Australian Ethical Investment
Annual Report 2011

Plain-text annual report

australianethical ANNUAL REPORT TO SHAREHOLDERS Year ended 30 June 2011 1800 021 227 • www.australianethical.com.au australianethical investment + superannuation ® Contents Chair and Managing Director’s report Financial summary to 30 June 2011 Community grants Corporate governance statement 2011 Directors’ report Directors’ particulars Directors’ meetings Remuneration report Financial statements Shareholder information Corporate directory 3 6 7 8 13 15 16 19 29 62 63 Chair and Managing Director’s report Over the course of the past year we have put in motion a number of changes that are all about repositioning the company to operate in this changing environment. None of these changes affect the core vision of the business and what we represent as an ethical organisation. These are challenging times for all financial services companies. However, these are also times in which many opportunities are presenting themselves. Australian Ethical is a unique ‘true to label’ company with a special point of difference that sets it apart from others. We are confident that with the right skills and attitude we will continue to carve out a special place in the investment and retirement landscape. Financial results Australian Ethical recorded a net profit after tax of $1.3 million for the year to 30 June 2011, 25% higher than that recorded in the previous comparable period. Funds under Management (FUM) increased 4.9% to $644 million at 30 June 2011. A final fully franked dividend of $1.00 per share was paid on Friday 7 October 2011, resulting in a full year dividend of $1.45. In addition, following a review of the balance sheet, the future capital requirements of the business and other issues, the Board paid a special dividend of $0.25 per share. Funds under management Total revenue Total expenses Operating profit Community grants Depreciation/amortisation/ rights/options Tax Net profit after tax Dividends paid Earnings per share 2010 Change 2011 $M 644 15.1 (12.4) 2.7 (0.153) (0.677) $M 614 14.1 (11.7) 2.4 (0.125) (0.676) (0.665) (0.583) 1.3 $1.70 $1.29 1.0 $2.00 $1.03 5% 8% (6%) 15% 22% 0% (14%) 25% Comments on financial results As described above, funds management and superannuation companies currently face one of their most challenging environments for many years due to the following external factors: • global markets continue to be volatile leading to subdued valuations of portfolios and hence revenues based on funds under management; • net flows to managed funds are under pressure across the industry due to investors’ continued nervousness with investing in the market as well as a trend generally toward investing directly and outside of the managed fund environment; 3 Phillip Vernon Managing Director André Morony Chair Dear Shareholders We are delighted to present the ninth annual company report of Australian Ethical. Australian Ethical continues to be the most deeply committed ethical fund manager in Australia with all of our business and investment activities guided by the principles of the Australian Ethical Charter. Our clients save and invest with us knowing that they are putting their money to work for a better world. Having strong ethical principles at the core of everything we do is a powerful uniting and motivating force for our clients, our staff and our shareholders. The market in which we operate is going through extraordinary change. Global markets continue to be extremely volatile and uncertain whilst at the same time regulatory change in financial services is impacting fees, revenues and how firms package and sell their products and services. These forces are significantly influencing how we operate and how we plan for the future. The way in which the company has operated in the past has served it well. However we need to be aware of the forces at work around us and adapt our business accordingly to mitigate the risks and take advantage of opportunities that present themselves. First and foremost, we need to grow. Growing our business will make us much more influential to bring about change in the world as well as giving us the scale we need to prosper in a rapidly evolving environment. In order to grow we need to increase our reach and access to our investors. There are many potential investors who wish to invest with us but can’t because they cannot access us. And in order to give us this reach we need to be far more connected to the markets in which we operate. These are largely external considerations. Internally we need to simplify our business as we are far too complex a business for our size. We need to continue to invest to make our business more robust. We manage nearly $700 million of investors’ funds which requires systems, processes and skills of both staff and board members that are appropriate for that level of responsibility. Therefore we need to invest in the skills and talent of our people and reward them appropriately as it is our people that will get us to where we need to go. AUSTRALIAN ETHICAL INVESTMENT LTD• regulatory changes are leading to an environment where up-front fees are disappearing and the relationship with advisers is evolving. The following summary of the company’s results should be read with these dynamics in mind. • Funds under management increased by $30.3 million, $21.6 million due to net inflows and $8.7 million due to market movements. • Net inflows of $21.6 million reflected positive inflows of $31.4 million to our superannuation fund (up from $27.9 million last year) offset by $9.8 million of net outflows from our managed funds products ($4.9 million net inflow last year). This pressure on managed funds outflows is occurring across the industry. • Revenues increased by $1.1 million representing an increase of 8% over the previous year. A significant impact on revenue for the year was the acquisition fee paid by the Australian Ethical Property Trust for the purchase of Lawley House. Removing this transaction leads to underlying revenue growth of 1%, which is lower than the growth in funds under management. This slower revenue growth is due to a reduction in fees on inflows and an overall reduction in our average revenue margin due to a greater portion of our business coming from the wholesale investment market. • Operating expenses increased by $0.7 million, an increase of 6% over the previous year. Total expenses included costs associated with employment restructures during the year of $445,000. • After adjusting for employment restructure costs, employment costs increased by 2% being largely due to a general wages and salary increase provided to staff half way through the year. • Superannuation administration costs increased by 17%. This reflects a 4% increase in average member numbers and a 7% increase in administration charges under the contract. • Other increases in expenses reflect increased investment in information technology and connectivity to more efficiently perform our core investment management and client service functions. Increased depreciation related to office fit outs and video conferencing facilities have also impacted on the result. Community grants Under our constitution 10% of operating profit (after notional tax) is donated to charitable, benevolent and conservation causes. In 2011 grants of $152,802 will be made bringing our total community grants to almost $1.3 million. We continue to be very proud of our commitment to our community and strive to increase our level of non-financial involvement also. Investment performance The broad Australian share market was positive for the year to 30 June 2011, returning 11.7%. International share markets also performed well, but the strong Australian dollar diminished our overseas returns. These positive returns were despite continued market volatility caused by the debt concerns in Europe and the US. Although we are pleased that the majority of our funds achieved positive returns, it was a tough year for ethical investments due to the outperformance of sectors not typically in the portfolios such as resources and few outperformed their respective mainstream benchmarks. However, our long term performance remains very strong and we continue to be well positioned within investment markets and, with an increased awareness of ethical issues such as climate change, there is a growing recognition amongst investors of the need to invest and save in a more ethically positive way. Comments on business operations Restructure of Sales and Marketing Our sales and marketing area has been successfully restructured with the employment of two new executives in the senior management team and a realignment of team responsibilities to enhance synergies between sales, marketing and client relationship management. Adam Kirk joined us in August 2011 to lead the business development and client relationship team. Adam has a background in leading similar teams with Colonial First State, Skandia and Catholic Super. Paul Smith joined us in July 2011 to lead our product strategy, marketing and communications. Paul has a background in asset consulting, investment analysis and marketing with the likes of Schroders, Invesco and Carbon Planet. Founders During the year two of the founders of Australian Ethical, Howard Pender and James Thier left their executive positions after many years of service. James and Howard were both involved with the company when it was founded in 1986 and have each contributed enormously to its success over the years. We thank them for all their contribution and efforts. Client service improvements We continue to make improvements to our client service function, a core area of the business. During the course of the year we commenced a proactive sales follow up and relationship management program. We also in-sourced our superannuation call centre from our service provider, Pillar. All initial calls are now managed by Australian Ethical leading to a more consistent client service experience. 4 AUSTRALIAN ETHICAL INVESTMENT LTDOutlook, strategy and focus Despite the uncertainty in investment markets and the changing regulatory environment, we remain positive and optimistic for the future for Australian Ethical. We have responded to this new environment with some internal restructurings and have maintained good profitability through this period of change. Our three year focus is to strengthen the growth of our superannuation product, retain our position within non-super investments, broaden our client reach and simplify and streamline our business and ensure that it is operationally robust. We aim for a culture that is excellent inz our four core areas of ethical analysis, client service, investment performance and operational support. We thank all shareholders for your continued support and look forward to the coming year with a clear strategy, strong focus and optimism. Phillip Vernon Managing Director André Morony Chair Marketing improvements We have made a number of improvements in the way in which we market and service our products to clients. We have made significant improvements to the interactivity and ease of use of the website including allowing individuals and employers to join our superfund online. This has resulted in an almost doubling of our new client uptake on a monthly basis. We are implementing a co-ordinated social media strategy and improved the targeting of advertising to our audience, which has led to better coverage at lower cost; halving our marketing acquisition cost per new client. Climate Advocacy Fund Our Climate Advocacy Fund had its first full year of operation and put three resolutions to companies to improve their carbon emissions disclosure and performance. Resolutions were put to Aquila, Paladin and Woodside. The Climate Advocacy Fund also engaged with Oil Search but did not formally put a resolution to Oil Search’s AGM. Of these, we consider we obtained a positive outcome from Aquila, Paladin and Oil Search. Whilst Woodside didn’t accede to our request we obtained a 6% vote in support of our resolution, far in excess of our investment. Implementation of Garradin system During the year we substantially completed the implementation of the Garradin portfolio administration system with further phases of integration continuing. This project was a significant project for the company and was part of an ongoing program to replace legacy in-house developed systems and improve the robustness of our operations to a level appropriate for a regulated funds management and superannuation organisation. 5 AUSTRALIAN ETHICAL INVESTMENT LTDFunds under management Years $ million 2007 2008 2009 2010 2011 610 572 547 614 644 Financial summary to 30 June 2011 Revenue Years $ million 2007 2008 2009 2010 2011 12.5 14.1 13.1 14.1 15.1 Funds under management Funds under management 610 614 644 572 547 n o i l l i Revenue Revenue 14.1 13.1 14.1 12.5 15.1 16 14 12 10 8 660 640 620 600 580 560 540 520 500 480 $ million n Profit after tax o i l l i Years m $ 2007 2008 2009 2010 2011 Basic earnings per share Years 1 i l l i n o $ m $ 2007 2008 2009 2010 2011 0.5 0 1.95 1.70 1.22 1.03 1.29 2007 1.8 1.7 1.2 1.0 2007 1.3 2008 2009 2010 2011 As at 30 June Profit after tax (NPAT) Profit after tax (NPAT) 1.8 1.7 2 1.5 1.2 1.0 1.3 m $ Dividends Paid Years 4 $ 6 1.92 1.65 1.47 2.00 1.70 2007 2008 2009 2010 2011 Year ending 30 June Dividends paid Dividends paid 1.92 1.65 1.47 2.00 1.70 2 0 2007 2008 2009 2010 2011 2.00 1.50 $ 1.00 Return on equity 0.50 % Years 2008 2009 2010 2011 Year ending 30 June 0.00 2007 2008 2009 2010 2011 26.1 20.6 18.8 12.5 17.1 2007 2008 2009 2010 2011 Year ending 30 June Basic earnings per share Return on equity Basic earnings per share Return on equity 1.95 1.70 1.22 1.29 1.03 2.00 1.50 $ 1.00 0.50 0.00 26.1 20.6 18.8 17.1 12.5 30.0 25.0 20.0 $ 15.0 10.0 5.0 0.0 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Year ending 30 June Year ending 30 June Community grants 0 0 0 5 3 $ 0 0 0 5 $ Carpets for communities Men of the Trees Children’s Hospital Westmead ACT Eden Monaro Cancer Support Group Brighter Future 4 Kids Foundation Room to Read Australia Foundation Royal Guide Dogs for the Blind Assoc Bikes for Humanity 0 0 0 4 $ Dhimurru Aboriginal Corporation Australian Afghan Hassanian Youth Assoc Diamond Valley Foodshare Rainforest Rescue Liverpool Plains Land Management 0 0 6 3 $ Arthritis & Osteoporosis Assn of NT Animal Rescue Qld Barefoot Economy Kokoda Track Foundation Free the Bears Foundation Environment Victoria Cranbourne Police Senior Citizens Register Australia Zoo Wildlife Warriors Australian Platypus Conservancy A full description of all the grant recipients is available on the website www.australianethical.com.au Grants to community organisations As prescribed in Australian Ethical’s constitution, 10 per cent of our profit is donated to charitable, benevolent and conservation purposes as part of our contribution to a positive and sustainable society. Australian Ethical has donated more than $150,000 to 22 charities as part of its 2011 community grants scheme. This brings the total amount gifted to communities over the last 11 years to more than $1.28 million. Australian Ethical donates 10 per cent of its company profit each year through its community grants scheme. This is one of the highest levels of corporate giving in Australia based on percentage of profits. This year’s grants range in size from $3600 to $35,000 and include donations to charities that work across Australia and overseas. The successful organisations were chosen from more than 300 applicants. Volunteers planting in the Morbinning wheatbelt A family in Poipet, Cambodia involved in the Carpets for Communities scheme 7 AUSTRALIAN ETHICAL INVESTMENT LTDCorporate governance statement 2011 This statement has been prepared with reference to the second edition of the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations with 2010 Amendments (“Principles and Recommendations”) and discloses the extent to which Australian Ethical Investment Ltd (“Company”) has followed the Principles and Recommendations during the reporting period. The principles and recommendations provide a framework for good governance set out in eight core principles and 33 specific recommendations. This statement will be placed on the corporate governance section of the Company’s website. Principle 1 - Lay solid foundations for management and oversight The Company has formalised the functions reserved to the Board and those delegated to management. Board responsibilities The Board is directly responsible for the following activities. • Setting the strategic direction of Australian Ethical • Annual appraisal of the Board • Approval of Board committee fees • Recommendation to shareholders on the aggregate level of directors’ fees • Approval of individual director fees • Appointment and removal of the CEO • Annual appraisal of the CEO • Authorisation of the issue of the Trust PDS • Approval of risk management and compliance programs • Approval of significant company policies • Approval of indemnity, crime, director and officer and similar insurance programs • Protection and promotion of the Australian Ethical Charter The Board makes the following general delegations. Chair of the Board The Chair is delegated with all necessary authority to carry out the following functions: Inside the boardroom • Acting as the link between the board and the company when the CEO is unable to perform this role; • Establishing and maintaining an effective working relationship with the CEO; • Setting the tone for the board, including the establishment of a common purpose; • Chairing board meetings efficiently and shaping the agenda in relation to goals, strategy, budget and executive performance; • Work with the Company Secretary and CEO to ensure that appropriate information is presented to the Board; • Ensuring contributions by all board members and reaching consensus when making decisions; • Motivating board members and where appropriate dealing with underperformance; • Approval of the annual operational and capital expenditure budget and any material revisions • Instituting the process for appraising board members individually and the board as a whole; • Approval of major contracts, acquisitions or disposals • Overseeing conducting and finalising negotiations for the which have not been approved in the budget CEO’s employment and evaluating the CEO’s performance; • Authorisation of Board project expenditure • Assisting with the selection of board committee members. • Accept and sign-off of the annual audited accounts and directors’ report for the Australian Ethical group Outside the boardroom • Approval of the issue of shares and options • Communicating with shareholders on matters of corporate • Approval of significant changes to unit trust fees, including discount programs • Approval of significant changes to products or product offerings • Approval of the constitutional bonus and tithe amounts • Approval of the terms and conditions for any employee share ownership scheme, or if shareholder approval is required, approval of recommendations to shareholders • Approval of employee performance based remuneration programs • Approval of dividend payments and any DRP 8 governance; • Chairing shareholder meetings – annual and extraordinary general meetings (AGMs and EGMs); • Ensuring compliance with ASX Listing Rules and continuous disclosure requirements; • • Increasingly, being available to speak with large institutional investors; In conjunction with the CEO, communicating Board views to staff. AUSTRALIAN ETHICAL INVESTMENT LTDBoard Committees Board committees are delegated with all necessary authority to carry out their functions as set out in Board committee charters. • where remuneration is subject to the achievement of performance hurdles, the achievement of those hurdles is reviewed and the amount of any performance based remuneration is determined. CEO The CEO is delegated with all necessary authority to run Australian Ethical on an ongoing, day to day basis other than: • those responsibilities reserved to the Board; • delegations (general or specific) made by the Board to the Chair, Board committees, Directors or other senior executives, Specifically the CEO is delegated with responsibility and authority for the following: • • Implementing the strategic direction set by the Board; Implementing the risk management and compliance programs approved by the Board; • Approval and maintenance of Expenditure and Payment Guidelines; • Approval and maintenance of Employee Authorisations; • Employment, termination and suspension of staff; • Employee remuneration; • Employee policies and procedures. The above responsibilities and delegations are made public through the publication of this statement and its inclusion in the corporate governance section of the Company’s website. Evaluating the performance of senior executives The performance of executives is evaluated in accordance with the Company’s annual performance review guidelines. For the CEO, the review is conducted by the Chair. For other senior executives, the review is undertaken by the CEO. The process is as follows: • • • the CEO completes a draft annual performance review and provides it to the executive; the CEO and the executive then discuss the draft annual performance review. The discussion covers key responsibilities, overall performance, key behaviours, a review of achievements against the year’s objectives, objectives for the coming year, aspirations and areas for improvement; competencies and qualifications are also reviewed to ensure they remain applicable to the position. If not, a training program is developed to bring the executive to the appropriate level; and ¹As defined in section 9 of the Corporations Act 2001 Director Status James Thier Howard Pender Naomi Edwards (Chair) Non-independent/ Executive Non-independent/ Executive Independent/NED Justine Hickey Independent/NED Les Coleman Non independent/ NED André Morony Independent/NED Phillip Vernon Stephen Newnham Non-independent/ Executive Independent/NED Retired at the conclusion of the AGM – 17 November 2010 Resigned on 23 March 2011 Appointed Chair from 23 March 2011 Appointed to Board and Managing Director on 27 July 2010 Appointed 20 December 2010 An evaluation of the performance of senior executives was undertaken in the financial year in accordance with the process described above. In respect of the CEO, the process is for the Chair to present the results of the review to the Board. The Board then has an opportunity to provide feedback to the CEO and to consider recommendations from the Chair on the CEO’s remuneration package. Principle 2 - Structure the board to add value Independent directors The Company regards an independent director as a director who is not a member of management (i.e. a non-executive director) and who: 1. is not a substantial shareholder or an officer of, or otherwise associated directly with, a substantial shareholder of the Company; 2. has not within the last three years been employed in an executive capacity by the Company or another group member, or been a director after ceasing to hold any such employment; 3. within the last three years has not been a principal or employee of a material professional adviser or a material consultant to the Company or another group member, or an employee materially associated with the service provided; 9 AUSTRALIAN ETHICAL INVESTMENT LTD4. is not a material supplier or customer of the Company or other group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; 5. has no material contractual relationship with the Company or another group member other than as a director of the Company; 6. has not served on the Board for a period which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the Company; 7. is free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the director’s ability to act in the best interests of the Company. The list above reflects the relationships set out as relevant in the Principles and Recommendations. Unless there are specific qualitative factors relevant to the relationship, the Board is generally of the view that a quantitative materiality threshold arises at 10% of the relevant amount – considered from both the Company’s perspective and that of the other party. The classification of directors who held office during or since the end of the financial year is as follows: The Board was evenly balanced between independent and non-independent directors during the reporting period and thus did not comprise a majority of independent. On 1 July 2010 the Board comprised four non executive directors (however, only three are considered independent) and two executive directors. Over the course of the reporting period, whilst the Board’s composition changed, the overall mix remained at four non executive directors (three of whom are considered independent) and two executive directors. Les Coleman serves on an investment committee that has responsibilities for funds invested by related parties of SMF Funds Management Limited, which is a substantial shareholder in the Company. As such he is associated with a substantial shareholder (albeit in a limited way), and therefore given the above criteria is not classified as an independent director. Over time the board has moved from one dominated by executives to one more consistent with the ASX guidelines. The board’s approach to composition is to maintain a good long term balance between executive and non-executive / independent directors, with the right mix of independence, competence and alignment with the Australian Ethical Charter. With the prior approval of the Chair, each director has the right to seek independent legal and other professional advice at the Company’s expense on any aspect of the Company’s operations or undertakings in order to fulfil their duties and responsibilities as directors. Chair of the Board Both Naomi Edwards and Andre Morony, the two Chairs during the reporting period, are considered to be independent directors. Nomination committee The Board has a People, Remuneration and Nominations committee. Naomi Edwards and Justine Hickey were the members of the committee at the commencement of the reporting period. Following Naomi’s resignation the committee is now comprised of Andre Morony and Justine Hickey. Attendance at meetings is detailed in the directors’ report. A summary of the committee’s charter is available from the corporate governance section of the Company’s website. Board and director evaluation The directors undertake an annual self-assessment of their collective and individual performance and seek feedback from the senior management team. A questionnaire concerning Board and individual performance is completed by each director in respect of themselves and for each other director and the results collected by the Chair. The Board as a whole then considers and discusses the results of the questionnaire at a Board meeting. The Chair also talks to each director individually about their performance and generally on the evaluation and comments received from their peers. The results of the questionnaire are examined from both a qualitative and quantitative perspective. Where discussed at a Board meeting, results and any action plans are documented in the minutes. An assessment in accordance with the above process was undertaken in the relevant period. Director skills and experience The time in office, skills, experience and expertise of each director in office as at the date of this report is included in the directors’ report. Selection and appointment of directors and re-appointment of incumbents The People, Remuneration and Nominations committee has the following responsibilities: • • assess the necessary and desirable competencies of directors; ensure the directors have the appropriate mix of competencies to enable the Board to discharge its responsibilities effectively; • develop Board succession plans to ensure an appropriate balance of skills, diversity, experience and expertise is maintained; • make recommendations to the Board relating to the appointment and retirement of directors. The People, Remuneration and Nominations committee considers the above responsibilities, the current Board composition, any nominations or suggestions for directorship and the assessment of incumbent directors when making recommendations to the Board on composition on an annual basis. 10 AUSTRALIAN ETHICAL INVESTMENT LTDIn selecting an external auditor the Board seeks competence, industry experience, integrity and independence. In normal circumstances, appointment of the external auditor will typically continue for a significant number of years. Rotation of external audit engagement partners occurs in accordance with the rotation requirements of the Corporations Act 2001. Principle 5 - Make timely and balanced disclosure The Company has written policies and procedures designed to ensure compliance with the ASX Listing Rule disclosure requirements and accountability at senior executive level for compliance. The disclosure policy appears in the corporate governance section on the Company’s website. Principle 6 - Respect the rights of shareholders The Company does not have a separately documented policy for shareholder communication. However, the website includes comprehensive and informative sections which provide shareholders (and others) with up-to-date information about corporate activities, including company announcements. A facility is available to shareholders to be advised via e-mail when announcements are made. The Company’s website also provides shareholders with guidance on a range of issues concerning the management of their shareholdings. The Company has a regular sequence of communication points with investors and members including a newsletter, Aim High, for trust and superannuation investors, and since listing the Company has also produced a shareholder newsletter. It has revised its annual general meeting arrangements to promote participation and dissemination of information and has ensured access to the external auditor at these meetings. The Company also produces a sustainability report for shareholders and other stakeholders on its triple bottom line performance (available on the Company’s website). The sustainability report is produced using the Global Reporting Initiative guidelines. The Company complies with the corporate governance guidelines for notices of meeting. Principle 3 - Promote ethical and responsible decision making Code of conduct The Company has a code of conduct which applies to directors and staff. It is available on the Company’s website. Share trading The Company has a share trading policy which applies to directors and staff. It was released to the ASX on 22 December 2010 and is available on the Company’s website. Diversity The Company has a draft diversity policy that will include measurable objectives for achieving gender diversity and require annual assessment against the objectives and progress in achieving them. It is anticipated that this draft policy will be finalised by the Board in November 2011. Principle 4 - Safeguard integrity in financial reporting Audit committee Throughout the period, the Board had an Audit committee consisting of three members being one external member (Ruth Medd, chair), one independent director (Naomi Edwards) and one non-executive director (Les Coleman). Ms Medd is the independent chair of the Company’s subsidiary, Australian Ethical Superannuation Pty Ltd. Stephen Newnham, an independent director, replaced Naomi on the Audit committee after her resignation on 23 March 2011. The qualifications of those appointed to the Audit committee are provided in the directors’ report, as are the number of meetings of the committee and attendances at those meetings. The committee does not consist of only non-executive directors of the Company (it has one external member, Ruth Medd who is a non executive director of the Company’s subsidiary). A summary of the charter for the Audit committee appears on the Company’s website. The Board is of the view that notwithstanding that the Audit committee does not comply with all the Corporate Governance recommendations on membership, it is consistent with the spirit of the recommendations and the committee is able to perform its functions with independence and diligence. In particular: • • the committee is comprised only of non-executives; at a number of meetings the committee speaks directly to the external auditor in the absence of executive management. The committee considers the performance and independence of the external auditor over the course of a reporting period. 11 AUSTRALIAN ETHICAL INVESTMENT LTDDetails of remuneration Details of remuneration paid to directors and executives during the reporting period are set out in the directors’ report. The report distinguishes the structure of non-executive director remuneration and that of executive directors. Non-executive directors receive fees for serving as a director in the form of cash payments, plus mandated superannuation contributions. They do not participate in bonus or equity schemes designed for the remuneration of executives. Principle 7 - Recognise and manage risk Policies for the oversight and management of material business risks and internal controls The Company has established policies for the oversight and management of material business risks. The company’s risk management guide is available from the corporate governance section of its website. The Board has required management to implement a risk management system consistent with the Company’s risk management guide. The Board has required management to report to it on whether material business risks are being appropriately managed. During the relevant period, management has reported to the board’s Audit, Compliance and Risk committee and directly to the Board as to the effectiveness of the entity’s management of its material business risks. The CEO and risk management officer certify to the Board that its internal control and risk management systems are operating efficiently and effectively throughout the group. CEO and CFO sign-off of financial reports The Company requires the CEO and the CFO to state in writing to the Board that the financial reports present a true and fair view, in all material respects, of the Company’s financial condition and operating results and are in accordance with relevant accounting standards. The CEO and CFO certify to the Board that the integrity of the financial statements is founded on a sound system of risk management and internal control, and that the system is operating effectively in all material respects in relation to financial reporting risks. Principle 8 - Remunerate fairly and responsibly Remuneration committee The Board has a People, Remuneration and Nominations committee. The members of the committee at the commencement of the relevant period were Naomi Edwards and Justine Hickey. As noted above, Andre Morony replaced Naomi Edwards on this committee following her resignation on 23 March 2011. Details of attendance at meetings of the committee are provided in the directors’ report. The charter for the committee is available in the corporate governance section of the Company’s website. The Board is aware of the recommendation that the Remuneration committee should have three members; it is anticipated that a further independent will be appointed in calendar year 2012. 12 AUSTRALIAN ETHICAL INVESTMENT LTDDirectors’ report The directors of Australian Ethical Investment Limited, the controlling entity, present their report on the company and its controlled entity for the financial year ended 30 June 2011. In compliance with the Corporations Act 2001, the directors report as follows: Directors The name of each person who has been a director during the year ended 30 June 2011 and to the date of this report are: Review of operations The consolidated entity, Australian Ethical (Australian Ethical Investment Limited and its wholly owned subsidiary, Australian Ethical Superannuation Pty Ltd), has recorded a consolidated net profit after income tax expense for the year ending 30 June 2011 of $1,282,533, a 25% increase on the result of the previous financial year. Return on equity for the year is 17.1%, up from 12.5% in 2009-10. Earnings per share has increased 25% to 128.8 cents per share and the cost to income ratio has reduced slightly to 87%. Name James Thier Howard Pender Naomi Edwards Justine Hickey Les Coleman André Morony Phillip Vernon Time in office 19 years 19 years 5 years 4 years 3 years 3 years 1 year Directorship ceased 17 November 2010 Average funds under management (FUM) grew by 5.5% with the year end FUM (before distribution) being $644 million compared to $614 million for the prior year end. Resigned 23 March 2011 Our inflows have remained resilient in a tough managed funds market and grown by 2% for the year ended 30 June 2011. Inflow growth has been centred around our superannuation fund. Inflow growth has been offset by a reduction in our entry fee margin as we adjust our business model to accommodate regulatory change (entry fee changes to our superannuation fund, implemented in May 2010). Stephen Newnham < 1 year Appointed 20 December 2010 The reported result has been affected by two significant one- off issues: Directors have been in office since the start of the financial year to the date of this report unless otherwise stated. Company secretaries The name of each person who was a company secretary of the company as at the end of the financial year are: Name Philip George Gary Leckie Principal activities The principal activity of the controlling entity during the financial year was to manage seven public offer ethical managed funds (registered managed investment schemes). The controlling entity’s wholly owned subsidiary, Australian Ethical Superannuation Pty Limited, was trustee of the Australian Ethical Retail Superannuation Fund during the financial year. Other than as described in this report, there were no significant changes in the nature of the controlling entities activities during the year. • Employment restructure expenses of $445,000; and • Acquisition fee revenue of $651,000 paid by the Australian Ethical Property Trust as per the trust constitution in relation to the purchase of Lawley House. In a challenging market we continue to work on and improve our client service and marketing initiatives. During the year we in-sourced our superannuation call centre with all initial calls managed by Australian Ethical, enabling a better client service experience. We also made improvements to our website and introduced an online joining facility for our superfund, virtually doubling our new client numbers. During the year our sales and marketing area was restructured and addressing the challenges facing our industry is a high priority. Financial position At the year end, Australian Ethical net assets are $7,628,812. The company has no debt and is generating positive returns and cash flow. 13 AUSTRALIAN ETHICAL INVESTMENT LTDDirectors’ indemnification The constitution of the controlling entity provides a general indemnity for officers of the company against liabilities incurred in that capacity, including costs and expenses in successfully defending legal proceedings. During the financial year, the company paid a premium to insure the directors (named above), the company secretary and all officers of the company and of any related body corporate against a liability incurred as a director, secretary or officer 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. During the year the company entered into or maintained deeds of indemnity, insurance and access (The Deed) with directors and officers which provides a general indemnity against liabilities incurred in that capacity to the extent permitted by the Corporations Act 2001. The Deed obligates the company to use its reasonable endeavours to obtain and maintain insurance for the benefit of a director or officer of the company and any subsidiary, to the extent that such coverage is available in the market on terms which the company reasonably considers financially prudent and on terms consistent with the practice of comparable companies operating in similar markets. The Deed also provides that the company will pay on behalf of the director or officer or lend to the director or officer the amount necessary to pay the reasonable legal costs incurred by the director or officer in defending an action for a liability incurred as a director or officer of the company or a subsidiary on such terms as the company reasonably determines. The director or officer must repay to the company such legal costs if they become legal costs for which the company was not permitted by law to indemnify the director or officer. The company need not pay or provide a loan to the director or officer to the extent that the director or officer is actually reimbursed for legal costs as they fall due under an insurance policy or otherwise. The company has not otherwise, during or since the financial year, indemnified or agreed to indemnify a director, officer or auditor of the company or of any related body corporate against a liability incurred as such director, officer or auditor. Dividends Dividends paid or declared by the company to members since the end of the previous financial year were: Cents per share Total amount $ Franked/ unfranked Date of payment Declared and paid during the financial year Final 2010 50 496,570 Franked 15/10/2010 Special 2010 100 993,141 Franked 15/10/2010 Interim 2011 45 449,061 Franked 25/03/2011 Total 1,938,772 Declared after end of year After balance sheet date, the directors declared the following dividend: Final 2011 997,913 Franked 100 7/10/2011 Special 2011 25 249,478 Franked 7/10/2011 Events subsequent to reporting date Since reporting date the global equity markets have experienced significant volatility as aresult of uncertainties related to European sovereign debt and United States debt and budget management. A large proportion of the FUM managed by the company is linked to domestic and international securities markets. This could potentially have a detrimental impact on company revenue for the coming financial year. No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of Australian Ethical Investment Ltd and its controlled entity, the results of those operations or the state of affairs of Australian Ethical Investment Ltd in financial years subsequent to the financial year ended 30 June 2011, other than as outlined in this report. Likely developments and business strategies Further information about likely developments and business strategies in the operations of the consolidated entity and the expected results of those operations in future financial years has been addressed in the ASX announcement accompanying our Appendix 4E disclosures. 14 AUSTRALIAN ETHICAL INVESTMENT LTDDirectors’ particulars André Morony B.Ec.(Hons), M.Ec., Non-Executive Chairperson André started his 40 years in the finance sector at the Commonwealth Treasury, where he worked in a number of financial policy areas. Here he also represented Australia for three years at the Organisation for Economic Cooperation and Development in Paris. Subsequent roles include chief economist and chief investment officer at Bankers Trust Australia (BT), and chief investment officer at Australian Reward Investment Alliance (ARIA). He currently sits on the investment committee of GESB, the Western Australian Government employees superannuation fund. André chairs the remuneration and nominations committee and is also a member of the investment committee. Howard Pender B.A.(Hons), Executive Director Howard received a university medal in economics from the Australian National University. He worked at the Commonwealth Treasury and then as senior economist at Bankers Trust in Sydney. From 1992 to 1997, he was a visiting fellow in the Centre for International and Public Law at the Australian National University. Howard has been a director of two other ASX- listed companies. Howard is a director of Australian Ethical Superannuation Pty Ltd and is a member of the investment committee. Dr Les Coleman BEng(Hons), BSc(Hons), MEc, PhD Non-Executive Director Les has been a trustee of two superannuation funds; a director of ten companies involved in finance, retail and distribution; and has over 20 years experience in senior management positions with resources, manufacturing and finance companies in Australia and overseas. Since 2004, Les has been a senior lecturer at the Finance Department of the University of Melbourne. His particular research interests are corporate risk and non- financial indicators of superior firm performance, especially ethics and sustainability. He is a regular contributor to print and broadcast media, including four years as a weekly columnist with The Australian. Les is a member of the audit, compliance and risk committee. Justine Hickey B.Com, GAICD, SAFin, ASIP, Non-Executive Director Justine has 20 years experience as a senior executive and director in the investment and funds management industry. As an executive she worked at Suncorp Investment Management in Brisbane and Flemings Investment Management (now JP Morgan) in London. Justine is a director of Rio Tinto Staff Super Fund Pty Ltd and member of the investment committees of Dalton Nicol Reid and the University of Melbourne. Justine has an active interest in philanthropy, chairing the Evolve Foundation and is a director of RSPCA QLD. At Australian Ethical, Justine chairs the investment committee and is a member of the people, remuneration and nominations committee. Stephen Newnham Non-Executive Director Steve has over 20 years experience in marketing and distribution in the financial industry. He comes from Lonsec Ltd as a consultant on the marketing and distribution of their research and stockbroking services. Prior to this, Steve was head of distribution at Zurich Financial Services, chairman of a financial planning dealer group, director of a wrap platform and an administration business, and executive vice president of BT Financial Group. Steve has had significant involvement with community and social justice activities, having worked on homeless shelter support schemes, indigenous fellowship programs, environmental and drought relief projects and mental health awareness initiatives. Steve is on the audit, compliance and risk committee. Phillip Vernon BEc, MCom, MBA, FCPA Managing Director Phil has 25 years experience in financial services covering funds management, superannuation and capital markets. He was a member of the Executive Committee of Perpetual Limited heading up its Corporate Trust division and has extensive experience in corporate governance and industry regulation including a long involvement with the Australian Securitisation Forum, Australia’s peak body representing the securitisation industry in Australia acting as Chairman of its National Committee, Education and Regulatory Committees. Phil has a long involvement in sustainability and corporate social responsibility and is a Director of Planet Ark, a not for profit environmental organisation. 15 AUSTRALIAN ETHICAL INVESTMENT LTDDirectors’ meetings The number of directors’ meetings (including meetings of committees of directors of which not all directors are members) and number of meetings attended by each of the directors of the controlling entity during the financial year are set out below. Director Board Investment Remuneration and nominations Audit, compliance and risk Eligible Attend Eligible Attend Eligible Attend Eligible Attend James Thier Howard Pender Naomi Edwards Justine Hickey André Morony Les Coleman Phillip Vernon Stephan Newnham 3 7 4 7 7 7 7 4 3 7 4 7 7 7 7 4 - 4 - 4 4 - - - - 4 - 4 4 - - - - - 1 2 1 - - - - - 1 2 1 - - - - - 4 - - 6 - 3 - - 4 - - 6 - 3 Directorships held in other listed entities in the last three years Name Justine Hickey André Morony Entity Period of directorship Hyperion Flagship Investments Limited Macquarie Private Capital Group Limited 3 years 1 years Directors’ relevant interests in securities of the company Parent entity directors Fully paid ordinary shares numbers Share option numbers Performance rights 2011 2010 2011 2010 2011 2010 Directors continuing at 30 June 2011 Howard Pender Justine Hickey Phillip Vernon 49,852 1,200 - 49,852 1,326 2,839 700 - -- - - - - - 2,798 Directors not - continuing at 30 June 2011 James Thier 51,367 51,367 1,364 2,881 - Directors’ holdings in registered schemes made available by the company None of the current directors have holdings in the registered schemes made available by the company. Several directors are members of the Australian Ethical Retail Superannuation Fund. 320 - 317 316 Employment contracts of directors and senior managers For each individual whose remuneration has been disclosed in this report and is currently employed under an employment contract, the details of the employment contract are as follows: Name Duration of contract Period of termination notice required Phillip Vernon Gary Leckie Philip George James Jordan Ongoing Ongoing Ongoing Ongoing 12 weeks 12 weeks 12 weeks 12 weeks Termination payment provided for under the contract None except for accrued leave and any payment in lieu of notice. 16 AUSTRALIAN ETHICAL INVESTMENT LTDOptions and rights as at the date of this report Options/rights over unissued shares as at the date of this report are as follows: Options reference Number of options on issue Exercise period Exercise price AEFAU AEFAV Totals 29,704 2,690 32,394 14/10/11 to 13/1/12 14/10/11 to 13/1/12 $32.27 $32.27 All options are over unissued shares in the company. Unexercised options expire at the end of the exercise period. No option holder has any right under the options to participate in any other share issue of the company or of any other entity. Performance rights reference Number of rights on issue AEFAW AEFAY AEFAZ Totals 7,914 19,624 4,760 32,298 All performance rights are over unissued shares in the company. Performance rights expire if the performance conditions are not met at the end of the performance period. No holder of performance rights is entitled to, by virtue of holding the performance rights, to participate in any other share issue of the company or of any other entity. Shares issued upon the exercise of options 4,772 ordinary shares of the company were issued during the year ended 30 June 2011 on the conversion of performance rights granted under the company’s employee share ownership plan. No further shares have been issued since that date to the date of this report. No amounts are unpaid on any of the shares. Non-director committee members and company secretary particulars Name Ruth Medd Qualifications Experience B.Sc., Dip Comp Science, CPA, MAICD Philip George BSc LLB ACIS Gary Leckie BEc CA Tom May BA LLB MBA Ruth is currently on the board of the NFAW Ltd (National Foundation for Australian Women) and WOB Pty Ltd. Ruth is Chair of the company’s wholly- owned subsidiary Australian Ethical Superannuation Pty Ltd. Ruth also chairs the company’s audit, compliance and risk committees. Ruth started in IT in the 1970s. Since then she has been a senior public servant, a broadcasting regulator, the inaugural Company Secretary at Telstra and the Executive Director of an industry association. Philip has experience in commercial law, corporate governance and project management. He has been a company secretary and legal counsel for listed companies for over seven years. He was a senior associate at the national law firm Minter Ellison and conducted a commercial legal practice in partnership for two years. Gary is a Chartered Accountant who is responsible for the fiscal management and operational activities of the Australian Ethical group. Gary has more than ten years experience in the financial services industry. Prior to working in the financial services industry Gary was employed with big four accounting firm Deloitte. Tom has experience in the superannuation and distribution aspects of financial services law. He has been a lawyer since 1990 when he was a legal officer in the federal government. He subsequently worked in house with funds management and life insurance companies before working in private practice in London and Tokyo. 17 AUSTRALIAN ETHICAL INVESTMENT LTDThe company’s earnings over the last five years are as follows: Year 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011 Earnings $1,362,612 $1,819,177 $1,651,790 $1,202,752 $1,022,555 $1,282,533 Other specific information has been disclosed in the attached financial report as referenced in the table below: Disclosure Dividends Rights – issued during the financial year and since the end of the financial year² Financial Statement Reference Note 5 Note 25 Auditor’s declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 forms part of this report and follows at the end of the report. Non-audit services The directors, in accordance with advice from the audit committee, are satisfied that the provision of the non-audit services by the auditor during the year is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the services disclosed in the financial report did not compromise the external auditor’s independence because the provision of non-audit services is minor and in most cases is ancillary or related to audit activities. The directors are not aware of any circumstances that would prevent the external auditor from exercising objective and impartial judgement in relation to the conduct of the audit. Details of non-audit services provided by the auditor are set out in Note 2 of the attached financial report. Other specific information The company’s shares have traded on the ASX since 17 December 2002. Movements in closing share price at the beginning and end of financial years since listing are as follows: Date Closing daily price¹ 17 December 2002 30 June 2003 30 June 2004 30 June 2005 30 June 2006 30 June 2007 30 June 2008 30 June 2009 30 June 2010 30 June 2011 $12.50 $11.30 $13.00 $17.20 $28.50 $48.00 $34.00 $22.00 $23.20 $19.10 ¹ Where shares were not traded on the day specified, the price quoted is the closing daily price when trades did occur on the day earlier than and closest to the date specified. ² The financial statements show rights issued during the financial year. No rights have been issued since the end of the financial year to the date of this report. 18 AUSTRALIAN ETHICAL INVESTMENT LTDRemuneration report The Remuneration Report is subject to audit by the Company’s external auditor. Names and positions of key management personnel (directors and named executives) at any time during the financial year Parent Entity Directors Name James Thier Retired Position Director, non-executive 17 November 2010 Howard Pender Director, executive Naomi Edwards Chairperson, non-executive Resigned 23 March 2011 Justine Hickey Director, non-executive Les Coleman Director, non-executive André Morony Director, non-executive Phillip Vernon Director, executive Appointed 27 July 2010 Stephen Newnham Executives Name James Jordan Philip George Gary Leckie Director, non-executive Appointed 20 December 2010 Position Chief investment officer Head of client services and product Chief financial officer / chief operatingofficer Paul Harding–Davis Head of distribution Tim Xirakis Head of client relationships Employment ended on 5 January 2011 Employment ended on 8 August 2011 The Corporations Act 2001 requires disclosure of compensation of key management personnel. Key management personnel is defined as persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity. The Corporations Act 2001 also requires disclosure of the remuneration of: 1. each of the five named company executives who receive the highest remuneration for that year; and 2. if consolidated financial statements are required – each of the five named relevant group executives who receive the highest remuneration for that year. The above named directors and executives are key management personnel of the consolidated entity. 19 AUSTRALIAN ETHICAL INVESTMENT LTDRemuneration policy Directors The aggregate amount of remuneration payable to non- executive directors for the performance of their duties as directors is set by the company in a general meeting. In proposing any motions on non-executive director remuneration to a general meeting, the Board has regard to market rates for directorships in comparable companies operating in similar industries. It also takes into account recommendations from the Remuneration and Nominations Committee. Within the approved aggregate amount, fees paid to individual non-executive directors for services as a non- executive director are determined by the Board. During the relevant period, the Chair received a higher amount, with other non-executive directors all receiving equal amounts. Under the constitution, non-executive directors are also entitled to be paid reasonable expenses, remuneration for additional services and superannuation contributions. In particular, non-executive directors are paid for serving on board committees. Non executive director remuneration is not linked to company performance. Executive directors receive remuneration as employees of the company. There are no arrangements to pay any director a retirement benefit. Other key management personnel Board policy: The Board’s policy for determining the nature and amount of remuneration for key management personnel of the consolidated group is covered by the same policy that applies to all staff and includes the following: “Flexible remuneration strategies will be developed as required to meet specific employee requirements, facilitate retention/maintenance of a high quality work force and to ensure employees are rewarded relative to their input to the organisation. Important points are: • Participation in specific remuneration arrangements may be on an individual or team basis. • Eligibility to participate in specific remuneration arrangements is dependant on the role, responsibilities, scope and impact of individual employees orteams in the case of a team based scheme. • Recommendations for individual employees or teams to participate in such schemes will be made by individual Section Managers. • Details will be negotiated on an individual basis with relevant employees or teams. Flexible remuneration strategies may include cash or share based rewards.” Assessment of the Managing Director’s performance and whether performance conditions are met is completed by the Chair and is overseen by the Board with input from the Remuneration and Nominations Committee. In turn, the Managing Director is responsible for assessing senior management and whether performance conditions are met. In all reviews, both quantitative and qualitative data is used to determine whether performance criteria are achieved. During the year remuneration arrangements for a number of KMP were reviewed and updated. New key performance indicators (KPI) and related individual STIs were established centred around criterion including achievement of individual performance goals, performance of the company’s managed funds, net flows, relationship development, earnings per share growth and achievement of budget. For these revised arrangements assessment of KMP performance will be based on results for the current year and any STI payments or grant of rights will be made after year end based on these assessments. Hedging policy Directors and executives participating in the company’s equity-based plans are prohibited from entering into any transaction which would have the effect of hedging or otherwise transferring to any other person the risk of any fluctuation in the value of any unvested entitlement in the company’s securities. Performance-based remuneration and company performance The Board policy and remuneration arrangement review is generally aiming to: • Achieve some level of market parity on remuneration packages; • Establish performance incentives for KMP which are outcomes focused and aligned with company goals; • Establish alignment of KMP remuneration with shareholder value and interests; and • Provide a retention aspect for high performing managers. More specifically performance criteria were chosen to ensure alignment between the strategic priorities of the organisation, as established by the Board and individual objectives. The aim was to provide senior employees of the Company with an ownership of AEI’s strategic direction, greater job clarity, flexibility to plan individual goals and objectives, and an opportunity to develop in their roles. 20 AUSTRALIAN ETHICAL INVESTMENT LTDb) Individual Category • Employment must continue until 1 July 2011 • The number of shares that will be issues to each employee in respect of their performance rights under this category will be adjusted up or down by a maximum 20%, dependent of the absolute performance of the company’s managed investment schemes, for which the employee has responsibility or provides significant input. The nominated managed investment scheme has been agreed between the company and the employee. Performance will be measured over a performance period of 1 July 2010 to 30 June 2011. Performance rights issued under the general category (above) are performance-based in two ways. Firstly, they are subject to a three year employment condition and secondly, shares will only be issued in respect of the performance rights where return on equity meets the levels described above. Performance rights issued under the individual category are linked to the performance of the company’s managed funds, as described above. Staff bonus plan All permanent staff are eligible to participate in an annual staff bonus. Under the company’s constitution, before the directors recommend or declare a dividend to be paid out of profits of any one year, they must pay a bonus to current employees which is set by reference to the profit of the company for that year and can be up to thirty percent of the company profit. All staff across the organisation, irrespective of position (and including KMP), receives the same set amount (pro-rated for part time staff). Individual bonuses During the current year two KMP were paid specific “at risk” components in remuneration. The payments are shown in the following tables. The service and performance criteria used to determine the amount of the payments were established prior to the current yearand are generally as follows: 1. James Thier – seminar, speaking and media penetration targets; engagement with dealer groups and advisors; and promotion of the new Climate Advocacy Fund; 2. Paul Harding-Davis – managing to budget; net inflow targets; engagement with dealer groups and engagement with asset consultants; 3. James Jordan – stock research objectives and fund investment performance. Employee share incentive schemes Under the employee incentive schemes, a pool of performance rights which would, if exercised, amount to 5% of the company’s existing ordinary share capital, was made available. This scheme was approved at the 2008 Annual General meeting. The corporate employee share incentive scheme (ESIS) is split into two categories: general and individual. All employees, including KMP, participate in the general ESIS. The number of performance rights issued to each employee is based on their relative remuneration. The individual ESIS is utilised for senior and professional employees. The number of performance rights issued is based more specifically on individual performance and KPIs. Subject to the terms and conditions of the scheme rules, the performance rights that have been issued during the current year have the following attributes determining whether shares will be issued in respect of the rights: a) General Category • Employment must continue until 30 June 2013 • The arithmetic average return on equity over the performance period (AROE) must exceed 15% per annum or no shares shall be awarded at the end of the performance period • • If the AROE exceeds 15% per annum but is less than 20% per annum, half the maximum number of shares shall be awarded If the AROE is equal to or greater than 20% per annum the maximum number of shares shall be awarded • AROE is determined as the arithmetic average of return on equity over six month periods calculated using audited half-year financial statements • The performance period is three financial years being 2010-11, 2011-12, 2012-13 21 AUSTRALIAN ETHICAL INVESTMENT LTDRemuneration details for the year ended 30 june 2011 Parent entity directors’ remuneration Short-term benefits Post employment benefits Long- term benefits Equity- settled share-based payments Parent entity director’s remuneration Salary, fees and leave Cash bonus Other Super- annuation Long service leave Termination benefits Rights Total $ $ James Thier 2011 122,525 2010 122,576 14,440 14,150 Howard Pender 2011 135,444 2,978 2010 132,334 2,626 Naomi Edwards 2011 47,410 2010 81,000 Justine Hickey 2011 28,593 2010 31,950 Anne O’Donnell 2011 - - - - - - 2010 95,938 4,000 André Morony 2011 30,259 2010 25,000 Les Coleman 2011 26,084 2010 26,000 Stephen Newnham 2011 13,234 2010 - - - - - - - Phillip Vernon 2011 272,330 2,251 2010 154,135 - Total parent entity director’s remuneration 2011 675,879 19,669 2010 668,933 20,776 $ - - - - - - - - - - - - - - - - - - - - $ 12,221 12,874 12,189 12,652 4,273 7,290 2,578 2,876 - 8,718 2,729 2,250 2,352 2,340 1,193 - 23,429 12,799 60,964 61,799 $ 3,477 3,604 11,251 3,856 - - - - - $ - - - - - - - - - 2,927 235,000 - - - - - - 5,483 2,981 20,211 13,368 - - - - - - - - - - $ 11,196 9,439 11,960 9,469 - - - - - - - - - - - - $ 163,859 162,643 173,822 160,937 51,683 88,290 31,171 34,826 - 346,583 32,988 27,250 28,436 28,340 14,427 - 40,316 8,204 63,472 27,112 343,809 178,119 840,194 1,026,988 22 AUSTRALIAN ETHICAL INVESTMENT LTDNamed executives remuneration (including other key management personnel) Short-term benefits Post employment benefits Long- term benefits Equity- settled share-based payments Named executives (including other KMP) remuneration Salary, fees and leave Cash bonus Other Super- annuation Long service leave Termination benefits Rights Total $ $ Philip George 2011 196,182 4,000 Ruth Medd Gary Leckie Tim Xirakis 2010 179,638 4,000 2011 31,101 2010 42,350 - - 2011 204,509 2010 179,309 4,000 4,000 2011 181,756 2010 184,881 4,000 4,000 Paul Harding Davis 2011 101,316 10,250 2010 196,696 21,500 Martin Halloran 2011 - - 2010 245,064 3,366 James Jordan 2011 256,524 3,259 2010 150,951 3,200 2011 971,388 25,509 2010 1,178,889 40,066 Named executives (including other KMP) remuneration $ - - - - - - - - - - - - - - - - $ 17,797 15,836 2,804 3,690 18,244 16,206 16,191 15,779 11,502 19,491 - 15,017 23,285 14,013 $ 5,680 (8,483) - - (8,277) 1,510 5,129 1,510 $ - - - - - - - - (9,812) 57,459 3,989 - 4,937 6,143 4,179 - - - - - $ 16,006 14,825 - - 16,380 14,973 15,958 14,588 - 15,712 - 48,066 15,327 40,471 $ 239,665 205,816 33,905 46,040 234,856 215,998 223,034 220,758 170,715 257,388 - 316,450 304,538 212,814 89,823 100,032 (1,137) 57,459 7,642 - 63,671 148,635 1,206,713 1,475,264 23 AUSTRALIAN ETHICAL INVESTMENT LTDCash bonus compensation benefits Details of cash bonuses paid to key management personal are included in the remuneration tables set out above. The annual staff cash bonuses of $4,000 per full time employee were paid on 15 September 2010. The nature of the cash bonuses and the criteria used to determine the amount of the payments are detailed in the remuneration policy and in the discussion on performance based remuneration and company performance. Analysis of bonuses included in remuneration The vesting profile of short term-incentive bonuses are detailed below. No amounts vest in future financial years in respect of the short term-incentive bonuses for the 2011 year. Parent entity directors James Thier Howard Pender Phillip Vernon Named executives (including other KMP) Philip George Gary Leckie Tim Xirakis Paul Harding–Davis James Jordan Cash bonus¹ $ 3,503 2,978 2,251 4,000 4,000 4,000 4,000 3,259 Performance bonus $ 10,937 - - - - - 6,250 - Share bonus Vested in year $ - - - - - - - - % 88 100 100 100 100 100 25 100 Forfeited in year² % 12 - - - - - 75 - ¹ Details of cash and performance bonus have been provided in the director’s report under remuneration policy ² The amounts forfeited are due to the performance or service criteria not being met in relation to the current financial year As mentioned earlier in this report criteria for cash based bonuses were established for key management personnel. These criteria are assessed against the results for the year and relevant cash bonuses paid subsequent to year end. The maximum and minimum possible total value of the cash bonuses for financial years after the financial year to which the report relates is set out in the table below: Parent entity director Phillip Vernon Named executives (including other KMP) Timothy Xirakis Phillip George Gary Leckie James Jordan Minimum $ - - - - - Maximum $ 100,000 13,000 7,407 11,334 48,069 Equity based remuneration Equity based remuneration consists of grants of options and rights under the company’s employee share ownership plan and employee share incentive scheme. Details of the share plans (including the service and performance criteria) are provided in the section on remuneration policy above and in Note 25 of the attached financial report. Set out in the following table are the holdings of equity instruments granted to the KMP that existed during the reporting period and includes details of vesting profiles of options/rights granted as compensation. 24 AUSTRALIAN ETHICAL INVESTMENT LTDOption holdings KMP option holdings Option class Grant date Fair value at grant date ($) No. granted No. vested & excercised % of grant vested No. expired % of grant forfeited Financial year in which grant vests $ James Thier AEFAT 24-Sep-07 AEFAV 1-Dec-08 8.40 3.65 1 ,517 1 ,364 2011 Total 2010 Total - - Howard Pender AEFAT 24-Sep-07 8.40 1 ,513 AEFAV 1-Dec-08 3.65 1 ,326 2011 Total 2010 Total - - Philip George AEFAT 24-Sep-07 AEFAU 14-Oct-08 8.40 3.65 2 ,469 2 ,169 2011 Total 2010 Total - - Gary Leckie AEFAT 24-Sep-07 AEFAU 14-Oct-08 8.40 3.65 1 ,767 1 ,919 2011 Total 2010 Total - - Tim Xirakis AEFAT 24-Sep-07 AEFAU 14-Oct-08 8.40 3.65 1 ,776 1 ,895 2011 Total 2010 Total - - Paul Harding Davis AEFAU 14-Oct-08 3.65 1 ,060 2011 Total 2010 Total - - James Jordan AEFAT 24-Sep-07 AEFAU 14-Oct-08 8.40 3.65 1 ,146 1 ,243 2011 Total 2010 Total - - - 100% ( 1,517) 100% 24-Sep-10 - - - - - - - - - - ( 2,356) - - - - - - - - - - - - - - - - - - ( 1,517) ( 1,432) - - - 14-Oct-11 100% ( 1,513) 100% 24-Sep-10 - - - - ( 1,513) ( 1,469) - - - 14-Oct-11 100% ( 2,469) 100% 24-Sep-10 - - - - ( 2,469) - - - - 14-Oct-11 100% ( 1,767) 100% 24-Sep-10 - - - - ( 1,767) ( 1,443) - - - 14-Oct-11 100% ( 1,776) 100% 24-Sep-10 - - - - - - - ( 1,776) ( 1,387) - - - 14-Oct-11 14-Oct-11 - - - - - - 100% ( 1,146) 100% 24-Sep-10 - - - - ( 1,146) - - - - 14-Oct-11 25 AUSTRALIAN ETHICAL INVESTMENT LTDRights holdings Rights class Grant date Fair value at grant date ($) No. granted Value of rights granted ($) No. vested & excercised % of grant vested No. expired No. lapsed % of grant lapsed Value of rights lapsed ($) AEFAY 19-Apr-11 $16.25 2011 Total 2010 Total AEFAY 19-Apr-11 $16.25 2010 Total 2011 Total 2010 Total 689 689 319 736 736 320 $11,196 $11,196 $9,439 $11,960 $11,960 $9,469 AEFAY 19-Apr-11 $16.25 2481 $40,316 2011 Total 2010 Total AEFAY 19-Apr-11 $16.25 2011 Total 2010 Total 2481 317 985 985 501 $40,316 $8,204 $16,006 $16,006 $14,825 AEFAY 19-Apr-11 $16.25 1,008 $16,380 2011 Total 2010 Total 1,008 506 AEFAY 19-Apr-11 $16.25 2011 Total 2010 Total AEFAY 19-Apr-11 $16.25 AEFAX 30-Nov-09 AEFAX 23-Nov-10 $32.91 $26.00 2011 Total 2010 Total 982 982 493 868 - 47 915 1271 $16,380 $14,973 $15,958 $15,958 $14,588 $14,105 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (862) 100% $1,222 $15,327 $40,471 (47) 100% (909) - - - KMP rights holdings James Thier Howard Pender Phillip Vernon Philip George Gary Leckie Tim Xirakis James Jordan 26 AUSTRALIAN ETHICAL INVESTMENT LTDExplanation of relative proportions of elements of remuneration that are related to performance Non-executive directors receive their total remuneration as cash or superannuation contributions. No element is dependent on performance. The remuneration structures and performance conditions for executive directors and other key management personnel are outlined earlier in this report. People in these positions were entitled to participate in the staff bonus and employee share schemes described above. Rights granted during the financial year, when valued at grant date, make up a small proportion of the overall remuneration of people holding these positions. The following table illustrates the proportion of remuneration that was performance and non–performance based and the proportion of remuneration received in the form of options/ rights during the financial year Proportion of elements of remuneration related to performance Proportion of elements of remuneration not related to performance Non-salary cash-based incentives Shares Options/ rights Fixed salary/ fees Total Parent entity directors’ remuneration % % % % % James Thier Howard Pender Naomi Edwards Justine Hickey André Morony Les Coleman Phillip Vernon Named executives (including other KMP) Philip George Ruth Medd Gary Leckie Tim Xirakis Paul Harding–Davis James Jordan 7 - - - - - - - - - - 6 - - - - - - - - - - - - - - 7 7 - - - - 11 7 - 7 7 - 5 86 93 100 100 100 100 89 93 100 93 93 94 95 100 100 100 100 100 100 100 100 100 100 100 100 100 This directors’ report, incorporating the remuneration report, is signed in accordance with a resolution of the Board of Directors. Phillip Vernon Managing Director Dated: 31 August 2011 27 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity AUDITOR’S INDEPENDENCE DECLARATION UNDER SECTION 307C OF THE CORPORATIONS ACT 2001 I declare that, to the best of my knowledge and belief, during the year ended 30 June 2011 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. THOMAS DAVIS & CO. J.G. RYAN PARTNER Date 31 August 2011 Liability limited by a scheme approved under Professional Standards Legislation 19 28 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Financial statements Statement of financial position as at 30 June 2011 Notes Consolidated entity Parent entity 2011 $ 2010 $ 2011 $ 2010 $ 7 8 9 13 10 11 12 9 13 14 15 16 15 16 2,554,689 3,245,297 496,423 - 232,306 1,892,734 3,050,029 998,441 24,474 337,195 2,298,126 2,698,177 496,423 - 189,988 435,037 2,604,874 998,441 213,987 297,283 6,528,715 6,302,873 5,682,714 4,549,622 4,040,747 45,355 61,820 607,503 4,215,168 46,297 100,505 435,083 4,040,747 45,355 377,820 606,108 4,215,168 46,297 416,505 433,688 4,755,425 4,797,053 5,070,030 5,111,658 11,284,140 11,099,926 10,752,744 9,661,280 2,587,710 443,545 533,024 2,495,424 - 451,046 2,339,705 443,545 533,024 2,659,060 - 451,046 3,564,279 2,946,470 3,316,274 3,110,106 34,926 56,123 34,805 62,923 34,926 56,123 34,805 62,923 91,049 97,728 91,049 97,728 3,655,328 3,044,198 3,407,323 3,207,834 7,628,812 8,055,728 7,345,421 6,453,446 17 5,915,219 974,402 739,191 5,791,147 869,149 1,395,432 5,915,219 974,402 455,800 5,791,147 869,149 ( 206,850) 7,628,812 8,055,728 7,345,421 6,453,446 Current assets Cash and cash equivalents Trade and other receivables Financial assets Current tax assets Other current assets Total current assets Non-current assets Property, plant & equipment Intangible Assets Financial assets Deferred tax assets Total non-current assets Total assets Current liabilities Trade and other payables Current tax liabilities Short-term provisions Total current liabilities Non-current liabilities Non-current liabilities Deferred tax liabilities Other long-term provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity The accompanying notes form part of these financial statements 20 20 29 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Statement of comprehensive income for the year ended 30 June 2011 Notes Consolidated entity Parent entity 2011 $ 2010 $ 2011 $ 2010 $ Revenue 3 15,143,951 14,067,899 14,328,858 11,891,805 Commissions paid to advisers ( 175,660) ( 194,080) ( 15,048) ( 32,394) External services ( 2,424,539) ( 2,358,711) ( 718,427) ( 898,684) Employee benefits expense ( 7,471,015) ( 7,339,724) ( 7,453,632) ( 7,316,108) Depreciation Occupancy costs Communication costs Other expenses ( 421,258) ( 358,491) ( 421,258) ( 358,491) ( 271,218) ( 245,823) ( 262,184) ( 232,939) ( 748,853) ( 774,633) ( 747,597) ( 774,633) ( 1,531,231) ( 1,065,991) ( 1,440,464) ( 994,545) Profit before community grants and income tax expense 2,100,177 1,730,446 3,270,248 1,284,011 Community grants expense 1 (l) ( 152,802) ( 124,941) ( 152,802) ( 124,941) Profit before income tax 1,947,375 1,605,505 3,117,446 1,159,070 Income tax expense Profit for the year Other comprehensive income Other comprehensive income 4 ( 664,842) ( 582,950) ( 516,024) 90,168 1,282,533 1,022,555 2,601,422 1,249,238 Net gain/(loss) on revaluation of available-for-sale investments Other comprehensive income for the period, net of tax ( 26,580) ( 26,580) 18,645 18,645 ( 26,580) ( 26,580) 18,645 18,645 Total comprehensive income for the period 1,255,953 1,041,200 2,574,842 1,267,883 Profit attributable to members of the parent entity 1,282,533 1,022,555 2,601,422 1,249,238 Total comprehensive income attributable to members of the parent entity Basic earnings per share (cents per share) Diluted earnings per share (cents per share) 1,255,953 1,041,200 2,574,842 1,267,883 6 6 128.8 127.9 103.0 102.0 The accompanying notes form part of these financial statements 30 21 21 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Consolidated entity Balance at 1 July 2009 Profit attributable to members of the group Other comprehensive income for the period Total comprehensive income for the period Transactions with owners in their capacity as owners: Shares issued during the period Dividends paid or provided for Share-based payment expense Balance at 30 June 2010 Balance at 1 July 2010 Profit attributable to members of the group Other comprehensive income for the period Total comprehensive income for the period Transactions with owners in their capacity as owners: Shares issued during the period Dividends paid or provided for Share-based payment expense Balance at 30 June 2011 Parent entity Statement of changes in equity for year ended 30 June 2011 Note Issued capital ordinary $ Asset revaluation reserve $ Share-based payment reserve $ 5,739,635 - - - 51,512 - - 5,791,147 5,791,147 - - - ( 59,322) - 18,645 18,645 - - - ( 40,677) ( 40,677) - ( 26,580) ( 26,580) 594,591 - - - - - 315,235 909,826 909,826 - - - Retained earnings $ 2,178,301 1,022,555 - 1,022,555 Total $ 8,453,205 1,022,555 18,645 1,041,200 - ( 1,805,424) - 1,395,432 51,512 ( 1,805,424) 315,235 8,055,728 1,395,432 1,282,533 - 1,282,533 8,055,728 1,282,533 ( 26,580) 1,255,953 124,072 - - 5,915,219 - - - ( 67,257) ( 124,072) - 255,905 1,041,659 - ( 1,938,772) - 739,191 - ( 1,938,772) 255,905 7,628,812 17 5 17 5 Note Issued capital ordinary $ $ Asset revaluation reserve $ $ Share-based payment reserve $ $ Retained earnings $ $ Total $ $ Balance at 1 July 2009 Profit attributable to members of the parent entity Other comprehensive income for the period Total comprehensive income for the period Transactions with owners in their capacity as owners: Shares issued during the period Dividends paid or provided for Share-based payment expense Balance at 30 June 2010 Balance at 1 July 2010 Profit attributable to members of the parent entity Other comprehensive income for the period Total comprehensive income for the period Transactions with owners in their capacity as owners: Shares issued during the period Dividends paid or provided for Share-based payment expense Balance at 30 June 2011 17 5 17 5 The accompanying notes form part of these financial statements. 5,739,635 - - - ( 59,322) - 18,645 18,645 594,591 - - - 349,336 1,249,238 - 1,249,238 6,624,240 1,249,238 18,645 1,267,883 51,512 - - 5,791,147 5,791,147 - - - - - - ( 40,677) ( 40,677) - ( 26,580) ( 26,580) - - 315,235 909,826 909,826 - - - - ( 1,805,424) - ( 206,850) 51,512 ( 1,805,424) 315,235 6,453,446 ( 206,850) 2,601,422 - 2,601,422 6,453,446 2,601,422 ( 26,580) 2,574,843 124,072 - - 5,915,219 - - - ( 67,257) ( 124,072) - 255,905 1,041,659 - ( 1,938,772) - 455,800 - ( 1,938,772) 255,905 7,345,421 22 22 31 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Statement of cash flows for the year ended 30 June 2011 Notes Consolidated entity Parent entity 2011 $ 2010 $ 2011 $ 2010 $ 21,360,606 ( 18,429,046) - 95,885 ( 357,731) ( 184,026) ( 125,396) 14,111,414 ( 12,274,001) - 130,785 ( 812,425) ( 170,904) ( 135,644) 18,497,823 ( 16,282,198) 1,665,953 76,271 ( 87,001) ( 184,026) ( 125,396) 9,906,897 ( 10,558,223) 1,797,057 101,847 ( 161,346) ( 170,904) ( 135,644) 22 (b) 2,360,292 849,225 3,561,426 779,684 656,109 ( 273,142) ( 191,352) - 48,820 1,847,723 ( 500,035) ( 1,133,628) ( 49,889) 18,783 656,109 ( 273,142) ( 191,352) - 48,820 1,847,723 ( 500,035) ( 1,133,628) ( 49,889) 18,783 Cash flows from operating activities Receipts from operations Payment to suppliers & employees Dividends received Interest/distributions received Income tax paid Bonus Community grants Net cash provided by (used in) operating activities Cash flows from investing activities Proceeds from sale of investments Purchase of property, plant & equipment Purchase of investments Loans to Staff Repayment of loans Net cash provided by (used in) investing activities 240,435 182,954 240,435 182,954 Cash flows from financing activities Proceeds from share issue Share buy-back payment Dividends paid - - ( 1,938,772) 51,512 - ( 1,805,424) - - ( 1,938,772) 51,512 - ( 1,805,424) Net cash provided by (used in) financing activities ( 1,938,772) ( 1,753,912) ( 1,938,772) ( 1,753,912) Net increase (decrease) in cash held 661,955 ( 721,733) 1,863,089 ( 791,274) Cash at beginning of financial year 1,892,734 2,614,467 435,037 1,226,311 Cash at end of financial year 22 (a) 2,554,689 1,892,734 2,298,126 435,037 The accompanying notes form part of these Financial Statements 32 23 23 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 1 - Statement of significant accounting policies Basis of preparation The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. Australian Accounting Standards set out accounting policies that the AASB has concluded would result in a financial report containing relevant and reliable information about transactions, events and conditions. Compliance with Australian Accounting Standards ensures that the financial statements and notes also comply with International Financial Reporting Standards. The financial statements have been prepared on an accruals basis and are based on historical costs, modified, where applicable, by the measurement at fair value of selected non- current assets, financial assets and financial liabilities. The financial report covers the consolidated entity of Australian Ethical Investment Limited and its wholly owned entity Australian Ethical Superannuation Pty Ltd and Australian Ethical Investment Limited as an individual parent entity. Australian Ethical Investment Limited is a listed public company and both the parent and wholly owned entity are incorporated and domiciled in Australia. The following is a summary of the material accounting policies adopted by the consolidated entity in the preparation of the financial statements. The accounting policies have been consistently applied, unless otherwise stated. Accounting policies a) Principles of consolidation A controlled entity is any entity Australian Ethical Investment Limited has the power to control the financial and operating policies of so as to obtain benefits from its activities. All controlled entities have a June financial year-end. All inter-company balances and transactions between entities in the consolidated entity, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of controlled entities have been changed where necessary to ensure consistencies with those policies applied by the parent entity. The consolidated financial statements comprise the financial statements of Australian Ethical Investment Limited and its wholly owned entity Australian Ethical Superannuation Pty Limited. b) Income tax The charge for current income tax expenses is based on the profit for the year adjusted for any non-assessable or disallowed items. It is calculated using tax rates that have been enacted or are substantively enacted by the reporting date. 24 33 AUSTRALIAN ETHICAL INVESTMENT LTDAustralian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 1 - Statement of significant accounting policies - continued b) Income tax - continued Deferred tax is accounted for using the statement of financial position liability method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or liability is settled. Deferred tax is credited in the statement of comprehensive income except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly against equity. Deferred income tax assets are recognised to the extent that it is probable that future tax profits will be available against which deductible temporary differences can be utilised. The amount of benefits brought to account or which may be realised in the future is based on the assumption that no adverse change will occur in income taxation legislation and the anticipation that the consolidated entity will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. Australian Ethical Investment Limited and its wholly owned entity Australian Ethical Superannuation Pty Ltd have formed an income tax consolidated group under the Tax Consolidation System. Australian Ethical Investment Limited is responsible for recognising the current and deferred tax assets and liabilities for the tax consolidated group. The group notified the Australian Tax Office (ATO) on 24 March 2004 that it had formed an income tax consolidated group to apply from 1 July 2002. The tax consolidated group has entered a tax sharing agreement whereby each company in the group contributes to the income tax payable in proportion to their contribution to the net profit before tax of the tax consolidated group. Under the tax sharing agreement Australian Ethical Superannuation Pty Ltd agrees to pay its share of the income tax payable to Australian Ethical Investment Limited on the same day that Australian Ethical Investment Limited pays the ATO for group tax liabilities. c) Property, plant and equipment Each class of property, plant and equipment is carried at cost or fair value less, where applicable, any accumulated depreciation and impairment losses. Property Leasehold land and buildings are shown at cost less any accumulated depreciation and any accumulated impairment losses. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the re-valued amount of the asset. Plant and equipment Plant and equipment are measured on the cost basis less depreciation and impairment losses. The carrying amount of plant and equipment is reviewed annually by directors to ensure it is not in excess of the recoverable amount from these assets. The recoverable amount is assessed on the basis of the expected net cash flows that will be received from the assets 34 25 AUSTRALIAN ETHICAL INVESTMENT LTDAustralian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 1 - Statement of significant accounting policies - continued c) Property, plant and equipment - continued employment and subsequent disposal. The expected net cash flows have been discounted to their present values in determining recoverable amounts. Depreciation The depreciable amount of all fixed assets including buildings, is depreciated over their estimated useful lives to the consolidated entity commencing from the time the asset is held ready for use. The depreciation rates used for each class of assets are: Class of fixed asset Depreciation rates Depreciation basis Buildings Furniture, fittings and equipment Software Straight line 2.5%-20% 10% to 37.5% Straight line/diminishing value 18.75% to 40% Straight line/diminishing value The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains and losses are included in the statement of comprehensive income. When re-valued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to retained earnings. d) Intangible assets The development of the company’s website was capitalised as an intangible asset and carried at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over its estimated useful live at two and half years. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimates being accounted for on a prospective basis. e) Financial instruments Recognition Financial instruments are initially measured at cost on trade date, which includes transaction costs, when the related contractual rights or obligations exist. Subsequent to initial recognition these instruments are measured as set out below. Available-for-sale financial assets The consolidated entity holds only available for sale financial assets. Available for sale financial assets are assets not classified as financial assets at fair value through profit and loss, loans and receivables, or held-to-maturity investments. Available-for-sale financial assets are reflected at fair value. Unrealised gains and losses arising from changes in fair value are taken directly to equity. 26 35 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 1 - Statement of significant accounting policies – continued e) Financial instruments– continued Fair value Fair value is determined based on current bid prices for all quoted investments. Valuation techniques are applied to determine the fair value for all unlisted securities, including recent arm’s length transactions, reference to similar instruments and option pricing models. Impairment At each reporting date, the group assesses whether there is objective evidence that a financial instrument has been impaired. In the case of available-for sale financial instruments, a prolonged decline in the value of the instrument is considered to determine whether an impairment has arisen. Impairment losses are recognised in the statement of comprehensive income. f) Impairment of assets At each reporting date, the group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over it recoverable amount is expensed to the statement of comprehensive income. Where it is not possible to estimate the recoverable amount of an individual asset, the group estimates the recoverable amount of the cash-generating unit to which the asset belongs. g) Employee benefits Provision is made for the company’s liability for employee benefits arising from services rendered by employees to reporting date. Employee benefits that are expected to be settled within one year have been measured at the amounts expected to be paid when the liability is settled, plus related on-costs. Employee benefits payable later than one year have been measured at the present value of the estimated future cash outflows to be made for those benefits. Share options and rights Share based compensation benefits are provided to employees via the Australian Ethical Investment Limited employee share ownership plan. Share options and rights have been granted annually to employees and details are disclosed in the annual financial report. Share options granted before 7 November 2002 and/or vested before 1 January 2005 No expense is recognised in respect of these options. The shares are recognised when the options are exercised and the proceeds received allocated to share capital. Share options granted on or after 7 November 2002 and vested after 1 January 2005 The fair value of options granted under the Australian Ethical Investment Limited employee share ownership plan is recognised as an employee benefit expense with a corresponding increase in equity. The fair value is measured at grant date and recognised over the vesting period. At each reporting date, the entity revises its estimate of the number of options and rights that are expected to become exercisable. The employee benefit expense recognised each period takes into account the most recent estimate. 36 27 AUSTRALIAN ETHICAL INVESTMENT LTDAustralian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 1 - Statement of significant accounting policies – continued g) Employee benefits - continued Upon the exercise of options and rights the proceeds received, net of any directly attributable transaction costs, are credited to share capital. Employee bonus The group recognises a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the company's shareholders after certain adjustments. The group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. h) Provisions Provisions are recognised when the group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that outflow can be reliably measured. i) Cash and cash equivalents Cash and cash equivalents include cash on hand and deposits held at call with banks. j) Revenue Revenue from the rendering of a service is recognised upon the delivery of the service to the customers. Interest revenue is recognised on a proportional basis taking into account the interest rates applicable to the financial assets. All revenue is stated net of the amount of goods and services tax (GST). k) Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Taxation Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense. Receivables and payables in the statement of financial position are shown inclusive of GST. Cash flows are presented in the statement of cash flows on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows. l) Community grants expense The Company’s Constitution states that "the directors before recommending or declaring any dividend to be paid out of the profits of any one year must have first:- (i) paid or provisioned for payment to current employees, or other persons performing work for the company, a work related bonus or incentive payment, set at the discretion of the directors, but to be no more than 30 percent (30%) of what the profit for that year would have been had not the bonus or incentive payment been deducted" 28 37 AUSTRALIAN ETHICAL INVESTMENT LTDAustralian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 1 - Statement of significant accounting policies - continued l) Community grants expense - continued (ii) "gifted or provisioned for gifting an amount equivalent to ten percent (10%) of what the profit for that year would have been had not the above mentioned bonus and amount gifted been deducted". m) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the company, by the weighted average number of ordinary shares outstanding during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of the interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. n) Comparative figures Where required comparative figures have been adjusted to conform with changes in presentation for the current financial year. Critical accounting estimates and judgements The directors evaluate estimates and judgments incorporated into the financial report based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the group. Key estimates – annual leave and long service leave provision In estimating the annual leave and long service leave provision, an average salary increase of four percent has been incorporated. Key judgements Australian Ethical Investment Limited has a loan receivable from the Centre for Australian Ethical Research recorded as an asset on its statement of financial position for $69,091, and a staff loan for $12,250. The directors have determined that no provision for impairment is required for these loans. Accounting Standards not previously applied The AASB has issued new, revised and amended accounting standards and interpretations that have mandatory application dates for future reporting periods. The group has decided against early adoption of these standards. A discussion of those future requirements and their impact on the group follows: • AASB 9: Financial Instruments and AASB 2009-11: Amendments to Australian Accounting Standards arising from AASB 9 [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 121, 127, 128, 131, 132, 136, 139, 1023 & 1038 and Interpretations 10 & 12] (applicable for annual reporting periods commencing on or after 1 January 2013). These standards are applicable retrospectively and amend the classification and measurement of financial assets. The group has not yet determined the potential impact on the financial statements. 38 29 AUSTRALIAN ETHICAL INVESTMENT LTDAustralian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 • AASB 124: Related Party Disclosures (applicable for annual reporting periods commencing on or after 1 January 2011). This standard removes the requirement for government related entities to disclose details of all transactions with the government and other government related entities and clarifies the definition of a related party to remove inconsistencies and simplify the structure of the standard. No changes are expected to materially affect the group. • AASB 1053: Application of Tiers of Australian Accounting Standards and AASB2010-2: Amendments to Australian Accounting Standards arising from Reduced Disclosure Requirements [AASB 1, 2, 3, 5, 7, 8, 101, 102, 107, 108, 110, 111, 112, 116, 117, 119, 121, 123, 124, 127, 128, 131, 133, 134, 136, 137, 138, 140, 141, 1050 & 1052 and Interpretations 2, 4, 5, 15, 17, 127, 129 & 1052] (applicable for annual reporting periods commencing on or after 1 July 2013). AASB 1053 establishes a revised differential financial reporting framework consisting of two tiers of financial reporting requirements for those entities preparing general purpose financial statements: − Tier 1: Australian Accounting Standards; and − Tier 2: Australian Accounting Standards - Reduced Disclosure Requirements. Tier 2 of the framework comprises the recognition, measurement and presentation requirements of Tier 1, but contains significantly fewer disclosure requirements. The following entities are required to apply Tier 1 reporting requirements (i.e. full IFRS): − for-profit private sector entities that have public accountability; and − the Australian Government and state, territory and local governments. Since the group is a for-profit private sector entity that has public accountability, it does not qualify for the reduced disclosure requirements for Tier 2 entities. • AASB 2009-12: Amendments to Australian Accounting Standards [AASBs 5, 8, 108, 110, 112, 119, 133, 137, 139, 1023 & 1031 and Interpretations 2, 4, 16, 1039 & 1052] (applicable for annual reporting periods commencing on or after 1 January 2011). This standard makes a number of editorial amendments to a range of Australian Accounting Standards and Interpretations, including amendments to reflect changes made to the text of International Financial reporting Standards by the IASB. The standard also amends AASB 8 to require entities to exercise judgement in assessing whether a government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures. These amendments are not expected to impact the group. 30 39 AUSTRALIAN ETHICAL INVESTMENT LTDAustralian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 • AASB 2010-4: Further amendments to Australian Accounting Standards arising from the Annual Improvements Project [AASB 1, AASB 7, AASB 101 & AASB 134 and Interpretation 13] (applicable for annual reporting periods commencing on or after 1 January 2011). This Standard details numerous non-urgent but necessary changes to Accounting Standards arising from the IASB's annual improvements project. Key changes include: − clarifying the application of AASB 108 prior to an entity's first Australian-Accounting- Standards financial statements; − adding an explicit statement to AASB 7 that qualitative disclosures should be made in the context of the quantitative disclosures to better enable users to evaluate an entity's exposure to risks arising from financial instruments; − amending AASB 101 to the effect that disaggregation of changes in each component of equity arising from transactions recognised in other comprehensive income is required to be presented, but is permitted to be presented in the statement of changes in equity or in the notes; − adding a number of examples to the list of events or transactions that require disclosure under AASB 134; and − making sundry editorial amendments to various Standards and Interpretations. This Standard is not expected to impact the group. 40 31 AUSTRALIAN ETHICAL INVESTMENT LTDAustralian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 2 - Auditors' remuneration Remuneration of the auditors for: Audit services - Auditing the financial report - Auditing the sustainability report Non-audit services Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ 39,188 5,900 38,279 5,750 34,538 5,900 33,629 5,750 - Tax and other accounting advice 3,462 3,371 3,462 3,371 Note 3 - Revenue Operating activities - Management fees net of rebates - Entry fees - Member & Withdrawal Fees - Other fees - Dividend from wholly owned subsidiary - Interest/distributions - Wholly owned entity fee - Other revenue 11,235,864 1,107,289 697,654 1,219,025 - 98,246 - 785,873 15,143,951 10,801,006 1,349,887 536,221 1,162,694 - 123,949 - 94,142 14,067,899 4,602,218 80,839 - 998,442 1,665,953 78,632 6,167,594 735,180 14,328,858 4,701,333 157,969 - 1,162,694 1,797,057 95,011 3,892,705 85,037 11,891,805 Total revenue Total revenue 15,143,951 15,143,951 14,067,899 14,067,899 14,328,858 14,328,858 11,891,805 11,891,805 32 41 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 4 - Income tax expense a) The components of tax expense comprise: - Current tax - Deferred tax b) The prima facie tax payable on profit from ordinary activities before income tax is reconciled to the income tax expense as follows: Prima facie tax payable on profit from ordinary activities before income tax at 30% (2010:30%) - Consolidated entity - Parent entity - Other members of the income tax consolidated group net of intercompany transactions Add: tax effect of: - Other non-allowable items - Share options expensed during year - Under provision for income tax in prior year Less: tax effect of: - Rebateable fully franked dividends - Franking and foreign tax credits - Tax allowance on capital investment Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ 828,581 (163,739) 664,841 560,819 22,131 582,950 679,763 (163,739) 516,024 (109,344) 19,176 (90,168) 584,212 - 481,651 - - 935,233 - 347,721 - - 148,818 673,118 2,130 76,772 2,483 665,597 1,891 94,570 5,582 583,694 2,076 76,772 2,483 1,165,382 1,820 94,570 5,582 1,122,811 - ( 755 ) - - ( 744 ) - ( 499,785 ) ( 755 ) - ( 539,117) ( 744) - Income tax expense attributable to entity 664,842 582,950 664,842 582,950 Allocation of income tax expense to wholly owned entity under the tax sharing agreement - - ( 148,818) ( 673,118) Income tax expense attributable to entity 664,842 582,950 516,024 ( 90,168) The applicable weighted average effective tax rates are as follows: 34% 36% 17% -8% 42 33 2 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 5 - Dividends (a) Distributions paid Final fully franked dividend of 50 (2010: 132 ) cents per share franked at the tax rate of 30% (2010:30%) Special fully franked dividend of 100 (2010: 0) cents per share franked at the tax rate of 30% (2010:30%) Interim fully franked dividend of 45 (2010: 50) cents per share franked at the tax rate of 30% (2010:30%) (b) Distributions declared Final fully franked dividend of 100 (2010: 50) cents per share franked at the tax rate of 30% (2010: 30%) Special fully franked dividend of 25 (2010: 100) cents per share franked at the tax rate of 30% (2010:30%) (c) Franking account Balance of franking account at year end adjusted for franking credits which will arise from income for franking credits which will arise from income tax payments in the following year. Subsequent to year-end, the franking account would be reduced by the declared dividend reflected above as follows: Note 6 - Earnings per share Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ 496,570 1,308,854 496,570 1,308,854 993,141 - 993,141 - 449,061 1,938,772 496,570 1,805,424 449,061 1,938,772 496,570 1,805,424 997,913 496,570 997,913 496,570 249,478 993,141 249,478 993,141 1,380,710 1,418,530 534,596 846,114 638,448 780,082 (a) Earnings used to calculate basic EPS and dilutive EPS 1,282,533 1,022,555 (b) Weighted average number of ordinary shares outstanding during the year used in calculation of basic EPS Weighted average number of rights outstanding Weighted average number of ordinary shares outstanding during the year used in calculation of dilutive EPS Note 7 - Cash and cash equivalents Cash on hand Cash at bank Deposits at call 996,004 6,886 992,385 9,516 1,002,890 1,001,901 300 171,559 2,382,830 2,554,689 300 1,020,195 872,239 1,892,734 300 10,000 2,287,826 2,298,126 300 6,842 427,895 435,037 Cash at bank earns interest at floating rates based on daily bank deposit rates. Deposits at call is money invested in high interest bank account. Interest is calculated daily based on daily bank deposit rates. 34 43 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 8 - Trade and other receivables Trade receivables Other Amounts receivable - wholly owned entity Note 9 - Financial assets Available-for-sale financial assets Loans Less non-current portion Current portion a. Available-for-sale financial assets comprise: - Money market deposit at cost - Mortgage backed security at fair value - Listed securities at fair value - Units in unit trust at fair value - Shares in wholly owned entity at cost Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ 3,238,499 6,798 - 3,245,297 3,039,901 10,128 - 3,050,029 2,623,778 6,798 67,601 2,698,177 2,516,422 10,128 78,324 2,604,874 476,902 81,341 558,243 61,820 496,423 973,096 125,850 1,098,946 100,505 998,441 792,902 81,341 874,243 377,820 496,423 1,289,096 125,850 1,414,946 416,505 998,441 - - 137,036 339,866 - 476,902 500,000 144,616 2,558 325,922 - 973,096 - - 137,036 339,866 316,000 792,902 500,000 144,616 2,558 325,922 316,000 1,289,096 b. Loans comprise - Loan to other entity - Loan to staff 69,091 12,250 81,341 82,492 43,358 125,850 69,091 12,250 81,341 82,492 43,358 125,850 The first loan is provided to an independent entity with a fixed interest rate of 9.0% and matures 1 August 2015.. Loan to staff is provided to one staff member with the FBT interest rate set by the ATO. Note 10 - Other current assets Other Prepayments 11,857 220,449 232,306 11,914 325,281 337,195 11,858 178,130 189,988 11,914 285,369 297,283 44 35 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 11 - Property, plant and equipment Land and buildings Leasehold land At cost Total land Buildings At cost Accumulated depreciation Total buildings Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ 230,000 230,000 230,000 230,000 230,000 230,000 230,000 230,000 2,784,117 ( 368,642 ) 2,415,475 2,784,117 ( 297,085 ) 2,487,032 2,784,117 ( 368,642) 2,415,475 2,784,117 ( 297,085) 2,487,032 Total land and buildings 2,645,475 2,717,032 2,645,475 2,717,032 Plant and equipment At cost Accumulated depreciation Total plant and equipment 2,809,022 ( 1,413,750) 1,395,272 2,680,113 ( 1,181,977) 1,498,136 2,809,022 ( 1,413,750) 1,395,272 2,680,113 ( 1,181,977) 1,498,136 Total property, plant and equipment 4,040,747 4,215,168 4,040,747 4,215,168 Movements in carrying amounts Land Balance at the beginning of year Additions Disposals Carrying amount at the end of year Buildings Balance at the beginning of year Additions Disposals Depreciation expense Carrying amount at the end of year Plant and equipment Balance at the beginning of year Additions Disposals Depreciation expense Carrying amount at the end of year 230,000 - - 230,000 230,000 - - 230,000 230,000 - - 230,000 230,000 - - 230,000 2,487,032 - - ( 71,557) 2,415,475 2,558,589 - - ( 71,557) 2,487,032 2,487,032 - - ( 71,557) 2,415,475 2,558,589 - - ( 71,557) 2,487,032 1,498,136 256,948 ( 36,793) ( 323,019) 1,395,272 1,350,992 430,862 ( 10,286) ( 273,431) 1,498,136 1,498,136 256,948 ( 36,793) ( 323,019) 1,395,272 1,350,992 430,862 ( 10,286) ( 273,431) 1,498,136 Total 4,040,747 4,215,168 4,040,747 4,215,168 An independent valuer was contracted to value the land and buildings at 30 June 2009. Independent valuation will be conducted on a three year cycle in order to comply with accounting standard requirements on impairment. Based on the valuation conducted in 2009 and assessment of the market since that date, the cost value of land and building disclosed above is below the commercial valuation and therefore no impairment has occurred. 36 45 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Note 12 - Intangible Assets Website development costs At cost Accumulated amortisation Total intangibles Website development costs Balance at the beginning of year Additions Disposals Amortisation expense Carrying amount at the end of year Note 13 - Tax assets Current Tax assets Tax refund receivable due to income tax overpayment Deferred Tax assets The balance comprises temporary differences attributable to: Amounts recognised in profit or loss Employee benefits Community grants Audit fees Amounts recognised directly in equity Financial asset revaluations Movements Opening balance at 1 July Opening balance at 1 July Credited (charged) to the statement of comprehensive income Credited (charged) to equity Closing balance at 30 June Note 14 - Trade and other payables Trade payables Sundry payables and accrued expenses Employee bonus Amounts payable to wholly owned entity Note 15 - Tax liabilities Current tax liabilities Income tax payable Deferred tax liabilities The balance comprises temporary differences attributable to: Amounts recognised in profit or loss: Stamp duty on leasehold property: Tax deferred income Movements Opening balance at 1 July Credited/(charged) to the income statement Credited/(charged) to equity Closing balance at 30 June Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ 85,540 ( 40,185 ) 45,355 59,800 ( 13,503) 46,297 85,540 ( 40,185) 45,355 59,800 ( 13,503) 46,297 46,297 25,740 - ( 26,682) 45,355 - 59,800 - ( 13,503) 46,297 46,297 25,740 - ( 26,682) 45,355 - 59,800 - ( 13,503) 46,297 - - 24,474 24,474 - - 213,987 213,987 517,881 46,578 14,220 578,679 362,580 40,850 14,220 417,650 517,881 46,578 12,825 577,284 362,580 40,850 12,825 416,255 28,824 607,503 17,433 435,083 28,824 606,108 17,433 433,688 435,083 435,083 464,200 464,200 433,688 433,688 459,850 459,850 161,029 11,391 607,503 ( 21,126) ( 7,991) 435,083 161,029 11,391 606,108 ( 18,171) ( 7,991) 433,688 411,535 1,971,145 205,029 - 2,587,710 436,714 1,864,510 194,200 - 2,495,424 394,251 1,740,426 205,029 - 2,339,705 313,031 1,655,441 194,200 496,388 2,659,060 443,545 443,545 - - 443,545 443,545 - - 30,896 4,030 34,926 34,805 121 - 34,926 30,896 3,909 34,805 33,732 1,073 - 34,805 30,896 4,030 34,926 34,805 121 - 34,926 30,896 3,909 34,805 33,732 1,073 - 34,805 46 37 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ 533,024 533,024 451,046 451,046 533,024 533,024 451,046 451,046 56,123 56,123 62,923 62,923 56,123 56,123 62,923 62,923 5,791,147 5,739,635 5,791,147 5,739,635 Note 16 - Provisions Current Employee benefits - long service leave Non-Current Employee benefits - long service leave Note 17 - Issued capital Ordinary shares Fully paid ordinary shares at the beginning of the financial year 993,141 (2010 - 991,556) shares Issue of share capital Shares issued during the year under the employee share ownership plan: 1,585 on 22 December 2009 (options exercised) - 51,512 - 51,512 4,772 on 23 November 2010 (rights exercised) 124,072 - 124,072 - Balance 30 June 997,913 (2010 - 993,141) shares 5,915,219 5,791,147 5,915,219 5,791,147 At 30 June 2011 there were 997,913 fully paid ordinary shares which have no par value. Options/rights Options/rights (i) For detailed information relating to the Australian Ethical Investment Limited employee share ownership plan, including details of options/rights issued, exercised and lapsed during the financial year and the options/rights outstanding at year-end, refer to note 25 share-based payments. (ii) For information related to share options and rights issued to key management personnel during the financial year refer to the remuneration report contained within the Directors' report. Ordinary shares Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares held. At the shareholders meeting each ordinary share is entitled to one vote when a poll is called, othewise each shareholder has one vote on a show of hands. Capital management The company’s capital structure and policies remain relatively simple. The company currently has no debt and capital not required for working purposes is held as an investment in Trevor Pearcey House and in an investment portfolio comprising Australian Ethical trusts and listed securities. Detail provided in Note 9 and 11. Management effectively manages the group's capital by assessing the group's financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of distributions to shareholders and share issues. Maintenance of a certain level of capital is a condition of the company’s Australian Financial Services Licence. The company currently meets the $5.0M capital requirement above which no extra capital is required as a result of increased funds under management. 38 47 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ Note 18 – Events after the reporting date Since the end of the financial year, no material events that may have an impact on these financial statements have occurred. The financial report was authorised for issue on the directors' declaration date by the board of directors. Note 19 - Economic dependence The consolidated entity is dependent upon management fees received in its capacity as responsible entity of the Australian Ethical Trusts and as trustee of the Australian Ethical Retail Superannuation Fund. Note 20 - Contingencies Liabilties and assets of trusts and superannuation fund Liabilities of the trusts and superannuation fund for which the consolidated entity and parent entity are responsible entity and trustee but not shown in the financial statements of the consolidated entity or parent entity were: Current liabilities Payables Provisions Total liabilities 3,249,481 18,472,200 21,721,681 29,220,186 11,719,003 40,939,189 1,957,613 17,710,906 19,668,519 28,346,164 10,539,437 38,885,601 Rights of indemnities for liabilities incurred by the consolidated entity and parent entity not recorded in the financial statements were: 21,721,681 40,939,189 19,668,519 38,885,601 The trusts and superannuation fund hold sufficient assets to meet these liabilities as and when they fall due. The trusts and superannuation fund hold sufficient assets to meet these liabilities as and when they fall due. The assets of the trusts and superannuation fund are not available to meet any liabilities of the consolidated entity or parent entity acting in their own right. 48 39 3 AUSTRALIAN ETHICAL INVESTMENT LTDAustralian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the consolidated financial statements for the half-year ended 30 June 2011 Note 21 - Operating segments The group has identified its operating segments based on the internal reports that are reviewed and used by the board of directors (chief operating decision makers) in assessing performance and determining the allocation of resources. Reportable segments disclosed are: 1) public offer managed funds (managed funds); and 2) public offer retail superannuation fund (super) (i) Segment performance Revenue External sale Inter-segment sale Interest revenue 30 June 2011 30 June 2010 Managed funds $ Super $ Total $ Managed funds $ Super $ Total $ 6,416,679 6,167,594 78,632 8,629,026 - 19,614 15,045,705 6,167,594 98,246 6,107,033 3,892,705 95,011 7,836,917 - 28,938 13,943,950 3,892,705 123,949 Total segment revenue 12,662,905 8,648,640 21,311,545 10,094,749 7,865,855 17,960,604 Inter-segment eliminations Total group revenue (6,167,594) 15,143,951 (3,892,705) 14,067,899 Segment net profit before tax 2,622,030 795,165 3,417,195 588,405 2,243,491 2,831,896 Reconciliation of segment result to group net profit/loss after tax Income tax expense (516,024) (148,818) (664,842) 90,168 (673,118) (582,950) Unallocated items - Depreciation and amortisation - Other corporate overheads * - Other corporate overheads * Group net profit after tax (421,258) (1,048,562) (1,048,562) 1,282,533 (358,491) (867,900) (867,900) 1,022,555 * Other corporate overheads includes staff bonus, tithe expense, staff options/rights expense and the payment to the former Chief Executive Officer. (ii) Segment assets 30 June 2011 30 June 2010 Managed funds $ Super $ Total $ Managed funds $ Super $ Total $ Assets 10,752,744 914,998 11,667,742 9,661,280 2,518,170 12,179,450 Inter-segment eliminations Total group assets (iii) Segment liabilities (383,602) 11,284,140 (1,080,224) 11,099,226 Liabilities 3,407,323 315,606 3,722,929 3,207,834 600,589 3,808,423 Inter-segment eliminations Total group liabilities (67,601) 3,655,328 (764,225) 3,044,198 40 40 49 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ Note 22 - Cash flow information (a) Reconciliation of cash Cash at the end of the financial year as shown in the cash flow statement is reconciled to the related items in the balance sheet as follows: Cash on hand Cash at bank Deposits at call 300 171,559 2,382,830 2,554,689 300 1,020,195 872,239 1,892,734 300 10,000 2,287,826 2,298,126 300 6,842 427,895 435,037 (b) Reconciliation of cash flow from operations with net profit from ordinary activities after income tax expense Net profit from ordinary activities after income tax expense Non-cash flows in operating profit Depreciation Provisions (Profit) loss on sale of property, plant & equipment (Profit) loss on sale of property, plant & equipment (Profit) loss on sale of investment Share options/rights expensed Changes in assets and liabilities (Increase) decrease in trade & other receivables (Increase) decrease in current tax assets (Increase) decrease in prepayments & other assets (Increase) decrease in deferred tax assets Increase (decrease) in trade & other payables Increase (decrease) in current tax liability Increase (decrease) in deferred tax liability 1,282,533 1,022,555 2,601,422 1,249,238 421,258 75,178 27,246 27,246 ( 6,449) 255,905 358,491 ( 70,439) 19,659 19,659 - 315,235 421,258 75,178 27,246 27,246 ( 6,449) 255,905 358,491 ( 70,439) 19,659 19,659 - 315,235 ( 199,654) - 104,888 ( 136,555) 92,276 443,545 121 ( 1,248,023) ( 24,474) ( 57,829) 21,126 739,051 ( 227,201) 1,074 (30,088) - 107,296 52,958 (319,365) 375,944 121 ( 1,485,227) ( 213,987) ( 62,022) 18,171 706,262 ( 56,771) 1,074 Net cash provided by (used in) operating activities 2,360,292 849,225 3,561,426 779,684 50 41 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ Note 23 – Related party transactions Australian Ethical Investment Limited is the ultimate parent entity and owns 100% of Australian Ethical Superannuation Pty Ltd. Australian Ethical Investment Limited acts as the responsible entity for the Australian Ethical Trusts (Australian Ethical Balanced Trust, Australian Ethical Smaller Companies Trust, Australian Ethical Income Trust, Australian Ethical Larger Companies Trust, Australian Ethical International Equities Trust, Australian Ethical World Trust, Australian Ethical Property Trust and the Climate Advocacy Fund). Australian Ethical Superannuation Pty Ltd acts as trustee for the Australian Ethical Retail Superannuation Fund. Transactions between related parties are on commercial terms and conditions no more favourable than those available to other parties unless otherwise stated. Australian Ethical Superannuation Pty Ltd a) Transactions between Australian Ethical Investment Limited and its wholly owned entity, Australian Ethical Superannuation Pty Ltd during the financial year consisted of: (i) Transactions whereby Australian Ethical Investment Limited provides management services to the wholly owned entity on a cost recovery basis (ii) Transactions between Australian Ethical Investment Limited and its wholly owned entity under the tax consolidation and related tax sharing agreement referred to in note 1(b). (iii) Transactions whereby Australian Ethical (iii) Transactions whereby Australian Ethical Investment Limited collects management fee income on behalf of wholly owned entity and on- pays this management fee income to the wholly owned entity on a monthly basis. (iv) Transactions whereby Australian Ethical Investment Limited receives a dividend from the wholly owned entity referred to in note 3. b) Outstanding balances at end of period: Amounts receivable from wholly owned entity: Taxation and other Amounts payable to wholly owned entity: Management fee income - - - - - - - - - - - - 6,167,594 3,892,705 148,818 673,117 6,401,445 5,987,343 1,665,953 1,797,057 67,601 78,324 - 496,388 42 51 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ Note 23 – Related party transactions - continued Australian Ethical Trusts a) Transactions between Australian Ethical Investment Limited, as responsible entity, and the Australian Ethical Trusts during the financial year consisted of: (i) Transactions whereby Australian Ethical Investment Limited provides investment services to the Australian Ethical Trusts in accordance with the trust deed. - Australian Ethical Balanced Trust - Australian Ethical Smaller Companies Trust - Australian Ethical Income Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical World Trust - Australian Ethical Property Trust - Climate Advocacy Fund (ii) Transactions whereby Australian Ethical Investment Limited provides accounting services to the Australian Ethical Trusts in accordance with the trust deed. - Australian Ethical Balanced Trust - Australian Ethical Smaller Companies Trust - Australian Ethical Income Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical World Trust - Australian Ethical World Trust - Australian Ethical Property Trust (iii) Transactions whereby Australian Ethical Investment Limited seeks expense reimbursement from the Australian Ethical Trusts in accordance with the trust deed. - Australian Ethical Balanced Trust - Australian Ethical Smaller Companies Trust - Australian Ethical Income Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical World Trust - Australian Ethical Property Trust 3,459,096 4,039,271 360,548 1,717,663 1,442,241 - 296,802 23,775 3,563,536 3,842,863 327,041 1,964,631 1,017,719 14,026 136,068 510 3,459,096 4,039,271 360,548 1,717,663 1,442,241 - 296,802 23,775 3,563,536 3,842,863 327,041 1,964,631 1,017,719 14,026 136,068 510 253,495 204,500 88,251 130,247 102,249 - - 34,201 274,208 220,101 94,591 140,969 110,550 15,572 15,572 18,362 253,495 204,500 88,251 130,247 102,249 - - 34,201 274,208 220,101 94,591 140,969 110,550 15,572 15,572 18,362 26,885 32,012 1,963 20,885 4,502 - 121 40,599 46,764 3,873 30,272 1,933 2,808 9 26,885 32,012 1,963 20,885 4,502 - 121 40,599 46,764 3,873 30,272 1,933 2,808 9 (iv) Transaction whereby Australian Ethical Investment Limited received a distribution payment from the Australian Ethical Balanced Trust 4,665 2,695 4,665 2,695 52 43 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ Note 23 – Related party transactions - continued b) Outstanding balances at end of period: Amounts receivable from the Australian Ethical Trusts in relation to investment services, accounting services and reimbursable expenses: - Australian Ethical Balanced Trust - Australian Ethical Smaller Companies Trust - Australian Ethical Income Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical World Trust - Australian Ethical Property Trust - Climate Advocacy Fund Value of units held by Australian Ethical Investment Limited in the Australian Ethical Balanced Trust Value of units held by Australian Ethical Investment Limited in the Climate Advocacy Fund Distribution receivable from Australian Ethical Balanced Trust Distribution receivable from Climate Advocacy Fund Fund 438,059 491,102 93,853 235,973 168,801 6,501 64,300 6,992 85,327 304,836 62,394 150,125 156,617 5,908 63,816 191 438,059 491,102 93,853 235,973 168,801 6,501 64,300 6,992 85,327 304,836 62,394 150,125 156,617 5,908 63,816 191 233,479 227,064 233,479 227,064 106,386 98,858 102,452 98,858 3,316 3,482 3,482 6,057 718 718 3,316 3,482 3,482 6,057 718 718 44 53 AUSTRALIAN ETHICAL INVESTMENT LTD Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Notes to the financial statements for the year ended 30 June 2011 Consolidated entity Parent entity 2011 $ 2010 $ $ 2011 $ 2010 $ Note 23 – Related party transactions - continued Australian Ethical Retail Superannuation Fund a) Transactions between the Consolidated entity and the Australian Ethical Retail Superannuation Fund during the financial year consisted of: (i) Transactions between Australian Ethical Superannuation Pty Limited and the Australian Ethical Retail Superannuation Fund related to investment services/ (rebate of investment services.) (ii) Transactions between Australian Ethical Superannuation Pty Limited and the Australian Ethical Retail Superannuation Fund related to contribution fee/ (rebate of contribution fee) (iii) Transactions between Australian Ethical Superannuation Pty Limited and the Australian Ethical Retail Superannuation Fund related to member admin fee/ (rebate of member admin fee) (iv) Transactions between Australian Ethical Superannuation Pty Limited and the Australian Ethical Retail Superannuation Fund related to other reimbursables/ (rebate of other reimbursables) Outstanding balances at end of period: Outstanding balances at end of period: Amounts receivable from/ (payable to ) the Australian Ethical Retail Superannuation Fund: (i) Investment services/ (rebate of investment services fee) 232,201 112,330 1,026,450 1,191,919 697,654 536,221 226,299 50,839 52,372 14,415 (ii) Contribution fee/ (rebate of contribution fee) 175,916 236,967 (iii) Member admin fee/ (rebate of member admin fee) (iv) Other reimbursables/ (rebate of other reimbursables) 350,798 268,872 37,623 762 Terms and conditions No provision for doubtful debts has been raised in relation to any outstanding balances and no expense has been recognised in respect of bad or doubtful debts due from related parties. Outstanding balances are unsecured and are repayable in cash. - - - - - - - - - - - - - - - - 54 45 AUSTRALIAN ETHICAL INVESTMENT LTD AUSTRALIAN ETHICAL INVESTMENT LIMITED A.B.N. 47 003 188 930 AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2011 Note 24 - Key management personnel compensation a) Key management personnel Names and positions of key management personnel (directors and named executives) at any time during the financial year Parent entity directors Name James Thier Howard Pender Naomi Edwards Justine Hickey Les Coleman Stephen Newnham André Morony Phillip Vernon Position Director, executive Director, executive Director, non-executive Director, non-executive Director, non-executive Director, non-executive Chairperson, non-executive Managing Director ,executive Other key management personnel Name Gary Leckie Tim Xirakis Philip George Paul Harding Davis James Jordan Position Chief Financial Officer Head of Client Relationships Head of Product & Client Services Head of Distribution Chief Investment Officer b) Key management personnel compensation Retired 17 November 2010 Resigned 23 March 2011 Appointed 20 December 2010 Appointed 27 July 2010 Resigned 8 August 2011 Resigned 5 January 2011 Short term employment benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments Total compensation Economic Entity 2011 $ 1,698,879 151,363 19,073 57,459 127,143 2,053,917 2010 $ 1,866,314 158,141 21,010 235,000 175,747 2,456,212 Parent Entity 2011 $ 1,661,759 148,016 19,073 57,459 127,143 2,013,450 2010 $ 1,809,139 153,731 21,010 235,000 175,747 2,394,627 Further key management personnel remuneration details are included in the Remuneration Report section of the Directors' Report. c) Equity instrument disclosures relating to key management personnel Option holdings Number of options held by key management personnel. KMP options holdings Option Class Balance at beginning of year No. granted No. expired No. vested & excercised Balance at end of year Vested at end of year Vested & excercisable at end of year Vested & un- excercisable at end of year Parent entity directors James Thier Howard Pender Named executives (including other key management personnel) Philip George Gary Leckie Tim Xirakis Paul Harding Davis James Jordan AEFAT AEFAV 2011 Total 2010 Total AEFAT AEFAV 2011 Total 2011 Total 2010 Total AEFAT AEFAU 2011 Total 2010 Total AEFAT AEFAU 2011 Total 2010 Total AEFAT AEFAU 2011 Total 2010 Total AEFAU 2011 Total 2010 Total AEFAT AEFAU 2011 Total 2010 Total 1,517 1,364 2,881 4,313 1,513 1,326 2,839 2,839 4,308 2,469 2,169 4,638 6,994 1,767 1,919 3,686 5,129 1,776 1,895 3,671 5,058 1,060 1,060 1,060 1,146 1,243 2,389 2,389 - - - - - - - - - - - - - - - - - - - - - - - - - - - - ( 1,517) ( 1,517) ( 1,432) ( 1,513) ( 1,513) ( 1,513) ( 1,469) ( 2,469) ( 2,469) - ( 1,767) ( 1,767) ( 1,443) ( 1,776) ( 1,776) ( 1,387) ( 1,146) ( 1,146) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ( 2,356) - 1,364 1,364 2,881 - 1,326 1,326 1,326 2,839 - 2,169 2,169 4,638 - 1,919 1,919 3,686 - 1,895 1,895 3,671 1,060 1,060 1,060 - 1,243 1,243 2,389 1,517 - 1,517 1,432 1,513 - 1,513 1,513 1,469 2,469 - 2,469 2,356 1,767 - 1,767 1,443 1,776 - 1,776 1,387 - - - 1,146 - 1,146 - 1,517 - 1,517 1,432 1,513 - 1,513 1,513 1,469 2,469 - 2,469 2,356 1,767 - 1,767 1,443 1,776 - 1,776 1,387 - - - 1,146 - 1,146 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 46 46 55 AUSTRALIAN ETHICAL INVESTMENT LTD AUSTRALIAN ETHICAL INVESTMENT LIMITED A.B.N. 47 003 188 930 AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2011 Note 24 - Key management personnel compensation - continued Rights holdings Number of Rights held by key management personnel. KMP Rights Holdings Rights Class Balance at beginning of year No. granted No.forfeited No. vested & excercised Balance at end of year Vested at end of year Vested & excercisable at end of year Vested & un- excercisable at end of year Parent entity directors James Thier Howard Pender Phillip Vernon Named executives (including other key management personnel) Philip George Gary Leckie Tim Xirakis Paul Harding Davis James Jordan AEFAY AEFAW 2011 Total 2010 Total AEFAY AEFAW 2011 Total 2010 Total AEFAY AEFAW 2011 Total 2010 Total AEFAY AEFAW 2011 Total 2010 Total AEFAY AEFAW 2011 Total 2010 Total AEFAY AEFAW 2011 Total 2010 Total AEFAY AEFAW 2011 Total 2010 Total AEFAY AEFAW AEFAX 2011 Total 2010 Total Share holdings Number of shares held by key management personnel. - - - - - 319 319 320 320 317 317 - 501 501 - 506 506 - 493 493 - - - 531 531 - - 409 862 1,271 - 689 - 689 319 736 - 736 320 2,481 - 2,481 317 985 - 985 501 1,008 - 1,008 506 982 - 982 493 - - - 531 868 - 47 915 1,271 - - - - - - - - - - - - - - - - - - - - - - - - - ( 531) ( 531) - - - - - - ( 909) ( 909) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 689 319 1,008 319 736 320 1,056 320 2,481 317 2,798 317 985 501 1,486 501 1,008 506 1,514 506 982 493 1,475 493 - - - 531 868 409 - 1,277 1,271 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 909 909 - 909 909 - 909 909 - Balance at beginning of year Acquired / Granted as Remuneration On exercise of options/ rights Net Change other (1) Balance at end of year (2) & (3) Parent entity directors James Thier James Thier Howard Pender Justine Hickey 2011 2011 2010 2011 2010 2011 2010 65,846 65,846 65,846 51,883 52,283 700 700 Named executives (including other key management personnel) Philip George Gary Leckie Paul Harding Davis James Jordan 2011 2010 2010 2009 2011 2010 2011 2010 - - 1,104 489 1,598 78 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,387 909 - - - 730 730 ( 1,200) ( 400) 500 - 615 ( 1,387) ( 838) 1,520 - - 66,576 66,576 65,846 50,683 51,883 1,200 700 - - 1,104 1,104 760 1,598 909 - (1) "Net change other" incorporates changes resulting from purchases, sales, forfeitures during the year. (2) Shares issued are fully paid (3) Balance represents shareholdings by key management personnel including their related parties as required by AASB 124 Related Party Disclosures Key management personnel loans Balance at beginning of year Interest charged Interest not charged Write-off Balance at end of year No. of Individuals at end of year Key management personnel $ $ $ $ $ 2011 2010 43,358.14 1,860.30 - 1,697.65 - - - - 12,250.11 43,358.14 1 2 (a) The Loan is repayable on 30 November 2013 and currently bears interest at 7.8 % per annum that is the FBT interest rate set by the ATO. (b) In the 2010 -11 reporting period, there were no loans to individuals that exceeded $100,000 at any time. 56 47 47 AUSTRALIAN ETHICAL INVESTMENT LTD AUSTRALIAN ETHICAL INVESTMENT LIMITED A.B.N. 47 003 188 930 AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2011 Note 25 - Share based payments The following share-based payment arrangements existed at 30 June 2011: On 14 October 2008, 41,937 share options were granted to non-probationary employees under the Australian Ethical Investment Limited employee share ownership plan and on 1 December 2008, 2,690 share options were granted to executive directors. The options were issued for nil consideration, are exercisable from 14 October 2011, have an exercise price of $32.27 each and a three month window in which to be exercised. In most circumstances the options will lapse if the holder is no longer an employee of Australian Ethical Investment Limited. The options hold no voting or dividend rights. During this reporting period, Australian Ethical Investment Limited issued 4,772 ordinary shares on conversion of 4,772 AEFAX performance rights for nil consideration issued under its employee share incentive scheme in November 2009 .This conversion of performance rights resulted in an increase in ordinary shares of 4,772. During the 2010 reporting period, 10,819 performance rights (identifier: AEFAW) were granted. Under the Australian Ethical Investment Limited employee share incentive scheme (ESIS) participants are granted performance rights to ordinary shares, subject to meeting specified performance criteria over the performance period. The number of shares that the participant will ultimately receive will depend on the extent to which the performance criteria are met by the company and the individual employee. These rights were issued for nil consideration. These rights hold no voting or dividend rights. Subject to the terms and conditions of the ESIS rules, the performance rights have the following attributes determining whether shares will be issued in respect of the rights. - employment must continue until 30 June 2012 - the arithmetic average return on equity over the performance period (‘AROE’) must exceed 15% p.a. or no shares shall be awarded at the end of the performance period; - if the AROE exceeds 15% p.a. but is less than 20% p.a., half the maximum number of shares shall be awarded; - if the AROE is equal to or greater than 20% p.a. the maximum number of shares shall be awarded. - AROE is determined as the arithmetic average of return on equity over six month periods calculated using audited half-year financial statements - The performance period is the financial years 2009/10, 2010/11 and 2011/12 During the reporting period 25,432 performance rights in two classes (identifiers: AEFAY and AEFAZ) were granted. Under the Australian Ethical Investment Limited employee share incentive scheme (ESIS) participants are granted performance rights to ordinary shares, subject to meeting specified performance criteria over the performance period. The number of shares that the participant will ultimately receive will depend on the extent to which the performance criteria are met by the company and the individual employee. These rights were issued for nil consideration. These rights hold no voting or dividend rights. Subject to the terms and conditions of the ESIS rules, the performance rights have the following attributes determining whether shares will be issued in respect of the rights. ASX Code AEFAY Number Granted 20,582 AEFAZ 4,760 Attributes - employment must continue until 30 June 2013 - the arithmetic average return on equity over the performance period (‘AROE’) must exceed 15% p.a. or no shares shall be awarded at the end of the performance period; - if the AROE exceeds 15% p.a. but is less than 20% p.a., half the maximum number of shares shall be awarded; - if the AROE is equal to or greater than 20% p.a. the maximum number of shares shall be awarded. - AROE is determined as the arithmetic average of return on equity over six month periods calculated using audited half-year financial statements. - The performance period is the financial years 2010/11, 2011/2012 and 2012/2013. - employment must continue until 1 July 2011; - the number of shares that will be issued to each employee in respect of their performance rights under this category will be adjusted up or down by a maximum 20%, dependent on the absolute performance of one of the company's managed investment schemes, for which the employee has responsibility or provides significant input; a managed investment scheme has been agreed between the company and the employee. Performance will be measured over a performance period of 1 July 2010 to 30 June 2011 Performance rights reconciliation Outstanding at the beginning of the financial year Granted Forfeited Exercised Expired Outstanding at year-end Exercisable at year-end Fair value - Rights Consolidated Entity 2011 2010 Number of Rights Number of Rights 14,476 25,569 ( 2,857) ( 4,772) - - 16,330 ( 1,854) - - 32,416 14,476 - - - - Parent Entity 2011 2010 Number of Rights Number of Rights 14,476 25,569 ( 2,857) ( 4,772) - 32,416 - - 16,330 ( 1,854) - - 14,476 - All rights were calculated at grant date based on the underl;ying share prices minus estimated net present value of future dividends that the holders of rights are not entitled to. Weighted average fair value - Options Consolidated Entity Parent Entity 2011 2010 2011 2010 Number of Options Weighted Average Exercise Price $ Number of Options Weighted Average Exercise Price $ Number of Options Weighted Average Exercise Price $ Weighted Average Exercise Price $ Number of Options Outstanding at the beginning of the financial year Granted Forfeited Exercised Expired 68,682 - ( 4,435) - ( 31,853) 44.00 - 32.27 - 57.57 116,777 - ( 16,956) ( 1,585) ( 29,554) 40.76 32.27 42.78 31.00 31.00 68,682 44.00 116,777 - ( 4,435) - ( 31,853) - 32.27 - 57.57 - ( 16,956) ( 1,585) ( 29,554) Outstanding at year-end 32,394 32.27 68,682 44.00 32,394 32.27 68,682 Exercisable at year-end - - - - - - - 40.76 32.27 42.78 31.00 31.00 44.00 - The options outstanding at 30 June 2011 had a weighted average exercise price of $32.27 and a weighted average remaining contractual life of 0.54 years. Exercise price for options outstanding at 30 June 2011 is $32.27 Included under employee benefits expense in the income statement is : $75,860 (2010: $190,602) relating to options issued under the employee share ownership plan. $180,045 (2010: $124,633) relating to rights issued under the employee share ownership plan. 48 48 57 AUSTRALIAN ETHICAL INVESTMENT LTD AUSTRALIAN ETHICAL INVESTMENT LIMITED A.B.N. 47 003 188 930 AND CONTROLLED ENTITY Notes to the financial statements for the year ended 30 June 2011 Note 26 - Financial instruments (a) Financial risk management The consolidated entity’s financial instruments consist of cash and cash equivalents (note 7), trade and other receivables (note 8), financial assets (note 9) and trade and other payables (note 14). The main purpose of these financial instruments is to finance the consolidated entity’s operations. The consolidated entity has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. (b) Interest rate risk The consolidated entity’s exposure to interest rate risk, which is the risk that a financial instrument’s value will fluctuate as a result of changes in market interest rates and the effective weighted average interest rates on classes of financial assets and financial liabilities is as follows: Weighted average effective interest rate Floating interest rate Fixed interest rate within 1 year 2011 % 2010 % 2011 $ 2010 $ 2011 $ 2010 $ 5 5 4 5 2,554,389 1,892,434 481,764 485,040 3,036,153 2,377,474 - - - - - - 14,659 14,659 - - - - 513,401 513,401 - - Fixed interest rate within 1 to 5 years Non-interest bearing Total 2011 $ 2010 $ 2011 $ 2010 $ 2011 $ 2010 $ - - 61,820 61,820 - - - - 100,505 300 3,245,297 - 300 3,050,029 - 2,554,689 3,245,297 558,243 1,892,734 3,050,029 1,098,946 100,505 3,245,597 3,050,329 6,358,229 6,041,709 - - 2,587,710 2,495,424 2,587,710 2,495,424 2,587,710 2,495,424 2,587,710 2,495,424 Cash and cash equivalents Trade and other receivables Financial assets Total financial assets Trade and other payables Total financial liabilities Cash Trade and other receivables Financial assets Total financial assets Trade and other payables Total financial liabilities (c) Credit Risk The maximum exposure to credit risk, excluding the value of any collateral or other security, at balance date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the balance sheet and notes to the financial statements. Quantitative details related to financial assets is contained in note 9. Quantitative details related to financial assets is contained in note 9. In relation to the financial asset – loan to independent entity – disclosed at note 9, the loan agreement between the parent entity and the independent entity provides for the parent to enforce a security over the independent entity’s assets should a default in loan payments occur. The independent entity has not defaulted in loan payments over the six years of the loan. Consideration of credit risk in relation to financial assets is incorporated into executive management risk considerations. The defined investment parameters governing the approval of financial asset investments incorporates a sliding scale of risk exposure as follows: - The maximum exposure to any one issuer is to be no greater than twenty five per cent of the portfolio; - Minimum amount to be held in cash, AAA securities or senior bank debt is fifty per cent of the portfolio; and - Minimum amount to be held in cash, AAA securities, senior bank debt, rated corporate debt or subordinated bank debt to be eighty per cent of the portfolio. (d) Liquidity risk The group carries no borrowing debt on the balance sheet and has sufficient reserves of cash, cash equivalents and liquid investments to assess the liquidity risk as low. The cash position and cash flows are reviewed by executive management to ensure regulatory and future operational requirements are catered for. Trade and other payables are expected to be paid as follows: Less than 6 months 6 months to 1 year 1 to 5 years Consolidated Entity 2011 $ 2010 $ $ Parent Entity 2011 $ 2010 $ 2,019,037 535,327 - 2,554,364 1,994,991 500,433 - 2,495,424 1,806,802 535,327 - 2,342,129 2,158,627 500,433 - 2,659,060 58 49 49 AUSTRALIAN ETHICAL INVESTMENT LTD AUSTRALIAN ETHICAL INVESTMENT LIMITED A.B.N. 47 003 188 930 AND CONTROLLED ENTITY DIRECTORS' DECLARATION The Directors of Austalian Ethical Investment Limited declare the following: 1. the financial statements and notes, as set out on pages 20 to 50 and the additional disclosures in the directors' report designated as audited are in accordance with the Corporations Act 2001 : (a) comply with accounting standards, which, as stated in accounting policy note 1 to the financial statements, constitutes explicit and unreserved compliance with international financial reporting standards (IFRS); and (b) give a true and fair view of the financial position as at 30 June 2011 and of the performance for the financial year ended on that date of the company and consolidated entity; 2. the Chief Executive Officer and Chief Finance Officer have each declared that: (a) the financial records of the company for the financial year have been properly maintained in accordance with section 286 of the Corporations Act 2001 ; (b) the financial statements and notes for the financial year comply with the Accounting Standards; and (c) the financial statements and notes for the financial year give a true and fair view. 3. in the directors’ opinion there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. This declaration is made in accordance with a resolution of the Board of Directors. Phillip Vernon Managing Director Dated this 31 August 2011 5151 59 AUSTRALIAN ETHICAL INVESTMENT LTDINDEPENDENT AUDITOR'S REPORT TO THE MEMBERS OF AUSTRALIAN ETHICAL INVESTMENT LIMITED ABN: 47 003 188 930 Report on The Financial Report We have audited the accompanying financial report of Australian Ethical Investment Limited, which comprises the statement of financial position as at 30 June 2011, and the statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies, other explanatory information and the directors' declaration of the company and the consolidated entity comprising the company and the entity it controlled at the year- end or from time to time during the financial year. Directors’ Responsibility 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 is free from material misstatement, whether due to fraud or error. In Note 1 the directors also state, in accordance with Accounting Standard AASB 101: Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards. Auditor's Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation of the financial report that gives and true and fair view 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 entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. 60 52 AUSTRALIAN ETHICAL INVESTMENT LTD Opinion In our opinion: (a) the financial report of Australian Ethical Investment Limited is in accordance with the Corporations Act 2001; including: (i) (ii) giving a true and fair view of the Company’s and Consolidated Entity’s financial position as at 30 June 2011 and of their performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the Remuneration Report included in pages 10 to 18 of the directors’ report for the year ended 30 June 2011. 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. Opinion In our opinion, the Remuneration Report of Australian Ethical Investment Limited for the year ended 30 June 2011, complies with Section 300A of the Corporations Act 2001. THOMAS DAVIS & CO. J G RYAN PARTNER Chartered Accountants SYDNEY, 31 August 2011 Liability limited by a scheme approved under Professional Standards Legislation. 53 61 AUSTRALIAN ETHICAL INVESTMENT LTD Twenty largest shareholders Ordinary shares Number of ordinary shares % Substantial shareholder Yes Yes 196,472 19.59 51,367 49,852 49,436 36,933 33,683 31,797 24,462 24,447 5.12 4.97 4.93 3.68 3.36 3.17 2.44 2.44 20,140 2.01 Name Select Managed Funds Pty Ltd J A Thier H Pender C M Le Couteur T R Lee J M Boag Citicorp Nominees Pty Ltd J I Ajani B A & A M McGregor HB Sarjeant & Asscoc Pty Ltd E A Iceton D Thier P A, M W & K A Anderson 16,500 14,474 10,833 1.65 1.44 1.08 1.05 0.96 0.96 0.93 0.73 0.71 Garrett Smythe Ltd 10,562 M & A Beuchat A M O'Donnell A S Cook R M Myer UBS Wealth Management Australia Nominees Pty Ltd 9,667 9,630 9,342 7,332 7,160 J Groessler 6,622 0.66 Shareholder information All information as at 30 September 2011 Distribution of shareholdings Ordinary shares Holdings ranges 1-1,000 1,001-5,000 5,001-10,000 10,001- 100,000 100,001+ Totals Holders Units % 730 82 9 13 1 835 184,810 180,090 66,928 374,486 18.430 17.959 6.674 37.345 196,472 1,002,786 19.593 100.000 Distribution of shareholdings Ordinary shares Holdings ranges 1-1,000 1,001-5,000 5,001-10,000 10,001- 100,000 100,001+ Totals Holders Units % 730 82 9 13 1 835 184,810 180,090 66,928 374,486 18.430 17.959 6.674 37.345 196,472 1,002,786 19.593 100.000 62 AUSTRALIAN ETHICAL INVESTMENT LTDCorporate directory Australian Ethical Investment Ltd ABN 47 003 188 930 Company secretary Tom May Telephone: Email: 02 6201 1953 tmay@australianethical.com.au Postal address GPO Box 2435 Canberra ACT 2601 Head office Trevor Pearcey House (Block E) Traeger Court 34 Thynne Street Bruce ACT 2617 www.australianethical.com.au Share registry Boardroom Pty Limited ABN 14 003 209 836 Street: Level 7, 207 Kent Street Sydney NSW 2000 Telephone: Facsimile: Post: GPO Box 3993 1300 737 760 01300 653 459 Sydney NSW 2001 Email: enquiries@boardroomlimited.com.au www.boardroomlimited.com.au Using the Boardroom Ltd website, shareholders are able to view balances, transaction history and recent dividend payments. They can also view and update email addresses, annual report elections and tax file numbers. Various forms are also available for download to assist in the management of shareholdings. Stock exchange listing Australian Securities Exchange ASX code: AEF 63 AUSTRALIAN ETHICAL INVESTMENT LTD australianethical investment + superannuation ® www.australianethical.com.au | 1800 021 227 | 64 

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