20
20A N N U A L
R E P O R T
Contents
Directors’ Report
Auditor’s Independence Declaration
Consolidated Statement of Financial Position
Consolidated Statement of Profit or Loss and Other Comprehensive Income
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
Notes to the Financial Statements
Directors’ Declaration
Independent Audit Report
Shareholder Information
Corporate Directory
11
34
35
36
37
38
39
84
85
91
93
2
Annual Report 2020
3
Annual Report 2020
4,250+
Products
55+
Lenders
204
Staff
AFG broker numbers...
2,975
nationally
FY18
FY19
FY20
28.1M
28.6M
36.3M
AFG underlying NPAT has increased
to 36.3M FY20 from 28.6M FY19 arrow-circle-up
FY18
FY19
FY20
33.3M
33.0M
38.1M
AFG reported NPAT has increased
to 38.1M FY20 from 33.0M FY19 arrow-circle-up
FY20 Residential
settlements up
9% arrow-circle-up on FY19 to
Residential
trail book up
5% arrow-circle-up to
FY20 AFG Business
settlements up
167% arrow-circle-up on FY19 to
FY20 Commercial
settlements of
$34.1B
$154.6B
$346M
$2.29B
4.7
4.7
5.4
5.7
5.9
4.7
FY18
FY19
FY20
Dividends (cents per share)
Interim
Final
4
Annual Report 2020
52%
of Australian mortgages over the last 18
months have been written through a broker 1
1 Mortgage and Finance Association of Australia (MFAA) quarterly surverys
1 in 11
Australian residential mortgages
are arranged by an AFG broker
AFG Home Loans trail book
up 14% arrow-circle-up on FY19 to
$10.5B
AFG Home Loans services over
25,000
retail customers
FY19
FY20
1.06B
1.35B
FY19
FY20
2.06B
2.91B
AFGS settlements has increased
to 1.35B FY20 from 1.06B FY19 arrow-circle-up
AFGS loan book has increased
to 2.91B FY20 from 2.06B FY19 arrow-circle-up
FY18
FY19
FY20
31%
33%
27%
27% reported return on equity
AFGS successful
$700M
term transaction in July 2020
5
Annual Report 2020
Chairman’s message
Tony Gill, Chairman
I am very pleased to be reporting on another successful year
The reach the broker distribution channel provides to lenders
for AFG in what has been quite an extraordinary year.
and customers is vitally important. Limited access to branches
AFG has reported net profit after tax of $38.1 million for the full
year to 30 June 2020, a 15.3% increase year on year.
There remains considerable uncertainty about the progression
of the COVID-19 pandemic and its full impact on the country’s
economy. Substantial fiscal and monetary stimulus and the
government’s policy settings are assisting with the supply of
credit to households and businesses.
In this troubled environment, AFG’s fundamentals remain
robust. The Company is well capitalised with a healthy balance
and the constraints on movement necessitated by the pandemic
has accelerated the move to end-to-end digital transactions.
AFG’s continued investment in technology ensured our brokers
were well positioned to rapidly adapt to this change and were
able to continue to assist their customers through the lockdown.
The financial year also saw one of AFG’s founding Directors,
Kevin Matthews, retire from the Board. I would like to
acknowledge Kevin’s significant contribution to the Company
and long-term commitment to the wider industry during his
more than 35 years in the finance sector.
sheet and no debt. Our strong cashflow generation and active
The way forward
management of risk means the Company is positioned to
withstand new funding and economic shocks that may arise.
As a result, the Board is confident the Company is well
positioned to navigate the current uncertainties and has
resolved to pay a fully franked final ordinary dividend for the
2020 financial year of 4.7 cents per share.
The year that was
In August 2019 AFG announced its intention to merge with
mortgage aggregator Connective Group Pty Ltd. The binding
conditional implementation deed was subject to ACCC and
a non-customary condition, a court approval. We were very
pleased to receive word in June the ACCC would not oppose
the merger. We now await the decision of the court.
The Company has also enjoyed enormous success with
The unique challenges presented by the pandemic and its
effect upon our economy are impacting our country in ways
none of us could have predicted. For AFG, the impact on our
staff and brokers has been most evident in the new ways of
working that have evolved. Investment in technology ensured
our brokers and staff could adapt rapidly. This capability will
continue to develop. The Board maintains a cautious outlook,
with a conservative approach to capital and lending so as to
position the Company to respond to the evolving situation.
The AFG Board and executive team are cognisant that while we
currently have strong volumes as we enter the 2021 financial
year, the ongoing impact of COVID-19 on the community and on
future lending fundamentals mean that despite the Company’s
strength the outlook for the property and mortgage markets
remain uncertain. Against this backdrop, AFG is confident
our Residential Mortgage Backed Securitisation (RMBS)
that the role of brokers, who deliver choice and competition
programme. AFG priced two transactions in the 2020 financial
to Australian borrowers, will remain critically important as our
year. Subsequent to the end of the financial year AFG
country comes out the other side of the pandemic.
completed its largest single RMBS transaction of $700 million,
taking the total issuance since inception to $3.575 billion.
The Company has a sound strategic direction, a healthy financial
position and a committed and skilled workforce who have shown
The AFG Securities division of our business has enjoyed a
their adaptability to change and capacity to ensure continued
successful year in terms of responsible book growth and
support of our broker network and customers through what has
improvement in funding mix. The dislocation in the funding
been a challenging but very successful year for the Company.
markets necessitated a cautious approach to lending for
a period and was a key reason for the modest equity raise
conducted in May 2020. Strengthening the capital position has
ensured support for AFG Securities and the business has now
returned to a more normal footing with new originations
growing once more.
Tony Gill
Chairman
6
Annual Report 2020
7
Annual Report 2020
Chief Executive
Officer’s message
David Bailey, CEO
As I sat down to prepare this year’s annual letter to shareholders
Fortunately, with our head office located in Perth we have been
I reflected on the year that I had expected to report - two
able to return the majority of staff to more normal working
successful RMBS transactions; a strategic merger; a strong
conditions. As I write, our interstate teams continue to work
brand; a clear direction forward with greater regulatory certainty;
from home where required.
solid growth in every state and advances in all divisions of the
Company. A global pandemic was not on the list.
Despite the evolving economic uncertainty facing the Australian
economy over the past six months, I am in the fortunate position
of being able to report a highly successful year for the Company.
AFG has proven its resilience during a time of extraordinary
upheaval in the economy to report its best financial result to date.
AFG’s residential loan book is now at $154.6 billion,
representing growth of 5% on FY19. AFG’s combined
residential and commercial loan book now sits at $163 billion.
The AFG Business platform also recorded pleasing growth, with
settlements up 167% from $130 million in FY19 to $346 million
in FY20. The platform offers an extensive commercial product
range and lender choice for customers. There are now 29 lenders
on the AFG Business panel, including all four major banks.
AFG Securities
The AFG Securities division continued to be a strong
contributor with the loan book growing to $2.9 billion. This is
an increase of 41.3% on FY19 and a testament to our brokers’
faith in the quality and service offered by our securitized
products to recommend them to their customers.
Lenders have responded rapidly to borrowers affected by job
losses and business interruptions due to COVID-19 and AFG
Securities is no exception. Pleasingly we are seeing customers
move from a payment pause to make new repayment
arrangements and AFG Securities will continue to maintain
an active and prudent approach to lending and the support
of our customers.
COVID-19
As Australia grappled with the devastating bushfires that
The move to virtual interactions extended to AFG’s support
of our broker network, with weekly all-network webinars
outlining government, regulatory and practical advice to help
our brokers navigate the rapidly shifting landscape. During
lockdown periods from March, brokers maintained their
levels of activity, with a shift in focus to refinance loans as
customers sought savings and the country’s major lenders
chased growth. Recently, government initiatives have
supported increased activity from upgraders and first home
buyers. July 2020 was a record lodgement and settlement
month with $6.3 billion and $3.6 billion, respectively.
There are of course uncertainties as the country continues
to grapple with a way through the current health and
economic challenges. With rising unemployment there
is an expectation that some additional borrowers may
enter hardship as government fiscal support programmes
and loan relief measures come to an end or lockdowns
are extended in Victoria or revisited on other parts of
the country. The disruption to both the residential and
commercial lending markets is likely yet to be fully realised
and the scale of the impact is difficult to predict. We
maintain a cautious outlook, with a conservative approach
to capital and lending to position the Company to respond to
the evolving situation.
Residential Mortgage Backed Securities
I was particularly pleased with the performance of our AFG
Securities business. As both an originator and a distributor
of mortgages, our experience informs our lending practices.
This has fortified support, and driven oversubscription from a
broadened investor base. Disciplined lending criteria and active
management of the portfolio has meant we were in a fortunate
marked the end of 2019 and the beginning of 2020, the health
position to take our paper to market. The role the AOFM
and economic crisis unfolding overseas was soon to reach
played in assisting the broader credit markets to return quickly
our shores. By March, the Company had enacted its Business
at a time of great uncertainty should also be noted, and this
Continuity Plan and moved to a remote working arrangement
has allowed competition and choice for Australian home loan
for teams across the country.
borrowers to continue.
8
Annual Report 2020
9
Annual Report 2020
Merger with Connective
Looking forward
The merger represents an opportunity for all AFG shareholders
Currently our pipeline of business remains strong with brokers
to benefit from the diversification and flexibility of the
continuing to provide value to customers across Australia.
combined group. The prospect of complementing AFG’s
Whilst various federal and state government incentives
existing business with the cultural fit and similar customer-
have played an important role in stimulating lending activity,
focused philosophy of the Connective business is compelling
uncertainties remain as to the impact the pandemic will have
and I look forward to progressing the transaction once the
on the economy over the next twelve months. Given these
court condition is met.
Regulatory change
Changes to the law will require mortgage brokers to act in the
best interests of consumers when providing credit assistance
from 1 January 2021. This is an important distinction for
Australian mortgage brokers. Customers now electing to use
a mortgage broker can be assured of the protection that the
broker is working in their best interest. No other channel to
market can provide this level of assurance.
We have had very productive engagement with government
and the regulators through the year. We believe the appropriate
balance between meeting consumer expectations and the
practicality of application has been addressed. AFG has played
a leading role in driving industry change and is well equipped to
meet these new requirements.
uncertainties, in May 2020 the Company chose to raise
$60 million to ensure AFG was well placed and well capitalised
to maintain the momentum behind our business during this
period of market disruption. The capital raise, which was
predominately a rights issue, was well received by shareholders.
The impact of the COVID-19 pandemic on the economy and our
business remains highly uncertain however AFG is committed to
building upon our long-term strategy and securing our business
to withstand any possible future headwinds.
I would like to express my gratitude to the AFG management
team, staff and our brokers who have shown extraordinary
resilience and commitment to support each other as we
navigate these difficult times.
10
David Bailey
CEO
Annual Report 2020
Director’s 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 2020 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
(Independent 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
and the Pinchgut Opera. Mr Gill is a former member of the
Board of Genworth Mortgage Insurance Limited (GMA.AX), and
a former member of ASIC’s External Advisory Panel. Mr Gill
holds a Bachelor of Commerce and is a Chartered Accountant
(retired).
Brett McKeon
(Executive Director) Resigned 1 July 2019
Malcolm Watkins
(Executive Director)
Mr Watkins is a founding Director of AFG and plays a key role
in the strategic direction of the Company. For 26 years he has
driven the company’s tactical development of market-leading
IT and marketing divisions. Mr Watkins is also on the board of
Thinktank, a leading commercial property lender in which AFG
holds a 32.81 per cent stake. He is tasked with overseeing the
opportunity to blend Thinktank’s commercial property lending
expertise with AFG’s broad distribution and securitisation
capabilities, to deliver strategic value to both businesses.
Mr Watkins is also a former board member of the industry’s
peak national body representing the sector, the Mortgage and
Finance Association of Australia (MFAA).
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
(Non-Executive Director) Appointed 1 July 2019
and Nomination Committee. Following a career spanning 35
Mr McKeon is a founding Director of AFG and the Group’s
former Managing Director. Mr McKeon has worked for more
than 31 years in the financial services industry. He has
considerable management, capital raising, public company
and sales experience and is an experienced director in both
the public and private arenas. In addition to his role as Non-
Executive Director of AFG, Mr McKeon is the Chair of Establish
Property Group (EPG), a privately-owned company specialising
in debt and equity funding solutions for property developers,
property development, mortgage fund investments and other
opportunities for sophisticated and wholesale investors.
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 range of investment activities. He is also a Director of the
Fremantle Football Club. Mr Carter was a Member of the
Australian Stock Exchange and is a Fellow of the Financial
Services Institute. Mr Carter is a well-known professional with
unique experience in equities, capital markets and corporate
transactions. This experience and reputation provides a
platform for integrity and good governance.
11
DIRECTOR’S REPORTAnnual Report 2020 Melanie Kiely
(Independent Non-Executive Director)
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
Ms Kiely is an experienced Executive and Company Director
broker for more than 30 years. He is a former Director of the
with over 25 years of experience in health care, financial
Mortgage and Finance Association of Australia (MFAA) and
services and consulting in Australia, Europe and South Africa.
served on the MFAA’s National Brokers Committee for 12
Ms Kiely is also currently a Director of the Black Dog Institute
years. Mr Matthews is also a Senior Fellow of the Financial
and CEO of Good Sammy Enterprises. Prior to this, she has
Services Institute of Australasia (FINSIA) and a life member
held senior roles with Silver Chain, HBF Health Fund, nib
of the MFAA.
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. Ms Muirsmith is
Managing Director of Lenox Hill, a digital strategy and
advisory firm and is a Non-Executive Director of Cedar Woods
Properties Ltd, the Telethon Kids Institute, and Chair and Non-
Executive Director of HealthDirect Australia. She is a Graduate
of the Australian Institute of Company Directors and a Fellow
of Chartered Accountants Australia and New Zealand, where
she is a member of the Australian and New Zealand Corporate
Sector and 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.
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. 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
1,329,546
Brett McKeon
16,289,779
Malcolm Watkins
17,462,284
Craig Carter
Melanie Kiely
Jane Muirsmith
960,714
89,376
86,819
-
20,114
37,222
-
-
-
The above-named Directors held office during the whole of the
financial year and since the end of the financial year except
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.
where noted otherwise.
Kevin Matthews
(Non-Executive Director)
(Retired 28 October 2019)
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
12
Annual Report 2020DIRECTOR’S REPORT (continued) DIREC TOR’S REPORT (continued)
Dividends
Total dividends paid during the financial year ended 30 June 2020 were $24,359k (2019: $22,340k), which included:
•
•
A final fully franked ordinary dividend of $12,719k (5.9 cents per fully paid share) was declared out of profits of the Company for
2019 and paid on 27 September 2019.
An interim fully franked ordinary dividend of $11,640k (5.4 cents per fully paid share) was declared out of profits of the Company for
2020 and paid on 26 March 2020.
A final fully franked ordinary dividend of $12,584k (4.7 cents per fully paid share) has been declared out of profits of the Company for the
financial year ended 30 June 2020 and is to be paid on 29 September 2020.
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, white label and its established RMBS programme.
Corporate Governance Statement
The Company’s Corporate Governance Statement can be found at investors.afgonline.com.au/investor/?page=corporate-governance
13
Annual Report 2020 Review of Operations
For the year ended 30 June 2020 the Group recorded a net profit after tax of $38,078k, 15.3% above (30 June 2019: $33,029k). Revenue
from operating activities was up 6.1% to $682,183k (30 June 2019: $642,839k) as residential settlement volumes grew by 8.9% and the
AFG Securities loan book was up 41.3%.
The increase in profit was attributable to the following:
•
•
•
•
AFG Securities loan book growing by 41.3% to $2.91B (2019: $2.06B);
Increased residential trail book of 4.9% to $154.6B (2019: $147.4B);
Increased residential settlements of 8.9% to $34.1B (2019: $31.3B);
Offset by decreased commercial settlements of 1.7% to $2.29B (2019: $2.33B).
Net cash flows from operating activities $40,316k (2019: $28,090k) was a result of increased interest income, growth in the AFGHLs white
label trail books and favourable working capital movements when compared to prior period. The increased AFG Securities loan book provides a
strong platform to generate increased ongoing cashflow and earnings in future years. AFG continues to generate strong cash flows, and this will
enable AFG to continue to invest to generate future growth.
In March 2020, the World Health Organisation declared COVID-19 a world-wide pandemic. COVID-19 as well as measures to slow the spread
of the virus, have since had a significant impact on global economies and equity, debt and commodity markets. The Group has considered the
impact of COVID-19 and other market volatility in preparing the financial statements.
In May 2020, AFG successfully completed a $60 million Equity Raising to support the growth of the AFG Securities business, to accelerate
the investment in our technology and to allow the Company to continue to explore strategic opportunities to further diversify earnings.
The AFG Securities business has enjoyed a successful year in terms of responsible book growth and improvement in funding mix.
The dislocation in the funding markets necessitated a cautious approach to lending for a period and the equity raise ensures this part
of our business continues from a position of strength.
There has been a meaningful reduction in the number of AFG Securities customers requesting hardship arrangements due to the pandemic
with overall hardship reducing from 9.56% on 7 May 2020 to 5.33% at 21 August 2020.
Subsequent to 30 June 2020, the Group completed a $700 million Residential Mortgage Backed Securities (RMBS) issue.
The 30 June 2020 results included a significant increase in impairment charges due to the expected economic impact of the COVID-19
pandemic. The expected credit loss (ECL) provision has increased by $2,516k from $757k to $3,272k for the year ended 30 June 2020.
Impairment charges are discussed further in Note 3(b)(ii) and Note 29 of the 2020 Annual Report.
Given the dynamic and evolving nature of COVID-19, limited recent experience of the economic and financial impacts of such a pandemic, and
the short duration between the declaration of the pandemic and the preparation of these financial statements, changes to the estimates and
outcomes that have been applied in the measurement of the Group assets and liabilities may arise in the future.
In response to the current COVID-19 pandemic, the Group has provided support to its customers by implementing a range of initiatives, such as
granting deferrals of residential mortgage loan repayments to customers affected by the COVID-19 pandemic.
The following table reconciles the unaudited underlying earnings to the reported profit after tax for the period in accordance with Australian
Accounting Standards:
In thousands of AUD
30 June 2020
30 June 2019
Operating
income
Profit
after tax
Operating
income
Profit
after tax
Underlying results from continuing operations
607,311
36,266
548,235
28,565
Change in the carrying value of trailing commissions
contract asset and payable
74,872
1,812
94,604
4,464
Total result from operating activities
682,183
38,078
642,839
33,029
14
Annual Report 2020DIRECTOR’S REPORT (continued) DIRE CTOR ’S REPOR T (Continued)
Likely Developments
and Expected Results
dividend expected to be paid out of retained earnings at
30 June 2020 is $12,584k. The financial effect of this dividend
has not been brought to account in the financial statements for
The Group will continue to provide choice and lead the market by
the year ended 30 June 2020.
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
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
years have not been included in this report because disclosure
affairs of the Group in future financial years.
of the information would, in the opinion of the Directors, be likely
to result in unreasonable prejudice to the Group.
Environmental Regulation
The Group is not subject to any significant environmental
regulation under a law of the Commonwealth or of a State or
Territory in respect of its activities.
Subsequent Events
Share options
There were no options issued or exercised during the financial
year (2019: Nil).
Indemnification of insurance of
directors and officers
During the financial year, the Group paid a premium in respect
of a contract insuring the Directors of the Group (as named
On 30 July 2020, the Group successfully completed AFG 2020-
above) and officers against a liability incurred as a Director or
1 Trust, a $700 million Residential Mortgage Backed Securities
officer to the extent permitted by the Corporations Act 2001.
(RMBS) issue.
As at 21 August 2020, there has been a meaningful reduction in
the number of AFG Securities customers requesting hardship
arrangements due to the pandemic with overall hardship
reducing from 9.56% on 7 May 2020 to 5.33% at 21 August 2020.
The contract of insurance prohibits disclosure of the nature of
the liability and the amount of the premium.
Indemnification of auditors
To the extent permitted by law, the Company has agreed to
On 27 August 2020, the Directors recommended the payment
indemnify its auditors, Ernst & Young Australia, as part of the
of a dividend of 4.7 cents per fully paid ordinary share,
terms of its audit engagement agreement against claims by
fully franked based on tax paid at 30%. The dividend has a
third parties arising from the audit (for an unspecified amount).
record date of 10 September 2020 and a payment date of
No payment has been made to indemnify Ernst & Young
29 September 2020. The aggregate amount of the proposed
Australia during or since the financial year.
15
Annual Report 2020
Directors’ Meetings
The number of Directors’ meetings (excluding circulatory resolutions) held during the year and each Director’s attendance at those
meetings is set out in the table below.
The Directors met as a Board 21 times during the year. 11 meetings were main meetings and 10 meetings were convened to consider
special business. Special meetings are convened at a time to enable the maximum number of Directors to attend and are generally held
to consider specific items that cannot be held over to the next scheduled main meeting. Apologies were received from Directors in all
instances where they were unable to attend a meeting.
Directors’ Board Meetings
Main Meetings
Held
Main Meetings
Attended
Special
Meetings Held
Special Meetings
Attended
11
11
11
4
11
11
11
11
11
11
3
11
11
10
10
10
10
2
10
10
10
10
9
9
2
10
10
10
Tony Gill
Brett McKeon
Malcolm Watkins
Kevin Matthews1
Craig Carter
Melanie Kiely
Jane Muirsmith
(1) Kevin Matthews retired on 28 October 2019.
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
Maximum
Possible
Meetings
Attended
Maximum
Possible
Meetings
Attended
Maximum
Possible
Meetings
Attended
Craig Carter
Melanie Kiely
Jane Muirsmith
7
7
7
7
7
7
5
5
5
5
5
5
5
5
5
5
5
5
16
Annual Report 2020DIRECTOR’S 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, Ernst & Young. 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.
Ernst & Young received or is due to receive the following amounts for the provision of non-audit services:
Other non-audit services
$
30,000
30,000
Auditor’s Independence declaration
The auditor’s independence declaration is included on page 34 of this financial report for the year ended 30 June 2020.
This report is made in accordance with a resolution of the Directors.
17
DIRECTOR’S REPORT (continued)Annual Report 2020 D IR ECTO R’S REPORT (continued)
18
Annual Report 2020 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 FY20.
FY20 Performance & Remuneration
Outcomes Summary
The COVID-19 pandemic made FY20 a challenging year for businesses
As with most organisations, this is a unique year with the uncertainty
generally. Despite this, the group delivered a pleasing result in FY20
associated with the COVID-19 pandemic and the challenges presented
which reflects the ability of the business and its brokers to adapt quickly
for setting appropriate remuneration targets and structures that align
to a changing environment, the importance of the role brokers play in the
rewarding good performance with shareholder returns.
financial services sector and the group’s earnings diversification strategy.
As in previous years, the AFG Board remains committed to an Executive
Remuneration structure that balances both of these elements 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 as an effective ‘gateway’ to any incentive payment.
In setting our structure and targets, we value and seek the feedback of
our shareholders, stakeholders and proxy advisors. Where appropriate we
have used this feedback to revise the Executive Remuneration framework
over time. For FY21, the remuneration structure has been modified to
reflect the uncertainty in the medium to long term, whilst also trying to
maintain an element of continuity and consistency to ensure it acts as a
true incentive to long term performance and shareholder return.
The business delivered NPAT growth of 15.3% with an FY20 result of
$38.1m, up from $33.0m in FY19 and representing EPS CAGR of 7.2%
since FY17 (Normalised NPAT: $30.2m).
Over the Total Shareholder Return (TSR) LTI performance period of 1 July
2017 to 1 July 2020 AFG has delivered TSR performance at the 85th and
87th percentile of the Diversified Financials and Small Industrials Indexes
respectively.
Despite lockdowns across the country over the past 6 months the
business performed well, residential volumes continued to improve in
H2 FY20 with settlements in FY20 up 9% on FY19. AFG Business and
Thinktank volumes were up 166% and 79% respectively. The earnings
diversification strategy was also evident through the contribution of AFG
I am pleased to note that following good EPS and strong TSR
Securities with a $2.9b loan book generating NIM of 157bps for the year.
performance the FY18 LTI plan has vested at just under target for
Underlying NPAT was up 27% to $36.3m as the AFGHLs trail book begins
30 June 2020.
to generate increased cash flow for the business.
The focus of our FY21 Executive Remuneration structure remains a
mixture of short and long term targets designed to drive both earnings
growth, the development of key strategic initiatives to deliver continued
and sustainable returns for shareholders and the retention of key
Performance against other KPI measures was also strong, with the
Group’s loan book ending the year at $163.0b up 4.9% and the AFGHLs
book at $10.5b up 14% from FY19. This demonstrates growth in the core
business, generating ongoing stability for future investment and growth.
executive talent.
The modifications that have been made to the Group’s STI and LTI
structures for FY21 respectively:
For the STI, 100% of the STI award for all KMPs (other than COO)
will be allocated to NPAT. With the potential need to change
strategy and priorities quickly we believe this could be hindered by
A successful capital raising was also completed in FY20 primarily to
strengthen the capital position of the group, support future growth of
AFG Securities and other ongoing growth initiatives. Despite this no
adjustments have been made to LTI EPS targets with existing targets
remaining in place for the current plans vesting in FY21 and FY22.
KMP being focussed on other short term strategic targets.
A 5-year history of AFG’s NPAT, Residential, AFGHLs and AFG Securities
Given the critical competitive nature of our systems, the STI
loan books, AFG Securities Settlements, ROE and Dividends is provided
targets for the COO will include an allocation of 30% towards the
below:
progress of the Group’s IT development programme with 70%
allocated to NPAT. Importantly, NPAT remains as a gate opener (of
Net Profit After Tax
90%) for the payment of the IT related performance indicator.
0
$5
$10
$15
MILLIONS
$25
$20
$30
$35
$40
$45
• With respect to the LTI, due to the current difficulty in forecasting
longer term earnings results, a greater weighting of the KMPs LTI
award will be allocated to TSR given the comparable nature of this
target. Historically the split of the dollar value of an executives LTI
award has been 65% EPS and 35% TSR. For at least FY21 this will
change to 65% TSR and 35% EPS. The TSR target will continue to
include a positive absolute TSR gateway for payment to occur.
• With regard to fixed remuneration, it has been decided to make no
increases to fixed remuneration, in line with the general market in
these uncertain COVID-19 related times.
FY16
FY17
FY18
FY19
FY20
* Grey shading of FY17 NPAT shows the initial recognition of AFGHL white
label trail book relating to loans settled in prior periods.
19
•
•
DIRECTOR’S REPORT (continued)Annual Report 2020 Normalised Return on Equity
AFGS Settlements
$0.6 $0.8
$1.2
$1.4
$1.6
BILLIONS
$1.0
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
$0.2
$0.4
FY16
FY17
FY18
FY19
FY20
FY16
FY17
FY18
FY19
FY20
Residential Loan Book
BILLIONS
AFGS Loan Book
0
$20
$40 $60 $80 $100 $120 $140 $160 $180
0
$0.5
$1.0
$1.5
BILLIONS
$2.0
$2.5
$3.0
$3.5
FY16
FY17
FY18
FY19
FY20
FY16
FY17
FY18
FY19
FY20
Dividends (cents per share)
0
5
10
15
20
25
FY16
FY17
FY18
FY19
FY20
Interim
Final
Special
AFGHL Settlements
MILLIONS
0
$500
$1,000
$1,500 $2,000 $2,500 $3,000 $3,500
FY16
FY17
FY18
FY19
FY20
AFGHL Portfolio
BILLIONS
0
$2
$4
$6
$8
$10
$12
FY16
FY17
FY18
FY19
FY20
20
* Grey shading of FY17 NPAT shows the initial recognition of AFGHL white label
trail book relating to loans settled in prior periods.
In line with this performance, the key remuneration outcomes, which
are detailed further in the Remuneration Report include:
• Total FY20 STI payments made at 101%, which is an outstanding
result in a challenging year. The STI targets individually were assessed
as follows, NPAT (118%), AFGHLs (87%) and AFG Business (63%).
• Performance rights associated with the EPS target vested at 72%
reflecting the EPS CAGR of 7.2% since FY17
• Performance rights associated with TSR targets vested at
124% (Diversified Financials – 85th percentile) and 133% (Small
Industrials – 87th percentile)
We are pleased with the outcome for our executive team as it reflects
the excellent business performance and the foundations built for long
term growth. It also aligns with our shareholder returns for the period
and potential returns in the future given these foundations.
We continue to believe the Group’s remuneration structure delivers
outcomes that reflect 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
as we navigate these uncertain times, 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.
Yours sincerely,
Melanie Kiely
Chair, Remuneration & Nomination Committee
Annual Report 2020DIRECTOR’S REPORT (continued)
1.
Introduction
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
Brett McKeon4
Executive Directors
Malcolm Watkins
Executives
David Bailey
Lisa Bevan
Ben Jenkins
John Sanger
Non-Executive Chairman
Appointed 28 August 2008
Non-Executive Director
Resigned 28 October 2019
Non-Executive Director
Appointed 25 March 2015
Non-Executive Director
Appointed 31 March 2016
Non-Executive Director
Appointed 31 March 2016
Non-Executive Director
Transitioned 1 July 2019
Executive Director
Appointed 8 December 1997
Chief Executive Officer
Appointed 16 June 2017
Company Secretary
Appointed 9 March 1998
Chief Financial Officer
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 outcome based measures linked to the absolute and relative performance of the business. As is
appropriate, conduct continues to be an absolute gateway for incentive payment. As is appropriate, conduct continues to be an absolute
gateway for incentive payment.
21
DIRECTOR’S REPORT (continued)Annual Report 2020 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
Short-term incentive (STI)
Paid in cash
Long-term incentive (LTI)
Awards are made in the form
of performance rights
Key roles and responsibilities as set out in
the individual’s employment contract and
position description.
To provide competitive fixed remuneration set with
reference to role, market and experience in order to
attract, retain and engage key talent.
Considerations:
•
•
•
•
Role and responsibility
External benchmarking
Contribution, competencies and capabilities
Company size and performance
Rewards Executives for their contribution to
achievement of Group outcome and the achievement
of strategically relevant KPI targets in the given
financial year.
Ensures a strong link to the long-term creation of
shareholder value.
•
•
CAGR EPS was chosen as a performance hurdle
as it is:
»
A key indicator of the creation and growth
in shareholder value over the long term.
»
Provides a reliable measurement of the
creation of shareholder value and has been
given a lower weighting in FY21 due to the
challenging economic environment and
uncertainty of what impact the COVID-19
pandemic will have.
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.
Group Financial Measures FY20:
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 remained at 60% in FY20,
in line with FY19.
90% NPAT hurdle for any STI payment
including strategic targets.
Group Financial Measures FY21:
Given the uncertain economic
environment, the majority of KMP will
have 100% of their STI allocated to the
Group’s NPAT target.
Given the critical nature of our systems,
the STI targets for the COO will include an
allocation of 30% towards the progress of
the Group's IT development programme
with 70% allocated to NPAT.
FY20 grant:
•
•
65% of a KMPs entitlement
allocated to a 3-year CAGR EPS
target.
35% of a KMPs entitlement
allocated to relative TSR targets,
50% measure against the ASX
Diversified Financials Index
and 50% against the ASX Small
Industrials Index. Both TSR targets
include a gateway requirement for
absolute TSR to be positive.
FY21 grant:
•
•
35% of a KMPs entitlement
allocated to a 3-year CAGR EPS
target.
65% 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.
22
Annual Report 2020DIRECTOR’S REPORT (continued) 3.1
Executive Remuneration Outcomes
STI award outcomes FY20
The combined cash bonus pool available to be paid to the Executives for on target performance in the 2020 financial year was $541,884 and
the minimum is nil. For the 2020 financial year, 101% of the target STI bonus amount was achieved by the Executives as outlined below.
Target
NPAT ($’000)
AFGHL settlements
AFGB settlements
Total
D. Bailey
M. Watkins
L. Bevan
B. Jenkins
J. Sanger
Total
FY19
000’s
$33,029
$3,153
$130
FY20
000’s
$38,078
$3,141
$346
Growth
Payment
15%
(0.4%)
166%
118%
87%
63%
101%
Target STI
opportunity
As a % of fixed
remuneration
STI outcome
% Achieved
% Forfeited
$229,000
$22,556
$88,128
$90,000
$112,200
$541,884
40%
17%
33%
31%
34%
$230,706
$22,724
$88,785
$90,671
$113,036
$545,922
101%
101%
101%
101%
101%
0%
0%
0%
0%
0%
LTI award outcomes FY20
For the 2020 financial year, 98% of the target LTI bonus (granted in FY18) 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 Industrials
Target
10%
Achieved
% Achieved
7.2%
75th Percentile
85th Percentile
75th Percentile
80th Percentile
72%
133%
124%
Performance Rights
Target LTI opportunity
LTI outcome
% Achieved
% Forfeited
D. Bailey
B. McKeon*
M. Watkins
L. Bevan
B. Jenkins
J. Sanger
Total
269,667
265,292
21,260
31,889
82,371
83,351
66,239
20,915
31,372
81,035
81,999
63,550
554,777
544,163
98%
98%
98%
98%
98%
96%
98%
* B. McKeon was MD of AFG at the commencement of the LTI period (1 July 2017) and as he continued to be employed as an Executive Director (and
transitioned to Non-Executive Director from 1 July 2020) his rights were not forfeited.
2%
2%
2%
2%
2%
4%
23
DIRECTOR’S REPORT (continued)Annual Report 2020 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 47% to 75% fixed and 25% to 53% 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
Performance period
Link between
performance and reward
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
FY20 is listed at 3.1 as an absolute dollar amount and as a percentage of the Executive’s fixed base.
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.
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. In FY21 100% of the STI target for all KMPs (other
than COO) will be allocated to NPAT, with the potential need to change strategy and priorities quickly we
believe this could be hindered by KMP being focussed on other short term strategic targets
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 including leadership qualities 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
FY21 STI Opportunity
Offers to participate in STI awards for 2021 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 (100%). In the
instance of the COO (who is a KMP), the STI award is based on achievement against the targeted NPAT (70%) as well as AFG’s
Technology Enhancement Project (30%). More broadly the allocation of targets is dependent upon the Executive’s role in the business,
however all have a substantial proportion of their STI linked to a NPAT target.
24
Annual Report 2020DIRECTOR’S REPORT (continued) 3.5 The LTI Plan – 2019, 2020 and 2021 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.
2019 &2020 LTI Grant
2021 LTI Grant
Instrument
Performance rights to acquire ordinary AFG shares
Performance rights to acquire ordinary AFG shares
Quantum
65% of an Executive’s annual LTI entitlement weighted to an
EPS target
35% 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
65% of an Executive’s annual LTI entitlement
weighted to relative TSR targets
Grant date
1 July 2018, other than those approved at the 2018 AGM; and
1 July 2019 other than those subject to approval at the 2019
AGM
1 July 2020 other than those subject to approval
at the 2020 AGM
Grant date fair
value
TSR Small Industrials Index 2019 $0.84; 2020 $1.04
TSR Small Industrials Index $1.153
TSR Diversified Financials Index 2019 $0.79; 2020 $0.98
TSR Diversified Financials Index $1.149
EPS $1.36 (being the 20-day Volume Weighted Average Price
leading up to 30 June 2019)
EPS $1.796 (being the 20-day Volume Weighted
Average Price leading up to 30 June 2020)
EPS $1.58 (being the 20-day Volume Weighted Average Price
leading up to 30 June 2020)
Gateway
performance
measure
TSR – Absolute TSR must be positive
TSR – Absolute TSR must be positive
EPS – 2019 5.0% CAGR EPS; 2020 2.5% 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.
Given the uncertain economic environment
resulting from the COVID-19 pandemic a 3 year
EPS CAGR gateway is considered appropriate.
This uncertainty was also a factor in changing
the weighting of the LTI award further towards
TSR.
Key
performance
measure
TSR
Relative Total Shareholder Return (pro-rata vesting between
hurdles) 50% measured against the Diversified Financials
Index, 50% against Small Industrials
50th Percentile – 50% vesting
75th Percentile – 100% vesting
85th Percentile – 125% vesting (stretch target)
90th Percentile – 150% vesting (stretch target)
EPS accretion
2019 5.0% CAGR – 50% vesting
2020 2.5% CAGR – 50% vesting
2019 10% CAGR – 100% vesting
2020 5% CAGR – 100% vesting
2019 12.5% CAGR – 150% vesting (stretch target)
2020 7.5% CAGR – 150% vesting (stretch target)
TSR
Relative Total Shareholder Return (pro-rata
vesting between hurdles) 50% measured against
the Diversified Financials Index, 50% against
Small Industrials
50th Percentile – 50% vesting
75th Percentile – 100% vesting
85th Percentile – 125% vesting (stretch target)
90th Percentile – 150% vesting (stretch target)
EPS accretion
2.5% CAGR – 50% vesting
5% CAGR – 100% vesting
7.5% CAGR – 150% vesting (stretch target)
Performance &
service period
Performance
assessment
1 July 2018 – 30 June 2021 (FY19 Grant)
1 July 2020 – 30 June 2023 (FY21 Grant)
1 July 2019 – 30 June 2022 (FY20 Grant)
30 June 2021 and 30 June 2022
30 June 2023
Performance period not yet complete.
Performance period not yet complete.
25
DIRECTOR’S REPORT (continued)Annual Report 2020 LTI Plan Rules & Design Considerations
Link between performance
and reward
Cessation of employment
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.
If the participant ceases employment for cause or resigns, unless the Board determines otherwise, any
unvested Performance Rights will automatically lapse.
Generally, if the participant ceases employment for any other reason, all of their unvested Performance
Rights will remain on foot and subject to the original performance condition. However, the Board
retains discretion to determine that some of their Rights (up to a pro rata portion based on how much
of the Performance Period remains) will lapse.
Dividends & voting
The Performance Rights do not carry dividends or voting rights prior to vesting.
Clawback and preventing
inappropriate benefits
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.
Reconstructions, corporate
action, rights issues,
bonus issues, etc.
The rules of the LTI Plan include specific provisions dealing with rights issues, bonus issues, and
corporate actions and other capital reconstructions. These provisions are intended to ensure that there
is no material advantage or disadvantage to the participant in respect of their Performance Rights as a
result of such corporate actions.
26
Annual Report 2020DIRECTOR’S REPORT (continued) n
o
i
t
a
r
e
n
u
m
e
r
n
o
i
t
a
r
e
n
u
m
e
R
s
t
n
e
m
y
a
p
s
t
n
e
m
y
a
p
f
o
n
o
i
t
r
o
p
o
r
P
l
a
t
o
T
r
e
h
t
O
d
e
s
a
b
-
e
r
a
h
S
m
r
e
t
-
g
n
o
L
s
e
s
u
n
o
b
r
e
h
t
O
l
t
n
e
m
y
o
p
m
e
t
s
o
P
m
r
e
t
-
t
r
o
h
S
d
e
t
a
e
r
l
e
c
n
a
m
r
o
f
r
e
P
r
e
h
t
O
s
t
n
e
m
y
a
p
s
e
r
a
h
S
s
t
h
g
R
i
e
v
a
e
l
s
e
s
u
n
o
b
s
t
i
f
e
n
e
b
i
e
c
v
r
e
s
g
n
o
L
y
r
a
n
o
i
t
e
r
c
s
D
i
t
n
e
m
e
r
i
t
e
R
n
o
i
t
a
u
n
n
a
r
e
p
u
S
l
a
t
o
T
y
r
a
t
e
n
o
m
s
u
n
o
b
h
s
a
C
s
t
i
f
e
n
e
b
-
n
o
N
%
%
0
5
%
4
4
-
%
8
4
%
2
2
%
8
2
%
1
4
%
8
3
%
1
4
%
4
3
%
2
4
%
8
2
%
4
4
%
8
3
,
6
1
6
0
8
1
1
,
,
5
3
3
1
3
0
1
,
-
4
2
9
2
7
2
,
7
8
6
3
8
1
,
7
9
3
6
9
1
,
8
4
2
2
8
4
,
8
7
4
7
4
4
,
9
9
4
0
0
5
,
0
4
2
6
2
4
,
8
9
6
6
7
5
,
0
1
5
4
5
4
,
,
8
4
7
3
2
9
2
,
,
4
8
8
8
2
8
2
,
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
4
5
3
6
5
3
,
7
0
8
3
1
,
3
3
3
7
7
2
,
4
9
2
3
1
,
-
-
8
4
3
3
1
1
,
1
1
3
3
,
1
3
3
8
1
,
1
6
9
7
3
,
8
0
5
2
,
7
0
4
2
,
7
5
6
0
1
1
,
3
0
8
4
,
7
6
0
4
0
1
,
0
1
7
4
,
3
8
5
9
8
,
9
2
3
2
1
1
,
3
6
7
9
2
1
,
8
5
8
2
4
,
-
-
-
-
4
3
4
7
2
7
,
8
1
1
1
2
,
0
5
1
5
6
6
,
2
2
7
3
2
,
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
3
0
0
1
2
,
1
3
5
0
2
,
-
5
7
9
2
1
,
4
5
5
1
1
,
8
1
4
3
1
,
3
0
0
1
2
,
1
3
5
0
2
,
3
0
0
1
2
,
1
3
5
0
2
,
3
0
0
1
2
,
1
3
5
0
2
,
6
6
5
5
9
,
7
1
5
8
0
1
,
$
$
2
5
4
9
8
7
,
9
9
4
7
,
7
7
1
0
2
7
,
9
4
0
7
,
-
-
0
9
2
3
4
1
,
9
4
0
7
,
4
9
2
1
5
1
,
2
5
9
6
,
1
1
6
2
4
1
,
0
7
3
6
,
5
8
7
5
4
3
,
9
9
4
7
,
0
7
1
8
1
3
,
9
4
0
7
,
7
6
1
7
6
3
,
9
9
4
7
,
6
2
1
6
1
3
,
9
4
0
7
,
$
6
0
7
0
3
2
,
8
6
6
2
7
1
,
-
8
0
0
7
1
,
4
2
7
2
2
,
8
0
0
7
1
,
5
8
7
8
8
,
2
5
4
6
6
,
1
7
6
0
9
,
8
0
6
4
5
,
1
2
1
1
9
3
,
9
4
0
7
,
3
0
6
4
8
,
2
3
9
5
2
4
,
9
9
4
7
,
6
3
0
3
1
1
,
,
0
3
6
9
7
0
2
,
,
5
9
4
1
3
0
2
,
8
4
9
6
3
,
5
1
6
1
4
,
2
2
9
5
4
5
,
7
4
3
2
1
4
,
s
e
e
f
&
y
r
a
a
S
l
$
,
7
4
2
1
5
5
0
6
4
0
4
5
,
-
3
3
2
9
1
1
,
0
2
0
2
9
1
0
2
0
2
0
2
9
1
0
2
1
n
o
e
K
c
M
.
B
y
e
l
i
a
B
.
D
P
M
K
8
1
6
1
2
1
,
0
2
0
2
i
1
s
n
k
t
a
W
.
M
3
3
2
9
1
1
,
,
1
0
5
9
4
2
9
6
6
4
4
2
,
,
7
9
9
8
6
2
9
6
4
4
5
2
,
7
9
3
5
0
3
,
9
6
4
9
9
2
,
,
0
6
7
6
9
4
1
,
,
3
3
5
7
7
5
1
,
9
1
0
2
0
2
0
2
9
1
0
2
0
2
0
2
9
1
0
2
0
2
0
2
9
1
0
2
0
2
0
2
9
1
0
2
2
n
a
v
e
B
.
L
i
s
n
k
n
e
J
.
B
r
e
g
n
a
S
.
J
l
a
t
o
T
l
a
t
o
T
:
s
e
t
o
N
9
1
0
2
e
n
u
J
0
3
d
n
a
0
2
0
2
e
n
u
J
0
3
d
e
d
n
e
s
r
a
e
y
e
h
t
r
o
f
n
o
i
t
a
r
e
n
u
m
e
r
e
v
i
t
u
c
e
x
E
l
s
e
b
a
T
n
o
i
t
a
r
e
n
u
m
e
R
y
r
o
t
u
t
a
t
S
.
4
.
l
9
1
0
2
y
u
J
1
r
o
t
c
e
r
i
D
e
v
i
t
u
c
e
x
E
-
n
o
N
o
t
d
e
n
o
i
t
i
s
n
a
r
t
n
o
e
K
c
M
t
t
e
r
B
.
k
e
e
w
r
e
p
s
y
a
d
2
s
s
a
b
e
m
i
i
t
l
t
r
a
p
a
n
o
d
e
y
o
p
m
e
e
r
a
s
n
k
t
a
W
i
.
M
d
n
a
n
o
e
K
c
M
.
B
.
k
e
e
w
r
e
p
s
y
a
d
4
s
s
a
b
e
m
i
i
t
t
r
a
p
a
n
o
d
e
y
o
p
m
e
s
l
i
n
a
v
e
B
.
L
1
2
27
DIRECTOR’S REPORT (continued)Annual Report 2020
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 and in line with the market. 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 2020 AGM.
5.2 Structure
The remuneration of NEDs consists of Directors’ fees, which is inclusive of statutory superannuation and Committee fees (if any). The
below summarises the NED fees:
•
•
Chairman: $158,000 inclusive of superannuation
Non-Executive Directors: $95,000 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 2020 and 30 June 2019:
Year
Board and
Committee Fees
Short-term benefits
(non-monetary)
Superannuation
Total
T. Gill
K. Matthews*
C. Carter
M. Kiely
J. Muirsmith
B. McKeon
Total
Total
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
2020
2019
$
144,292
136,986
28,285
82,192
86,758
82,192
86,758
82,192
86,758
82,192
86,758
-
519,609
465,754
* Kevin Matthews resigned as a Director on 28 October 2019
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$
13,708
13,014
2,687
7,808
8,242
7,808
8,242
7,808
8,242
7,808
8,242
-
49,363
44,246
$
158,000
150,000
30,972
90,000
95,000
90,000
95,000
90,000
95,000
90,000
95,000
-
568,972
510,000
28
Annual Report 2020DIRECTOR’S 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 FY18, FY19 and FY20 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.
The 2018 plan vested on 30 June 2020 as detailed below.
KMP
Year /
Tranches
(T)
Grant
date
No. of
rights
awarded
during
the year1
Fair
value
per
rights at
award
date $
Vesting
date
Exercise
price
Expiry
date
No.
forfeited
during
the year
No.
vested
during
the
year1
B. McKeon
2018 / T1
11,274
1-Jul-17
$1.25
30-Jun-20
2018 / T2
5,059
1-Jul-17
$0.75
30-Jun-20
2018 / T3
4,927
1-Jul-17
$0.77
30-Jun-20
2019 / T1
10,608
1-Jul-18
$1.36
30-Jun-21
2019 / T2
4,899
1-Jul-18
$0.79
30-Jun-21
2019 / T3
4,607
1-Jul-18
$0.84
30-Jun-21
M. Watkins
2018 / T1
16,910
1-Jul-17
$1.25
30-Jun-20
2018 / T2
7,588
1-Jul-17
$0.75
30-Jun-20
2018 / T3
7,391
1-Jul-17
$0.77
30-Jun-20
2019 / T1
10,608
1-Jul-18
$1.36
30-Jun-21
2019 / T2
4,899
1-Jul-18
$0.79
30-Jun-21
2019 / T3
4,607
1-Jul-18
$0.84
30-Jun-21
2020 / T1
9,285
1-Jul-19
$1.58
30-Jun-22
2020 / T2
4,028
1-Jul-19
$0.98
30-Jun-22
2020 / T3
3,795
1-Jul-19
$1.04
30-Jun-22
L. Bevan
2018 / T1
43,680
1-Jul-17
$1.25
30-Jun-20
2018 / T2
19,600
1-Jul-17
$0.75
30-Jun-20
2018 / T3
19,091
1-Jul-17
$0.77
30-Jun-20
2019 / T1
41,255
1-Jul-18
$1.36
30-Jun-21
2019 / T2
19,051
1-Jul-18
$0.79
30-Jun-21
2019 / T3
17,916
1-Jul-18
$0.84
30-Jun-21
2020 / T1
90,276
1-Jul-19
$1.58
30-Jun-22
2020 / T2
39,161
1-Jul-19
$0.98
30-Jun-22
2020 / T3
36,901
1-Jul-19
$1.04
30-Jun-22
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
30-Jun-20
3,191
30-Jun-20
30-Jun-20
30-Jun-21
30-Jun-21
30-Jun-21
-
-
-
-
-
8,083
6,275
6,556
-
-
-
30-Jun-20
4,786
12,124
30-Jun-20
30-Jun-20
30-Jun-21
30-Jun-21
30-Jun-21
30-Jun-22
30-Jun-22
30-Jun-22
-
-
-
-
-
-
-
-
9,412
9,835
-
-
-
-
-
-
30-Jun-20
12,361
31,319
30-Jun-20
30-Jun-20
30-Jun-21
30-Jun-21
30-Jun-21
30-Jun-22
30-Jun-22
30-Jun-22
-
-
-
-
-
-
-
-
24,312
25,404
-
-
-
-
-
-
29
DIRECTOR’S REPORT (continued)Annual Report 2020 KMP
Year /
Tranches
(T)
Grant
date
No. of
rights
awarded
during
the year1
Fair
value
per
rights at
award
date $
Vesting
date
Exercise
price
Expiry
date
No.
forfeited
during
the year
No.
vested
during
the
year1
D. Bailey
2018 / T1
143,000
1-Jul-17
$1.25
30-Jun-20
2018 / T2
64,167
1-Jul-17
$0.75
30-Jun-20
2018 / T3
62,500
1-Jul-17
$0.77
30-Jun-20
2019 / T1
134,557
1-Jul-18
$1.36
30-Jun-21
2019 / T2
62,136
1-Jul-18
$0.79
30-Jun-21
2019 / T3
58,138
1-Jul-18
$0.84
30-Jun-21
2020 / T1
228,672
1-Jul-19
$1.58
30-Jun-22
2020 / T2
125,223
1-Jul-19
$0.98
30-Jun-22
2020 / T3
117,999
1-Jul-19
$1.04
30-Jun-22
B. Jenkins
2018 / T1
44,200
1-Jul-17
$1.25
30-Jun-20
2018 / T2
19,833
1-Jul-17
$0.75
30-Jun-20
2018 / T3
19,318
1-Jul-17
$0.77
30-Jun-20
2019 / T1
40,775
1-Jul-18
$1.36
30-Jun-21
2019 / T2
18,830
1-Jul-18
$0.79
30-Jun-21
2019 / T3
17,708
1-Jul-18
$0.84
30-Jun-21
2020 / T1
92,622
1-Jul-19
$1.58
30-Jun-22
2020 / T2
40,178
1-Jul-19
$0.98
30-Jun-22
2020 / T3
37,861
1-Jul-19
$1.04
30-Jun-22
J. Sanger
2018 / T1
37,987
6-Mar-18
$1.54
30-Jun-20
2018 / T2
14,189
6-Mar-18
$1.11
30-Jun-20
2018 / T3
14,063
6-Mar-18
$1.12
30-Jun-20
2019 / T1
43,174
1-Jul-18
$1.36
30-Jun-21
2019 / T2
19,937
1-Jul-18
$0.79
30-Jun-21
2019 / T3
18,750
1-Jul-18
$0.84
30-Jun-21
2020 / T1
100,855
1-Jul-19
$1.58
30-Jun-22
2020 / T2
43,750
1-Jul-19
$0.98
30-Jun-22
2020 / T3
41,226
1-Jul-19
$1.04
30-Jun-22
T1 – Earnings Per Share allocation
T2 – TSR (Diversified Financials) allocation
T3 – TSR (Small Industrials) allocation
1 Number vested during the year is calculated on T1 72%, T2 124% and T3 133%
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
30-Jun-20
40,469
102,531
30-Jun-20
30-Jun-20
30-Jun-21
30-Jun-21
30-Jun-21
30-Jun-22
30-Jun-22
30-Jun-22
-
-
-
-
-
-
-
-
79,593
83,169
-
-
-
-
-
-
30-Jun-20
12,509
31,691
30-Jun-20
30-Jun-20
30-Jun-21
30-Jun-21
30-Jun-21
30-Jun-22
30-Jun-22
30-Jun-22
-
-
-
-
-
-
-
-
24,601
25,706
-
-
-
-
-
-
30-Jun-20
10,750
27,237
30-Jun-20
30-Jun-20
30-Jun-21
30-Jun-21
30-Jun-21
30-Jun-22
30-Jun-22
30-Jun-22
-
-
-
-
-
-
-
-
17,600
18,714
-
-
-
-
-
-
30
Annual Report 2020DIRECTOR’S REPORT (continued) 5.4 Shareholdings of KMP
Ordinary shares held in Australian Finance Group Limited ASX:AFG (number)
30 June
2020
Balance
1 July 2019
Granted as
remuneration
Sold during
the period
Net change
other 2
Balance 30
June 20201
Held
nominally
Directors
T. Gill
1,125,000
B. McKeon
21,179,773
M. Watkins
19,602,689
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
-
240,440
48,089
-
-
-
115,412
224,410
80,148
-
-
204,546
1,329,546
1,152,274
(6,000,000)
869,566
16,289,779
16,289,779
(5,000,000)
2,811,506
17,462,284
17,424,195
-
-
-
(565,412)
(140,000)
(37,500)
-
460,714
960,714
960,714
22,212
21,819
89,376
86,819
196,971
1,280,304
47,668
7,755
81
1,198,744
50,403
35,081
89,376
86,819
98,485
609,334
-
-
1 Includes shares held directly, indirectly and beneficially by the KMP
2 Direct market purchase due to equity raising
30 June
2019
Balance
1 July 2018
Granted as
remuneration
Sold during
the period
Net change
other 2
Balance 30
June 20191
Held
nominally
Directors
T. Gill
1,125,000
B. McKeon
21,179,773
M. Watkins
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 Includes shares held directly, indirectly and beneficially by the KMP
2 Direct market purchase
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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
-
-
31
DIRECTOR’S REPORT (continued)Annual Report 2020 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
M. Watkins
No expiry, continuous agreement
12 months (or payment in lieu of notice)
12 weeks
D. Bailey
L. Bevan
No expiry, continuous agreement
12 months (or payment in lieu of notice)
12 weeks
No expiry, continuous agreement
12 months (or payment in lieu of notice)
12 weeks
B. Jenkins
No expiry, continuous agreement
6 months (or payment in lieu of notice)
12 weeks
J. Sanger
No expiry, continuous agreement
6 months (or payment in lieu of notice)
12 weeks
7.
Remuneration Governance
7.1
Remuneration and Nomination
The Remuneration and Nomination Committee is responsible for ensuring AFG has remuneration strategies and a framework that fairly
and responsibly rewards Executives and Non-Executive Directors with regard to performance, the law and corporate governance. The
Committee ensures that AFG remuneration policies are directly aligned to business strategy, financial performance and support increased
shareholder wealth over the long term.
As at 30 June 2020 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 2020.
32
Annual Report 2020DIRECTOR’S REPORT (continued) 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 2019 AGM
The 30 June 2019 Remuneration Report was presented to shareholders and was approved at the 2019 Annual General Meeting.
8. Other Transactions and Balances with KMP and their Related Parties
(i) 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 $1,038k (2019: $464k). 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) Establish Property Group Ltd (EPG) was created as part of the demerger of AFG's former property business prior to listing on the
ASX 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 $1,076k which has been
paid to Qube (2019: $1,126k). In addition to the above McCabe Street Pty Ltd has an outstanding loan owing to AFG amounting to
$224k (2019: $218k), this loan is on commercial terms at arms-length. EPG and McCabe Street Pty Ltd share a common director.
Directors of McCabe Street Pty Ltd include B. McKeon, D. Bailey and L. Bevan.
End of Audited Remuneration Report
9.
Independent Audit of Remuneration Report
The Remuneration Report has been audited by Ernst & Young. Please see page 85 of this Annual Report for Ernst & Young’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
Sydney
27 August 2020
33
DIRECTOR’S REPORT (continued)Annual Report 2020 Independence declaration under Section 307C of the Corporations Act 2001
Ernst & Young
11 Mounts Bay Road
Perth WA 6000 Australia
GPO Box M939 Perth WA 6843
Tel: +61 8 9429 2222
Fax: +61 8 9429 2436
ey.com/au
Auditor’s Independence Declaration to the Directors of Australian Finance
Group Limited
As lead auditor for the audit of the financial report of Australian Finance Group Limited for the
financial year ended 30 June 2020, I declare to the best of my knowledge and belief, there have
been:
a. No contraventions of the auditor independence requirements of the Corporations Act 2001 in
relation to the audit; and
b. No contraventions of any applicable code of professional conduct in relation to the audit.
This declaration is in respect of Australian Finance Group Limited and the entities it controlled during
the financial year.
Ernst & Young
F Drummond
Partner
27 August 2020
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
FD:LC:AFG:127
34
Annual Report 2020
Consolidated Statement of Financial Position
As at 30 June 2020
In thousands of AUD
Assets
Cash and cash equivalents
Trade and other receivables
Contract assets
Property, plant and equipment
Intangible assets
Loans and advances
Investment in associate
Right of use assets
Total assets
Liabilities
Trade and other payables
Interest-bearing liabilities
Employee benefits
Current tax payable
Provisions
Contract liability
Lease Liability
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
17
17
18
19
25
20
21
22
13(b)
23
24
25
13(c)
26(a)
2020
2019
161,528
5,446
974,599
506
3,318
96,818
5,409
899,727
849
812
2,920,773
2,072,004
17,034
6,323
14,341
-
4,089,527
3,089,960
950,792
2,914,562
5,194
5,988
2,787
5,619
6,559
19,813
3,911,314
874,076
2,073,772
5,234
2,808
3,129
4,296
-
21,823
2,985,138
178,213
104,822
102,157
2,604
(14)
73,466
178,213
43,541
1,630
(96)
59,747
104,822
The Consolidated Statement of Financial Position should be read in conjunction with the Notes to the Financial Statements.
35
Annual Report 2020
Consolidated Statement of Profit or Loss
and Other Comprehensive Income
For the year ended 30 June 2020
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 for the period
Attributable to:
Owners of the Company
Note
2020
2019
7
8
9
12
12
19
13(a)
589,342
92,841
682,183
(538,282)
(53,316)
90,585
14,488
(5,770)
(48,848)
50,455
940
(163)
2,314
3,091
53,546
(15,468)
38,078
38,078
38,078
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
Other comprehensive loss for the year, net of income tax
-
-
Total comprehensive income for the year
38,078
33,029
Total comprehensive income for the year attributable to:
Owners of the Company
Total comprehensive income for the year
Earnings per share
Basic earnings per share (cents per share)
Diluted earnings per share (cents per share)
27
27
38,078
38,078
17.30
17.09
33,029
33,029
15.38
15.24
The Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the Notes to the Financial Statements.
36
Annual Report 2020
Consolidated of Changes in Equity
For the year ended 30 June 2020
In thousands of AUD
Share
capital
Foreign
currency
translation
reserve
Fair
value
reserve
Share-
based
payment
reserve
Retained
earnings
Total
equity
Balance at 1 July 2018
43,541
(14)
(73)
814
49,056
93,324
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
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(9)
(9)
-
-
-
-
-
-
-
-
816
816
-
-
33,029
33,029
-
(9)
33,029
33,020
(22,338)
(22,338)
-
816
(22,338)
(21,522)
Balance at 30 June 2019
43,541
(14)
(82)
1,630
59,747
104,822
Balance at 1 July 2019
43,541
(14)
(82)
1,630
59,747
104,822
Total comprehensive income for the period
Profit
Transferred to Statement of Profit or Loss
Total comprehensive income for the period
Transactions with owners,
recorded directly in equity
Shares issued
Share issue costs (net of tax)
Dividends to equity holders
Share-based payment transactions
Total transactions with owners
Balance at 30 June 2020
-
-
-
-
60,001
(1,385)
-
-
58,616
102,157
-
-
-
-
-
-
-
-
-
(14)
-
-
82
82
-
-
-
-
-
-
-
-
-
-
-
-
-
974
974
-
-
38,078
38,078
-
82
38,078
38,160
-
-
60,001
(1,385)
(24,359)
(24,359)
-
974
(24,359)
35,231
2,604
73,466
178,213
The Consolidated Statement of Changes in Equity should be read in conjunction with Notes to the Financial Statements
37
Annual Report 2020
Consolidated Statement of Cash Flows
For the year ended 30 June 2020
In thousands of AUD
Note
2020
2019
Cash flows from operating activities
Cash receipts from customers
Cash paid to suppliers and employees
Interest received
Interest paid
Income taxes paid
Net cash generated by operating activities
14(b)
Cash flows from investing activities
Net interest received
Acquisition of property, plant and equipment
Purchase of intangible assets
Investment in Thinktank
Decrease in broker loans and advances
Net loans and advances to borrowers
Net cash used in investing activities
Cash flows used in financing activities
Proceeds from warehouse facility
Repayments of warehouse facility
Proceeds from securitised funding facilities
Repayments to securitised funding facilities
Proceeds from issue of ordinary shares, net of issue costs
26(a)
Payment of principal portion of lease liability
Decrease in loans from funders
Dividends paid
Net cash generated by financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at 1 July
26(b)
Cash and cash equivalents at 30 June
14(a)
The Statement of Cash Flows should be read in conjunction with the Notes to the Financial Statements.
521,491
(506,401)
92,841
(53,317)
(14,298)
40,316
940
(330)
(2,645)
(379)
1,977
(847,490)
(847,927)
1,255,852
(602,798)
432,543
(245,740)
58,616
(1,793)
-
(24,359)
872,321
64,710
96,818
161,528
483,933
(463,541)
73,137
(53,513)
(11,926)
28,090
2,014
(291)
(529)
-
270
(690,655)
(689,191)
707,306
(160,090)
391,777
(247,423)
-
-
(21)
(22,340)
669,209
8,108
88,710
96,818
38
Annual Report 2020
Notes to the Financial Statements
1. Reporting entity
2. Basis of preparation
3. Significant accounting policies
4. Determination of fair values
5. Financial risk management
6. Segment information
7. Commissions and other income
8. Other income
9. Other expenses
10. Employee costs
11. Auditors’ remuneration
12. Finance income and expenses
13. Income tax
14. Cash and cash equivalents
15. Trade and other receivables
16. Contract assets
17. Property, plant and equipment & Intangibles
18. Loans and advances
19. Investment in associate
20. Trade and other payables
21. Interest-bearing liabilities
22. Employee benefits
23. Provisions
24. Contract liability
25. Leases
26. Capital and reserves
27. Earnings per share
28. Share based payments
29. Financial instruments
30. Group entities
31. Parent entity
32. Capital and other commitments
33. Contingencies
34. Related parties
35. Subsequent events
39
Annual Report 2020
1 Reporting entity
The Consolidated Financial Statements for the financial year
ended 30 June 2020 comprise Australian Finance Group Ltd
(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
(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.
controlled entities. The Group’s principal activities in the course
Estimates and underlying assumptions are reviewed on
of the financial year were mortgage origination and lending. The
an ongoing basis. Revisions to accounting estimates are
Company’s principal place of business is 100 Havelock Street,
recognised in the period in which the estimate is revised and in
West Perth, Western Australia.
any future periods affected.
2 Basis of preparation
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
(a) Statement of compliance
following notes:
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.
•
•
•
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 trail commission 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 Expected
Credit losses
The Financial Report is presented in Australian dollars and all
values are rounded to the nearest thousand dollars ($000’s)
Taxation
unless otherwise stated.
The Consolidated Financial Statements were authorised for
issue by the Board of Directors on 27 August 2020.
(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 are measured using the expected value
method under AASB 15.
(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.
40
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
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) 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 16 Leases;
AASB 2017-7 Amendments to Australian Accounting Standards - Long-term Interests in Associates and Joint Ventures;
AASB 2017-6 Amendments to Australian Accounting Standards – Prepayment Features with Negative Compensation;
AASB 2018-1 Amendments to Australian Accounting Standards – Annual Improvements 2015-2017 Cycle;
AASB 2018-2 Amendments to Australian Accounting Standards – Plan Amendment, Curtailment or Settlement;
AASB interpretation 23 Uncertainty over Income tax Treatments.
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.
AASB 16 Leases
In the context of the transition to AASB 16, right of use assets of $6.8M and lease liabilities of $6.8M were recognised as at 1 July 2019.
The Group transitioned to AASB 16 in accordance with the modified retrospective approach. The prior year figures were not adjusted. As
part of the application of AASB 16, the Group chooses to apply the option to adjust the right of use asset by the amount of any provision
for onerous leases recognised in the balance sheet immediately before the date of initial application.
The following reconciliation to the opening balance for the lease liabilities as at 1 July 2019 is based upon the operating lease obligations
as at 30 June 2019:
In thousands of AUD
Operating lease commitments at 30 June 2019
Lease obligations relating to new lease entered into after 1 July 2019
Gross operating lease liabilities at 1 July 2019
Discounting
Lease liabilities at 1 July 2019
$’000
9,175
(1,347)
7,828
(1,022)
6,806
The lease liabilities were discounted at the incremental borrowing rate as at 1 July 2019. The weighted average incremental borrowing
rate was 5%. Non lease components have been included in future cashflows of the lease liability.
The Group also applied the available practical expedients whereby it used a single discount rate to a portfolio of leases with reasonably
similar characteristics.
41
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 (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
Conceptual Framework for Financial Reporting
AASB 2019-1 Amendments to Australian Accounting Standards – References to the
Conceptual Framework
Application
date*
Application
date for
Group
1 January 2020
30 June 2021
1 January 2020
30 June 2021
AASB 2018-6 Amendments to Australian Accounting Standards –Definition of a Business
1 January 2020
30 June 2021
AASB 2019-3 Amendments to Australian Accounting Standards –Interest rate
Benchmark Reform
1 January 2020
30 June 2021
AASB 2018-7 Amendments to Australian Accounting Standards –Definition of Material
1 January 2020
30 June 2021
AASB 2019-5 Amendments to Australian Accounting Standards –Disclosure of the Effect of
New IFRS Standards Not Yet Issued in Australia
1 January 2020
30 June 2021
AASB 2020-4 Amendments to Australian Accounting Standards – COVID-19 Related
Rent Concessions
AASB 17 Insurance Contracts
1 June 2020
30 June 2021
1 January 2021
30 June 2022
AASB 2020-2 Amendments to Australian Accounting Standards – Removal of Special Purpose
Financial Statements for Certain For-Profit Private Sector Entities
1 July 2021
30 June 2022
AASB 2020-1 Amendments to Australian Accounting Standards – Classification of Liabilities
as Current or Non-Current
1 January 2022
30 June 2023
AASB 2020-3 Amendments to Australian Accounting Standards – Annual Improvements 2018-
2020 and Other Amendments
1 January 2022
30 June 2023
AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of
Assets between an Investor and its Associate or Joint Venture
1 January 2022
30 June 2023
Amendments to IFRS 17 - Insurance Contracts
1 January 2023
30 June 2024
* Reporting period commences on or after the application date
3 Significant accounting policies
Except as expressly described in the Notes to the Financial Statements, the accounting policies set out below have been applied
consistently to all periods presented in these Consolidated Financial Statements and have been applied consistently by all Group entities.
(a) Basis of consolidation
The Consolidated Financial Statements incorporate the Financial Statements of the Company and entities (including structured entities)
controlled by the Company and its subsidiaries. Control is achieved when the Company:
•
•
•
Has power over the investee
Is exposed, or has rights, to variable returns from its involvement with the investee
Has the ability to use its power to affect its returns
When the Group has less than a majority of the voting rights or similar rights of an investee, the Group considers all relevant facts and
circumstances in assessing whether it has power over an investee, including:
•
•
•
The contractual arrangement with the other vote holders of the investee
Right arising from other contractual arrangements
The Group’s voting rights and potential voting rights
42
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) Consolidation of a subsidiary begins when the Group obtains
The Group has established the following special purpose
control over the subsidiary and ceases when the Group loses
entities to support the specific funding needs of the Group’s
control of the subsidiary. Specifically, income and expenses of a
securitisation programme:
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.
Profit or loss and each component of other comprehensive
income are attributed to the owners of the Company. Total
comprehensive income of subsidiaries is attributed to the owners
•
•
•
AFG 2010-1 Trust and its Series (SPE) to conduct
securitisation activities funded by 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, AFG 2019-2 Trust and AFG 2020-1
Trust. (SPE-RMBS) to hold securitised assets and issue
Residential Mortgage Backed Securities (RMBS).
AFG 2010-2 Pty Ltd and AFG 2010-3 Pty Ltd to hold and
fund investments in some of our Residential Mortgage
Backed Securities (RMBS) to meet risk retention
requirements.
of the Company and to the non-controlling interests even if this
The special purpose entities meet the criteria of being
results in the non-controlling interests having a deficit balance.
controlled entities under AASB 10 – Consolidated Financial
All intra-group balances, and any unrealised income and
Statements.
expenses arising from intra-group transactions, are eliminated
The elements indicating control include, but are not limited to,
in preparing the Consolidated Financial Statements. Unrealised
the below:
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 as it
becomes a financial instrument on loss of significant influence.
(i)
Special purpose entities
•
•
•
•
•
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.
As a result, the Company controls the special purpose entities
and on consolidation the underlying loans and notes issued are
recognised as assets and liabilities.
(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).
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
Special purpose entities are those entities over which the group
with those of the Group, from the date that significant influence
has no ownership interest but in effect the substance of the
commences until the date that significant influence ceases.
relationship is such that the Group controls the entity.
43
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 (b) Financial instruments
(i)
Financial assets
Initial recognition and measurement
modification does not result in cashflows that are substantially
different, the modification does not result in derecognition.
(ii)
Impairment
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
The Group applies the Expected Credit Loss (“ECL”) model under
AASB 9. This applies to contract assets, and financial assets
measured at amortised cost and debt investments at FVOCI,
asset not at fair value through profit or loss, transaction costs
but not to investments in equity instruments.
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
•
•
•
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; and
c)
exposure at default (EAD): the expected loss when a
default takes place.
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
it is not designated at Fair Value through Profit and Loss
since initial recognition, or if the financial instrument is a
(FVPL).
The amortised cost of a financial asset is:
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
•
the amount at which the financial asset is measured at
originated credit-impaired financial asset), the Group measures
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.
the loss allowance for that financial instrument at an amount
equal to a 12-month ECL.
The Group has assessed the loans and advances (securitised
assets) and recognised the ECL for these assets.
Impairment of Loans and Advances
Interest income, foreign exchange gains and losses and
The Group has applied the three-stage model based on the
impairment are recognised in profit and loss.
change in credit risk since initial recognition to determine the
Derecognition of financial assets
The Group derecognises a financial asset when the contractual
Stage 1: 12-month ECL
loss allowances of its loans and advances.
rights to the cash flows from the asset expire, or when it
At initial recognition, ECL is collectively assessed and measured
transfers the financial asset and substantially all the risks
by classes of financial assets with the same level of credit risk
and rewards of ownership of the asset to another entity. If
based on the PD within the next 12 months and LGDs with
the Group neither transfers nor retains substantially all the
consideration to forward looking economic indicators. Loss
risks and rewards of ownership and continues to control the
allowances for financial assets measured at amortised cost are
transferred asset, the Group recognises its retained interest
deducted from the gross carrying amount of the assets.
in the asset and an associated liability for amounts it may
have to pay. When assessing whether or not to derecognise
an asset, the entity considers whether there has been a
change in counterparty and whether there has been a
substantial modification to the terms of the arrangement. If the
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
44
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) 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; and
S&P assumptions such as first homebuyer, occupancy, employment type, geographical concentration, principal and interest and
interest only.
In addition to the above, the Group has considered the impact of COVID-19 in preparing the ECL.
As part of this assessment, the Group has also considered:
•
•
•
Government support to borrowers;
Increased probability weightings for downside cases; and
Staging for borrowers who have asked for a deferral of mortgage payments.
The 30 June 2020 results included a significant increase in impairment charges due to the expected economic impact of the COVID-19
pandemic. ECL provision has increased by $2,515k from $757k to $3,272k for the year ended 30 June 2020. Impairment charges are
discussed further in Note 29 of the 2020 Annual Report.
Given the dynamic and evolving nature of COVID-19, limited recent experience of the economic and financial impacts of such a pandemic,
and the short duration between the declaration of the pandemic and the preparation of these financial statements, changes to the
estimates and outcomes that have been applied in the measurement of the Group assets and liabilities may arise in the future.
In response to the current COVID-19 pandemic, the Group has provided support to its customers by implementing a range of initiatives,
such as granting deferrals of residential mortgage loan repayments to customers affected by the COVID-19 pandemic.
45
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 A summary of the assumptions underpinning the Groups ECL model is as follows:
Category
Definition of Category
Basis for recognition of ECL provision
Performing
Customers have a low risk of default and a strong capacity to meet
contractual cash flows
12 month expected losses
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
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
Given the uncertainty around further lockdowns and the flow on effect to unemployment rates, interest rates and property prices and
therefore probability of default, the final probability of default was calculated as the maximum of:
•
•
•
the probability of default calculated using S&P methodology;
the probability of default floor based on days past due; and
the probability of default floor based on restructuring status, which takes into account any hardship arrangements.
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)
the financial instrument has a low risk of default;
(2)
the debtor has a strong capacity to meets its contractual cash flow obligation in the near term; and
(3) 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. Even when forward looking assumptions are considered the ECL would not be 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 within impairment expense.
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.
46
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) The Group initially recognises financial liabilities 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.
(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
The Group’s non-derivative financial liabilities include interest-
of issuance, net of any related income tax benefit.
bearing liabilities and trade and other payables.
Subsequent measurement
Repurchase of share capital
When share capital recognised as equity is repurchased the
Subsequent to initial recognition, interest-bearing liabilities are
amount of consideration paid, including directly attributable
measured at amortised cost using the effective interest rate
costs, is recognised as a reduction in equity.
method.
Derecognition
Dividends
Dividends are recognised as a liability in the period in which
A financial liability is derecognised when the obligation under the
they are declared.
liability is discharged or cancelled or expires. When an existing
financial liability is replaced by another from the same lender on
substantially different terms, or the terms of an existing liability
are substantially modified, such an exchange or modification
is treated as the derecognition of the original liability and the
recognition of a new liability. The difference in respect of the
carrying amounts is recognised in the income statement. The
Group considers a modification substantial based on qualitative
factors and if it results in a difference between the adjusted
(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.
discounted present value and the original carrying amount of the
For the purpose of the Statement of Cash Flows, cash and
financial liability of, or greater than, ten per percent.
cash equivalents consist of the cash and term deposits as
defined above, net of outstanding bank overdrafts.
(iv) Amortised cost and effective interest method
The effective interest method is a method of calculating the
(d) Property, plant and equipment
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,
(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.
a shorter period, to the gross carrying amount of the debt
Where parts of an item of property, plant and equipment have
instrument on initial recognition. For purchased or originated
different useful lives, they are accounted for separately.
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.
Gains and losses on disposal of an item of property, plant and
equipment are determined by comparing the proceeds from
disposal with the carrying amount and are recognised net
within “other income” in profit or loss.
The amortised cost of a financial asset is the amount at which
the financial asset is measured at initial recognition minus the
(ii) Subsequent costs
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 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.
47
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 (iii) Depreciation
(f)
Impairment of non-financial assets
Depreciation is recognised in profit or loss on a straight-line
The carrying amounts of the Group’s non-financial assets,
basis over the estimated useful lives of each part of an item of
other than deferred tax assets, are reviewed at each
property, plant and equipment. Leased assets are depreciated
over the shorter of the lease term and their useful life unless it
reporting date to determine whether there is any indication
of impairment. If any such indication exists then the asset’s
is reasonably certain that the Group will obtain ownership by
recoverable amount is estimated.
the end of the lease term. Land is not depreciated.
The estimated useful lives for the current and comparative
periods are as follows:
(i)
plant and equipment
(ii) fixtures and fittings
2-5 years
5-20 years
Depreciation methods, useful lives and residual values are
reassessed at each reporting date.
(e)
Intangibles
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.
(i)
Software development costs
The recoverable amount of an asset or cash-generating unit
Software development costs are recognised as an expense
is the greater of its value in use and its fair value less costs to
when incurred, except to the extent that such costs, together with
sell. In assessing value in use, the estimated future cash flows
previous unamortised deferred costs in relation to that project, are
are discounted to their present value using a pre-tax discount
expected probable, to provide future economic benefits.
rate that reflects current market assessments of the time value
The unamortised balance of software development costs
deferred in previous periods is reviewed regularly and at each
reporting date, to ensure the criterion for deferral continues to
be met. Where such costs are considered to no longer provide
future economic benefits they are written-off as an expense in
the profit or loss.
(ii) Other intangible assets
Other intangible assets that are acquired by the Group, which
have finite useful lives, are measured at cost less accumulated
amortisation (see above (i)) and impairment losses (see
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
(except goodwill) 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.
accounting policy 3(f)).
(g) Employee benefits
(iii) Subsequent expenditure
Subsequent expenditure is capitalised only when it increases
the future economic benefits embodied in the specific asset to
which it relates. All other expenditure is recognised in profit or
loss when incurred.
(iv) Amortisation
Amortisation is recognised in profit or loss on a straight-line
basis over the estimated useful lives of intangible assets from
the date that they are available for use. The estimated useful
lives for the current and comparative periods are as follows:
(i) Capitalised software development costs
2.5 - 5 years
(ii) Software licenses
2.5 - 5 years
(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 and high quality corporate
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.
48
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) (ii) Short-term benefits
Short-term employee benefits are measured on an undiscounted
basis and are expensed as the related service is provided.
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
A liability is recognised for employee benefits such as wages,
consideration received in respect of unsatisfied performance
salaries and annual leave if the Group has present obligations
obligations and reports these amounts as other liabilities in the
resulting from employees’ services provided to reporting date.
statement of financial position. Similarly, if the Group performs
A provision is recognised for the amount expected to be paid
under short-term and long-term cash bonus or profit-sharing
plans if the Group has a present legal or constructive obligation
to pay this amount as a result of past service provided by the
employee and the obligation can be estimated reliably.
(iii) Share-based payment transactions
The grant date fair value of options and shares granted to
employees is recognised as an employee expense, with a
corresponding increase in equity over the period in which the
employees become unconditionally entitled to the options or
shares. The amount recognised as an expense is adjusted
to reflect the actual number of options or shares that vested,
except for those that fail to vest due to market conditions not
being met.
(h) Provisions
A provision is recognised if, as a result of a past event, the
Group has a present legal or constructive obligation that can
be estimated reliably, and it is probable that an outflow of
economic benefits will be required to settle the obligation.
Provisions are determined by discounting expected future cash
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. In relation to the Group the contract
asset is recognised to account for the revenue in relation to the
satisfaction of a performance obligation.
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 to account for the time value
of money.
Other income – sponsorship income and fees for
services.
flows at a pre-tax discount rate that reflects current market
The Group often enters into transactions that will give rise to
assessments of the time value of money and the risks specific
different streams of revenue. In all cases, the total transaction
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
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
The Group accounts for revenue under AASB 15 Revenue
over the life of the loan.
from contracts with customers. 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.
Commission revenue is recognised as follows:
•
•
Origination commissions: Origination commissions
on loans other than those originated by the Group 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
49
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 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.
Trail commissions – significant estimates and judgements
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 from lenders on settled loans. 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 to determine the expected value. 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.
“Point in
time” or
“Over time”
Point in time
Types of
Service
Commissions
– origination
commissions
Nature and timing of
satisfaction of performance
obligations
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.
Revenue recognition policy under AASB 15
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.
The Group recognises this revenue at the point in time,
when the loan is settled with the lender.
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.
Over time
Interest income –
discount unwind
on the NPV trail
commission
contract asset
Revenue arising from the
discount rate applied to the trail
commission contract asset.
Interest income from the unwinding of the discount rate
on the trail commission contract asset is recognised
over time.
50
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) “Point in
time” or
“Over time”
Point in time
Types of
Service
Other income
– sponsorship
income
Nature and timing of
satisfaction of performance
obligations
The performance obligation is that
a sponsored event has occurred.
Over time
Other income –
Fees for services
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.
Revenue recognition policy under AASB 15
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 when performance obligation is
satisfied.
(j)
Leases
The Group adopted AASB 16 on 1 July 2019.
Recognition and measurement
When a contract is entered into, the Group assesses whether the contract contains a lease. A lease arises when the Group has the right to
direct the use of an identified asset which is not substitutable and to obtain substantially all economic benefits from the use of the asset
throughout the period of use. The leases recognised by the Group relate to office space.
Right of Use assets
The Group recognises right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for
use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any
remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised and lease payments
made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain
ownership of the leased asset at the end of the lease term, the recognised right-of-use assets are depreciated on a straight-line basis over
the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment.
Lease Liabilities
At the commencement date of the lease, the Group recognises lease liabilities measured at the present value of lease payments to
be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease
incentives receivable.
In calculating the present value of lease payments, the Group uses the incremental borrowing rate at the lease commencement date.
After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease
payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a
change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
Key estimates and judgements
(a) Control - Judgement is required to assess whether a contract is or contains a lease at inception by assessing whether the Group
has the right to direct the use of the identified asset and obtain substantially all the economic benefits from the use of that asset.
(b) Lease term - Judgement is required when assessing the term of the lease and whether to include optional extension and
termination periods. Option periods are only included in determining the lease term at inception when they are reasonably certain to
be exercised. Lease terms are reassessed when a significant change in circumstances occurs.
(c) Discount rates - Judgement is required to determine the discount rate, where the discount rate is the Group’s incremental borrowing
rate if the rate implicit in the lease cannot be readily determined.
(k) Finance income and expenses
Finance income comprises interest income on funds invested and foreign currency gains. Interest income is recognised as it accrues,
using the effective interest method.
Finance expenses comprise interest payable on borrowings.
51
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 (l) Securitisation interest income and expense
Interest income is the key component of this revenue stream
and it is recognised 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 relating to trail
commission to brokers are also spread across the estimated
life of the loan using the effective interest method.
Deferred income tax assets and liabilities are measured at the
tax rates that are expected to apply to the year when the asset
is realised, or the liability is settled, based on tax rates (and tax
laws) that have been enacted or substantively enacted at the
balance sheet date.
Income taxes relating to items recognised directly in equity are
recognised in equity and not in the profit or loss.
(i)
Tax consolidation
The Company and its wholly-owned Australian resident entities
Interest income is recognised using the effective interest
have formed a tax consolidated group with effect from 1 July
method for debt instruments measured subsequently at
2004 and are therefore taxed as a single entity from that date. The
amortised cost.
head entity within the tax-consolidated group is the Company.
For financial assets other than purchased or originated credit
Current tax expenses, deferred tax liabilities and deferred tax
impaired financial assets, interest income is calculated by
assets arising from temporary differences of the members
applying the effective interest rate to the gross carrying amount
of the tax-consolidated group are recognised in the separate
of a financial asset, except for financial assets that have
Financial Statements of the members of the tax-consolidated
subsequently become credit impaired.
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
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.
asset. If, in subsequent reporting periods, the credit risk on
Any current tax liabilities (or assets) and deferred tax assets
the credit impaired financial instrument improves so that the
arising from unused tax losses of the subsidiaries is assumed
financial asset is no longer credit impaired, interest income is
by the head entity in the tax-consolidated group and are
recognised by applying the effective interest rate to the gross
recognised by the Company as amounts payable (receivable)
carrying amount of the financial asset.
Securitisation expense comprises interest payable on borrowings.
(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.
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
Deferred income tax is generally provided on all temporary
assessments of the probability of recoverability is recognised
differences at the balance sheet date between the tax bases of
by the head entity only.
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.
(ii) Nature of tax funding arrangements and tax
sharing arrangements
The head entity, in conjunction with other members of
the tax-consolidated group, has entered into a tax funding
arrangement which sets out the funding obligations of
members of the tax-consolidated group in respect of tax
amounts. The tax funding arrangements require payments/
(receipts) to/(from) the head entity equal to the current tax
liability (asset) assumed by the head entity and any tax loss
Unrecognised deferred income tax assets are reassessed at
deferred tax asset assumed by the head entity, resulting in the
each balance sheet date and are recognised to the extent that
head entity recognising an intra-group receivable (payable)
it has become probable that future taxable profit will allow the
equal in amount to the tax liability (asset) assumed. The inter-
deferred tax asset to be recovered.
entity receivables (payables) are at call.
52
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) Contributions to fund the current tax liabilities are payable as
per the tax funding arrangement and reflect the timing of the
4 Determination of fair values
head entity’s obligation to make payments for tax liabilities to
A number of the Group’s accounting policies and disclosures
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
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.
tax payment obligations. No amounts have been recognised
Contract Asset
in the Financial Statements in respect of this agreement as
payment of any amounts under the tax sharing agreement is
considered remote.
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 15
(iii) Goods and services tax
(refer to Note 3(i) Revenue from Contracts with Customers).
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.
(n) Borrowing costs
Borrowing costs directly attributable to the acquisition,
construction or production of a qualifying asset are capitalised
as part of the cost of that asset 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.
(o) Trail commissions payable
The Group pays trail commissions to brokers. This is initially
measured at expected value being the net present value of
expected future trailing commission payable to brokers.
The trail commissions 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
The contract asset from lenders 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.
Other financial instruments
The carrying amount of all other financial assets and
liabilities recognised in the Statement of Financial Position
approximate their fair value, with the exception of the trail
commission payables that are initially recognised at fair value
and subsequently measured at amortised cost based on an
actuarial assessment of future cashflow using appropriate
discount rates.
5 Financial risk management
Overview
The Group has exposure to credit, liquidity and market risks
from the use of financial instruments.
This note presents information about the Group’s exposure to
each of the below risks, the objectives, policies and processes
for measuring and managing risk, and the management of
capital. 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
actuarial analysis of historical runoff information. Refer to Note
for developing and monitoring risk management policies.
29(d) for details on the key assumptions.
Risk management policies are established to identify and
analyse the risks faced by the Group, to set appropriate risk
53
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 limits and controls, and to monitor risks and adherence to
counterparties and obtaining sufficient collateral or other
limits. Risk management policies and systems are reviewed
security where appropriate.
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 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
The Risk and Compliance Committee oversees how
consequence, the Group has no significant concentrations of
management monitors compliance with the Group’s risk
credit risk. The Group has established a credit quality review
management policies and procedures and reviews the
process to provide early identification of possible changes
adequacy of the risk management framework in relation to the
in credit worthiness of counterparties by the use of external
risks faced by the Company and the Group.
credit agencies, which assigns each counterparty a risk rating.
(a) Credit risk
Credit risk is the risk of financial loss to the Group if a customer
or counterparty to a financial instrument fails to meet its
contractual obligations and arises principally from the Group’s
receivables from customers. Refer to Note 29(a) for details.
Trade and other receivables
Risk ratings are subject to regular review.
The Group’s maximum exposure is 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.
The Group has applied an ECL model to determine the collective
impairment provision of its loans and advances. Refer note
The Group’s exposure to credit risk is influenced mainly by the
3(b)(ii)) and 29(a)(ii) for details. COVID-19 economic impacts
individual characteristics of each customer. The demographics
have increased the likelihood of losses due to such things as
of the Group’s customer base, including the default risk of the
increased unemployment and potentially decreasing property
industry and country in which customers operate, has less of
prices. These factors have been included in the ECL model
an influence on credit risk.
which has seen the provision increase to $3,272k (2019: $757k).
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
(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
The Group’s contract assets relate mainly to high credit quality
Group’s reputation.
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. Majority of all lenders have confirmed they will pay
trail on COVID-19 hardship cases. The final adjustment on
foreclosures is not expected to have a material impact on the
trail book. No expected credit loss required as the credit risk of
the underlying borrower as well as the impact of COVID-19 is
built into the variable constraint used in the calculation. 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
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.
54
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) 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.
to sustain future development of the business. The Board
of Directors monitors the return on capital, which the Group
defines as net operating income divided by total shareholders’
equity and aims to maintain a capital structure that ensures
the lowest cost of capital available to the Group. The Board
of Directors also monitors the level of dividends to ordinary
shareholders.
The SPEs are subject to the external requirements imposed by
the warehouse facility providers. The terms of the warehouse
facilities provide a mechanism for managing the lending
activities of the SPE and ensure that all outstanding principal
and interest is paid at the end of each reporting period.
Similarly, the SPE-RMBS are subject to external requirements
imposed by the bondholders and the rating agencies. The
The Group’s most significant exposure to interest rate risk is
terms of the RMBS transactions provide a mechanism for
on the interest-bearing loans within the SPE which fund the
ensuring that all outstanding principal and interest is paid at
residential mortgage securitisation programme. To minimise
the end of each reporting period. There were no breaches of
its exposure to increases in cost of funding, the Group only
the covenants or funding terms imposed by the warehouse
lends monies on variable interest rate term. Should there
and RMBS transactions in the current period. AFG Securities
be changes in pricing the Group has the option to review its
Pty Ltd is subject to externally imposed minimum capital
position and offset those costs by passing on interest rate
requirements by the Australian Securities and Investments
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
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. All
external customers are Australian entities.
The following summary describes the operations in each of the
Group’s reportable segments:
The Group is exposed to an increase in the level of credit
AFG Wholesale Mortgage Broking
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
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
those insurers as well as the Company’s maximum cash flow
lenders.
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
The Group receives two types of commission payments on
loans originated through its network;
•
Upfront commissions on settled loans
55
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 Upfront commissions are received by the Group from lenders as a percentage of the total amount borrowed. Once a loan settles, the
Group receives a one-off payment linked to the total amount borrowed as an upfront commission, a large portion of which is then paid by
the Group to the originating broker.
•
Trail commissions on the loan book
Trail commissions are received by the Group from lenders over the life of the loan (if it is in good order and not in default), as a percentage
of the particular loan’s outstanding balance. The trail book represents the aggregate of residential mortgages outstanding that have been
originated by the Group’s contracted brokers and are generating trail income.
AFG Home Loans
AFGHL offers the Group’s branded mortgage products, funded by third party wholesale funding providers (white label products) or AFG
Securities mortgages (securitised loans issued by AFG Securities Pty Ltd) that are distributed through the Group’s distribution network.
AFGHL sits on the Group’s panel of lenders alongside the other residential lenders and competes with them for home loan customers.
The segment earns fees for services, largely in the form of upfront and trail commissions, and net interest margin on loans funded by its
securitisation programme. Segment results that are reported to the Board of Directors include items directly attributable to the relevant
segment as well as those that can be allocated on a reasonable basis.
Other/Unallocated
Other/unallocated items are comprised mainly of other operating activities from which the Group earns revenue and incurs expenses that
are not required to be reported separately since they don’t meet the quantitative thresholds prescribed by AASB 8 or are not managed
separately and include corporate and taxation overheads, assets and liabilities. Information regarding the results of each reportable
segment is included 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.
Year ended 30 June 2020
In thousands of AUD
AFG Wholesale
Mortgage
Broking
AFG Home Loans
Other /
Unallocated /
Eliminations
Income
Operating income
Inter-segment1
Other income
Finance income
Share of profit of an associate
551,283
34,871
1,119
-
-
129,421
-
-
105
-
1,479
(34,871)
13,369
835
2,314
Total
682,183
-
14,488
940
2,314
Total segment income
587,273
129,526
(16,874)
699,925
Timing of revenue recognition
At a point in time
Over time
Results
587,273
-
35,546
93,980
(29,789)
12,915
Segment profit/(loss) before income tax
43,980
11,430
(1,864)
593,030
106,895
53,546
(15,468)
38,078
Income tax expense
Net profit after tax
Assets and liabilities
Total segment assets
Total segment liabilities
Other segment information
971,979
946,520
3,079,982
2,967,384
37,566
(2,590)
4,089,527
3,911,314
Depreciation and amortisation
(87)
(22)
(2,377)
(2,486)
56
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) Year ended 30 June 2019
In thousands of AUD
AFG Wholesale
Mortgage
Broking
AFG Home Loans
Other /
Unallocated /
Eliminations
Income
Operating income
Inter-segment1
Other income
Finance income
Share of profit of an associate
530,095
31,622
1,603
-
-
111,288
-
-
33
-
1,456
(31,622)
13,529
1,995
1,526
Total
642,839
-
15,132
2,028
1,526
Total segment income
563,320
111,321
(13,116)
661,525
Timing of revenue recognition
At a point in time
Over time
Results
563,320
-
37,335
73,986
(25,306)
12,190
Segment profit/(loss) before income tax
33,223
16,728
(3,492)
575,349
86,176
46,459
(13,430)
33,029
880,616
868,931
2,184,060
2,115,354
25,284
853
3,089,960
2,985,138
Income tax expense
Net profit after tax
Assets and liabilities
Total segment assets
Total segment liabilities
Other segment information
Depreciation and amortisation
(149)
(21)
(855)
(1,025)
1 Relate to Intercompany transactions
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
2020
2019
530,654
1,764
514,124
1,263
55,785
53,466
268
871
213
636
589,342
569,702
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.
57
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 8 Other income
In thousands of AUD
Timing of revenue recognition
At a point in time
Sponsorship and incentive income
Performance bonus income
Over time
Professional indemnity insurance(i)
Software licence fees (ii)
Fees for services
Other(iii)
Total Other income
2020
2019
2,977
512
2,358
2,925
5,114
602
3,605
834
2,321
2,883
4,996
493
14,488
15,132
i.
ii.
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.
Software Licenses is the income generated from FLEX & SMART. This revenue relates to AFG software and marketing services used by brokers and is
recognised over time.
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 loans and advances
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
58
Note
10
2020
3,588
4,244
4,993
397
30,528
2,486
-
2,612
48,848
2020
21,324
6,165
31
924
2,084
30,528
2019
3,977
2,148
3,433
423
29,391
1,026
1,609
508
42,515
2019
20,344
6,268
(13)
772
2,020
29,391
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) 11 Auditors’ remuneration
In thousands of AUD
Fees to Ernst & Young (Australia)
Fees for auditing the statutory financial report of the parent covering the group and
auditing the statutory financial reports of any controlled entities
Fees for assurance services that are requires by legislation provided
by the auditor – AFSL
Fees for other services – CBA lender review program
Total fees to Ernst & Young (Australia)
Fees to other overseas member firms of Ernst & Young (Australia)
Total Fees to Ernst & Young
Fees to Deloitte Touche Tohmatsu (Australia)
Fees for auditing the statutory financial report of the parent covering the group and
auditing the statutory financial reports of any controlled entities
Fees for assurance services that are requires by legislation provided
by the auditor – AFSL
Fees for other services - Actuarial Services
Total fees to Deloitte Touche Tohmatsu (Australia)
Fees to other overseas member firms of Deloitte Touche Tohmatsu (Australia)
2020
2019
240,000
15,000
30,000
285,000
-
285,000
-
-
101,500
101,500
-
-
-
-
-
-
-
189,500
15,500
97,500
302,500
-
Total Fees to Deloitte Touche Tohmatsu
101,500
302,500
12 Finance income and expenses
Recognised in profit or loss
In thousands of AUD
Interest income on broker loans and receivables
Interest income on cash and cash equivalents
Net foreign exchange gain
Finance income
Interest expense on lease liability
Finance expense
2020
400
540
-
940
163
163
2019
599
1,415
14
2,028
-
-
59
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 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
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% (2019: 30%)
Non-deductible expenses
Over provision in prior periods
Other adjustments
2020
2019
17,321
-
-
(1,853)
15,468
2020
53,546
16,064
(596)
-
-
15,468
12,853
(126)
(26)
729
13,430
2019
46,458
13,938
(356)
(126)
(26)
13,430
(b)
Current tax assets and liabilities
The current tax liability for the Group of $5,988k (2019: $2,808k) represents the amount of income taxes payable in respect of current and
prior financial years.
(c) Deferred tax assets and liabilities
Deferred tax assets and liabilities are attributable to the following:
In thousands of AUD
Property, plant and equipment and
intangibles
Trade and other receivables
Contract asset
Employee benefits
Assets
Liabilities
Net
2020
(265)
-
-
2019
(34)
-
-
2020
2019
-
-
-
-
2020
(265)
-
2019
(34)
-
285,195
263,014
285,195
263,014
Trade and other payables
(260,465)
(237,881)
Other items
(3,288)
(1,817)
(1,364)
(1,459)
Tax (assets) / liabilities
(265,382)
(241,191)
285,195
263,014
Set off of tax
265,382
241,191
(265,382)
(241,191)
-
-
-
-
-
-
(1,364)
(1,459)
(260,465)
(237,881)
(3,288)
19,813
-
(1,817)
21,823
-
Net deferred tax liabilities
-
-
19,813
21,823
19,813
21,823
60
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) 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
2020
106,895
1,252
108,147
41,348
12,033
53,381
161,528
161,528
2019
48,297
1,276
49,573
30,611
16,634
47,245
96,818
96,818
1. Discloses amounts held in the special purpose securitised trusts and series on behalf of the warehouse funder and the bondholders
2. Discloses cash collateralised standby letter of credit, liquidity reserve account and cash provided in trust by the warehouse providers
to fund pending settlements
The effective interest rate on short term deposits in 2020 was 1.30% (2019: 2.32%). The deposits had an average maturity of 68 days
(2019: 73 days).
The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in Note 29.
61
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 (b) Reconciliation of cash flows from operating activities
In thousands of AUD
Cash flows from operating activities
2020
2019
Profit for the period from continuing operations
38,078
33,029
Adjustments to reconcile the profit to net cash flows:
Income tax expense from continuing operations
Depreciation and amortisation
Term out cost amortisation
Interest on leases
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 ECL provision
Increase in trade and other payables
Increase/(Decrease) in contract liability
(Decrease)/Increase in employee entitlements
(Decrease)/Increase in provisions
Cash generated from operations
Income tax paid
Net cash generated by operating activities
15 Trade and other receivables
In thousands of AUD
Current
Trade receivables
Other receivables1
Accrued income
Prepayments
1 Other receivables include the Think Tank Pty Ltd term deposit. Refer Note 19.
62
15,468
2,486
932
343
(940)
976
(2,314)
(74,872)
72,284
2
52,443
13,430
1,025
259
-
(2,014)
773
(1,526)
(94,674)
88,298
10
38,610
(5,717)
(2,909)
2,516
4,077
1,678
(41)
(342)
54,614
(14,298)
40,316
2020
214
2,031
150
2,395
3,051
5,446
333
3,205
(178)
681
274
40,016
(11,926)
28,090
2019
239
1,256
375
1,870
3,539
5,409
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) 16 Contract Asset
Current
In thousands of AUD
2020
2019
Net present value of future trail commissions contract asset
209,863
194,283
Non-current
Net present value of future trail commissions contract asset
764,736
974,599
705,444
899,727
The Group’s exposure to credit and currency risks and impairment losses related to contract assets are disclosed in Note 29.
17 Property, plant and equipment and Intangibles
Property, plant and equipment
In thousands of AUD
Plant and
equipment
Fixtures and
fittings
246
254
(3)
(185)
312
312
185
(206)
291
1,133
11
-
(607)
537
537
145
(467)
215
Balance at 1 July 2018
Acquisitions
Disposals and write-offs
Depreciation
Balance at 30 June 2019
Balance at 1 July 2019
Acquisitions
Depreciation
Balance at 30 June 2020
Intangibles
In thousands of AUD
Balance at 1 July 2018
Acquisitions
Depreciation
Balance at 30 June 2019
Balance at 1 July 2019
Acquisitions
Depreciation
Balance at 30 June 2020
Total
1,379
265
(3)
(792)
849
849
330
(673)
506
2020
Software
Development
526
529
(243)
812
812
2,726
(220)
3,318
63
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 18 Loans and advances
In thousands of AUD
Current
Securitised assets1
Other secured loans2
Non-current
Securitised assets1
Other secured loans2
Less: Provision for expected credit loss3
2020
2019
457,834
1,223
459,057
353,943
1,574
355,517
2,462,787
1,713,417
2,201
(3,272)
3,827
(757)
2,461,716
1,716,487
2,920,773
2,072,004
(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 9.77% p.a. (2019: 10.70% p.a.).
b)
Loan and advances to McCabe St Limited (related party) $224k (2019: $218k) are secured over its land and assets. Interest is
charged on average at 2.94% p.a. (2019: 4.13% 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 $3,272k
(2019: $757k).
During the financial year, new loans issued in the Group’s securitisation programme were $1,354,499k (2019: $1,059,513k).
The Group’s exposure to credit, currency and interest rate risks related to loans and advances is disclosed in Note 29.
19 Investment in associate
In thousands of AUD
Non-current
Cost of investment1
Contingent consideration liability
Share of post-acquisition profit
Purchase additional shares
1 Includes transaction costs
64
2020
2019
11,141
1,488
4,026
379
17,034
11,141
1,488
1,712
-
14,341
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) AFG holds a 32.81% investment in Think Tank Group Pty Ltd (“Thinktank”) with additional contingent consideration payable of $1,488k. In
connection with the investment AFG distributes 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 period
Acquisition costs
Contingent consideration liability
Purchase additional shares
2020
2019
72,006
1,647,111
1,719,117
919,756
778,984
42,162
1,071,871
1,114,033
410,141
692,378
1,698,740
1,102,519
20,377
11,514
8,584
3,794
17,034
14,341
4,026
11,141
1,488
379
17,034
1,712
11,141
1,488
-
14,341
65
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 20 Trade and other payables
In thousands of AUD
Current
Note
2020
2019
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
187,347
65,483
6,212
259,042
691,750
691,750
172,430
63,282
3,981
239,693
634,383
634,383
950,792
874,076
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.
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 facilities2
Securitised funding facilities1
Non-current
Securitised funding facilities1
2020
2019
1,615,500
203,515
1,819,015
1,095,547
1,095,547
962,444
191,722
1,154,166
919,606
919,606
2,914,562
2,073,772
1 Securitised funding facilities include RMBS and risk retention facilities
2 On 30 July 2020, the Group successfully completed the AFG 2020-1 Trust issue, a $700 million Residential Mortgage Backed Securities (RMBS) issue.
Refer Note 35.
66
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) Terms and debt repayment schedule
Terms and conditions of outstanding loans were as follows:
2020
2019
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
2.13%
2020-2021
1,615,500
1,615,500
3.13%
2019-2020
962,444
962,444
2.16%
2020-2024
1,294,978
1,299,062
3.17%
2019-2024
1,106,674
1,111,328
2,910,478
2,914,562
2,069,118
2,073,772
(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 $401,000k (2019: $44,356k). The interest is
recognised at an effective rate of 2.13% (2019: 3.13%).
As at the reporting date we have two securitisation warehouse facilities, expiring on the 14 December 2020 and 10 May 2021.
(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 2.13% (2019: 3.17%).
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 being 1% of the aggregated invested amount of all notes at that time,
$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 $5,640k (2019:
$5,940k).
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.
67
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 Other Securitised funding facilities
Securitised funding facilities are secured only on the assets of each of the individual securitisation trusts. As at the reporting date we
have two other securitised funding facilities, provided for the purpose of funding the purchase of Notes in our RMBS issues required to be
retained under the EU Regulations. These facilities are also supported by a guarantee provided by AFG Securities Pty Ltd. Total funding
provided in financial year ending 30 June 2020 was $38,304k.
(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 Payment 2
Provision for make good
2020
200
252
452
38
252
290
162
162
2020
2,421
1,317
1,358
5,096
98
98
2019
200
276
476
118
276
394
82
82
2019
2,491
1,444
1,181
5,116
118
118
5,194
5,234
2020
1,089
1,488
210
2,787
2019
1,291
1,488
350
3,129
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). The contingent payment refers to the contingent consideration payable of $1,488k (2019:
$1,488k) in relation to the Thinktank strategic investment.
68
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) 24 Contract liability
Contract Liability
In thousands of AUD
Current
Sponsorship income
Lease incentives
Unearned income
25 Leases
2020
5,287
-
332
5,619
2019
3,936
10
350
4,296
In the context of the transition to AASB 16, right of use assets of $6.8M and lease liabilities of $6.8M were recognised as at 1 July 2019.
The Group transitioned to AASB 16 in accordance with the modified retrospective approach. The prior year figures were not adjusted. As
part of the application of AASB 16, the Group chooses to apply the option to adjust the right of use asset by the amount of any provision
for onerous leases recognised in the balance sheet immediately before the date of initial application.
The following reconciliation to the opening balance for the lease liabilities as at 1 July 2019 is based upon the operating lease obligations
as at 30 June 2019:
In thousands of AUD
Operating lease commitments at 30 June 2019
Lease obligations relating to new lease entered into after 1 July 2019
Gross operating lease liabilities at 1 July 2019
Discounting
Lease liabilities at 1 July 2019
$’000
9,175
(1,347)
7,828
(1,022)
6,806
The lease liabilities were discounted at the incremental borrowing rate as at 1 July 2019. The weighted average incremental borrowing
rate was 5%. Non lease components have been included in future cashflows.
The Group also applied the available practical expedients wherein it:
•
Used a single discount rate to a portfolio of leases with reasonably similar characteristics.
The Group leases a number of office facilities under operating leases. The leases run for a period of up to 6 years, with an option to renew
the lease after that date. Lease payments are generally increased every year to at least reflect Consumer Price Index (CPI) movements,
with regular adjustments to reflect market rentals.
Lease Assets
In thousands of AUD
At 1 July 2019
Additions
Lease remeasurements
Depreciation
Carrying amount at 30 June 2020
At 30 June 2020
Historical cost
Accumulated depreciation and impairment
Carrying amount at 30 June 2020
$’000
6,806
1,134
-
(1,617)
6,323
7,940
(1,617)
6,323
69
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 Lease Liabilities
In thousands of AUD
At 1 July 2019
Additions
Repayments
Accretion of interest
Lease remeasurements
Carrying amount at 30 June 2020
At 30 June 2020
Current
Non-current
Carrying amount at 30 June 2020
$’000
6,806
1,134
(1,723)
342
-
6,559
$’000
1,292
5,267
6,559
Maturity profile of lease liabilities. The table below presents the contractual discounted cash flows associated with the Group’s lease
liabilities, representing principal and interest.
Maturity profile of lease liabilities
Due for payment in:
In thousands of AUD
1 year or less
1-2 years
2-3 years
3-4 years
4-5 years
More than 5 years
26 Capital and reserves
(a) Share capital
The Company
On issue at 1 July
Issued for cash
Share issue costs
$’000
1,292
1,236
1,242
1,348
1,239
202
6,559
Share Capital
($’000)
Ordinary shares
(’000)
2020
43,541
60,001
(1,385)
2019
43,541
-
-
2020
214,813
52,928
-
2019
214,813
-
-
On issue at 30 June – fully paid
102,157
43,541
267,741
214,813
The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are fully paid and rank
equally with regard to the Company’s residual assets.
The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at
meetings of the Company.
70
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) (b) Dividends
Dividends paid in the current year by the Group are:
2020
Final 2019 ordinary
1st interim 2020 ordinary
2019
Final 2018 ordinary
1st interim 2019 ordinary
Declared and unrecognised as a liability:
2020
Final 2020 ordinary
Cents per
share
Total amount
($’000)
Franked /
unfranked
Date of
payment
5.9
5.4
5.7
4.7
4.7
12,719
11,640
24,359
12,244
10,096
22,340
12,584
12,584
100%
100%
03/10/2019
26/03/2020
100%
100%
27/09/2018
28/03/2019
100%
29/09/2020
2020
18,379
42,885
61,264
2019
15,114
35,267
50,381
Dividends declared or paid during the year or after 30 June 2020 were franked at the rate of 30%.
In thousands of AUD
Dividend franking account
30 per cent franking credits available to shareholders of Australian Finance Group
Limited for subsequent financial years
The ability to utilise the franking credits is dependent upon the ability to declare dividends. In accordance with the tax consolidation
legislation the Company as the head entity in the tax-consolidated group has also assumed the benefit of $61,264k (2019: $50,381k)
franking credits.
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
Profit attributable to ordinary equity holders of the Company
30 June 2020
30 June 2019
38,078
33,029
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
220,149
2,676
222,825
214,813
1,956
216,769
71
Thousands
Thousands
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 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
1/07/2016
30/06/2019
-
593,136
1/07/2017
30/06/2020
593,136
695,396
-
-
1/07/2018
30/06/2021
1,288,532
710,560
554,199
1/07/2019
30/06/2022
1,405,956
1,325,215
554,056
-
-
-
-
Balance at
end of the
year
593,136
1,288,532
-
-
38,937
1,405,956
141,340
2,035,775
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. An impairment assessment using
forward looking assumptions has been undertaken refer to Note 3(b)(ii) for further information.
72
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) 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
2020
-
148,402
28,519
1,673
3,421
6,820
7,098
2,452
11,479
209,864
2020
-
540,772
103,923
6,096
12,465
24,852
25,863
8,934
41,830
2019
-
142,095
16,154
4,178
8,654
6,461
8,401
-
8,340
764,735
194,283
2019
-
515,948
58,656
15,169
31,422
23,460
30,503
-
30,286
705,444
(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
Mortgage brokers
Other
Residential mortgage borrowers
Carrying amount
2020
2019
2,912,074
2,064,586
3,199
5,500
5,183
2,235
2,920,773
2,072,004
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 $5,145,814k (2019: $3,729,217k). During the year ended 30 June 2020 the Group did not take possession of any residential
securities or manage any assisted shortfall sales loans. During the financial year 3 securities were sold as mortgagee in possession with all
three properties taking into possession during the FY19. Of the 3 securities sold one returned a shortfall after the LMI claim to the value of $1k.
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%1
Between 90%-95%1
Between 80%-90%1
Less than 80%
Carrying amount
2020
2019
403
37,528
421,061
2,453,082
2,912,074
2,188
43,971
319,534
1,698,893
2,064,586
1 LVR greater than 80% is required to have Lenders Mortgage Insurance (LMI), resulting in 100% of this balance being insured.
73
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 The COVID-19 pandemic economic impacts have increased the likelihood of losses due to such things as increased unemployment and
potentially decreasing property prices. These factors have been included in the ECL model which has seen the provision increase to
$3,272k (2019: $757k).
Given the dynamic and evolving nature of the COVID-19 pandemic, limited recent experience of the economic and financial impacts of such
a pandemic, and the short duration between the declaration of the pandemic and the preparation of these financial statements, changes to
the estimates and outcomes that have been applied in the measurement of the Group assets and liabilities may arise in the future.
In response to the current COVID-19 pandemic, the Group has provided support to its customers by implementing a range of initiatives,
such as granting deferrals of residential mortgage loan repayments to customers affected by the COVID-19 pandemic.
A summary of the assumptions underpinning the Groups ECL model is as follows:
Category
Definition of Category
Basis for recognition of
ECL provision
Performing
Customers have a low risk of default and a strong capacity to meet contractual cash flows
12 month expected losses
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
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
Given the uncertainty around further lockdowns and the flow on effect to unemployment rates, interest rates and property prices and
therefore probability of default, the final probability of default was calculated as the maximum of:
•
•
•
The probability of default calculated using S&P methodology;
The probability of default floor based on days past due; and
The probability of default floor based on restructuring status, which takes into account any hardship arrangements.
30 June 2019
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
Gross Carrying
amount
2,813
2,089
Amortised cost
-
None
2,919
2,291
174
2,064,760
2,063,829
Underperforming
3.62%
Lifetime expected losses
Non-performing
8.84%
Lifetime expected losses
Write off
Total Loans
-
Asset is written off
74
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) 30 June 2020
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
0.05% 12 month expected losses
2,638,147
2,636,820
Underperforming
0.56%
Lifetime expected losses
246,634
245,255
Gross carrying
amount
Gross Carrying
amount
Non-performing
2.08%
Lifetime expected losses
-
Asset is written off
Write off
Total Loans
30 June 2019
27,293
-
26,727
Amortised cost
-
None
2,912,074
2,908,802
Performing
Under
performing
Non-
performing
Write
off
Total
In thousands of AUD
Opening loss allowance as at 1 July 2018
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
30 June 2020
74
-
-
-
-
-
375
449
-
-
-
-
-
-
106
106
175
174
423
-
-
-
-
(175)
202
202
-
-
-
(174)
-
-
-
-
-
-
(174)
(175)
683
757
Performing
Under
performing
Non-
performing
Write
off
Total
In thousands of AUD
Opening loss allowance as at 1 July 2019
449
106
202
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 2020
-
-
395
-
-
482
1,326
-
-
877
-
(106)
502
1,379
-
-
359
-
(201)
207
567
-
-
-
-
-
-
-
-
757
-
-
1,631
-
(307)
1,191
3,272
75
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 In thousands of AUD
Performing
Underperforming
Non-performing
Loans written off
Total gross loans and advances
Less Loan loss allowance
Less Write off
Loans and advances net of ECL as at 30 June
30 June 2020
30 June 2019
2,638,147
2,059,376
246,634
27,293
-
2,919
2,291
174
2,912,074
2,064,760
(3,272)
-
(757)
(174)
2,908,802
2,063,829
The reconciliation of opening and closing expected credit losses on loans and advances are as follows:
In thousands of AUD
30 June 2019
Movement
30 June 2020
Stage 1
Stage 2
Stage 3*
Total Provision for ECL
In thousands of AUD
Opening loss allowance as at 1 July
Stage 1
Stage 2
Stage 3*
Closing loss allowance as at 30 June
449
106
202
757
877
1,273
365
2,515
1,326
1,379
567
3,272
30 June 2020
30 June 2019
757
877
1,273
365
3,272
423
375
106
(147)
757
* Amount was written off in the reporting period ended 30 June 2019 or 30 June 2020. 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 2020 (2019: Nil).
Other secured loans
The Group has minimal exposure to credit risk for loans made during the year. No impairment loss was recognised during 2020 (2019: 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.
76
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) -
-
-
-
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.
2020
In thousands of AUD
Securitisation warehouse
facilities
Carrying
amount
Contractual
cash flows
6 months
or less
6-12
months
1-2
years
2-5 years More than
5 years
1,615,500
1,647,613
1,364,658
282,955
-
-
Secured funding facilities1
1,299,060
1,313,068
102,288
102,288
253,585
854,907
Net present value of future trail
commissions payable
879,096
1,036,190
120,658
109,695
189,051
377,219
239,567
Trade and other payables
71,696
71,696
71,696
-
-
-
-
3,865,352
4,068,567
1,659,300
494,938
442,636
1,232,126
239,567
1 Excludes set up costs amortisation
2019
In thousands of AUD
Securitisation warehouse
facilities
Carrying
amount
Contractual
cash flows
6 months
or less
6-12
months
1-2
years
2-5
years
More than
5 years
962,444
983,944
778,678
205,266
-
-
Secured funding facilities1
1,111,027
1,128,618
96,723
96,722
160,289
774,884
Net present value of future trail
commissions payable
806,813
959,597
112,221
102,067
175,934
349,582
219,793
Trade and other payables
64,612
64,612
64,612
-
-
-
-
2,944,896
3,136,771
1,052,234
404,055
336,223
1,124,466
219,793
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 cashflows 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.
The expiry dates of our warehouse facilities are the 14 December 2020 and 10 May 2021.
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 20.
77
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 (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
2020
2019
974,599
(879,096)
95,503
899,727
(806,813)
92,914
3,082,301
2,168,749
(2,914,562)
(2,073,772)
167,739
94,977
The Group’s main interest rate risk arises from securitised assets, cash deposits and interest-bearing facilities. All the Group’s borrowings
are issued at variable rates, however the vast majority pertains to the warehouse facility which is arranged as ‘pass through’ facilities, and
therefore the exposure to the interest rate risk is mitigated by the ability to pass any rate increases onto borrowers.
1 Discount rate for trail commission receivable and payable is fixed for the life of the loan.
Cash flow sensitivity analysis for variable rate instruments
Due to the market conditions existing at 30 June 2020, 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
2019 and 2020.
Effect in thousands of AUD
100bp increase
100bp decrease
100bp increase
100bp decrease
After tax profit
After tax equity
30 June 2020
Variable rate contract assets
Variable rate financial liabilities
Cash flow sensitivity (net)
30 June 2019
Variable rate contract assets
Variable rate financial liabilities
Cash flow sensitivity (net)
21,538
(16,155)
5,383
15,143
(6,737)
8,406
(21,538)
16,155
(5,383)
(15,143)
6,737
(8,406)
21,538
(16,155)
5,383
15,143
(6,737)
8,406
(21,538)
16,155
(5,383)
(15,143)
6,737
(8,406)
78
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) (iii) Prepayment risk
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 contract asset and future
trail commission payables. 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 and equity
Securitised assets
2020
+5%
(2,894)
-5%
3,058
2019
+5%
(3,982)
-5%
4,208
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.
(iv) 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).
79
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 Fair value of financial assets and liabilities that are not measured at fair value (but fair value disclosures are required)
The table below reflects the fair value of the trail commission payable, non-current loans and advances and non-current securitised
funding facilities. The carrying amount of all the other financial assets and liabilities recognised in the Statement of Financial Position
approximate their fair value due to their short-term nature.
In thousands of AUD
Carrying amount
Fair value
Carrying amount
Fair value
30 June 2020
30 June 2019
Financial assets
Non-current loans and advances
Financial liabilities
Future Trailing commission payable1
Non-current securitised funding facilities
2,464,989
2,457,168
1,717,244
1,711,854
879,096
1,095,547
917,984
1,086,130
806,813
919,606
826,777
916,687
1 Note 4% discount rate applied to the Fair value calculations. Run off rate and pay out percentage remain consistent with the carrying value calculation
assumptions.
Loans and advances
The fair values of loans and advances are estimated using a discounted cash flow analysis, based on current lending rates for similar
types of lending arrangements ranging from 2.6% to 6.8%.
For the purpose of fair value disclosure under AASB 13 Fair Value Measurement, the loans and advances would be categorised as a level
3 asset where the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
Future Trailing commission payable
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.
The trail commission assets and liabilities at 30 June 2020 relate to the Residential, Commercial and the AFGHL 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.
The fair value of trailing commission contract asset from lenders and the corresponding payable to members is determined by using a
discounted cash flow valuation. These calculations require the use of assumptions which are determined by management, reviewed by
external actuaries, by reference to market observable inputs. The valuation is classified as level 3 in the fair value measurement hierarchy.
The key assumptions underlying the carrying value calculations of trailing commission receivable and the corresponding payable to
members at the reporting date is summarised in the following table:
Average loan life
Discount rate per annum
Percentage paid to brokers
Securitised funding facilities
30 June 2020
30 June 2019
Between 3.1 and 5.1 years
Between 3.2 and 5.1 years
Between 4% and 13.5%
Between 5% and 13.5%
Between 85% and 94%
Between 85% and 93.8%
The fair values of securitised funding facilities are estimated using discounted cash flow analysis, based on current borrowing rates for
similar types of borrowing arrangements ranging from 1.4% to 1.6%.
For the purposes of fair value disclosure under AASB 13 Fair Value Measurement, the subordinated notes would be categorised as a level
3 liability where the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
80
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) 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 2016-1 Trust
AFG 2017-1 Trust
AFG 2018-1 Trust
AFG 2019-1 Trust
AFG 2019-2 Trust
AFG 2020-1 Trust
AFG 2010-2 Pty Ltd
AFG 2010-3 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
2020
2019
Australia
100
100
Australia
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
-
100
100
Australia
32.81
33.55
AFG 2019-2 Trust and AFG 2010-3 Pty Ltd were established during the year ended 30 June 2020.
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% (2019: 63%) 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 24% (2019: 32%).
81
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 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
AFG 2019-2
2020
32,113
-
450
560
700
3,930
-
2019
21,500
-
450
560
700
3,930
n/a
1 The level of subordination subscribed by the Company or Group 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).
31 Parent entity
Throughout the financial year ending 30 June 2020, the parent Company of the Group was Australian Finance Group Ltd.
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
See Notes 32 and 33 for the parent entity capital and other commitments, and contingencies.
82
2020
2019
34,992
-
34,992
31,112
-
31,112
2020
2019
265,200
1,072,748
231,929
936,978
102,157
2,504
31,109
135,770
216,754
951,661
237,080
886,188
43,542
1,455
20,476
65,473
Annual Report 2020NOTES TO THE FINANCIAL STATEMENTS (continued) 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
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 $1,076k which has been paid to Qube. (2019:
$1,126k) In addition to the above McCabe Street Pty Ltd
has an outstanding loan owing to AFG amounting to
$224k (2019: $218k), this loan is on commercial terms
at arms-length. EPG and McCabe Street Pty Ltd share
a common director. Directors of McCabe Street Pty Ltd
include B. McKeon, D. Bailey and L. Bevan.
material to the Group.
(b) Subsidiaries
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.
Loans are made by the parent entity to wholly owned
subsidiaries to fund working capital. 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.
34 Related parties
(a) Other related parties
35 Subsequent events
A number of KMP held positions in other entities that result in
On 30 July 2020, the Group successfully completed the AFG
them having control over the financial or operating policies of
2020-1 Trust issue, a $700 million Residential Mortgaged Backed
these entities.
Securities (RMBS) issue.
A number of these entities transacted with the Group in the
As at 21 August 2020, there has been a meaningful reduction
reporting period. The terms and conditions of the transactions
in the number of AFG Securities customers requesting
with the other related parties were no more favourable than
hardship arrangements due to the pandemic with overall
those available, or which might reasonably be expected to be
hardship reducing from 9.56% on 7 May 2020 to 5.33% at
available, on similar transactions to non-KMP related entities
21 August 2020.
on an arm’s length basis.
The aggregate amounts recognised during the year relating to
of a dividend of 4.7 cents per fully paid ordinary share,
On 27 August 2020, the Directors recommended the payment
other related parties were as follows:
(i) Mr T. Gill is an Independent Director of First Mortgage
Services (FMS), one of the Group's 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 $1,038k (2019: $464k).
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.
fully franked based on tax paid at 30%. The dividend has a
record date of 10 September 2020 and a payment date of
29 September 2020. The aggregate amount of the proposed
dividend expected to be paid out of retained earnings at 30
June 2020 is $12,584k. The financial effect of this dividend has
not been brought to account in the financial statements for the
year ended 30 June 2020.
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
(ii) Establish Property Group Ltd (EPG) was created as part
significantly affect, the operations of the Group, the results of
of the demerger of AFG's former property business on
those operations, or the state of affairs of the Group in future
22 April 2015.
financial years.
83
NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2020 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 2020 and of its performance for the year
ended on that date
(ii) Complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations
Regulations 2001
b) The Financial Statements and Notes to the Financial Statements also comply with International Financial Reporting Standards as
disclosed in Note 2(a)
c) There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.
The Directors have been given the declarations by the Chief Executive Officer, and the Chief Financial Officer required by Section 295A of
the Corporations Act 2001.
On behalf of the Board
Tony Gill
Chairman
Dated at Sydney, New South Wales on 27 August 2020
84
Annual Report 2020DIRECTOR’S DECLARATION Independent Audit Report
to the members of Australian Finance Group Limited
Ernst & Young
11 Mounts Bay Road
Perth WA 6000 Australia
GPO Box M939 Perth WA 6843
Tel: +61 8 9429 2222
Fax: +61 8 9429 2436
ey.com/au
Independent auditor's report to the members of Australian Finance Group
Limited
Report on the audit of the financial report
Opinion
We have audited the financial report of Australian Finance Group Limited (the Company) and its
subsidiaries (collectively the Group), which comprises the consolidated statement of financial position
as at 30 June 2020, the consolidated statement of profit or loss and other comprehensive income,
consolidated statement of changes in equity and consolidated statement of cash flows for the year
then ended, notes to the financial statements, including a summary of significant accounting policies,
and the directors' declaration.
In our opinion, the accompanying financial report of the Group is in accordance with the Corporations
Act 2001, including:
a. giving a true and fair view of the consolidated financial position of the Group as at 30 June 2020
and of its consolidated financial performance for the year ended on that date; and
b. complying with Australian Accounting Standards and the Corporations Regulations 2001.
Basis for opinion
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Report section of our report. We are independent of the Group in accordance with the auditor
independence requirements of the Corporations Act 2001 and the ethical requirements of the
Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional
Accountants (including Independence Standards) (the Code) that are relevant to our audit of the
financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with
the Code.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our opinion.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in
our audit of the financial report of the current year. These matters were addressed in the context of
our audit of the financial report as a whole, and in forming our opinion thereon, but we do not provide
a separate opinion on these matters. For each matter below, our description of how our audit
addressed the matter is provided in that context.
We have fulfilled the responsibilities described in the Auditor’s Responsibilities for the Audit of the
Financial Report section of our report, including in relation to these matters. Accordingly, our audit
included the performance of procedures designed to respond to our assessment of the risks of
material misstatement of the financial report. The results of our audit procedures, including the
procedures performed to address the matters below, provide the basis for our audit opinion on the
accompanying financial report.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
FD:LC:AFG:128
85
Annual Report 2020
2
Provision for expected credit loss
Why significant
How our audit addressed the key audit matter
As described in Notes 3 Significant accounting
policies, 5 Financial risk management and 29
Financial Instruments, the provision for expected
credit losses (ECL) is determined in accordance
with Australian Accounting Standards - AASB 9
Financial Instruments (AASB 9).
This was a key audit matter due to the size and
timing of the recognition of the provision, and the
degree of judgement and estimation uncertainty
associated with the calculations, including the
impacts of COVID 19 on the ECL.
Key areas of judgement included:
►
►
►
►
►
the application of the impairment
requirements within AASB 9, which is
reflected in the Group’s expected credit loss
model;
the identification of exposures with a
significant deterioration in credit quality;
assumptions used in the expected credit loss
model (for exposures assessed on an
individual and collective basis);
the incorporation of forward-looking
information to reflect current or future
external factors (e.g. unemployment rates,
interest rates, gross domestic product growth
rates, and property prices)
forward-looking macroeconomic factors,
including developing macroeconomic
scenarios and their associated weightings
given the wide range of potential economic
outcomes and impacts from COVID-19 that
may impact future expected credit losses.
Our audit procedures included the following:
We assessed:
►
►
the alignment of the Group’s expected credit
loss model and its underlying methodology
with the requirements of AASB 9;
the approach determined by the Group for the
incorporation of forward-looking
macroeconomic factors including specifically
the consideration of impacts from COVID-19;
►
the effectiveness of relevant controls relating
to the:
►
►
capture of data used to determine the
provision for credit impairment, including
transactional data captured at loan
origination, ongoing internal credit
quality assessments, storage of data and
interfaces to the expected credit loss
model;
expected credit loss model, including
functionality, ongoing
monitoring/validation and model
governance.
We examined a sample of exposures assessed on
an individual basis to consider the reasonableness
of provisions adopted.
We assessed the significant modelling assumptions
for exposures evaluated on a collective basis and
overlays, with a focus on the:
►
►
►
basis for and data used to determine overlays;
sensitivity of the collective provisions to
changes in modelling assumptions; and
reasonableness of macroeconomic scenarios
and impact of COVID-19 at balance date.
We have involved our Actuarial and IT specialists in
the performance of these procedures where their
specific expertise was required.
We considered the adequacy and appropriateness
of the disclosures related to credit impairment
within the Financial Report.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
86
Annual Report 2020INDEPENDENT AUDIT REPORT (continued)
3
Future trailing commission
Why significant
How our audit addressed the key audit matter
As described in Note 3 Significant accounting
policies, 4 Determination of fair values and 29
Financial instruments, the Group recognised a
contract asset representing the expected value of
future trailing commission receivable in
accordance with AASB 15 Revenue from Contracts
with Customers (AASB 15) and a corresponding
trailing commission payable was recognised under
AASB 9 Financial Instruments (AASB 9)
representing the net present value of future
trailing commissions payable by the Group.
This is a key audit matter due to the size of the
contract assets and trailing commission payable
and the degree of judgment and estimation
uncertainty associated with the calculations.
Key areas of judgement included:
►
►
the estimation of the discount rate;
the percentage of commissions paid to
members; and
Our audit procedures included the following:
We assessed:
►
►
►
►
the alignment of the Group’s trailing
commission model and its underlying
methodology with the requirements of AASB
15 for the contract asset and AASB 9 for the
trailing commission payable;
the effectiveness of relevant controls relating
to the approval and determination of the net
present value of the future trailing commission
receivable and payable;
the reasonableness of management’s
assumptions applied, including the discount
rate and loan run-off rates;
the historical accuracy of management’s
estimates by comparing the previously
forecast trailing commission income and
expense to the actual results.
►
loan book run-off rate assumptions.
We have tested:
►
the capture of the data used in management’s
trail commission model for completeness;
► a sample of loans from the data used in the
model to external supporting documents such
as lender commission statements for accuracy;
►
the mathematical accuracy of the models; and
►
the expected percentage to be paid to
members by recalculation based on the loan
book data and applicable remuneration
structure.
We involved our Actuarial and IT specialists in
areas that required their specific expertise.
We assessed the adequacy and appropriateness of
the disclosures related to trailing commission
within the Financial Report.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
87
INDEPENDENT AUDIT REPORT (continued) Annual Report 2020
4
Information other than the financial report and auditor’s report thereon
The directors are responsible for the other information. The other information comprises the
information included in the Company’s 2020 Annual Report, but does not include the financial report
and our auditor’s report thereon.
Our opinion on the financial report does not cover the other information and accordingly we do not
express any form of assurance conclusion thereon, with the exception of the Remuneration Report
and our related assurance opinion.
In connection with our audit of the financial report, our responsibility is to read the other information
and, in doing so, consider whether the other information is materially inconsistent with the financial
report or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this
other information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of the directors for the financial report
The directors of the Company are responsible for the preparation of the financial report that gives a
true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001
and for such internal control as the directors determine is necessary to enable the preparation of the
financial report that gives a true and fair view and is free from material misstatement, whether due to
fraud or error.
In preparing the financial report, the directors are responsible for assessing the Group’s ability to
continue as a going concern, disclosing, as applicable, matters relating to going concern and using the
going concern basis of accounting unless the directors either intend to liquidate the Group or to cease
operations, or have no realistic alternative but to do so.
Auditor's responsibilities for the audit of the financial report
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is
free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that
includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an
audit conducted in accordance with the Australian Auditing Standards will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material
if, individually or in the aggregate, they could reasonably be expected to influence the economic
decisions of users taken on the basis of this financial report.
As part of an audit in accordance with the Australian Auditing Standards, we exercise professional
judgment and maintain professional scepticism throughout the audit. We also:
►
Identify and assess the risks of material misstatement of the financial report, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit
evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
88
Annual Report 2020INDEPENDENT AUDIT REPORT (continued)
5
► Obtain an understanding of internal control relevant to the audit in order to design audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Group’s internal control.
► Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by the directors.
► Conclude on the appropriateness of the directors’ use of the going concern basis of accounting
and, based on the audit evidence obtained, whether a material uncertainty exists related to
events or conditions that may cast significant doubt on the Group’s ability to continue as a going
concern. If we conclude that a material uncertainty exists, we are required to draw attention in
our auditor’s report to the related disclosures in the financial report or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up
to the date of our auditor’s report. However, future events or conditions may cause the Group to
cease to continue as a going concern.
► Evaluate the overall presentation, structure and content of the financial report, including the
disclosures, and whether the financial report represents the underlying transactions and events
in a manner that achieves fair presentation.
► Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Group to express an opinion on the financial report. We are
responsible for the direction, supervision and performance of the Group audit. We remain solely
responsible for our audit opinion.
We communicate with the directors regarding, among other matters, the planned scope and timing of
the audit and significant audit findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide the directors with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, actions
taken to eliminate threats or safeguards applied.
From the matters communicated to the directors, we determine those matters that were of most
significance in the audit of the financial report of the current year and are therefore the key audit
matters. We describe these matters in our auditor’s report unless law or regulation precludes public
disclosure about the matter or when, in extremely rare circumstances, we determine that a matter
should not be communicated in our report because the adverse consequences of doing so would
reasonably be expected to outweigh the public interest benefits of such communication.
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
89
INDEPENDENT AUDIT REPORT (continued) Annual Report 2020
6
Report on the audit of the remuneration report
Opinion on the remuneration report
We have audited the Remuneration Report included in pages 21 to 33 of the directors' report for the
year ended 30 June 2020.
In our opinion, the Remuneration Report of Australian Finance Group Limited for the year ended 30
June 2020, complies with section 300A of the Corporations Act 2001.
Responsibilities
The directors of the Company are responsible for the preparation and presentation of the
Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our
responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in
accordance with Australian Auditing Standards.
Ernst & Young
Fiona Drummond
Partner
Perth
27 August 2020
A member firm of Ernst & Young Global Limited
Liability limited by a scheme approved under Professional Standards Legislation
90
Annual Report 2020INDEPENDENT AUDIT REPORT (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 2020.
(a) Number of holders of equity securities
Ordinary share capital
267,741,761 fully paid ordinary shares are held by 6,705 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
221,030,372
33,207,598
6,308,184
6,012,434
1,183,173
267,741,761
42,199
%
No. of holders
%
1.10
74
1,317
19.64
846
12.62
2,325
34.68
2,143
31.96
6,705
257
100
3.83
82.55
12.40
2.36
2.25
0.44
100
0.02
* An unmarketable parcel is considered to be a shareholding of 294 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 2020 of $1.70.
(c) Substantial shareholders
The names and the number of securities held by substantial shareholders are set out below:
Mitsubishi UFJ Financial Group
MSW Investments ATF The Malcolm Stephen Watkins Family Trust
MBM Investments ATF The Brett McKeon Family Trust
Banyard Holdings Pty Ltd ATF The B&K McGougan Trust
# Shares
% of issued capital
23,622,399
17,462,284
16,289,779
14,788,765
8.82%
6.52%
6.08%
5.52%
91
Annual Report 2020
(d) Twenty largest holders of quoted equity securities
Top holders
HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED
NATIONAL NOMINEES LIMITED
CITICORP NOMINEES PTY LIMITED
J P MORGAN NOMINEES AUSTRALIA PTY
LIMITED
MBM INVESTMENTS PTY LTD
THE BRETT MCKEON FAMILY
BANYARD HOLDINGS PTY LTD
B & K MCGOUGAN
PERPETUAL CORPORATE TRUST LTD
<983L AC>
OCEANCITY INVESTMENTS PTY LTD
THE MATTHEWS FAMILY
BNP PARIBAS NOMINEES PTY LTD
BNP PARIBAS NOMS PTY LTD
MRS KAREN JANE MCGOUGAN
ASSURED FINANCIAL SERVICES PTY LTD
NEWECONOMY COM AU NOMINEES PTY LIMITED
<900 ACCOUNT>
UBS NOMINEES PTY LTD
LISA BEVAN
NATIONAL NOMINEES LIMITED
EDI NOMINEES PTY LTD
ANGELA MIDDLETON
EGMONT PTY LTD
NOLDEX PTY LTD
Company Secretary
Ms L. Bevan
Registered Office
Level 4, 100 Havelock Street, West Perth WA 6005
Share Registry
Link Market Service - Level 12, 680 George Street, Sydney NSW 2000
# Shares
44,404,240
37,353,326
28,009,439
23,216,973
16,289,779
14,788,765
12,345,025
11,818,182
4,130,713
3,247,986
3,243,637
2,089,637
1,326,864
1,223,975
1,181,819
1,176,831
1,051,819
1,000,000
960,714
700,000
% of issues
capital
16.58
13.95
10.46
8.67
6.08
5.52
4.61
4.41
1.54
1.21
1.21
0.78
0.50
0.46
0.44
0.44
0.39
0.37
0.36
0.26
92
Annual Report 2020SHAREHOLDER INFORMATION (continued)
Corporate Directory
Directors
Anthony (Tony) Gill
(Non-Executive Chairman)
Craig Carter
(Non-Executive Director)
Malcolm Watkins
(Executive Director)
Melanie Kiely
(Non-Executive Director)
Brett McKeon
(Non-Executive Director)
Jane Muirsmith
(Non-Executive Director)
Company Secretary
Lisa Bevan
(Company Secretary)
Notice of AGM
Corporate Office
Share Registry
The annual general meeting of Australian
Finance Group Limited will be held on Friday
27 November 2020 at 9.00am WST at Level 4,
100 Havelock Street, West Perth WA 6005.
Australian Finance Group Limited
Level 4
100 Havelock Street
West Perth WA 6005
Postal Address
PO Box 710
West Perth WA 6872
Phone
08 9420 7888
Link Market Services
Level 12
680 George Street
Sydney NSW 2000
Postal Address
Locked Bag A14
Sydney South NSW 1235
Phone
1300 554 474
Email
investors@afgonline.com.au
Email
registrars@linkmarketservices.com.au
Website
www.afgonline.com.au
Stock Listing
Australian Finance Group Limited’s ordinary
shares are listed on the Australian Securities
Exchange (ASX code: AFG).
93
Annual Report 2020 This page is intentionally left blank.
This page is intentionally left blank.
www.afgonline.com.au
Level 4, 100 Havelock Street
West Perth WA 6005
T 08 9420 7888
Australian Finance Group Ltd.
Australian Credit Licence: 389087
ABN: 11 066 385 822
ACN: 066 385 822