
805,053
718,515
86,538
1,468,332
1,381,761
86,571
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.
2019 ANNUAL REPORT
83
Notes to the Financial Statements (continued)
Cash flow sensitivity analysis for variable rate instruments
Due to the market conditions existing at 30 June 2019, 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 remain constant.
The analysis is performed on the same basis for 2018 and 2019.
Effect in thousands of AUD
30 June 2019
Variable rate contract assets
Variable rate financial liabilities
Cash flow sensitivity (net)
30 June 2018
Variable rate contract assets
Variable rate financial liabilities
Cash flow sensitivity (net)
(iii)
Prepayment risk
After tax profit
Equity
100bp
increase
100bp
decrease
100bp
increase
100bp
decrease
15,143
6,737
8,406
10,239
3,478
6,761
(15,143)
(6,737)
(8,406)
(10,239)
(3,478)
(6,761)
15,143
6,737
8,406
10,239
3,478
6,761
(15,143)
(6,737)
(8,406)
(10,239)
(3,478)
(6,761)
Net present value of contract assets and future trail commissions 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 29(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 performed on AFG’s historical loan data. The change
estimate is calculated based on historical movements of the prepayment rate.
The effect from changes in prepayment rates, with all other variables held constant, is as follows:
In thousands of AUD
After tax profit
2019
+5%
(3,982)
-5%
4,208
2018
+5%
(3,746)
-5%
3,960
Securitised assets
The Group is exposed to prepayment risk on its securitised assets. The warehouse facilities and the securitised
funding facilities 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.
84
2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
(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.
(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 trailing commission contract asset recognised at amortised cost and payables that are
initially recognised at fair value and subsequently carried at amortised cost, the carrying amount of all financial
assets and liabilities recognised in the Statement of Financial Position approximate their fair value.
Trailing commissions are received from lenders on settled loans over the life of the loan based on the loan
book balance outstanding if the respective loans are in good order and not in default. The Group is entitled to
the trailing commissions without having to perform further services. The Group also makes trailing commission
payments to Members when trailing commission is received from lenders. Trail commissions are actuarially
assessed on future cashflow based on a number of assumptions including estimated loan life, discount rate,
payout ratio and income rate. Refer to Note 3 for the accounting policies regarding trail commissions
The trail commission assets and liabilities at 30 June 2019 relate to the Residential, Commercial and the
AFGHLs white label loan books.
The movement in the future trail commission balances for the period are mostly attributable to the growth of the
respective trail books over the financial year as opposed to any significant changes in the assumptions applied.
In thousands of AUD
30 June 2019
30 June 2018
Carrying amount
Fair value Carrying amount
Fair value
Contract Assets*
Future Trail commission contract asset
899,727
922,409
805,053
832,315
Financial liabilities
Future Trail commission payables
806,813
826,777
718,515
742,368
* Future trailing commission receivable was recognised as a financial asset under AASB 139 for the year ended 30 June 2018. It is now recognised as a
contract asset under AASB 15. Refer to note 2(b)(i) for details.
2019 ANNUAL REPORT
85
Notes to the Financial Statements (continued)
The fair value of trail commission contract asset 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.
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 2019
30 June 2018
Between 3.2 and 5.1 years
Between 3.2 and 5.0 years
Between 5% and 13.5%
Between 5% and 13.5%
Between 85% and 93.8%
Between 85% and 93.4%
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 (from
approximately 2002) 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.
30 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 2013-2 Trust
AFG 2016-1 Trust
AFG 2017-1 Trust
AFG 2018-1 Trust
AFG 2019-1 Trust
AFG 2010-2 Pty Ltd
New Zealand Finance Group Ltd
AFG Home Loans Pty Ltd
Investment in associates
Think Tank Group Pty Ltd
Country of
incorporation
Ownership
interest
2019
2018
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
Australia
New Zealand
Australia
100
100
100
100
100
-
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
-
-
100
100
Australia
33.55
33.55
AFG 2019-1 Trust and AFG 1010-2 Pty Ltd were opened and AFG 2013-2 Trust was closed during the year ended
30 June 2019.
86
2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
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 63% (2018: 65%) 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 32% (2018: 45%).
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 2013-2
• AFG 2016-1
• AFG 2017-1
• AFG 2018-1
• AFG 2019-1
2019
21,500
-
450
560
700
3,925
2018
20,740
750
450
560
700
-
1 The level of subordination subscribed by the company will increase or decrease over time depending upon a number of factors including the size of
the warehouse or RMBS term structure as well as the ratings methodology used for these warehouse facilities
Other
Holders of RMBS are limited in their recourse to the assets of the Securitisation vehicle (subject to limited
exceptions). AFG Group companies may however incur liabilities in connection with RMBS which are not
subject to the limited recourse restrictions (for example where an AFG Group company acts as a trust manager
or servicer of a Securitisation vehicle).
2019 ANNUAL REPORT
87
Notes to the Financial Statements (continued)
31 Parent entity
Throughout the financial year ending 30 June 2019, 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
2019
2018
31,112
-
31,112
20,975
(15)
20,960
2019
2018
230,075
965,132
250,551
899,659
43,542
1,455
20,476
65,473
202,286
863,306
224,774
807,370
43,542
690
11,704
55,936
See Notes 32 and 33 for the parent entity capital and other commitments, and contingencies.
Refer to Note 21 (c) for the parent entity’s guarantees.
32 Capital and other commitments
There are no capital commitments as at the reporting date.
33 Contingencies
Third Party Guarantees
Bank guarantees have been issued by third party financial institutions on behalf of the Group and its
subsidiaries for items in the normal course of business such as operating lease contracts. The amounts involved
are not considered to be material to the Group.
Contingent Liability
The contingent liability refers to the contingent consideration payable of $1,488k (2018: $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.
88
2019 ANNUAL REPORT
Notes to the Financial Statements (continued)
34 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.
loan owing to AFG amounting to $218k (2018:
$209k), this loan is on commercial terms at
arms-length. EPG and McCabe Street share
some common directors with AFG.
(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.
The aggregate amounts recognised during the year
relating to other related parties were as follows:
35 Subsequent events
(i) During the year, the Group made payments
to Genworth Mortgage Insurance Australia
Limited, one of our providers of Lenders
Mortgage Insurance (LMI). Mr T. Gill was a
Non-Executive Director of Genworth Mortgage
Insurance Australia Limited until 31 August
2018. 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 up to 31 August 2018
were $326k (2018: $706k). These payments are
not considered to be material to the financial
results of the Group and therefore do not impact
on Mr T. Gill’s independence as a Director.
(ii) Mr T. Gill is an Independent Director of First
Mortgage Services (FMS), one of our providers
of loan settlement services. During the year, the
Group made payments to FMS. These dealings
were in the ordinary course of business
and were on normal terms and conditions.
The payments made for the provision of the
settlement services were $464k (2018: $333k).
These payments are not considered to be
material to the financial results of the Group
and therefore do not impact on Mr T. Gill’s
independence as a Director.
(iii) Establish Property Group Ltd (EPG) was
created as part of the demerger of the property
business on 22 April 2015. 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 $1,126k which has
been paid to Qube. (2018: $1,583k).In addition
to the above McCabe Street has an outstanding
On 12 August 2019, the Group announced it had
entered into a binding conditional implementation
deed to merge with the mortgage aggregation
business of Connective Group Pty Ltd. Under the
transaction, Connective Group Pty Ltd will receive
$60 million in cash and 30,886,441 AFG shares
valuing the acquisition at $120 million, with AFG to
primarily fund the cash component through a new
corporate debt facility.
The transaction is conditional upon a court validating
the transaction as not being unlawful or able to be
set aside (a non customary condition), in addition
to ACCC, AFG shareholder (if required), Connective
Group shareholder approval and other customary
approvals.
On 22 August 2019, the Directors declared the
payment of a dividend of 5.9 cents per fully paid
ordinary share, fully franked based on tax paid at
30%. The dividend has a record date of 9 September
2019 and a payment date of 3 October 2019.
The aggregate amount of the proposed dividend
expected to be paid out of retained earnings at 30
June 2019 is $12,755k. The financial effect of this
dividend has not been brought to account in the
financial statements for the year ended 30 June 2019.
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.
2019 ANNUAL REPORT
89
Directors’ Declaration
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 2019 and
of its performance for the year ended on that date
(ii) Complying with Australian Accounting Standards (including the Australian Accounting
Interpretations) and the Corporations Regulations 2001
b.
c.
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.
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 22 August 2019.
90
2019 ANNUAL REPORT
Independent Audit Report
to the members of Australian Finance Group Limited
2019 ANNUAL REPORT
(cid:28)(cid:29)
Independent Audit Report (continued)
92
2019 ANNUAL REPORT
Independent Audit Report (continued)
2019 ANNUAL REPORT
93
Independent Audit Report (continued)
94
2019 ANNUAL REPORT
Independent Audit Report (continued)
2019 ANNUAL REPORT
95
Shareholder Information (continued)
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 July 2019.
(a) Number of holders of equity securities
Ordinary share capital
214,812,671 fully paid ordinary shares are held by 2,796 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
181,123,153
28,118,414
5,090,286
2,299,349
181,469
214,812,671
945
%
84.32
12.16
2.37
1.07
0.08
100
0.00
No. of
holders
60
1,020
641
742
333
2,796
66
%
2.15
36.48
22.93
26.54
11.91
100
2.36
* An unmarketable parcel is considered to be a shareholding of 258 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 July 2019 of $1.94.
(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
Banyard Holdings Pty Ltd ATF The B&K McGougan Trust
Australian Ethical Investment Limited
Milford Asset Management Limited
Renaissance Smaller Companies Pty Ltd
# Shares
29,907,737
21,179,773
19,602,689
15,000,000
14,788,765
13,461,256
11,200,014
10,780,338
% of issued
capital
13.92%
9.86%
9.13%
6.98%
6.88%
6.27%
5.21%
5.02%
96
2019 ANNUAL REPORT
Shareholder Information (continued)
# Shares
% of issues
capital
37,288,390
32,818,159
28,742,171
21,179,773
15,000,000
14,788,765
8,388,589
4,000,000
2,000,000
1,917,825
1,450,000
1,110,000
1,000,250
1,000,000
643,545
529,883
505,000
500,000
465,000
455,000
17.36
15.28
13.38
9.86
6.98
6.88
3.91
1.86
0.93
0.89
0.68
0.52
0.47
0.47
0.30
0.25
0.24
0.23
0.22
0.21
Twenty largest holders of quoted equity securities
Top holders
HSBC CUSTODY NOMINEES
(AUSTRALIA) LIMITED
NATIONAL NOMINEES LIMITED
CITICORP NOMINEES PTY LIMITED
MBM INVESTMENTS PTY LTD
THE BRETT MCKEON FAMILY
OCEANCITY INVESTMENTS PTY LTD
THE MATTHEWS FAMILY
BANYARD HOLDINGS PTY LTD
B & K MCGOUGAN
JP MORGAN NOMINEES AUSTRALIA
LIMITED
MRS KAREN JANE MCGOUGAN
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