American Financial Group Annual Report 2021

Plain-text annual report

2021 ANNUAL REPORT 1 Annual Report 2021Contents Sustainability at AFG Directors’ Report Auditor’s Independence Declaration Consolidated Statement of Financial Position Consolidated Statement of Profit or Loss and Other Comprehensive Income Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Audit Report Shareholder Information Corporate Directory 13 19 42 43 44 45 46 47 92 93 99 101 Naomi Information Technology 3 Annual Report 2021$33.0M $38.1M $51.3M $28.6M $36.3M $49.6M FY19 FY20 FY21 FY19 FY20 FY21 AFG reported NPAT has increased to $51.3M FY21 from $38.1M FY20 AFG underlying NPAT has increased to $49.6M FY21 from $36.3M FY20 5,500+ Individual products 70+ Lenders 238 Employees 1 in 11 Australian residential mortgages are arranged by an AFG broker FY21 AFGS RMBS term transactions $1.95B AFG maintains a well capitalised, debt-free balance sheet with unrestricted cash, trail book assets, financial assets and sub-ordinated capital totaling $282 million 4 Annual Report 2021Go far. Go together. Lender Market Share 42% of flows to non-majors FY21 Non-Majors 42% Majors 58% AFG Broker numbers grew to over 3,050 nationally increased from 2,975 at FY20 28,500 AFG Home Loans customers serviced 5 Annual Report 202159% of Australian mortgages are written through a broker 2 2 Mortgage and Finance Association of Australia (MFAA) FY20 FY21 52% 59% FY21 Residential Settlements of FY21 Commercial Settlements of $43.6B up 28% from FY20 $2.32B up 1% from FY20 FY21 AFG Business Settlements of FY21 Asset Finance Settlements of $200M down 42% from FY20 $611M up 14% from FY20 6 Annual Report 2021FY21 Residential Trail book of FY21 AFG Home Loans Trail book of $166.6B up 8% from FY20 $11.2B up 7% from FY20 FY20 FY21 $2.91B $3.39B FY21 AFGS Loan Book up 17% from FY20 Dividends up 32% Interim Final FY21 AFGS Settlements $1.35B 5.9 4.7 4.7 5.4 7.4 5.9 FY19 FY20 FY21 cents per share AFG reported return on equity remains at 27% 7 Annual Report 2021Tony Gill Chairman Letter from the Chairman In providing my Chairman’s Report for AFG I am once again very pleased to be able to report an outstanding result from the company. AFG brokers have experienced increased demand for their services and have risen to the challenge of supporting their clients through the difficulties presented by the past 12 months. AFG’s combined residential and commercial loan book now stands at $175.71 billion. This represents growth of 8% over FY20. In an exceptional year of activity, our core residential lending business delivered record settlements of $43.63 billion, an increase of 28% on the prior year. Company Update As I write the country is once again experiencing lockdowns brought on by the COVID-19 pandemic. The effects will be felt by our community and the financial impacts will be felt in our economy for some time to come. Dividends For the full year to 30 June 2021 the Board resolved to pay a final ordinary dividend of 7.4 cents per share (fully franked). This results in a total ordinary dividend for the year of 13.3 cents per share, up from 10.1 cents per share in the prior year and represents a yield of 5%. Outlook AFG’s financial results demonstrate the strength of the company and the sector. Industry data reports overall broker market share in Australia has lifted to 59% and an AFG broker arranges one in Through the period, AFG staff and our brokers have shown great every 11 Australian mortgages. The choice of lender and products resilience as all adapted to intermittent lockdowns alongside available to those homebuyers is central to the decision to seek help unprecedented demand for home loans. I commend the business from a mortgage broker. We expect this trend to continue. on its smooth transition to working remotely when required. AFG remains debt free with unrestricted cash of $106.9 million and AFG staff now have the flexibility to operate under a hybrid work is delivering positive NPAT, both reported and underlying. We remain schedule of working from home alongside in the office. This model positive about the future of our company and our industry. of working is supported by the board and management, with significant investment in technology to ensure that staff are able to perform their duties to high standards, meet regulatory obligations and remain connected with their teams and their brokers. On behalf of the board, I would like to thank AFG staff, brokers, our lender partners, and our shareholders for their ongoing support of the company. Environmental, Social and Governance This year AFG is taking the first steps to report on the company’s Environmental, Social and Governance (ESG) practices. At the heart of our business is a commitment to driving shareholder value by conducting business in a sustainable, ethically sound, and socially responsible manner. We extend this commitment to all stakeholders. From our board, management and staff to our investors, contracted brokers, lending partners, consumers, and the community. The company is lifting the disclosure of our ESG performance and to ensure transparency we have added a sustainability section to our website and included a statement in this Annual Report outlining further details about our approach. Tony Gill Chairman 8 Annual Report 2021Erin Corporate 9 Annual Report 2021David Bailey CEO Letter from the CEO AFG has delivered another highly successful result. We report a record profit of $51.3 million, an increase of 35% on the prior year. AFG has delivered another highly successful result. We report a FY21 compared to the prior period. For the full year, Commercial record profit of $51.3 million, an increase of 35% on the prior year. settlements were $2.32 billion. Our core residential business delivered a record result for the year Our investment in commercial lender ThinkTank is also contributing and our AFG Home Loans’ white label products also increased strongly, recording $5.3m share of profit, an increase of 130%. 18% to $2.1 billion. Our higher margin AFG Securities products contributed settlements of $1.35 billion, representing book growth of 17% and a loan book on 30 June 2021 of $3.39 billion. We remain alert to the risks presented by the health and economic challenges our community continues to face, and we are confident AFG is well equipped to respond. Our workforce is adept at working remotely when required and our broker network is a proven force in providing frontline support for their customers. With the country once again grappling with lockdowns in many states AFG is pleased to note we are not seeing high numbers of hardship requests come through AFG Securities’ business. We remain aware of the impacts the shutdowns may have on the financial wellbeing of our customers and stand ready to respond, if necessary, with supportive programs in place while customers get back on their feet. AFG Home Loans The success of our lending business, AFG Home Loans, and, in particular, our own securitised home loan products, remains a highlight. Despite a pandemic-initiated slowdown in settlements in the first quarter of FY21, the AFG Securities business has reported an excellent full year of settlements and at the end of the financial year has a loan book of $3.39 billion. Residential Mortgage-Backed Securities In FY21 we continued our successful RMBS program, issuing $1.95 billion to the RMBS market. This takes the total paper issued by AFG Securities since 2013 to A$4.825 billion. A highlight was the successful completion of our first non- conforming RMBS issue in October 2020, valued at $500 million. The portfolio included low-documentation and non-conforming loans originated by AFG Securities and received strong support from domestic and international investors. We are now recognised as a regular issuer of quality RMBS paper. Technology AFG’s new technology platform, CRM, is built on enterprise grade technology and is a key pillar of AFG’s wider technology toolkit. Plans for a staged migration across the AFG network are underway. The migration of each broker to the CRM platform will be managed by AFG support staff, including the historical data transfer and seamless linkage with other key systems. A significant number of our brokers have been with AFG for many years, so it is a big task, but we are both excited and committed in every sense to a smooth Since the end of the first quarter, momentum in this business has built, and importantly, lodgements in the second half were up 82% transition and a great outcome. on the previous half. Commercial The Commercial lending market has been impacted the most As the financial year drew to a close AFG acquired an 8% stake in neobank Volt. Volt’s innovative technology combined with AFG’s large distribution footprint will deliver competitive products to the market and streamlined digital solutions for our brokers and their customers. Volt’s digital banking services and technology platform by COVID restrictions, but activity increased in the second half will be utilised within our AFG Securities business to streamline of the year driving settlements for FY21 in line with last year. credit decisioning and position our securitised products as a leader Importantly, commercial mortgage settlements were up 23% in H2 in the marketplace. 10 Annual Report 2021Connective When we announced the proposed merger with Connective Looking ahead In the residential market, government incentives are rolling back, and in August 2019, we informed the market the transaction was the Term Funding Facility offered to the major banks is no longer conditional upon clearance by the ACCC (which was granted on 18 in place. Combined with compression in RMBS spreads this means June 2020), and the resolution of court case involving Connective. the country’s smaller lenders, including AFG Securities, are better The end date to satisfy those two conditions for the transaction to able to compete. proceed is the 31 August 2021. Despite the Connective court case AFG now has 3,050 member brokers in our network and more concluding in March 2020, the decision by the judge has not yet than 70 lenders on our panel, providing choice for consumers and been delivered. driving competitive tension in a market that has seen the third-party Unfortunately, the extraordinary length of time that the judgement channel well surpass that of direct to lender. has taken meant the merger has not been able to proceed at AFG is positioned well to respond to the current environment this time. and continue to support our broker network in the service of their Regulatory change The introduction of a new statutory obligation for Australian mortgage brokers to act in the best interests of consumers, and to prioritise consumers’ interest when providing credit assistance came into effect in FY21. Our brokers were well equipped to meet this obligation six months ahead of the implementation date. This new legal requirement provides additional peace of mind for consumers and further positions mortgage brokers as the channel of choice for home lending. customers. I would like to thank AFG staff for their commitment to the company, and our brokers and shareholders for their ongoing support. David Bailey CEO Sahani & Peter Learning & Development 11 Annual Report 2021Leanne Marketing 12 Annual Report 2021Sustainability at AFG 13 Annual Report 2021Sustainability Highlights This year I am very pleased to introduce our first report on the company’s Environmental, Social and Governance (ESG) practices. Tony Gill Chairman 14 Annual Report 2021AFG carbon footprint 880.69 tonnes of carbon dioxide equivalent Principal partner Women in AFG Mentorship Program established Program established to measure annual carbon footprint AFG Winning Women Broker Scholarship established Diversity & Inclusion (% of women in positions) Board 33% Senior executives 22% Senior managers Total workforce 47% 51% 15 Annual Report 2021Our approach Although reporting accountability for our ESG performance is relatively new, actions on those things that feed into the ESG metrics, are not new to AFG. We are, and have always been, focused on continuing to drive value for our investors and create a positive impact for our employees, brokers, customers, and the communities in which we operate. The issue of what to report on, and how best to embed reportable corporate sustainability practices within the business are new. Standardised data will help inform companies such as ours to transparently disclose those things that many of us do every day, but they are not necessarily public processes. user-group Board In addition, this year AFG has been working to understand our direct impact on the environment (our ‘climate footprint’) and we have engaged with carbon solutions provider Carbon Neutral to measure our carbon emissions. The report examined AFG’s Scope 1, 2 and 3 Greenhouse Gas Emissions (GHG) under the operational control of the company for the full year 1 July 2020 to 30 June 2021. A summary of GHG emissions sources by activity is displayed below: Figure 1: Total gross GHG emissions by activity - AFG FY2021 (t COre: %). IT & Comms 330.45 (37.5%) Waste 10.65 (1.2%) Water 13.90 (1.6%) Working from home 1.17 (4.7%) Electricity 103.90 (11.8%) users AFG Management Sustainability Committee Operations, AFG Securities, Risk, IT, Legal, HR, Marketing, Lender & Industry Partnerships, Finance and Communication Land travel 49.51 (5.6%) The company has established a Management Sustainability Committee, with representatives from across the business. The committee provides enhanced oversight of the company’s sustainability policies, principles and practices to meet stakeholder expectations and ensure good governance. The committee reports through to the AFG Board. 🌱︁ Environment The droughts and floods of recent years, and the devastation of the 2020 bushfires brought into sharp focus the impacts of a changing climate on our land and our communities. AFG has now integrated climate change risk into its risk management framework. Environmental risks identified by AFG include the risks of adverse consequences of our direct impact on the environment and our indirect impact through our business operations. AFG has also identified the risks associated with changes to environmental laws, regulations, or other policies adopted by governments or regulatory authorities, including carbon pricing and climate change adaptation or mitigation policies. Environmental risks (including climate change) impact our brokers, their customers and our AFG Home Loans customers, including their communities and the businesses in which they work. Staff commuting 191.19 (21.7%) Air travel 114.60 (13.0%) Figure 2: Emission intensity per staff - FY2021 Measure/Metric C02-e per measure for FY 2021 Number of staff during period (224) 3.9 t CO2-e / staff member The main GHG emitting activities were associated with our use of technology, followed by staff commuting, air travel and electricity use. This year we all faced restrictions on travel due to the COVID-19 pandemic, this means the emissions generated by AFG through travel were likely lower during this period than at other times. From this starting point our challenge is now to develop consistent, accountable, and transparent internal practices to reduce avoidable GHG emissions where possible, and to examine opportunities to offset unavoidable GHG emissions to address our impact on the environment. 16 SUSTAINABILITYAnnual Report 2021🗪︁ Social AFG is committed to managing social risks and contributing to the community as a core part of our values. To achieve this, we have begun work on ways in which AFG can help to resolve some social risks impacting our key stakeholders. One of those is the social crisis of homelessness and disadvantage. In June 2021 we were very pleased to announce a landmark sponsorship agreement to help play our part in addressing that problem. AFG is now Principal Partner of Foyer Foundation, an independent charitable organisation that works with young Australians at-risk of, or experiencing, homelessness. The effective functioning of the company from the Board down, seen through sound governance, risk and compliance practices, employee protections, and the support provided to our brokers and customers creates a culture that delivers value to our stakeholders and guides our interactions in our industry and the wider community. I am pleased to report AFG is on track with our Diversity and Inclusion Objectives. Key metrics are below: Objective Status as at 30 June 2021 Achieve a minimum of 40% 37% of our management women in management positions are held by women. positions (including KMP, This is an increase of 1% from Foyer Foundation is an organisation that has a globally proven senior managers and other our reported numbers last model that works to address the issue among young people, managers) by 2022 with year. one of the hardest hit parts of our community when faced with increased year on year homelessness. Foyers are integrated learning and accommodation representation. settings that provide young Australians experiencing disadvantage with a pathway to education, training and employment that is founded on access to stable and secure housing. Continue to develop cultural 89% of employees agreed in awareness across AFG our 2021 Employee Survey ensuring our workforce that AFG supports cultural As one of the country’s largest networks of mortgage brokers we reflects the diverse Australian diversity. see firsthand the importance of a place to call home. By partnering population, demonstrated by a with Foyer Foundation, we are supporting a program that helps positive cultural diversity score young people into a stable and secure home from which they can of at least 80% in our annual (Survey period closed 6 August 2021) find their feet and take their place in the community. employee survey. The COVID-19 pandemic has had a significant impact on all aspects of life in Australia, particularly working arrangements affected by the numerous lockdowns across the country. In 2020 and 2021 our Maintain workplace diversity Workplace diversity was our as one of the top three highest performing area in our performing areas of our 2021 Employee Survey. AFG Securities (AFGS) business has been working hard to limit the employee pulse surveys. impact of the pandemic on our customers. For those in financial Continue training and The Diversity & Inclusion hardship due to COVID-19 related lost income, we have offered a awareness programs to Committee continues to deliver variety of tailored solutions to assist their recovery. Pleasingly, those ensure employees maintain a quarterly program of training numbers are low. In addition, an important area of focus for our AFGS business is providing access to those currently under-served in the lending market. AFGS employs a manual, “traditional” approach to credit assessment focusing on the individual borrower. Current credit scoring methodologies employed by the majority of lenders - particularly large ADIs - are favourably weighted to the depth of credit records and repayment history which can be biased against borrowers with changeable employment profiles. As a consequence, and uphold AFG’s acceptable and awareness initiatives. and expected behaviors and Mental health was a key focus diversity and inclusion values of the committee in response in the workplace. to challenges caused by COVID-19. Domestic violence awareness and support was also highlighted tying in with government education and awareness campaigns. the self-employed, sole-traders, part-time (often younger) workers Maintain no less than At 33%, AFG meets this with multiple income sources, borrowers who have suffered a one-off 30% of each gender in the objective. life event that impacted their credit score, and recent migrants can composition of AFG’s Board of be disadvantaged. By maintaining an approach that focuses on a Directors. personalised, circumstances-sensitive assessment model, AFGS supports borrowers whose needs may not be met by the broader AFG’s Women in Leadership mentor program launched in March banking sector. 🏛︁ Governance 2021. The program provides female employees a female mentor from our senior leadership team. The program runs for 12 months with mentees given guidance, suggestions for development and insights into key leadership traits. It has been well received and is The culture of an organisation is one that is difficult to distill to providing positive opportunities for development for both mentors numbers on a page, however the performance of a company that and the staff they are supporting. has an average of almost six years of service for its staff speaks to a strong and supportive culture. 17 SUSTAINABILITY (continued)Annual Report 2021More broadly, AFG is committed to equality in the mortgage broking industry and championing the important role women play. The AFG Winning Women program seeks to empower female brokers to help them reach their potential through a number of initiatives including a scholarship, state-based events, the provision of coaching courses, and mentoring opportunities with highly successful female brokers from the AFG network. Whilst not subject to compulsory reporting, AFG undertakes a voluntary Ethnicity Survey among staff. This year, we included two additional questions relating to religious beliefs and whether people have lived or worked overseas, contributing to global experience and awareness. These new questions reflect a broader meaning of ‘cultural diversity’ that the Diversity Council Australia has recently adopted. Interestingly, more than 50% of participants have lived or worked overseas, bringing significant global and cultural experience to AFG and the way staff work together. The AFG Group is committed to the highest level of integrity and ethical standards in all business practices and in upholding human rights across our operations and supply chains. This year we produced our first Joint Modern Slavery Statement setting out the steps we are taking to ensure that those practices are not taking place within our organisation or our supply chains. In addition, the Company has recently finalised its Modern Slavery Supplier Procedure. This internal procedure provides for an assessment of the risks of modern slavery in our supply chain and a due diligence process when any risks are identified. Looking ahead This is the first year AFG has published information about our approach to Sustainability. By raising the bar on disclosure, we aim to help our stakeholders understand more about how as a company we make decisions and how we create value. Our challenge is to identify the risks and opportunities presented by this new reporting environment and respond in a manner that is both consistent with the social contract under which we operate and the maintenance of long-term business success. I look forward to continuing to tell the story of AFG’s development through the lens of ESG metrics. Tony Gill Chairman 18 SUSTAINABILITY (continued)Annual Report 2021Directors’ 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 2021 and the auditor’s report thereon. Directors The Directors and Company Secretary of the Company at any time Malcolm Watkins (Executive Director) during or since the end of the financial year are: Anthony (Tony) Gill (Non-Executive Chairman) Mr Gill has been the Chairman of the Board since 2008. Mr Gill has extensive experience across Australia’s finance industry, mostly with Macquarie Bank. Mr Gill is a Director of First Mortgage Services and First American Title Insurance. He sits on the Board of the Butterfly Foundation for Eating Disorders 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 (Non-Executive Director) 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). Mr Watkins is a founding Director of AFG and plays a key role in the strategic direction of the Company. For 27 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 32.29% 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 and Nomination Committee. Following a career spanning 35 years in stockbroking and investment banking, specialising in Corporate Advice and Equity Capital Markets, Mr Carter now actively manages his own family business interests across a range of investment activities. Mr Carter is a well-known professional with unique experience in both business ownership and corporate advisory. This experience and reputation provides a platform for integrity and good governance. 19 DIRECTORS’ REPORTAnnual Report 2021Melanie Kiely (Independent Non-Executive Director) Company Secretary Lisa Bevan (Company Secretary) Ms Kiely is an experienced Executive and Company Director with Ms Bevan joined AFG in 1998 and was appointed to the position of over 30 years of experience in health care, financial services and Company Secretary in 2001. Ms Bevan is a Chartered Accountant, consulting in Australia, Europe and South Africa. Ms Kiely is also holds a Bachelor of Commerce degree and has a Diploma of currently a Non-Executive Director of AIA Health and the Black Dog Corporate Governance from the Governance Institute of Australia. Institute. She is also CEO of Good Sammy Enterprises. Prior to Ms Bevan is responsible for managing AFG’s secretariat, governance this, she has held senior roles with Silver Chain, HBF Health Fund, and ASX requirements. Ms Bevan also oversees the legal and nib health funds, MBF and was an Associate Partner at global human resources functions of the Company. 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 Interests in the shares and rights of the Company As at the date of this report, the interests of the Directors in the Committee, a member of the Audit Committee and a member of the shares of the Group were: Risk and Compliance Committee. Director Tony Gill Number of ordinary shares 1,329,546 Brett McKeon 16,310,694 Malcolm Watkins 17,493,656 Craig Carter Melanie Kiely Jane Muirsmith 960,714 89,376 86,819 Number of rights over ordinary shares - 20,114 54,362 - - - 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. 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. The above-named Directors held office during the whole of the financial year and since the end of the financial year except where noted otherwise. 20 DIRECTORS’ REPORT (continued)Annual Report 2021Mick Information Technology Dividends Total dividends paid during the financial year ended 30 June 2021 were $28,449k (2020: $24,359k), which included: • A final fully franked ordinary dividend of $12,614k (4.7 cents per fully paid share) was declared out of profits of the Company for 2020 and paid on 29 September 2020. • An interim fully franked ordinary dividend of $15,835k (5.9 cents per fully paid share) was declared out of profits of the Company for 2021 and paid on 18 March 2021. A final fully franked ordinary dividend of $19,860k (7.4 cents per fully paid share) has been declared out of profits of the Company for the financial year ended 30 June 2021 and is to be paid on 23 September 2021. Principal activities The Group’s principal activities in the course of the financial year continued to be: • Mortgage origination and management of home loans and commercial loans; and • Distribution of own branded home loan products, funded through its established RMBS programme and white label arrangements. Corporate Governance Statement The Company’s Corporate Governance Statement can be found at investors.afgonline.com.au/investor/?page=corporate-governance 21 DIRECTORS’ REPORT (continued)Annual Report 2021Review of operations For the year ended 30 June 2021 the Group recorded a net profit after tax of $51,304k, which is 34.7% above the prior period (2020: $38,078k). Revenue from operating activities was up 10.7% to $747,043k (2020: $675,009k) as residential settlement volumes grew by 28% and the AFG Securities loan book was up 16.5%. The increase in profit was attributable to the following: • AFG Securities loan book growing by 16.5% to $3.39B (2020: $2.91B). • • • Increased residential trail book of 7.8% to $166.6B (2020: $154.6B). Increased residential settlements of 27.8% to $43.6B (2020: $34.1B). Increased AFGHL white label settlements of 17.8% to $2.10B (2020: $1.79B). Net cash flows from operating activities $58,602k (2020: $40,316k) was a result of increased interest income, growth in the AFGHL white label trail books and favourable working capital movements when compared to prior period. The increased AFGS loan book provides a solid 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. During the year ended 30 June 2021, AFGS (wholly owned subsidiary of Australian Finance Group Ltd ) successfully priced three Residential Mortgage-Backed Securities (RMBS) issuances: • A$700M RMBS issue in July 2020 • A$500M Non-conforming RMBS issue in October 2020; and • A$750M RMBS issue in May 2021. COVID-19, as well as measures to slow the spread of the virus, have 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. The 30 June results included a provision for impairment charges due to the expected economic impact of the COVID-19 pandemic. The expected credit loss (ECL) provision has remained at $3,272k for the year ended 30 June 2021 (2020: $3,272k). Impairment charges are discussed further in Note 3(b)(ii) and Note 29 of the 2021 Annual Report. Given the dynamic and evolving nature of COVID-19, changes may arise to the estimates and outcomes that have been applied in the measurement of the Group assets and liabilities in the future. In response to the current pandemic, the Group has provided support to its customers and brokers by implementing a range of initiatives, such as granting deferrals of loan repayments if required. The following table reconciles the unaudited underlying earnings to the reported profit after tax for the period in accordance with Australian Accounting Standards: In thousands of AUD Underlying results from continuing operations Change in the carrying value of trailing commissions contract asset and payable 30 June 2021 30 June 2020 Operating income 671,029 Profit after tax 49,586 Operating income 600,137 Profit after tax 36,266 76,014 1,718 74,872 1,812 Total result from operating activities 747,043 51,304 675,009 38,078 22 DIRECTORS’ REPORT (continued)Annual Report 2021Mel, Sej & Jesse Revenue & IT Likely developments and expected results The Group will continue to provide choice and lead the market by building on the strengths of our traditional wholesale mortgage broking business while developing our significant distribution network to access other areas of the finance market. Further information about likely developments in the operations and the expected results of those operations in future financial years have not been included in this report because disclosure of the information would, in the opinion of the Directors, be likely to result in unreasonable prejudice to the Group. Environmental regulation The Group is not subject to any significant environmental regulation under a law of the Commonwealth or of a State or Territory in respect of its activities. Subsequent events On 12 July 2021, the Group successfully acquired an 8.04% interest in Volt Corporation Limited, and entered into a strategic alliance with Australia’s first neobank. On 23 July 2021, the Group noted the expiry date of the Connective merger of 31 August 2021. The Connective merger is unlikely to proceed due to the length of time the Connective court case judgment has taken to date. On 26 August 2021, the Directors recommended the payment of a dividend of 7.4 cents per fully paid ordinary share, fully franked based on tax paid at 30%. The dividend has a record date of out of retained earnings at 30 June 2021 is $19,860k. The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2021. There has not been any matter or circumstance, other than that referred to in the financial statements or notes thereto, that has arisen since the end of the financial year, that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. Share options There were no options issued or exercised during the financial year (2020: 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 above) against a liability incurred as a Director to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnification of auditors To the extent permitted by law, the Company has agreed to indemnify its auditors, Ernst & Young Australia, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Ernst & Young Australia during or since the 7 September 2021 and a payment date of 23 September 2021. financial year. The aggregate amount of the proposed dividend expected to be paid 23 DIRECTORS’ REPORT (continued)Annual Report 2021Directors’ 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 13 times during the year. 11 meetings were main meetings, and 2 meetings were convened to consider special business. Special meetings are convened at a time to enable the maximum number of Directors to attend and are generally held to consider specific items that cannot be held over to the next scheduled main meeting. Apologies were received from Directors in all instances where they were unable to attend a meeting. Directors’ Board Meetings Tony Gill Brett McKeon Malcolm Watkins Craig Carter Melanie Kiely Jane Muirsmith Main Meetings Held Main Meetings Attended Special Meetings Held Special Meetings Attended 11 11 11 11 11 11 11 11 11 11 11 11 2 2 2 2 2 2 2 2 2 2 1 2 Committee membership As at the date of this report the Company had an Audit Committee, Remuneration and Nomination Committee, and a Risk and Compliance Committee. Members acting on the Committees of the Board during the year were: Audit Craig Carter (C) Melanie Kiely Jane Muirsmith Notes (C) designates the Chair of the Committee Remuneration and Nomination Risk and Compliance Melanie Kiely (C) Craig Carter Jane Muirsmith Jane Muirsmith (C) Craig Carter Melanie Kiely 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 4 4 4 4 4 4 5 5 5 5 5 5 6 6 6 6 6 6 24 DIRECTORS’ REPORT (continued)Annual Report 2021Rounding 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. The Directors are of the opinion that the services as disclosed in Note 10 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 $ 55,000 55,000 Auditor’s independence declaration The auditor’s independence declaration is included on page 42 of this financial report for the year ended 30 June 2021. This report is made in accordance with a resolution of the Directors. 25 DIRECTORS’ REPORT (continued)Annual Report 2021Jacinta Partner Support 26 DIRECTORS’ REPORT (continued)Annual Report 2021Remuneration Report Dear Shareholder, On behalf of the Board, I am pleased to present AFG’s Remuneration Report for FY21. The AFG Board remains committed to an Executive Remuneration structure that aligns effective performance with shareholder returns and balances both of these elements in the short term and over time. FY21 Performance & remuneration outcomes summary The Group delivered a record result in FY21 with strong growth in the Residential Aggregation business and AFGHL. The business achieved NPAT growth of 35% with a FY21 result of $51.3 million, up from $38.1 million in FY20 and representing EPS CAGR of 7.2% since FY18. Just as importantly, good conduct, adherence to responsible lending Over the TSR LTI performance period of 1 July 2018 to 1 July 2021, obligations and ensuring positive customer outcomes must remain AFG has delivered TSR performance at the 90th and 95th percentile of front of mind as an effective ‘gateway’ to any incentive payment. the Diversified Financials and Small Industrials Indexes respectively. In setting our remuneration structure and targets, we value and seek Residential volumes were up 28% to a record $43.6 billion and the the feedback of our shareholders, stakeholders and proxy advisors. AFG Securities loan book grew strongly in the second half of the Over time, we have incorporated this feedback into our revisions of year to be $3.39 billion, up 17% on 30 June 2020. These strong the Executive Remuneration framework. results drove an increased dividend of 7.4 cents per share. For FY2021, like many organisations, we had to review our remuneration structure to reflect the uncertainty in the medium to When combined with the interim dividend this represents a yield of approximately 5%. longer terms during the early stages of the COVID-19 pandemic. In addition, the number of active brokers grew during the year, up The modifications made to the Group’s Short-Term Incentive (STI) from 2,975+ to 3,050+. and Long-Term Incentive (LTI) structures for FY21 are as follows: A 5-year history of AFG’s NPAT, Residential, AFGHL and AFG • With the increased need to adapt strategies and priorities 100% of the STI award for all KMPs (other than COO) was allocated to NPAT rather than specific strategic outcomes. Securities’ loan books, AFG Securities Settlements, ROE and Dividends is provided below: The STI targets for the COO included an allocation of 30% Net Profit After Tax MILLIONS $30 $40 $50 $60 towards the progress of the Group’s strategic IT development programme, and 70% allocated to NPAT. Importantly, NPAT remained as a gate opener (of 90%) for the payment of the IT-related performance indicator. • With respect to the LTI, due to the difficulty in forecasting longer term earnings results, a greater weighting of the KMPs LTI award was allocated to Total Shareholder Return (TSR) given the comparable nature of this target and strong alignment to shareholder wealth creation. Historically, the split of the dollar value of an executive’s LTI award has been 65% EPS and 35% TSR. In FY21 this changed to 65% TSR and 35% EPS. The TSR target will continue to include a positive absolute TSR gateway for payment to occur. • ln line with the general market, the uncertainty created by the COVID-19 pandemic meant the company did not make any increases to fixed remuneration for KMP in FY20/21. For FY22, given the increased level of market certainty, the following modifications have been made to the remuneration structure: • STI targets have reverted to a combination of NPAT (50%) and other strategic targets (50%). • LTI targets will retain the higher weighting to TSR (65%), due to AFG’s growth and inclusion in the ASX300. • The gateway and cap for NPAT performance has been changed from 90% and 150% to 85% and 125% respectively, reflecting the increased challenge presented by current markets and sensitivity of the Group’s P&L to net interest margin (and a desire not to over reward for this). 0 $10 $20 FY17 FY18 FY19 FY20 FY21 *Grey shading of FY17 NPAT shows the initial recognition of AFGHL white label trail book relating to loans settled in prior periods. Normalised Return on Equity 0% 5% 10% 15% 20% 25% 30% 35% 40% FY17 FY18 FY19 FY20 FY21 27 DIRECTORS’ REPORT (continued)Annual Report 2021Dividends (cents per share) AFGS Loan Book 0 5 10 15 20 25 0 $0.5 $1.0 $1.5 BILLIONS $2.0 $2.5 $3.0 $3.5 $4.0 FY17 FY18 FY19 FY20 FY21 Interim Final Special FY17 FY18 FY19 FY20 FY21 In line with this performance, the key remuneration outcomes, which are detailed further in the Remuneration Report include: • Total FY21 STI NPAT payments made at 150% (capped), an outstanding result in an uncertain year. • While significant progress has been made in the Group’s IT development programme, delivery timeframes have been impacted by a number of factors including COVID-19 lockdowns and strict travel restrictions and a decision to increase scope. As a consequence, the programme target in the COO’s STI measures for FY21 was not fully achieved, and has therefore been retained by the board. Using this same discretion, the board has retained 20% of the CEO’s target STI opportunity. These payments will be disbursed at the board’s discretion subject to satisfactory future delivery of the IT Program. • Performance rights associated with the EPS target vested at 72% reflecting the EPS CAGR of 7.2% since FY18. • Performance rights associated with TSR targets vested at 150% (Diversified Financials – 90th percentile) and 150% (Small Industrials – 90th percentile). We are pleased with the outcome for our executive team as it reflects the excellent business performance and the foundations built for the long term growth of the company. It also aligns with our shareholder returns for the period and builds the foundation for potential returns into the future. 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. Further detail on these remuneration results is provided in section 3 of the annual report. These results, fittingly reflect the outcomes of a Residential Loan Book BILLIONS 0 $20 $40 $60 $80 $100 $120 $140 $160 $180 FY17 FY18 FY19 FY20 FY21 AFGHL Settlements MILLIONS 0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 FY17 FY18 FY19 FY20 FY21 AFGHL Portfolio BILLIONS 0 $2 $4 $6 $8 $10 $12 FY17 FY18 FY19 FY20 FY21 AFGS Settlements 0 $0.2 $0.4 FY17 FY18 FY19 FY20 FY21 28 $0.6 $0.8 BILLIONS $1.0 $1.2 $1.4 $1.6 very successful year for AFG. Melanie Kiely Chair, Remuneration & Nomination Committee DIRECTORS’ REPORT (continued)Annual Report 2021 Introduction 1. The Remuneration Report outlines AFG’s remuneration philosophy, framework and outcomes for all Non-Executive Directors, Executive Directors and other Key Management Personnel (collectively KMP). The report is written in accordance with the requirements of the Corporations Act 2001 (the Corporations Act) and its regulations. This information has been audited as required by section 308(3C) of the Corporations 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 Craig Carter1 Melanie Kiely2 Jane Muirsmith3 Brett McKeon4 Executive Director Malcolm Watkins Executives David Bailey Lisa Bevan Ben Jenkins John Sanger Non-Executive Chairman Appointed 28 August 2008 13 years Non-Executive Director Appointed 25 March 2015 Non-Executive Director Appointed 31 March 2016 Non-Executive Director Appointed 31 March 2016 6 years 5 years 5 years Non-Executive Director Transitioned 1 July 2019 25 years Executive Director Appointed 8 December 1997 24 years 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 Chair 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 was appointed to the Board 19 June 1996 and transitioned to Non-Executive Director effective 1 July 2019. Other than Brett McKeon, all Non-Executive Directors listed above are Independent Directors. The average tenure for the AFG Board is 13 years. 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 outcomes 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. 29 DIRECTORS’ REPORT (continued)Annual Report 2021AFG 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 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. Group Financial Measures FY21: Given the uncertain economic environment, the majority of KMP had 100% of their STI allocated to the Group’s NPAT target. Given the critical nature of our broker IT systems, the STI targets for the COO included an allocation of 30% towards the progress of the Group’s strategic IT development programme with 70% allocated to NPAT. Group Financial Measures FY22: 50% allocation to NPAT, 30% to AFGS book growth and 20% to KPI’s linked to broker technology project. Long-term incentive (LTI) FY21 & 22 grants: Awards are made in the form of performance rights • 35% of a KMP’s entitlement allocated to a 3-year CAGR EPS target. Ensures a strong link to the long-term creation of shareholder value. • CAGR EPS was chosen as a performance hurdle as it is: • 65% of a KMP’s entitlement » A key indicator of the creation and growth in 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. shareholder value over the long term. » Provides a reliable measurement of the creation of shareholder value, and has been given a lower weighting due to the ongoing difficulty in long term forecasts with a greater weighting given to TSR. • 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. 30 DIRECTORS’ REPORT (continued)Annual Report 20213.1 Executive remuneration outcomes STI award outcomes FY21 The combined cash bonus pool available to be paid to the Executives for on target performance in the 2021 financial year was $541,884 and the minimum is nil. For the 2021 financial year, 150% of the target STI NPAT bonus amount was achieved by the Executives as outlined below. The technology measure for the Group’s COO has been deferred along with 20% of the CEO’s original STI entitlement pending completion of certain project milestones. Target FY20 000’s FY21 000’s Growth Payment NPAT ($’000) $38,078 $51,304 35% 150% 150% Total D. Bailey M. Watkins L. Bevan1 B. Jenkins J. Sanger Total Target STI opportunity $229,000 $22,556 $88,128 $90,000 $112,200 $541,884 As a % of fixed remuneration STI outcome % Achieved % Retained % Forfeited 40% 17% 33% 31% 34% $297,700 $33,834 $132,192 $135,000 $117,810 $716,536 130% 150% 150% 150% 105% 20% 0% 0% 0% 30% 0% 0% 0% 0% 0% 1. L. Bevan is employed on a part time basis 4 days per week. LTI award outcomes FY21 For the 2021 financial year, 109% of the target LTI bonus (granted in FY19) 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 95th Percentile 75th Percentile 90th Percentile 72% 150% 150% Performance Rights Target LTI opportunity LTI outcome % Achieved % Forfeited D. Bailey B. McKeon* M. Watkins L. Bevan B. Jenkins J. Sanger Total 255,131 278,260 20,114 20,114 78,222 77,313 81,861 21,938 21,938 85,313 84,322 89,282 532,755 581,053 109% 109% 109% 109% 109% 109% 109% 0% 0% 0% 0% 0% 0% * 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. 31 DIRECTORS’ REPORT (continued)Annual Report 20213.2 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 FY21 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 FY22 50% of the STI target for all KMPs will be allocated to NPAT, 30% to AFGS book growth and 20% to KPI’s linked to the broker technology project. 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 FY22 STI opportunity Offers to participate in STI awards for 2022 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 (50%), AFGS book growth (30%) and to the KPI’s linked to the broker technology project (20%) and as approved by the Board. 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. 32 DIRECTORS’ REPORT (continued)Annual Report 20213.5 The LTI plan – 2020, 2021 and 2022 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. 2020 LTI Grant 2021 & 2022 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 2019, other than those approved at the 2019 AGM 1 July 2020 & 2021 other than those approved at the 2020 AGM and those subject to approval at the 2021 AGM. Grant date fair value Gateway performance measure Key performance measure TSR Small Industrials Index 2020 $1.04; TSR Small Industrials Index 2021 $1.153; 2022 $1.910. TSR Diversified Financials Index 2020 $0.98; TSR Diversified Financials Index 2021 $1.149; 2022 $1.770. EPS $1.58 (being the 20-day Volume Weighted Average Price leading up to 30 June 2020) EPS $1.796 (being the 20-day Volume Weighted Average Price leading up to 30 June 2021) EPS $2.750 (being the 20-day Volume Weighted Average Price leading up to 30 June 2020) TSR – Absolute TSR must be positive TSR – Absolute TSR must be positive EPS – 2.5% CAGR EPS EPS – 2.5% CAGR EPS Given the uncertain economic environment resulting from the ongoing impacts of 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. TSR TSR Relative Total Shareholder Return (pro-rata vesting between hurdles) 50% measured against the Diversified Financials Index, 50% against Small Industrials Relative Total Shareholder Return (pro-rata vesting between hurdles) 50% measured against the Diversified Financials Index, 50% against Small Industrials 50th Percentile – 50% vesting 50th Percentile – 50% vesting 75th Percentile – 100% vesting 75th Percentile – 100% vesting 85th Percentile – 125% vesting (stretch target) 85th Percentile – 125% vesting (stretch target) 90th Percentile – 150% vesting (stretch target) 90th Percentile – 150% vesting (stretch target) EPS accretion 2.5% CAGR – 50% vesting 5% CAGR – 100% vesting EPS accretion 2.5% CAGR – 50% vesting 5% CAGR – 100% vesting Performance & service period Performance assessment 7.5% CAGR – 150% vesting (stretch target) 7.5% CAGR – 150% vesting (stretch target) 1 July 2019 – 30 June 2022 (FY20 Grant) 1 July 2020 – 30 June 2023 (FY21 Grant) 1 July 2021 – 30 June 2024 (FY22 Grant) 30 June 2022 30 June 2023 and 30 June 2024 Performance period not yet complete. Performance period not yet complete. 33 DIRECTORS’ REPORT (continued)Annual Report 2021LTI Plan Rules & Design Considerations 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. TSR is measured against the ASX Diversified Financials Index (50%) and against the ASX Small Industries Index (50%). Both TSR targets include a gateway requirement for absolute TSR to be positive. Link between performance and reward 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. Cessation of employment 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. The participant must not sell, transfer, encumber, hedge or otherwise deal with Performance Rights. Restrictions on dealing 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. 34 DIRECTORS’ REPORT (continued)Annual Report 2021n 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 r e h t O s e s u n o B 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 g n o L e v a e l i e c v r e s s e s u n o B s t i f e n e b y r a n o i t e r c s i D 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 - n o N s t i f e n e b y r a t e n o m h s a C s u n o b s e e f & y r a a S l P M K 0 2 0 2 e n u J 0 3 d n a 1 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 % % 7 5 % 0 5 % 6 2 % 2 2 % 0 5 % 1 4 % 7 4 % 1 4 % 6 4 % 2 4 % 1 5 % 4 4 $ $ $ $ $ $ , 3 7 5 5 8 3 1 , , 6 1 6 0 8 1 1 , 3 2 3 3 9 1 , 7 8 6 3 8 1 , 4 5 8 0 7 5 , 8 4 2 2 8 4 , 4 9 6 0 2 6 , , 9 9 4 0 0 5 6 3 1 5 2 6 , , 8 9 6 6 7 5 , 0 8 5 5 9 3 3 , , 8 4 7 3 2 9 2 , - - - - - - - - - - - - - - - - - - - - - - - - 7 8 1 7 9 4 , 9 6 3 0 1 , 4 5 3 6 5 3 , 7 0 8 3 1 , 8 7 3 7 1 , 0 4 3 2 , 1 3 3 8 1 , 8 0 5 2 , 2 0 3 5 5 1 , 9 8 7 4 , , 7 5 6 0 1 1 3 0 8 4 , 6 9 9 8 5 1 , 1 3 6 8 2 , 9 2 3 2 1 1 , 9 5 8 2 7 1 , 3 6 7 9 2 1 , - - - , 2 2 7 1 0 0 1 , 9 2 1 6 4 , 4 3 4 7 2 7 , 8 1 1 1 2 , - - - - - - - - - - - - $ - - - - - - - - - - - - $ 4 9 6 1 2 , 3 0 0 1 2 , 5 2 5 3 1 , 4 5 5 1 1 , 4 9 6 1 2 , 3 0 0 1 2 , 4 9 6 1 2 , 3 0 0 1 2 , 4 9 6 1 2 , 3 0 0 1 2 , 1 0 3 0 0 1 , 6 6 5 5 9 , $ $ $ $ 3 2 3 6 5 8 , 7 6 0 8 , 0 0 7 7 9 2 , 6 5 5 0 5 5 , 1 2 0 2 y e l i a B . D 2 5 4 9 8 7 , 9 9 4 7 , 6 0 7 0 3 2 , 7 4 2 1 5 5 , 0 2 0 2 , 0 8 0 0 6 1 8 2 6 4 , 4 3 8 3 3 , 8 1 6 1 2 1 , 1 2 0 2 i 1 s n k t a W . M 4 9 2 1 5 1 , 2 5 9 6 , 4 2 7 2 2 , 8 1 6 1 2 1 , 0 2 0 2 , 9 6 0 9 8 3 7 6 0 8 , 2 9 1 2 3 1 , 0 1 8 8 4 2 , 1 2 0 2 2 n a v e B . L 5 8 7 5 4 3 , 9 9 4 7 , 5 8 7 8 8 , 1 0 5 9 4 2 , 0 2 0 2 , 3 7 3 1 1 4 7 6 0 8 , 0 0 0 5 3 1 , 6 0 3 8 6 2 , 1 2 0 2 i s n k n e J . B 7 6 1 7 6 3 , 9 9 4 7 , 1 7 6 0 9 , 7 9 9 8 6 2 , 0 2 0 2 2 3 9 5 2 4 , 9 9 4 7 , 6 3 0 3 1 1 , 7 9 3 5 0 3 , 0 2 0 2 , 3 8 5 0 3 4 7 6 0 8 , 0 1 8 7 1 1 , 6 0 7 4 0 3 , 1 2 0 2 r e g n a S . J , 8 2 4 7 4 2 2 , , 0 3 6 9 7 0 2 , 6 9 8 6 3 , 6 3 5 6 1 7 , 8 4 9 6 3 , 2 2 9 5 4 5 , , 6 9 9 3 9 4 1 , , 0 6 7 6 9 4 1 , 1 2 0 2 0 2 0 2 l a t o T l a t o T : s e t o N . k e e w r e p s y a d 2 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 i s n k t a W . M . 1 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 . 2 35 DIRECTORS’ REPORT (continued)Annual Report 2021 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 be seeking to increase the NED pool to $1.2m at the 2021 AGM to cover the increase in relative market pay for NED’s since this date. 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 2021 and 30 June 2020: Board and Committee Fees Short-term benefits (non-monetary) Superannuation Total $ 144,292 144,292 - 28,285 86,758 86,758 86,758 86,758 86,758 86,758 86,758 86,758 491,324 519,609 $ - - - - - - - - - - - - - - $ $ 13,708 158,000 13,708 158,000 - 2,687 8,242 8,242 8,242 8,242 8,242 8,242 8,242 8,242 - 30,972 95,000 95,000 95,000 95,000 95,000 95,000 95,000 95,000 46,676 538,000 49,363 568,972 Year 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 2021 2020 T. Gill K. Matthews* C. Carter M. Kiely J. Muirsmith B. McKeon Total Total * Kevin Matthews resigned 28 October 2019 36 DIRECTORS’ REPORT (continued)Annual Report 2021Additional 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 FY19, FY20 and FY21 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 2019 plan vested on 30 June 2021 as detailed below. KMP Year / Tranches (T) No. of rights awarded during the year1 Grant date Fair value per rights at award date $ Vesting date Exercise price Expiry date No. forfeited during the year No. vested during the year1 2019 / T1 10,608 1-Jul-18 $1.36 30-Jun-21 B. McKeon 2019 / T2 4,899 1-Jul-18 $0.79 30-Jun-21 2019 / T3 4,607 1-Jul-18 $0.84 30-Jun-21 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 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 2021 / T1 4,396 1-Jul-20 $1.80 30-Jun-23 2021 / T2 6,386 1-Jul-20 $1.15 30-Jun-23 2021 / T3 6,358 1-Jul-20 $1.15 30-Jun-23 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 2021 / T1 42,737 1-Jul-20 $1.80 30-Jun-23 2021 / T2 62,084 1-Jul-20 $1.15 30-Jun-23 2021 / T3 61,815 1-Jul-20 $1.15 30-Jun-23 L. Bevan - - - - - - - - - - - - - - - - - - - - - 30-Jun-21 2,929 30-Jun-21 30-Jun-21 - - 30-Jun-21 2,929 30-Jun-21 30-Jun-21 30-Jun-22 30-Jun-22 30-Jun-22 30-Jun-23 30-Jun-23 30-Jun-23 - - - - - - - - 30-Jun-21 11,393 30-Jun-21 30-Jun-21 30-Jun-22 30-Jun-22 30-Jun-22 30-Jun-23 30-Jun-23 30-Jun-23 - - - - - - - - 7,679 7,348 6,911 7,679 7,348 6,911 - - - - - - 29,862 28,576 26,876 - - - - - - 37 DIRECTORS’ REPORT (continued)Annual Report 2021Additional disclosures relating to rights and shares 5.3 Rights awarded, vested and lapsed during the year (continued) KMP Year / Tranches (T) No. of rights awarded during the year1 Grant date Fair value per rights at award date $ Vesting date Exercise price Expiry date No. forfeited during the year No. vested during the year1 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 58,438 1-Jul-18 $0.84 30-Jun-21 D. Bailey 2020 / T1 288,672 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 2021 / T1 136,658 1-Jul-20 $1.80 30-Jun-23 2021 / T2 198,525 1-Jul-20 $1.15 30-Jun-23 2021 / T3 197,664 1-Jul-20 $1.15 30-Jun-23 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 B. Jenkins 2020 / T2 40,178 1-Jul-19 $0.98 30-Jun-22 2020 / T3 37,861 1-Jul-19 $1.04 30-Jun-22 2021 / T1 43,847 1-Jul-20 $1.80 30-Jun-23 2021 / T2 63,698 1-Jul-20 $1.15 30-Jun-23 2021 / T3 63,422 1-Jul-20 $1.15 30-Jun-23 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 J. Sanger 2020 / T2 43,750 1-Jul-19 $0.98 30-Jun-22 2020 / T3 41,226 1-Jul-19 $1.04 30-Jun-22 2021 / T1 47,745 1-Jul-20 $1.80 30-Jun-23 2021 / T2 69,360 1-Jul-20 $1.15 30-Jun-23 2021 / T3 69,059 1-Jul-20 $1.15 30-Jun-23 * 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 150% and T3 150% - - - - - - - - - - - - - - - - - - - - - - - - - - - 30-Jun-21 37,158 30-Jun-21 30-Jun-21 30-Jun-22 30-Jun-22 30-Jun-22 30-Jun-23 30-Jun-23 30-Jun-23 - - - - - - - - 30-Jun-21 11,260 30-Jun-21 30-Jun-21 30-Jun-22 30-Jun-22 30-Jun-22 30-Jun-23 30-Jun-23 30-Jun-23 - - - - - - - - 30-Jun-21 11,923 30-Jun-21 30-Jun-21 30-Jun-22 30-Jun-22 30-Jun-22 30-Jun-23 30-Jun-23 30-Jun-23 - - - - - - - - 97,399 93,204 87,657 - - - - - - 29,515 28,243 26,562 - - - - - - 31,251 29,905 28,125 - - - - - - 38 DIRECTORS’ REPORT (continued)Annual Report 20215.4 Shareholdings of KMP Ordinary shares held in Australian Finance Group Limited ASX:AFG (number) 30 June 2021 Balance 1 July 2020 Shares issued on vesting of rights Sold during the period Net change other 2 Balance 30 June 20211 Held nominally Directors T. Gill 1,329,546 B. McKeon 16,289,779 M. Watkins 17,462,284 C. Carter M. Kiely J. Muirsmith Executives L. Bevan D. Bailey B. Jenkins J. Sanger 960,714 89,376 86,819 1,280,304 1,198,744 50,403 35,081 - 20,915 31,372 - - - 81,035 265,293 81,999 63,551 - - - - - - (262,854) (160,000) (38,500) - - - - - - - - - - - 1,329,546 1,152,274 16,310,694 16,310,694 17,493,656 17,414,195 960,714 960,714 89,376 86,819 1,098,485 1,304,037 93,902 98,632 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 2020 Balance 1 July 2019 Shares issued on vesting of rights 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 39 DIRECTORS’ REPORT (continued)Annual Report 20216. 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 M. Watkins D. Bailey L. Bevan B. Jenkins J. Sanger Agreement expires Notice of termination by Company Employee notice No expiry, continuous agreement 12 months (or payment in lieu of notice) 12 weeks No expiry, continuous agreement 12 months (or payment in lieu of notice) 12 weeks No expiry, continuous agreement 12 months (or payment in lieu of notice) 12 weeks No expiry, continuous agreement 6 months (or payment in lieu of notice) 12 weeks No expiry, continuous agreement 6 months (or payment in lieu of notice) 12 weeks 7. Remuneration governance 7.1 Remuneration and Nomination Committee 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 2021 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 2021. 40 DIRECTORS’ REPORT (continued)Annual Report 20217.4 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 Director minimum shareholding policy During the year AFG adopted a formal Director Minimum Shareholding Policy. All Non-Executive Directors must establish and maintain a minimum level of ownership in AFG shares equal to their base annual director fees (including superannuation) within the later of 3 years of appointment and the date of adoption of the policy. All Non-Executive Directors currently meet the minimum shareholding requirements under the policy. 7.6 Remuneration Report approval at 2020 AGM The 30 June 2020 Remuneration Report was presented to shareholders and was approved at the 2020 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 $837k (2020: $1,038k). 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 the property business prior to listing on the ASX on 22 April 2015. Directors of EPG include B. McKeon, D. Bailey and L. Bevan. 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 $1,150k which has been paid to Qube (2020: $1,076k). In addition to the above McCabe Street Ltd has an outstanding loan owing to AFG amounting to $230k (2020: $224k), this loan is on commercial terms at arms-length. Directors of McCabe Street Ltd include B. McKeon, D. Bailey and L. Bevan. End of Audited Remuneration Report Independent Audit of Remuneration Report 9. The Remuneration Report has been audited by Ernst & Young. Please see page 93 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 26 August 2021 41 DIRECTORS’ REPORT (continued)Annual Report 2021Independence 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 2021, 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 26 August 2021 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation FD:LC:AFG:157 42 Annual Report 2021 Consolidated Statement of Financial Position As at 30 June 2021 In thousands of AUD Assets Cash unrestricted Cash restricted Trade and other receivables Other asset Contract assets Property, plant and equipment Intangible assets Loans and advances Investment in associates 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 13(a) 13(a) 14 15 16 17 17 18 19 25 20 21 22 12(b) 23 24 25 12(c) 26(a) 2021 2020 106,930 119,118 5,645 15,000 1,050,613 693 9,506 108,147 53,381 5,446 - 974,599 506 3,318 3,403,102 2,920,773 25,999 4,979 17,034 6,323 4,741,585 4,089,527 1,036,275 3,457,712 6,283 3,260 3,327 8,681 5,362 17,704 4,538,604 950,792 2,914,562 5,194 5,988 2,787 5,619 6,559 19,813 3,911,314 202,981 178,213 102,125 4,572 (29) 96,313 202,981 102,157 2,604 (14) 73,466 178,213 The Consolidated Statement of Financial Position should be read in conjunction with the Notes to the Financial Statements. 43 Annual Report 2021Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2021 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 Impairment loss on loans and advances Other expenses Results from operating activities Finance income Finance expenses Share of profit/(loss) of associates Net finance and investing income Profit before tax from continuing operations Income tax expense Profit for the period Attributable to: Owners of the Company Other comprehensive profit for the year, net of income tax Note 2021 2020 7 8 9 11 11 19 12(a) 656,801 90,242 747,043 (598,108) (46,520) 102,415 14,423 (7,383) - (44,175) 65,280 753 (187) 4,919 5,485 70,765 (19,461) 51,304 51,304 51,304 (15) 589,342 85,667 675,009 (531,107) (53,317) 90,585 14,488 (5,770) (2,612) (46,236) 50,455 940 (163) 2,314 3,091 53,546 (15,468) 38,078 38,078 38,078 - Total comprehensive income for the year 51,289 38,078 Earnings per share Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 27 27 19.12 18.88 17.30 17.09 The Consolidated Statement of Profit or Loss and Other Comprehensive Income should be read in conjunction with the Notes to the Financial Statements. 44 Annual Report 2021Statement of Changes in Equity For the year ended 30 June 2021 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 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 Balance at 1 July 2020 Total comprehensive income for the period Movement in reserve Profit 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 - - - - 60,001 (1,385) - - 58,616 102,157 102,157 - - - - - (32) - - (32) - - - - - - - - - (14) (14) - (15) - (15) - - - - - Balance at 30 June 2021 102,125 (29) - - 82 82 - - - - - - - - - - - - - - - - - - - - - - - - - - 38,078 38,078 - 82 38,078 38,160 - - 60,001 (1,385) (24,359) (24,359) 974 974 - 974 (24,359) 35,231 2,604 73,466 178,213 2,604 73,466 178,213 - - - - - - - - - 51,304 51,304 - (15) 51,304 51,289 - (8) - (40) (28,449) (28,449) 1,968 - 1,968 1,968 (28,457) (26,521) 4,572 96,313 202,981 The Consolidated Statement of Changes in Equity should be read in conjunction with Notes to the Financial Statements. 45 Annual Report 2021Statement of Cash Flows For the year ended 30 June 2021 In thousands of AUD Note 2021 2020 597,068 (558,825) 90,242 (46,520) (23,363) 58,602 753 (455) (6,522) (215) (3,700) (15,000) 581 (481,388) (505,946) - (729,500) 1,672,390 (400,795) (40) (1,742) (28,449) 511,864 64,520 161,528 226,048 521,491 (499,226) 85,666 (53,317) (14,298) 40,316 940 (330) (2,645) (379) - - 1,977 (847,490) (847,927) 1,255,854 (602,798) 432,543 (245,740) 58,614 (1,793) (24,359) 872,321 64,710 96,818 161,528 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 13(b) Cash flows from investing activities Gross interest received Acquisition of property, plant and equipment Purchase of intangible assets Additional Investment in Thinktank Investment in MAB Broker Services Pty Ltd Investment in Volt Corporation Ltd 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 Payment of principal portion of lease liability Dividends paid 26(b) Net cash generated by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at 1 July Cash and cash equivalents at 30 June 13(a) The Statement of Cash Flows should be read in conjunction with the Notes to the Financial Statements. 46 Annual Report 2021Notes to the Financial Statements 1. Reporting entity 2. Basis of preparation 19. Investment in associate 20. Trade and other payables 3. Significant accounting policies 21. Interest-bearing liabilities 4. Determination of fair values 22. Employee benefits 5. Financial risk management 6. Segment information 23. Provisions 24. Contract liability 7. Commissions and other income 25. Leases 8. Other income 26. Capital and reserves 9. Other expenses and employee costs 27. Earnings per share 10. Auditors’ remuneration 28. Share based payments 11. Finance income and expenses 29. Financial instruments 12. Income tax 13. Cash and cash equivalents 30. Group entities 31. Parent entity 14. Trade and other receivables 32. Capital and other commitments 15. Other asset 16. Contract assets 33. Contingencies 34. Related parties 17. Property, plant and equipment & Intangibles 35. Subsequent events 18. Loans and advances 47 Annual Report 20211. Reporting entity The Consolidated Financial Statements for the financial year ended (d) Use of estimates and judgements The preparation of Financial Statements in conformity with 30 June 2021 comprise Australian Finance Group Limited (the ‘Company’), which is a for profit entity and a Company domiciled in Australia and its subsidiaries (together referred to as the ‘Group’) 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 and the Group’s interest in associates and jointly controlled entities. expenses. Actual results may differ from these estimates. The Group’s principal activities in the course of the financial year were mortgage origination and lending. The Company’s principal place of business is 100 Havelock Street, West Perth, Western Australia. 2. Basis of preparation Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. Information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the Financial Statements is included in the following notes: (a) Statement of compliance The Financial Report complies with Australian Accounting Standards, and International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (“AASB”). • Note 3(a)(i) – Consolidation of special purpose entities • Note 3(b)(ii) – Impairment of financial assets held at amortised cost being customer loans and advances • Note 3(i) – Expected value of trail commission income The Financial Report is a general-purpose financial report, for a contract assets ‘for-profit’ entity, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The Financial Report has also been prepared on a historical cost basis, except where noted. The Financial Statements comprise the Consolidated Financial Statements of the AFG Group of companies. The Financial Report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($000’s) unless otherwise stated. The Consolidated Financial Statements were authorised for issue by the Board of Directors on 26 August 2021. The Directors have the power to amend and reissue the financial report. (b) Basis of measurement The consolidated financial statements have been prepared on a historical cost basis except for the following material items: • Note 5(a) – Impairment of contract asset 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 Taxation The Group’s accounting for taxation requires Management’s judgement in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the Statement of Financial Position. Deferred tax assets, including those arising from un- recouped tax losses, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient • Payables relating to trailing commission are initially measured at fair value and subsequently at amortised cost; future taxable profits. • Contract assets are measured using the expected value method under AASB 15 “Revenue from contracts with customers”. (c) Functional and presentation currency These Consolidated Financial Statements are presented in Australian dollars (“AUD”). 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 The Group is of a kind referred to in ASIC Corporations Instrument of deferred tax assets and deferred tax liabilities recognised on 2016/191 dated 31 March 2016 and in accordance all financial the Statement of Financial Position and the amount of other tax information presented in Australian dollars has been rounded to the losses and temporary differences not yet recognised. In such nearest thousand dollars unless otherwise stated. 48 circumstances, some or all of the carrying amounts of recognised deferred tax assets and liabilities may require adjustment, resulting in a corresponding credit or charge to the Consolidated Statement of Profit or Loss and Other Comprehensive Income. NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021(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: • Conceptual Framework for Financial Reporting • AASB 2019-1 Amendments to Australian Accounting Standards – Reference to the Conceptual Framework • AASB 2018-6 Amendments to Australian Accounting Standards – Definition of a Business • AASB 2019-3 Amendments to Australian Accounting Standards – Interest rate Benchmark reform • AASB 2018-7 Amendments to Australian Accounting Standards – Definition of Material • AASB 2019-5 Amendments to Australian Accounting Standards – Disclosure of the Effect of New IFRS • AASB 2020-4 Amendments to Australian Accounting Standards – COVID-19 Related Rent Concessions 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. (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. The Group is still currently assessing the impact: Affected Standards and Interpretations AASB 2020-8 Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform – Phase 2 Application date* Application date for Group 1 January 2021 30 June 2022 AASB 2021-3 Amendments to Australian Accounting Standards – COVID-19 related rent concessions beyond 30 June 2021 1 April 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 2020-7 Amendments to Australian Accounting Standards – COVID-19 Related Rent Concessions: Tier 2 Disclosures 1 July 2021 30 June 2022 AASB 2020-9 Amendments to Australian Accounting Standards – Tier 2 Disclosures: Interest Rate Benchmark Reform (Phase 2) and Other Amendments 1 July 2021 30 June 2022 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 AASB 17 Insurance Contracts AASB 2020-1 Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-Current 1 January 2023 30 June 2024 1 January 2023 30 June 2024 AASB 2021-2 Amendments to Australian Accounting Standards – Disclosure of Accounting Policies and Definitions of Accounting Estimates 1 January 2023 30 June 2024 AASB 2021-5 Amendments to Australian Accounting Standards – Deferred Tax related to Assets and Liabilities arising from a single transaction 1 January 2023 30 June 2024 *Reporting period commences on or after the application date. 49 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 20213. 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. 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 (a) Basis of consolidation The Consolidated Financial Statements incorporate the Financial recognised in the profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration Statements of the Company and entities (including structured received and the fair value of any retained interest and (ii) the entities) controlled by the Company and its subsidiaries. Control is previous carrying amount of the assets, and liabilities of the achieved when the Company: • Has power over the investee • Is exposed, or has rights, to variable returns from its involvement with the investee 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 • Has the ability to use its power to affect its returns the date when control is lost is regarded as the fair value on initial 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 recognition for subsequent accounting under AASB 9 as it becomes a financial instrument on loss of control. (i) Special purpose entities Special purpose entities are those entities over which the group has no ownership interest but in effect the substance of the relationship is such that the Group controls the entity. The Group holds capital • Right arising from other contractual arrangements and residual units in these respective special purpose entities. • The Group’s voting rights and potential voting rights The Group has established the following special purpose entities Consolidation of a subsidiary begins when the Group obtains control to support the specific funding needs of the Group’s securitisation over the subsidiary and ceases when the Group loses control of programme: the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the Consolidated Statement of Profit or Loss and Other Comprehensive Income from the date the Company gains control until the date when the company ceases to control the subsidiary. Subsidiaries are entities controlled by the Group. • AFG 2010-1 Trust and its Series (SPE) to conduct securitisation activities funded by short term warehouse facilities provided by warehouse and related mezzanine facility providers. • 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 When necessary, adjustments are made to the Financial Statements 2020-1 NC Trust and AFG 2021-1 Trust (SPE-RMBS) to hold of subsidiaries to bring their accounting policies in line with the securitised assets and issue Residential Mortgage-Backed Group’s accounting policies. Securities (RMBS) 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 of the Company and to the non-controlling interests even if this results in the non- controlling interests having a deficit balance. • 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 The special purpose entities meet the criteria of being controlled entities under AASB 10 – Consolidated Financial Statements. All intra-group balances, and any unrealised income and expenses The elements indicating control include, but are not limited to, the arising from intra-group transactions, are eliminated in preparing the below: Consolidated Financial Statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised • The Group has existing rights that gives it the ability to direct relevant activities that significantly affect the special purpose entities’ returns gains, but only to the extent that there is no evidence of impairment. • The Group is exposed, and has rights, to variable returns 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 50 from its involvement with the special purpose entities • The Group has all the residual interest in the special purpose entities NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021• Fees received by the Group from the special purpose The amortised cost of a financial asset is: entities vary on the performance, or non-performance, of the securitised assets • The Group has the ability to direct decision making accompanied by the objective of obtaining benefits from the special purpose entities’ activities • the amount at which the financial asset is measured at initial recognition; • minus the principal repayments; • plus the cumulative amortisation using the effective interest method of any difference between that initial amount and As a result, the Company controls the SPE and on consolidation the underlying loans and notes issued are recognised as assets and liabilities and interest on loans is recognised in the statement of the maturity amount; and • adjusted for any loss allowance. profit and loss. Interest income, foreign exchange gains and losses and impairment are recognised in profit and loss. (ii) Investments in associates (equity accounted investee) Derecognition of financial assets Associates are those entities in which the Group has significant The Group derecognises a financial asset when the contractual influence, but not control, over the financial and operating policies. rights to the cash flows from the asset expire, or when it transfers Investments in associates are accounted for using the equity the financial asset and substantially all the risks and rewards method (equity accounted investee) and are initially recognised at of ownership of the asset to another entity. If the Group neither cost. The cost of the investment includes transaction costs (see transfers nor retains substantially all the risks and rewards of 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 with those of the Group, from the date that significant influence commences until the date that significant influence ceases. (b) Financial instruments (i) Financial assets Initial recognition and measurement ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. 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 modification does not result in cashflows that are substantially different, the modification does not result in derecognition however, the modification will result in a gain/loss recognised in statement of profit and loss. (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 asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset. Transaction costs of financial assets carried at fair value through profit or loss are expensed in profit or loss. Trade receivables that do not contain a significant financing component are initially measured at the transaction price determined under AASB 15 (see Note 3(i) Revenue from contracts with customers). 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 but not to investments in equity instruments. ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). It consists of 3 components: Subsequent measurement Financial assets at amortised cost A financial asset is measured at amortised cost if it meets the following conditions: • it is held within a business model whose objective is to hold assets to collect contractual cash flows; • its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding; and • it is not designated at Fair Value through Profit and Loss (FVPL). 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; 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 since initial recognition, or if the financial instrument is a purchased or originated credit- impaired financial asset. If the credit risk on a financial instrument 51 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021has not increased significantly since initial recognition (except for a As part of the forward-looking assessment, the Group has purchased or originated credit-impaired financial asset), the Group considered: measures the loss allowance for that financial instrument at an amount equal to a 12-month ECL. • actual or expected adverse changes in business, financial or economic conditions that are expected to cause a The Group has assessed the loans and advances (securitised significant change to the borrower’s ability to meet its assets) and recognised the ECL for these assets. obligations such as market interest rates, unemployment Impairment of Loans and Advances The Group has applied the three-stage model based on the change in credit risk since initial recognition to determine the loss allowances of its loans and advances. Stage 1: 12-month ECL At initial recognition, ECL is collectively assessed and measured by classes of financial assets with the same level of credit risk based on the PD within the next 12 months and LGDs with consideration to forward looking economic indicators. Loss allowances for financial rates or property growth rates are incorporated in the model; • external (if available) credit ratings; • significant changes in the value of the collateral supporting the obligation or in the quality of third-party guarantees or credit enhancements; • significant changes in the quality of the underwriter; • S&P assumptions such as first homebuyer, occupancy, employment type, geographical concentration, principal and interest and interest only. assets measured at amortised cost are deducted from the gross In addition to the above, the Group has considered the impact of carrying amount of the assets. COVID-19 in preparing the ECL. Stage 2: Lifetime ECL As part of this assessment, the Group has considered: When the Group determines that there has been a significant increase in credit risk since initial recognition but not considered to be credit impaired, the Group recognises a lifetime ECL calculated as a product of the PD for the remaining lifetime of the financial asset and LGD, with consideration to forward looking economic • Government support to borrowers; • Increased probability weightings for downside cases; and • Staging for borrowers who have asked for a deferral of mortgage payments. indicators. Similar to Stage 1, loss allowances for financial assets The 30 June 2020 results included an increased provision for measured at amortised cost are deducted from the gross carrying impairment charges due to the expected economic impact of 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 the COVID-19 pandemic. COVID-19 economic impacts have continued to impact the likelihood of losses due to such things as increased unemployment and potential property price movements. The expected credit loss (ECL) provision has therefore remained at $3,272k for the year ended 30 June 2021 (2020: $3,272k). Impairment charges are discussed further in Note 3(b)(ii) and Note 29 of the 2021 Annual Report. credit impaired, a lifetime ECL is recognised as a collective or Given the dynamic and evolving nature of COVID-19, changes to the specific provision, and interest revenue is calculated in subsequent estimates and outcomes that have been applied in the measurement reporting periods by applying the effective interest rate to the of the Group assets and liabilities may arise in the future. amortised cost instead of the carrying amount. In response to the current COVID-19 pandemic, the Group has When determining whether the credit risk of a financial asset has provided support to its customers by implementing a range of increased significantly since initial recognition and when estimating initiatives, such as granting deferrals of residential mortgage loan ECLs, the Group considers reasonable and supportable information repayments to customers. 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. 52 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021A 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. 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. The Group’s non-derivative financial liabilities include interest-bearing liabilities and trade and other payables. 53 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021Subsequent measurement Repurchase of share capital Subsequent to initial recognition, interest-bearing liabilities are When share capital recognised as equity is repurchased the amount measured at amortised cost using the effective interest rate of consideration paid, including directly attributable costs, is method. Derecognition recognised as a reduction in equity. Dividends A financial liability is derecognised when the obligation under the Dividends are recognised as a liability in the period in which they are liability is discharged or cancelled or expires. When an existing declared. 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 (c) Cash and short-term deposits Cash and short-term deposits in the Consolidated Statement as the derecognition of the original liability and the recognition of of Financial Position comprise cash at bank and on hand, short a new liability. The difference in respect of the carrying amounts term deposits with a maturity of three months or less from date is recognised in the income statement. The Group considers a of origination, as well as restricted cash such as proceeds and modification substantial based on qualitative factors and if it results collections in the special purpose entities’ accounts which are not in a difference between the adjusted discounted present value and available to the shareholders. the original carrying amount of the financial liability of, or greater than, ten per percent. (iv) Amortised cost and effective interest method The effective interest method is a method of calculating the For the purpose of the Statement of Cash Flows, cash and cash equivalents consist of the cash and term deposits as defined above, net of outstanding bank overdrafts. (d) Property, plant and equipment amortised cost of a debt instrument and of allocating interest (i) Recognition and measurement income over the relevant period. For financial assets other than purchased or originated creditimpaired financial assets (i.e. assets Items of property, plant and equipment are measured at cost less accumulated depreciation (see (iii) below) and impairment losses that are creditimpaired on initial recognition), the effective interest (see accounting policy 3(f)). 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, 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 instrument Where parts of an item of property, plant and equipment have on initial recognition. For purchased or originated creditimpaired different useful lives, they are accounted for separately. 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 principal (ii) Subsequent costs 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. (v) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity at the time of issuance, net of any related income tax benefit. The cost of replacing part of an item of property, plant and equipment is recognised in the carrying amount of the item if it is probable that the future economic benefits embodied within the part will flow to the Group and its costs can be measured reliably. The costs of the day-to-day servicing of property, plant and equipment are recognised in profit or loss as incurred. (iii) Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Leased assets are depreciated over the shorter of the lease term and their useful life unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. Land is not depreciated. 54 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021The estimated useful lives for the current and comparative periods are as follows: (i) plant and equipment 2-5 years (ii) fixtures and fittings 5-20 years Depreciation methods, useful lives and residual values are reassessed at each reporting date. (e) Intangibles (i) Software development costs Software development costs are recognised as an expense when incurred, except to the extent that such costs, together with previous unamortised deferred costs in relation to that project, are expected probable, to provide future economic benefits. 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) 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. (iii) 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 Impairment of non-financial assets (f) The carrying amounts of the Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses recognised in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed (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. (g) Employee benefits (i) Long-term employee benefits (iv) Software-as-a-Service (SaaS) arrangements The Group’s liability in respect of long-term employee benefits is SaaS arrangements are arrangements in which the Group does not currently control the underlying software used in the arrangement. Where costs incurred to configure or customise SaaS arrangements result in the creation of a resource which is identifiable, and where the company has the power to obtain the future economic benefits flowing from the underlying resource and to restrict the access of others to those benefits, such costs are recognised as a separate intangible software asset and amortised over the useful life of the software on a straight-line basis. The amortisation is reviewed at least at the end of each reporting period and any changes are treated as changes in accounting estimates. 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. (ii) Short-term benefits Short-term employee benefits are measured on an undiscounted Where costs incurred to configure or customise do not result in the basis and are expensed as the related service is provided. recognition of an intangible software asset, then those costs that provide the Group with a distinct service (in addition to the SaaS access) are now recognised as expenses when the supplier provides the services. When such costs incurred do not provide a distinct A liability is recognised for employee benefits such as wages, salaries and annual leave if the Group has present obligations resulting from employees’ services provided to reporting date. service, the costs are now recognised as expenses over the duration A provision is recognised for the amount expected to be paid under of the SaaS contract. short-term and long-term cash bonus or profit-sharing plans if the 55 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021Group has a present legal or constructive obligation to pay this Under AASB 15, revenue is recognised when the Group satisfies amount as a result of past service provided by the employee and the performance obligations by transferring the promised services to its obligation can be estimated reliably. customers. Determining the timing of the transfer of control - at a (iii) Share-based payment transactions point in time or over time - requires judgement. Below is a summary of the major services provided and the Group’s accounting policy on The grant date fair value of options and shares granted to employees recognition as a result of adopting AASB 15. 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 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. market conditions not being met. • Other income – sponsorship income and fees for services. (h) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting expected future cash flows at a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the liability. The Group often enters into transactions that will give rise to different streams of revenue. In all cases, the total transaction price for a contract is allocated amongst the various performance obligations based on their relative stand-alone selling prices. The transaction price for a contract excludes any amounts collected on behalf of third parties. Commissions – origination and trail commissions The Group provides loan origination services and receives origination The unwinding of the discount is recognised as a finance cost. commission on the settlement of loans. Additionally, the lender Provision for clawbacks on settlements within the period are raised normally pays a trailing commission over the life of the loan. on both commission received and commission payable. Clawbacks Commission revenue is recognised as follows: will be re-measured each reporting period. (i) Revenue from contracts with Customers The Group accounts for revenue under AASB 15 Revenue from contracts with customers. The standard has introduced a single principle based five step recognition measurement model for revenue recognition: • 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 (1) Identifying the contract with a customer; commission revenue. (2) Identifying the separate performance obligations; • Trailing commissions: The Group receives trail commissions (3) Determining the transaction price; (4) Allocating the transaction price to the performance obligations; (5) Recognising revenue when or as performance obligations are satisfied. from lenders on settled loans over the life of the loan based on the loan balance outstanding. The Group also makes trail commission payments to brokers when trail commission is received from lenders. The future trail commission receivable is recognised upfront as a contract asset. Trailing commissions include revenue on residential, commercial and Revenue is recognised either at a point in time or over time, when (or AFGHL white label trail books. as) the Group satisfies performance obligations by transferring the promised goods or services to its customers. The Group recognises • Interest income: This is the financing component of the trail commission contract asset which brings into consideration contract liabilities (see Note 24) for consideration received in respect the time value of money. of unsatisfied performance obligations and reports these amounts as other liabilities in the statement of financial position. Similarly, if the Group performs 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. 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 56 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021payable 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. 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. Point in time Commissions – trail commissions At the point in time when the loan is settled with the lender. 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. Interest income from the unwinding of the discount rate on the trail commission contract asset is recognised over time. 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. Point in time Other income – sponsorship income The performance obligation is that a sponsored event has occurred. 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. 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 is recognised when performance obligation is satisfied. 57 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021(j) Leases Recognition and measurement incremental borrowing rate if the rate implicit in the lease cannot be readily determined. When a contract is entered into, the Group assesses whether the contract contains a lease. A lease arises when the Group (k) Finance income and expenses Finance income comprises interest income on funds invested and has the right to direct the use of an identified asset which is not foreign currency gains. Interest income is recognised as it accrues, substitutable and to obtain substantially all economic benefits using the effective interest method. from the use of the asset throughout the period of use. The leases recognised by the Group relate to office space. Finance expenses comprise interest payable on borrowings. 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 (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. Interest income is recognised using the effective interest method for debt instruments measured subsequently at amortised cost. For financial assets other than purchased or originated creditimpaired financial assets, interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset, except for financial assets that have subsequently At the commencement date of the lease, the Group recognises become creditimpaired. 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. For financial assets that have subsequently become credit impaired, interest income is recognised by applying the effective interest rate to the amortised cost of the financial asset. If, in subsequent reporting periods, the credit risk on the creditimpaired financial In calculating the present value of lease payments, the Group uses instrument improves so that the financial asset is no longer credit the incremental borrowing rate at the lease commencement date. impaired, interest income is recognised by applying the effective After the commencement date, the amount of lease liabilities is interest rate to the gross carrying amount of the financial asset. 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 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. Deferred income tax is generally provided on all temporary identified asset and obtain substantially all the economic differences at the balance sheet date between the tax bases of benefits from the use of that asset. assets and liabilities and their carrying amounts for financial b) Lease term - Judgement is required when assessing the reporting purposes. 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. 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 c) Discount rates - Judgement is required to determine income tax asset to be utilised. the discount rate, where the discount rate is the Group’s 58 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021Unrecognised deferred income tax assets are reassessed at each Contributions to fund the current tax liabilities are payable as per the balance sheet date and are recognised to the extent that it has tax funding arrangement and reflect the timing of the head entity’s become probable that future taxable profit will allow the deferred tax obligation to make payments for tax liabilities to the relevant tax asset to be recovered. authorities. Deferred income tax assets and liabilities are measured at the The head entity in conjunction with other members of the tax- tax rates that are expected to apply to the year when the asset is consolidated group has also entered into a tax sharing agreement. realised, or the liability is settled, based on tax rates (and tax laws) The tax sharing agreement provides for the determination of the that have been enacted or substantively enacted at the balance allocation of income tax liabilities between the entities should the sheet date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the profit or loss. (i) Tax consolidation The Company and its wholly-owned Australian resident entities have formed a tax consolidated group with effect from 1 July 2004 and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is the Company. head entity default on its tax payment obligations. No amounts have been recognised in the Financial Statements in respect of this agreement as payment of any amounts under the tax sharing agreement is considered remote. (iii) Goods and services tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of Current tax expenses, deferred tax liabilities and deferred tax acquisition of the asset or as part of the expense. assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate Financial Statements of the members of the tax-consolidated group using the ‘group allocation’ approach by reference to the carrying amounts of assets and liabilities in the separate Financial Statements of each 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. entity and the tax values applying under tax consolidation. Cash flows are included in the Statement of Cash Flows on a gross Any current tax liabilities (or assets) and deferred tax assets arising from unused tax losses of the subsidiaries is assumed by the head entity in the tax-consolidated group and are recognised by the Company as amounts payable (receivable) to (from) other entities in the tax-consolidated group in conjunction with any tax funding arrangement amounts (refer below). Any difference between these amounts is recognised by the Company as an equity contribution or distribution. 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, The Company recognises deferred tax assets arising from unused construction or production of a qualifying asset are recognised in tax losses of the tax-consolidated group to the extent that it is the profit or loss using the effective interest method. 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 (o) Trail commissions payable The Group pays trail commissions to brokers. This is initially tax losses as a result of revised assessments of the probability of measured at expected value being the net present value of expected recoverability is recognised by the head entity only. future trailing commission payable to brokers. (ii) Nature of tax funding arrangements and tax sharing arrangements The head entity, in conjunction with other members of the tax- consolidated group, has entered into a tax funding arrangement which sets out the funding obligations of members of the tax- consolidated group in respect of tax amounts. The tax funding arrangements require payments/(receipts) to/(from) the head entity equal to the current tax liability (asset) assumed by the head entity and any tax loss deferred tax asset assumed by the head entity, resulting in the head entity recognising an intra-group receivable (payable) equal in amount to the tax liability (asset) assumed. The inter-entity receivables (payables) are at call. 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 actuarial analysis of historical runoff information. Refer to Note 29(d) for details on the key assumptions. (p) Reclassification of comparative numbers The commission expense relating to AFG’s own-originated loans has been reclassified from “commission expense” to “interest income” as this is part of the effective interest rate on the loans and advances $9.9M (2020: $7.2M). Comparative figures have been reclassified to ensure consistency in presentation with current year numbers. 59 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021(q) Other assets Other assets relates to amounts held in escrow at year end, pertaining to an investment. Once the specified conditions are satisfied this amount will be reclassified to Investments. 4. Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non- financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. Where applicable, further information about the assumptions made in determining fair values are disclosed in the notes specific to that asset or liability. Contract Asset 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 (refer to Note 3(i) Revenue from Contracts with Customers). 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 Risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Risk and Compliance Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Company and the Group. (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 The Group’s exposure to credit risk is influenced mainly by the individual characteristics of each customer. The demographics of the Group’s customer base, including the default risk of the industry and country in which customers operate, has less of an influence on credit risk. Excluding financial institutions on the lender panel, trade and other receivables from other customers are rare given the nature of the Group’s business. The Group has assessed its history of losses as well as performing a forward-looking assessment, both of which have not resulted in any historical or expected material forward looking losses. Group does not require collateral in respect of trade The carrying amount of all other financial assets and liabilities and other receivables. recognised in the Statement of Financial Position approximate their fair value, with the exception of the trail commission payables that Contract assets 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’s contract assets relate mainly to high credit quality financial institutions who are the members of the lender panel. New panel entrants are subject to commercial due diligence prior to joining the panel. The Group bears the risk of non-payment of future trail commissions by lenders (contract assets) should they not maintain solvency. However, should a lender not meet its obligations as a debtor then the Group is under no obligation to pay out any future trail commissions to brokers. The Group has exposure to credit, liquidity and market risks from the use of financial instruments. Loans and advances This note presents information about the Group’s exposure to To mitigate exposure to credit risk on loans and advances, the each of the below risks, the objectives, policies and processes for Group has adopted the policy of only dealing with creditworthy measuring and managing risk, and the management of capital. counterparties and obtaining sufficient collateral or other security Further quantitative disclosures are included throughout the where appropriate. financial report. The Group’s loans and advances relate mainly to loans advanced The Board of Directors has overall responsibility for the through its residential mortgage securitisation programme. Credit establishment and oversight of the risk management framework. risk management is linked to the origination conditions externally The Risk and Compliance Committee is responsible for developing imposed on the Group by the warehouse facility provider including and monitoring risk management policies. geographical limitations. As a consequence, the Group has no 60 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021significant concentrations of credit risk. The Group has established ongoing basis to ensure risk levels are maintained within established a credit quality review process to provide early identification of limits. possible changes in credit worthiness of counterparties by the use of external credit agencies, which assigns each counterparty a risk rating. Risk ratings are subject to regular review. The Group’s most significant exposure to interest rate risk is on the interest-bearing loans within the SPE which fund the residential mortgage securitisation programme. To minimise its exposure to The Group’s maximum exposure is the carrying amount of the increases in cost of funding, the Group only lends monies on variable loans, net of any impairment losses. Subsequent to June 2014 all interest rate term. Should there be changes in pricing the Group has residential loans with a loan to value ratio of greater than 80% are the option to review its position and offset those costs by passing on subject to a lenders mortgage insurance contract. interest rate changes to the end customer. The Group has applied an ECL model to determine the collective Prepayment risk impairment provision of its loans and advances. Refer Notes 3(b)(ii)) and 29(a)(ii) for details. COVID-19 economic impacts have continued Prepayment risk is the risk that the Group will incur a financial loss because its customers and counterparties repay or request to impact the likelihood of losses due to such things as increased repayment earlier than expected. unemployment and potential property price movements. These factors have been included in the ECL model which has seen the provision remain at $3,272k (2020: $3,272k). (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 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. ensure, as far as possible, that it will always have sufficient liquidity For the loans and advances within the SPE and SPE-RMBS, the to meet its liabilities when due, under both normal and stressed Group minimises the prepayment risk by passing back all principal conditions, without incurring unacceptable losses or risking damage repayments to the warehouse facility providers and bondholders. to the Group’s reputation. Other market risk 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 Group is exposed to an increase in the level of credit support required within its securitisation programme arising from changes in the credit rating of mortgage insurers used by the SPE, and the composition of the available collateral held. The Group regularly reviews and reports on the credit ratings of those insurers as well as The liquidity position is assessed and managed under a variety of the Company’s maximum cash flow requirements should there be scenarios, giving due consideration to stress factors relating to both any adverse movement in those credit ratings. 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 (d) Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain exchange rates, interest rates and equity prices will affect the future development of the business. The Board of Directors monitors Group’s income or the value of its holdings of financial instruments. the return on capital, which the Group defines as net operating The objective of market risk management is to manage and income divided by total shareholders’ equity and aims to maintain control market risk exposures within acceptable parameters, while a capital structure that ensures the lowest cost of capital available optimising the return. Currency risk The Group is exposed to foreign currency risk on cash assets that are denominated in a currency other than AUD. The currencies giving rise to this risk are denominated in US dollars (USD) and New Zealand dollars (NZD). The Group elects not to enter into foreign exchange contracts to hedge this exposure as the net movements would not be material. The Group has no significant exposure to currency risk. Interest rate risk to the Group. The Board of Directors also monitors the level of dividends to ordinary shareholders. The SPEs are subject to the external requirements imposed by the warehouse facility providers. The terms of the warehouse facilities provide a mechanism for managing the lending activities of the SPE and ensure that all outstanding principal and interest is paid at the end of each reporting period. Similarly, the SPE-RMBS are subject to external requirements imposed by the bondholders and the rating agencies. The terms of the RMBS transactions provide a mechanism for ensuring that all outstanding principal and interest is paid at Interest rate risk is the risk to the Group’s earnings and equity arising the end of each reporting period. There were no breaches of the from movements in interest rates. Positions are monitored on an covenants or funding terms imposed by the warehouse and RMBS 61 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021transactions in the current period. AFG Securities Pty Ltd is subject to externally imposed minimum capital requirements by the Australian Securities and Investments Commission (ASIC) in accordance with the conditions of their Australian Financial Services Licence. 6. Segment information AASB 8 requires operating segments to be identified on the basis of internal reports about business activities in which the Group is engaged and that are regularly received by the chief operating decision maker, the Board of Directors, in order to allocate resources to the segment and to assess its performance. The Group has identified two reportable segments based on the nature of the products and services, the type of customers for those products and services, the processes followed to produce, the method used to distribute those products and services and the similarity of their economic characteristics. All external customers are Australian entities. The following summary describes the operations in each of the Group’s reportable segments: AFG Wholesale Mortgage Broking The mortgage broking segment refers to the operating activities in which the Group acts as a wholesale mortgage broker that provides its contracted brokers with administrative and infrastructure support as well as access to a panel of lenders. The Group receives two types of commission payments on loans originated through its network; • Upfront commissions on settled loans Upfront commissions are received by the Group from lenders as a percentage of the total amount borrowed. Once a loan settles, the Group receives a one-off payment linked to the total amount borrowed as an upfront commission, a large portion of which is then paid by the Group to the originating broker. • Trail commissions on the loan book Trail commissions are received by the Group from lenders over the life of the loan (if it is in good order and not in default), as a percentage of the particular loan’s outstanding balance. The trail book represents the aggregate of residential mortgages outstanding that have been originated by the Group’s contracted brokers and are generating trail income. AFG Home Loans AFGHL offers the Group’s branded mortgage products, funded by third party wholesale funding providers (white label products) or AFG Securities mortgages (securitised loans issued by AFG Securities Pty Ltd) that are distributed through the Group’s distribution network. AFGHL sits on the Group’s panel of lenders alongside the other residential lenders and competes with them for home loan customers. The segment earns fees for services, largely in the form of upfront and trail commissions, and net interest margin on loans funded by its securitisation programme. Segment results that are reported to the Board of Directors include items directly attributable to the relevant segment as well as those that can be allocated on a reasonable basis. Other/Unallocated Other/unallocated items are comprised mainly of other operating activities from which the Group earns revenue and incurs expenses that are not required to be reported separately since they don’t meet the quantitative thresholds prescribed by AASB 8 or are not managed separately and include corporate and taxation overheads, assets and liabilities. Information regarding the results of each reportable segment is included 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. 62 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021Year ended 30 June 2021 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 614,048 37,066 2,497 - - 131,401 - - 49 - 1,594 (37,066) 11,926 704 4,919 Total 747,043 - 14,423 753 4,919 Total segment income 653,611 131,450 (17,923) 767,138 Timing of revenue recognition At a point in time Over time Results 653,611 - 40,029 91,421 (34,768) 16,845 Segment profit before income tax 56,810 13,346 609 Income tax expense Net profit after tax Assets and liabilities Total segment assets Total segment liabilities Other segment information 1,036,349 1,032,717 3,750,915 3,621,012 (45,679) 4,741,585 (115,125) 4,538,604 Depreciation and amortisation (66) (28) (1,971) (2,065) 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 - - 122,247 - - 105 - 1,479 (34,871) 13,369 835 2,314 Total 675,009 - 14,488 940 2,314 Total segment income 587,273 122,352 (16,874) 692,751 Timing of revenue recognition At a point in time Over time Results 587,273 - 35,546 86,806 (29,789) 12,915 Segment profit/(loss) before income tax 43,980 11,430 (1,864) 658,872 108,266 70,765 (19,461) 51,304 593,030 99,721 53,546 (15,468) 38,078 971,979 946,520 3,079,982 2,967,384 37,566 (2,590) 4,089,527 3,911,314 Income tax expense Net profit after tax Assets and liabilities Total segment assets Total segment liabilities Other segment information Depreciation and amortisation (87) (22) (2,377) (2,486) 1 Relate to Intercompany transactions 63 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 20217. 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 2021 2020 585,758 2,373 530,654 1,764 67,491 55,785 254 925 268 871 656,801 589,342 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. 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 2021 2020 1,833 390 2,580 3,104 5,923 593 2,977 512 2,358 2,925 5,114 602 14,423 14,488 i. Professional indemnity insurance is the income generated from professional indemnity insurance cover. AFG purchases a third-party professional indemnity insurance policy for which it pays a premium and offers AFG’s brokers the option to be included under AFG’s policy cover. If this offer is taken up, brokers will be charged a fee. This revenue from this fee is brought to account over time. ii. Software Licenses is the income generated from FLEX & SMART. This revenue relates to AFG software 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. 64 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021Note 9(b) 9. Other expenses and employee costs (a) Other expenses In thousands of AUD Advertising and promotion Consultancy and professional fees Information technology Occupancy costs Employee costs Depreciation and amortisation (b) Employee costs In thousands of AUD Wages and salaries Other associated personnel expenses Change in liabilities for employee benefits Share-based payment transactions Superannuation 10. Auditors’ remuneration Fees to Ernst & Young (Australia – Amount in AUD) 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 & APRA 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 11. 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 Finance income Interest expense on lease liability Finance expense 2021 1,848 3,441 4,697 431 31,693 2,065 44,175 2021 21,990 5,868 416 1,168 2,251 31,693 2020 3,588 4,244 4,993 397 30,528 2,486 46,236 2020 21,324 6,165 31 924 2,084 30,528 2021 2020 278,100 271,940 35,500 35,000 55,000 368,600 - 30,000 336,940 - 368,600 336,940 2021 273 480 753 187 187 2020 400 540 940 163 163 65 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202112. 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 Income tax recognised in other comprehensive income Deferred tax movements recognised in other comprehensive income Income tax benefit arising from a previously unrecognised tax credit 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% (2020: 30%) Non-deductible expenses Over provision in prior periods Other adjustments 2021 2020 21,141 17,321 - 25 (1,705) 19,461 2021 (418) (517) 2021 70,765 21,229 (1,676) 25 (117) 19,461 - - (1,853) 15,468 2020 - - 2020 53,546 16,064 (596) - - 15,468 (b) Current tax assets and liabilities The current tax liability for the Group of $3,260k (2020: $5,988k) represents the amount of income taxes payable in respect of current and prior financial years. (c) Deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Assets Liabilities Net 2021 (447) - 2020 (265) 2021 2020 - - 2021 (447) 2020 (265) - 307,497 285,195 307,497 285,195 In thousands of AUD Property, plant and equipment and intangibles Contract asset Employee benefits Trade and other payables (282,425) (260,465) Other items (4,812) (3,288) (2,109) (1,364) - - - - - - (2,109) (1,364) (282,425) (260,465) (4,812) 17,704 - (3,288) 19,813 - Tax (assets) / liabilities (289,793) (265,382) 307,497 285,195 Set off of tax 289,793 265,382 (289,793) (265,382) Net deferred tax liabilities - - 17,704 19,813 17,704 19,813 66 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021 13. 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 2021 105,700 1,230 106,930 111,500 7,618 119,118 226,048 226,048 2020 106,895 1,252 108,147 41,348 12,033 53,381 161,528 161,528 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 2021 was 0.42% (2020: 1.30%). The deposits had an average maturity of 72 days (2020: 68 days). The Group’s exposure to interest rate risk and a sensitivity analysis for financial assets and liabilities are disclosed in Note 29. 67 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021(b) Reconciliation of cash flows from operating activities In thousands of AUD Cash flows from operating activities 2021 2020 Profit for the period from continuing operations 51,304 38,078 Adjustments to reconcile the profit to net cash flows: Income tax expense from continuing operations Depreciation and amortisation Interest on leases Term out cost amortisation Net interest income from investing activities Expense recognised in respect of equity-settled share-based payments Share of profit in associates 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 Increase in receivables and prepayments Increase in ECL provision Increase in trade and other payables Increase in contract liability Increase/(Decrease) in employee entitlements Increase/(Decrease) in provisions Cash generated from operations Income tax paid Net cash generated by operating activities 14. Trade and other receivables In thousands of AUD Current Trade and other receivables Other receivables Accrued income Prepayments 68 19,461 2,065 15,468 2,486 295 343 1,055 (753) 1,032 (4,919) (76,014) 73,559 2 67,087 (1,099) - 11,539 2,943 1,087 408 81,965 (23,363) 58,602 2021 147 1,173 398 1,718 3,927 5,645 932 (940) 976 (2,314) (74,872) 72,284 2 52,443 (5,717) 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 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202115. Other asset In thousands of AUD Current Other Asset1 2021 2020 15,000 15,000 - - 1. Other asset relates to the investment in Volt Corporation Limited (“Volt”). As at 30 June 2021 this amount was held in escrow, with the investment subsequently completing in July 2021 (Note 35). 16. Contract Assets In thousands of AUD Current 2021 2020 Net present value of future trail commissions contract asset 209,355 209,863 Non-current Net present value of future trail commissions contract asset 841,258 1,050,613 764,736 974,599 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 Consolidated Balance at 1 July 2019 Acquisitions Depreciation Balance at 30 June 2020 Balance at 1 July 2020 Acquisitions Write-offs Depreciation Balance at 30 June 2021 Plant and equipment Fixtures and fittings 312 185 (206) 291 291 374 (26) (178) 461 537 145 (467) 215 215 81 (17) (47) 232 Total 849 330 (673) 506 506 455 (43) (225) 693 69 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021Intangibles In thousands of AUD Consolidated Balance at 1 July 2019 Acquisitions Depreciation Balance at 30 June 2020 Balance at 1 July 2020 Acquisitions1 Depreciation Balance at 30 June 2021 1. The $6.5M acquisitions relate to work in progress as at 30 June 2021. 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 $’000 812 2,726 (220) 3,318 3,318 6,541 (353) 9,506 2021 2020 841,490 1,299 842,789 457,834 1,223 459,057 2,562,041 2,462,787 1,544 (3,272) 2,201 (3,272) 2,560,313 2,461,716 3,403,102 2,920,773 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 9.58% p.a. (2020: 9.77% p.a.). b) Loan and advances to McCabe St Limited (related party) $230k (2020: $224k) are secured over its land and assets. Interest is charged on average at 2.45% p.a. (2020: 2.94% 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 (2020: $3,272k). During the financial year, new loans issued in the Group’s securitisation programme were $1,345,534k (2020: $1,354,499k). The Group’s exposure to credit, currency and interest rate risks related to loans and advances is disclosed in Note 29. 70 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202119. Investment in associates In thousands of AUD Non-current Thinktank Cost of investment1 Contingent consideration liability Share of post-acquisition profit Purchase additional shares MAB Broker Services Pty Ltd Cost of investment2 Share of post-acquisition losses 2021 2020 12,629 - 9,297 725 22,651 3,700 (352) 3,348 11,141 1,488 4,026 379 17,034 - - - Total Investment in associates 25,999 17,034 1. Investment in Thinktank Group Pty Ltd (“Thinktank”) includes transaction costs. 2. Investment in MAB Broker Services Pty Ltd includes transaction costs Thinktank Investment AFG holds a 32.29% investment in Thinktank Group Pty Ltd (“Thinktank”). Principal place of business, Sydney NSW Australia. 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. MAB Broker Services Pty Ltd Investment On 25 September 2020, AFG, Mortgage Advice Bureau Australia (Holdings) Pty Ltd and Mortgage Advice Bureau Limited entered into a Share Subscription Agreement. As at 30 June 2021, AFG holds a 48.05% investment in MAB Broker Services Pty Ltd (“MAB”). Principal place of business, Sydney NSW Australia. 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 MAB. 71 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021In 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 Revenue 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 MAB summarised financial information Balance Sheet Current assets Non-current assets Total Assets Current liabilities Non-current liabilities Total Liabilities Net assets Income Statement Revenue Loss after tax Reconciliation to carrying amounts: Carrying amount of investment Group’s share of loss after tax for the period Acquisition costs 72 2021 2020 154,844 2,351,348 2,506,192 1,606,362 862,082 72,006 1,647,111 1,719,117 919,756 778,984 2,468,444 1,698,740 37,748 20,377 115,724 16,519 88,644 8,584 22,651 17,034 9,297 12,629 - 725 22,651 2,603 148 2,751 306 183 489 2,262 540 (632) 3,348 (352) 3,700 3,348 4,026 11,141 1,488 379 17,034 - - - - - - - - - - - - - NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202120. Trade and other payables In thousands of AUD Current Note 2021 2020 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 187,309 77,863 5,756 270,928 765,347 765,347 187,347 65,483 6,212 259,042 691,750 691,750 1,036,275 950,792 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 facilities Securitised funding facilities1 Non-current Securitised funding facilities1 2021 2020 886,000 637,920 1,615,500 203,515 1,523,920 1,819,015 1,933,792 1,933,792 1,095,547 1,095,547 3,457,712 2,914,562 1. Securitised funding facilities include RMBS and risk retention facilities Terms and debt repayment schedule Terms and conditions of outstanding loans were as follows: 2021 2020 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 1.83% 2021-2022 886,000 886,000 2.13% 2020-2021 1,615,500 1,615,500 Securitised funding facilities 1.43% 2021-2026 2,575,245 2,571,712 2.16% 2020-2024 1,294,978 1,299,062 3,461,245 3,457,712 2,910,478 2,914,562 73 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021(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 $363,500k (2020: $401,000k). The interest is recognised at an effective rate of 1.83% (2020: 2.13%). As at the reporting date we have two securitisation warehouse facilities, expiring on the 13 December 2021 and 10 April 2022. (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 1.43% (2020: 2.13%). 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 of $13,715k (2020: $5,640k). During the financial year there were no breaches to the terms of the SPE-RMBS that gave right to the bondholders to demand payment of the outstanding value. Other Securitised funding facilities Securitised funding facilities are secured only on the assets of each of the individual securitisation trusts. 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 2021 was $109,234k (2020: $38,304k). 74 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021(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 Provision other 2021 200 230 430 71 230 301 129 129 2021 3,094 1,449 1,620 6,163 120 120 2020 200 252 452 38 252 290 162 162 2020 2,421 1,317 1,358 5,096 98 98 6,283 5,194 2021 1,508 - 199 1,620 3,327 2020 1,089 1,488 210 - 2,787 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 referred to the contingent consideration payable (2020: $1,488k) in relation to the Thinktank strategic investment. No longer required due to 3-year period expiring at 30 June 2021. Released to the Statement of Comprehensive Income. 75 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202124. Contract liability Contract Liability In thousands of AUD Current Sponsorship income Unearned income 2021 8,400 281 8,681 2020 5,287 332 5,619 25. Leases The Group leases a number of office facilities under operating leases. The leases run for a period of up to 5 years, with an option to renew the lease after that date. Lease payments are generally increased every year to at least reflect Consumer Price Index (CPI) movements, with regular adjustments to reflect market rentals. Lease Assets In thousands of AUD At 1 July Additions Depreciation Carrying amount at 30 June Lease Liabilities In thousands of AUD At 1 July Additions Repayments Accretion of interest Carrying amount at 30 June In thousands of AUD Current Non-current Carrying amount at 30 June 2021 2020 6,323 125 (1,469) 4,979 6,806 1,134 (1,617) 6,323 2021 2020 6,559 125 (1,616) 294 5,362 2021 1,298 4,064 5,362 6,806 1,134 (1,723) 342 6,559 2020 1,292 5,267 6,559 Maturity profile of lease liabilities. The table below presents the contractual discounted cash flows associated with the Group’s lease liabilities, representing principal and interest. Maturity profile of lease liabilities Due for payment in: In thousands of AUD 1 year or less 1-2 years 2-3 years 3-4 years 4-5 years More than 5 years 76 2021 2020 1,298 1,275 1,348 1,239 202 - 5,362 1,292 1,236 1,242 1,348 1,239 202 6,559 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202126. Capital and reserves (a) Share capital The Company On issue at 1 July Issued for cash Share issue costs Share Capital ($’000) Number of Ordinary shares (’000) 2021 102,157 - (32) 2020 43,541 60,001 (1,385) 2021 267,741 641 - 2020 214,813 52,928 - On issue at 30 June – fully paid 102,125 102,157 268,382 267,741 The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are fully paid and rank equally with regard to the Company’s residual assets. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. (b) Dividends 2021 Final 2020 ordinary 1st interim 2021 ordinary 2020 Final 2019 ordinary 1st interim 2020 ordinary Declared but not recognised as a liability: 2021 Final 2021 ordinary Cents per share Total amount ($’000) Franked / unfranked Date of payment 4.7 5.9 5.9 5.4 7.4 12,614 15,835 28,449 12,719 11,640 24,359 19,860 19,860 100% 100% 29/09/2020 18/03/2021 100% 100% 03/10/2019 26/03/2020 100% 23/09/2021 2021 29,550 68,950 98,500 2020 18,379 42,885 61,264 Dividends declared or paid during the year or after 30 June 2021 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 $98,500k (2020: $61,264k) franking credits. 77 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202127. 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 2021 30 June 2020 51,304 38,078 Weighted average number of ordinary shares for basic EPS (thousands) Effect of dilution: Performance rights Weighted average number of ordinary shares adjusted for the effect of dilution Thousands Thousands 268,286 3,427 271,713 220,149 2,676 222,825 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, settled in equity, to certain Executives subject to the achievement of performance and service requirements. Eligible Executives are granted rights to a value determined by the Board that is benchmarked against direct industry peers and other Australian listed companies of a similar size and complexity. Executives participating in the plan will not be required to make any payment for the acquisition of rights. The rights lapse if the performance and service criteria are not met. The rights granted under the plan are subject to instalment vesting over a three-year period. The rights are subject to Total Shareholder Return (TSR) and Earnings Per Share (EPS) performance hurdles in addition to continuous service vesting conditions. The Board has the full discretion to determine whether some or all of the rights vest or lapse or whether unvested rights remain subject to vesting conditions in the event of a change of control. Refer to section 3.5 of the remuneration report for further detail. In any event, any rights that remain unvested will lapse immediately after the end of the relevant vesting period. The following table outlines performance rights that are conditionally issued under LTIP: Offer Date Vesting date Balance at start of the year Granted during the year Vested during the year Expired during the year Forfeited during the year Balance at end of the year 1/07/2016 30/06/2019 - 1/07/2017 30/06/2020 593,136 1/07/2018 30/06/2021 1,257,241 593,136 695,396 752,309 1/07/2019 30/06/2022 1,363,398 1,325,215 - - 755,176 640,635 1/07/2020 30/06/2023 1,987,804 1,349,079 746,4871 1. Number vested during the year is calculated on T1 72%, T2 150% and T3 150%. - - - - - - 593,196 31,291 91,953 1,257,241 1,363,398 146,753 1,987,804 99,789 2,652,246 78 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202129. 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. In thousands of AUD Current Non-Current Current Non-Current Standard & Poor’s Credit rating AA- A+ A A- BBB+ BBB BBB- Not rated (ii) Loans and advances Exposure to credit risk 2021 145,687 28,617 2,087 3,718 6,841 7,911 2,595 11,899 209,355 2021 585,419 114,993 8,388 14,940 27,490 31,790 10,429 47,809 841,258 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 41,830 764,735 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 2021 2020 3,393,462 2,912,074 2,613 7,027 3,199 5,500 3,403,102 2,920,773 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 $6,150,469k (2020: $5,145,814k). During the year ended 30 June 2021 the Group took possession of 4 residential securities. During the financial year 2 securities were sold as mortgagee in possession, neither experienced a shortfall, as sales proceeds exceeded the outstanding loan balance in both instances. 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. 79 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021The 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 2021 2020 395 17,417 498,752 2,876,898 3,393,462 403 37,528 421,061 2,453,082 2,912,074 1. LVR greater than 80% is required to have Lenders Mortgage Insurance (LMI), resulting in 100% of this balance being insured. COVID-19 economic impacts have continued to impact the likelihood of losses due to such things as increased unemployment and potential property price movements. These factors have been included in the ECL model which has seen the provision remain at $3,272k (2020: $3,272k). Given the dynamic and evolving nature of COVID-19 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. 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. 80 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202130 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 Underperforming 0.56% Lifetime expected losses Non-performing 2.08% Lifetime expected losses - Asset is written off Write off Total Loans 30 June 2021 2,638,147 2,636,820 Gross carrying amount 246,634 27,293 - 245,255 Gross Carrying amount 26,727 Amortised cost - None 2,912,074 2,908,802 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 0.09% 12 month expected losses 3,373,469 3,370,552 Gross carrying amount Gross Carrying amount 8,247 11,391 Amortised cost - None 8,305 11,688 - 3,393,462 3,390,190 Underperforming 0.71% Lifetime expected losses Non-performing 2.54% Lifetime expected losses - Asset is written off Write off Total Loans 30 June 2020 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 81 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202130 June 2021 In thousands of AUD Performing Under performing Non- performing Write off Total Opening loss allowance as at 1 July 2020 1,326 1,379 567 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 (4) (2) 852 - 771 (26) Closing loss allowance as at 30 June 2021 2,917 4 (25) - - (607) (692) 59 - 27 - - (106) (192) 296 - - - - - - - - 3,272 - - 852 - 58 (910) 3,272 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 2021 30 June 2020 3,373,469 2,638,147 8,305 11,688 - 246,634 27,293 - 3,393,462 2,912,074 (3,272) - (3,272) - 3,390,190 2,908,802 The reconciliation of opening and closing expected credit losses on loans and advances are as follows: In thousands of AUD 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 82 30 June 2020 Movement 30 June 2021 1,326 1,379 567 3,272 1,591 (1,320) (271) - 2,917 59 296 3,272 30 June 2021 30 June 2020 3,272 1,591 (1,320) (271) 3,272 757 877 1,273 365 3,272 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021 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 2021 (2020: Nil). Other secured loans The Group has minimal exposure to credit risk for loans made during the year. No impairment loss was recognised during 2021 (2020: Nil). (b) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Board of Directors reviews the rolling cash flow forecast on a monthly basis to ensure that the level of its cash and cash equivalents is at an amount in excess of expected cash outflows over the proceeding months. Excess funds are generally invested in at call bank accounts with maturities of less than 90 days. Within the special purpose entities, the Group also maintains sufficient cash reserves to fund redraws and additional advances on existing loans. The following are the contractual maturities of financial liabilities based on undiscounted payments, including estimated interest payments and excluding the impact of netting agreements for the Group. Carrying amount Contractual cash flows 6 months or less 6-12 months 1-2 years 2-5 years More than 5 years 886,000 908,521 757,157 151,364 - - Secured funding facilities1 2,571,712 2,588,960 373,775 308,304 616,892 1,289,989 952,656 1,114,848 128,927 116,890 200,338 399,233 269,460 83,619 5,362 83,619 83,619 5,362 649 - 649 - - 1,275 2,789 - - 4,499,349 4,701,310 1,344,127 577,207 818,505 1,692,011 269,460 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 - - - - - - 2021 In thousands of AUD Securitisation warehouse facilities Net present value of future trail commissions payable Trade and other payables Lease liability 1. Excludes set up costs amortisation 2020 In thousands of AUD Securitisation warehouse facilities 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 Trade and other payables Lease liability 1. Excludes set up costs amortisation 879,096 1,036,190 120,658 109,695 189,051 377,219 239,567 71,696 6,559 71,696 71,696 6,559 646 - 646 - - 1,236 3,829 - 202 3,871,911 4,075,126 1,659,946 495,584 443,872 1,235,955 239,769 83 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021The 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 the Group’s warehouse facilities are the 13 December 2021 and 10 April 2022. The Group has a history of successfully renegotiating the warehouse facility agreements prior to the expiry of the facility. Securitised funding facilities The securities are issued by the SPE-RMBS with an expected weighted average life of 3 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. (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 Cash and cash equivalents Other secured loans Securitised assets Financial liabilities Carrying amount 2021 2020 1,050,613 (952,656) 97,957 226,048 2,843 974,599 (879,096) 95,503 161,528 3,423 3,400,259 2,917,349 (3,457,712) (2,914,562) 171,438 167,738 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. 84 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021Cash flow sensitivity analysis for variable rate instruments Due to the market conditions existing at 30 June 2021, 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 2020 and 2021. Effect in thousands of AUD 100bp increase 100bp decrease 100bp increase 100bp decrease After tax profit After tax equity 30 June 2021 Variable rate financial assets Variable rate financial liabilities Cash flow sensitivity (net) 30 June 2020 Variable rate financial assets Variable rate financial liabilities Cash flow sensitivity (net) (iii) Prepayment risk 25,384 (8,860) 16,524 21,538 (16,155) 5,383 (25,384) 8,860 (16,524) (21,538) 16,155 (5,383) 25,384 (8,860) 16,524 21,538 (16,155) 5,383 (25,384) 8,860 (16,524) (21,538) 16,155 (5,383) 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 Securitised assets 2021 +5% (3,091) -5% 3,275 2020 +5% (2,894) -5% 3,058 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. 85 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021(d) Accounting classifications and fair values Fair value hierarchy The different levels have been defined as follows: • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). Fair value of financial assets and liabilities that are not measured at fair value (but fair value disclosures are required) 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 2021 30 June 2020 Financial assets Non-current loans and advances 2,563,585 2,555,880 2,464,989 2,457,168 Financial liabilities Future Trailing commission payable1 Non-current securitised funding facilities 952,656 1,933,792 984,195 1,863,255 879,096 1,095,547 917,984 1,086,130 1 Note 4% (2020:4%) 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 2.2% to 6.8%, (2020: 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 2021 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. 86 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021The key assumptions/inputs 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 Between 3.1 and 5.0 years Between 3.2 and 5.1 years Discount rate per annum Between 4% and 13.5% Between 4% and 13.5% Percentage paid to brokers Between 85% and 94.3% Between 85% and 94% 30 June 2021 30 June 2020 Securitised funding facilities 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 0.9% to 1.9%. 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. 30. Group entities 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 Trust2 AFG 2020-1 NC Trust2 AFG 2021-1 Trust2 AFG 2010-2 Pty Ltd AFG 2010-3 Pty Ltd New Zealand Finance Group Ltd1 AFG Home Loans Pty Ltd Investment in associates Thinktank Group Pty Ltd MAB Broker Services Pty Ltd3 Country of incorporation Percentage Ownership interest 2021 2020 Australia 100 100 Australia Australia 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 - - - 100 100 100 100 Australia Australia 32.29 48.05 32.81 - 1. New Zealand Finance Group Ltd was deregistered during the year ended 30 June 2021. 2. AFG 2020-1 Trust, AFG 2021-1 Trust and AFG 2020-1 NC Trust were incorporated during the year ended 30 June 2021. 3. The Group invested in MAB Broker Services Pty Ltd during the year ended 30 June 2021. 87 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021Additional 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% (2020: 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 20% (2020: 24%). 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 2016-1 • AFG 2017-1 • AFG 2018-1 • AFG 2019-1 • AFG 2020-1 • AFG 2020-1 NC 2021 22,521 450 560 700 3,930 3,325 4,750 2020 32,113 450 560 700 3,930 - - 1. The level of subordination subscribed by the company will increase or decrease over time depending upon a number of factors including the size of the warehouse or RMBS term structure as well as the ratings methodology used for these warehouse facilities Other Holders of RMBS are limited in their recourse to the assets of the Securitisation vehicle (subject to limited exceptions). AFG Group companies may however incur liabilities in connection with RMBS which are not subject to the limited recourse restrictions (for example where an AFG Group company acts as a trust manager or servicer of a Securitisation vehicle). 88 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202131. Parent entity Throughout the financial year ending 30 June 2021, the parent Company of the Group was Australian Finance Group Limited. In thousands of AUD Results of the parent entity Profit for the period 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 2021 2020 34,139 34,139 34,992 34,992 2021 2020 261,616 265,200 1,146,199 1,068,818 225,897 1,002,851 102,125 4,423 36,800 143,348 231,929 933,048 102,157 2,504 31,109 135,770 See Notes 32 and 33 for the parent entity capital and other commitments, and contingencies. 32. Capital and other commitments There are no capital commitments as at the reporting date. 33. Contingencies Third Party Guarantees Bank guarantees have been issued by third party financial institutions on behalf of the Group and its subsidiaries for items in the normal course of business such as operating lease contracts. The amounts involved are not considered to be material to the Group. Other than above, no material claims against these warranties have been received by the Group at the date of this report, and the Directors are of the opinion that no material loss will be incurred. 34. Related parties (a) Other related parties A number of key management personnel held positions in other entities that result in them having control over the financial or operating policies of these entities. A number of these entities transacted with the Group in the reporting period. The terms and conditions of the transactions with the other related parties were no more favourable than those available, or which might reasonably be expected to be available, on similar transactions to non-key management personnel related entities on an arm’s length basis. 89 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021The aggregate amounts recognised during the year relating to other related parties were as follows: (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 $837k (2020: $1,038k). 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 the property business prior to listing on the ASX on 22 April 2015. Directors of EPG include B. McKeon, D. Bailey and L. Bevan. 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 $1,150k which has been paid to Qube (2020: $1,076k). In addition to the above McCabe Street Ltd has an outstanding loan owing to AFG amounting to $230k (2020: $224k), this loan is on commercial terms at arms-length. Directors of McCabe Street Ltd include B. McKeon, D. Bailey and L. Bevan. (b) Compensation of key management personnel of the Group In thousands of AUD Short term employment benefits Post-employment pension and medical benefits Share based payment transactions Other long-term benefits Total compensation of key management personnel of the Group 2021 2,327 100 1,002 46 3,475 2020 2,080 96 727 21 2,924 The amounts disclosed in the table are the amounts recognised as an expense during the reporting period related to key management personnel. (c) Subsidiaries 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. (d) Associates In thousands of AUD Associate Thinktank MAB 30 June 2021 30 June 2020 Commissions from related parties Commissions to related parties Commissions from related parties Commissions to related parties 2,370 - - 1,383 2,248 - - - The amounts disclosed in the table are the amounts recognised as commission income and commission expense during the reporting period related to associates. 90 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 202135. Subsequent events On 12 July 2021, the Group successfully acquired an 8.04% interest in Volt Corporation Limited (“Volt”), and entered into a strategic alliance with Australia’s first neobank. On 23 July 2021, the Group noted the expiry date of the Connective merger. The Connective merger is unlikely to proceed due to the length of time the Connective court case judgment has taken to date. On 26 August 2021, the Directors recommended the payment of a dividend of 7.4 cents per fully paid ordinary share, fully franked based on tax paid at 30%. The dividend has a record date of 7 September 2021 and a payment date of 23 September 2021. The aggregate amount of the proposed dividend expected to be paid out of retained earnings at 30 June 2021 is $19,860k. The financial effect of this dividend has not been brought to account in the financial statements for the year ended 30 June 2021. There has not been any matter or circumstance, other than that referred to in the financial statements or notes thereto, that has arisen since the end of the financial year, that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in future financial years. 91 NOTES TO THE FINANCIAL STATEMENTS (continued)Annual Report 2021Director’s 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 2021 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 26 August 2021 92 DIRECTOR’S DECLARATIONAnnual Report 2021Independent 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 2021, 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 2021 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:156 93 Annual Report 2021 Page 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 continued 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 continued 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 the continued 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 the continued impacts 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 94 INDEPENDENT AUDIT REPORT (continued)Annual Report 2021 Page 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 95 INDEPENDENT AUDIT REPORT (continued)Annual Report 2021 Page 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 2021 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 96 INDEPENDENT AUDIT REPORT (continued)Annual Report 2021 Page 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 97 INDEPENDENT AUDIT REPORT (continued)Annual Report 2021 Page 6 Report on the audit of the remuneration report Opinion on the remuneration report We have audited the Remuneration Report included in pages 27 to 41 of the directors' report for the year ended 30 June 2021. In our opinion, the Remuneration Report of Australian Finance Group Limited for the year ended 30 June 2021, 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 26 August 2021 A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation 98 INDEPENDENT AUDIT REPORT (continued)Annual Report 2021 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 30 July 2021. (a) Number of holders of equity securities Ordinary share capital 268,382,396 fully paid ordinary shares are held by 6,519 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 219,933,448 33,646,820 7,670,784 6,194,679 936,665 268,382,396 14,358 % 81.95 12.54 2.86 2.31 0.35 100 0.01 No. of holders 78 1,365 1,007 2,289 1,780 6,519 193 % 1.20 20.94 15.45 35.11 27.30 100 2.96 *An unmarketable parcel is considered to be a shareholding of 193 shares or less, being a value of $500 or less in total, based on the Company’s last sale price on the ASX at 30 July 2021 of $2.59 (c) Substantial shareholders The names and the number of securities held by substantial shareholders are set out below: 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 17,493,656 16,310,694 14,788,765 6.52% 6.08% 5.51% 99 SHAREHOLDER INFORMATIONAnnual Report 2021(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> BNP PARIBAS NOMINEES PTY LTD BNP PARIBAS NOMS PTY LTD INVIA CUSTODIAN PTY LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED ASSURED FINANCIAL SERVICES PTY LTD ADRIEN MANN (SOUTH PACIFIC) PTY LTD EDI NOMINEES PTY LTD ANGELA MIDDLETON LISA BEVAN EGMONT PTY LTD NOLDEX PTY LTD NATIONAL NOMINEES LIMITED CS FOURTH NOMINEES PTY LIMITED 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 54,038,846 41,199,304 29,081,825 18,145,498 16,310,694 14,788,765 12,345,025 5,083,570 3,356,243 2,743,637 2,728,738 2,060,000 1,110,000 1,060,000 1,000,000 1,000,000 960,714 835,000 653,305 545,293 % of issues capital 20.14 15.35 10.84 6.76 6.08 5.51 4.60 1.89 1.25 1.02 1.02 0.77 0.41 0.39 0.37 0.37 0.36 0.31 0.24 0.20 100 SHAREHOLDER INFORMATION (continued)Annual Report 2021 CORPORATE DI RECT ORY 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 (Nom-Executive Director) Jane Muirsmith (Non-Executive Director) Company Secretary Lisa Bevan (Company Secretary) Notice of AGM The annual general meeting of Australian Corporate Office Share Registry Australian Finance Group Limited Link Market Services Finance Group Limited will be held on Friday Level 4 26 November 2021 at 9.00am WST at Level 4, 100 Havelock Street, West Perth WA 6005. 100 Havelock Street West Perth WA 6005 Postal Address PO Box 710 West Perth WA 6872 Phone 08 9420 7888 Email 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 registrars@linkmarketservices.com.au Website Stock Listing www.afgonline.com.au Australian Finance Group Limited’s ordinary shares are listed on the Australian Securities Exchange (ASX code: AFG). 101 Annual Report 2021This 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

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