Australian Ethical Investment
Annual Report 2012

Plain-text annual report

Australian Ethical Annual Report Year ended 30 June 2012 1800 021 227 | australianethical.com.au Contents Chair and Managing Director’s Report ...............................................................................................3 Financial Summary .............................................................................................................................6 2012 Community Grants ...................................................................................................................9 Directors’ Particulars ........................................................................................................................11 Directors’ Report ..............................................................................................................................13 Remuneration Report 2012 ..............................................................................................................18 Corporate Governance Statement 2012 ..........................................................................................25 Auditor’s Independence Declaration ................................................................................................32 Financial Statements ........................................................................................................................34 Independent Auditor’s Report ..........................................................................................................64 Shareholder Information ...................................................................................................................65 Shareholder Calendar Annual General Meeting ........................................................................................22 November 2012 Interim Results Announcement ............................................................................... 28 February 2013 Record Date for Interim Dividend ................................................................................ 15 March 2013 Payment Date for Interim Dividend ............................................................................. 29 March 2013 Annual Results Announcement .................................................................................. 30 August 2013 These dates may change at the company’s discretion. Contact Us Phone: Fax: Email: Web: Post: Registered address: 1800 021 227 02 9252 1987 enquiries@australianethical.com.au australianethical.com.au Australian Ethical Investment Ltd Reply Paid 3993, Sydney NSW 2001 Australian Ethical Investment Ltd Trevor Pearcey House (Block E) Traeger Court,34 Thynne Street Bruce ACT 2617 Chair and Managing Director’s Report Dear shareholder, The 2012 financial year has been one of significant change for Australian Ethical. Like all financial services companies, we continue to face a world that has fundamentally shifted. The global financial crisis is now some five years old, markets continue to be down significantly from their peak, investors continue to be nervous and regulatory change is turning the financial services industry on its head putting pressure on fees and hence revenues. ASX All Ordinaries Index (Five years to 30 June 2012) Down 40% from peak in 2007 Down 11% in last 12 months 7,500 6,500 5,500 4,500 3,500 2,500 In the face of this, three years ago, Australian Ethical found itself inadequately positioned to face such challenges. It was a high cost, high priced business with poorly structured products and was not able to meet basic client service standards required to operate in the market. Most critically, the company was heavily reliant for its revenues on up-front fees that were soon to be removed through regulation. Over the past few years we have achieved a lot in addressing these issues and setting the company up for a sustainable, long term future. In particular, during the 2012 financial year we have made significant improvements in our products, client service and costs. In addition, new client growth results have been very encouraging particularly in light of current market conditions, nervous investor sentiment and a rapidly evolving financial services environment. Over the 12 months to 30 June 2012, we had net new individual client growth of 5% across managed funds and superannuation. We also increased the number of default superannuation employer clients by 20% (from 248 to 297). Our ethical approach In all of this, nothing changes who we are or what we represent. Our philosophy remains that people should be able to save and invest in a way that looks after society and the environment and provides financial performance and security. Our investment criteria remains the highest ethical conviction in the market. Our exit during the year from Origin Energy because of its exposure to Coal Seam Gas is evidence of our continued willingness to take a stand on key ethical issues. We do, however, wish the company to be able to continue to deliver on this promise in such a way that allows it to not just remain viable, but to grow. The larger we are, the more influence we have to change the world for the better. To that end, over the last few months we conducted market and customer research, the result of which is a refreshed Australian Ethical brand plus an enhanced insight into our potential for sustainable growth. The key areas of insight from the research were: • There is a huge opportunity to expand our reach into our natural market. Australian Ethical is the only truly “green” investment manager and superannuation fund in Australia and our research shows that almost three-quarters of our 18,000 clients identify themselves as Greens voters. 1.2 million people voted for the Greens at the last election. This is what we call our natural market and should still be a hugely fertile source of new clients and growth. • Commitment to the Australian Ethical brand is still very high relative to our mainstream and ethical competitors. However, the awareness of our brand amongst even the natural market is quite low compared to where it should be. We need to communicate to this wider audience more effectively so that more people understand who we are and what we offer. • We are known as offering ‘the best ethical option’ by our clients. This is a reputation that we fully intend on retaining. However, we have found that we need to vastly improve the trust 1800 021 227 | australianethical.com.au 3 australianethical people have in our investment performance and the competitiveness, attractiveness and service levels of our products. This will mean greater communication of our investment expertise to increase the level of trust from clients. More trust will translate to high average balances as client trust us with more of their life savings. Business improvements During the 2012 financial year we have made significant improvements in the following areas: • Enhanced products – we have improved the insurance options available to our superannuation fund members, lowered the fees on our Cash Trust (formerly the Income Trust), removed the upfront fees on all our products and lowered the fees on our Smaller and Larger Companies Trusts and Climate Advocacy Fund for wholesale clients • Improved service – we have upgraded our portfolio administration operations, invested in improved call centre and customer management systems and recently we appointed Russell Investments to be our superannuation administrator from April 2013, which will provide a much improved and lower cost service to members. • Reduced costs – in order to be able to implement these changes and to properly position ourselves for what will be a lower fee environment in the years to come, we have had to reduce our costs with staff numbers reducing from 50 to 36 over the course of the past year. These improvements and adjustments were absolutely necessary to ensure the long term sustainability of the company. Without them the company was at risk of not surviving. Regulatory changes ahead The financial services industry is going through significant regulatory changes that impact the business in a number of ways. In particular: • Capital requirements for funds management businesses will change in November 2012 requiring greater liquidity to be held to comply with licensing requirements. This will be challenging to meet whilst we hold real estate, such as our Canberra premises, on our balance sheet. It also has an impact on dividends; and • Two new areas of legislation (Future of Financial Advice and MySuper) have combined to impact fees in a number of ways. In general, this legislation has led to lower fees and a more competitive environment. In particular it means the abolition of up-front fees. On 1 July 2012, as noted above, we removed up-front fees on all of our products in order to position us for this new environment. Financial results Our net profit after tax (NPAT) was $0.402 million for the 12 months to 30 June 2012 (FY12) whilst our underlying profit after tax (UPAT) was $0.859 million. The NPAT result reflects lower revenues due to lower funds under management, arising from lower market values and the continued reduction of inflows across the industry, and our decision to gradually reduce management fees. These factors have been offset somewhat by a reduction in operating costs the full benefit of which was not realised in FY12 The result also includes a number of one off items such as a three yearly revaluation of the Canberra office building, redundancy costs associated with a business restructuring to lower operating costs and costs incurred in respect of shareholder actions conducted throughout the year. Shareholder activity During the year a general meeting was called by a group of shareholders. Whilst we fully respect shareholders exercising their rights, the board objects strongly to the manner in which this campaign was conducted. As one indication, some 105 resolutions were lodged over more than a dozen separate visits to the company, each one causing much speculation and disruption amongst staff. Resolutions were constantly amended, directors were nominated without consent and in other cases withdrawn, causing unnecessary work for our team. The process was extremely destabilising at a time when the business can least afford it. The direct cost impact on the company as a result of the campaign was $125,000. The indirect cost impact on the business was immeasurable and far greater. The outcome of the meeting was a vote firmly in favour of the board and the strategies being implemented by it. These strategies are, in the board’s view, necessary to properly position the company to survive and thrive in a vastly more competitive and challenging environment. Whilst these changes have impacted many people, corporate shareholder activity should not be used to pursue personal agendas. We fully expect the shareholders to respect the vote of the shareholders as a whole as the company can ill afford another such campaign. 4 Director changes In closing The transformation of the company through the past financial year and continuing into this year is considerable. The changes have occurred by nature of the financial environment in which we are operating plus the strategic business imperatives for Australian Ethical’s long term future. Our sincere thanks and appreciation go to all our staff and shareholders who have along the way provided constructive input and shown ongoing commitment to the business. During the year we welcomed Louise Herron to the board. Whilst Louise’s tenure was short-lived (she recently became Chief Executive of the Sydney Opera House), she made a significant contribution to the company. Following Louise’s resignation, Steve Gibbs was appointed to the board. Steve brings with him a wealth of experience relevant to our business. He has been Chief Executive of ARIA, the Commonwealth Government superannuation fund and Executive Director of the Australian Institute of Superannuation Trustees. He has a long held involvement in Responsible Investment and was on the panel that originally proposed the United Nations Principles of Responsible Investment. We welcome Steve and look forward to his contribution. Phillip Vernon Managing Director André Morony Chair 1800 021 227 | australianethical.com.au 5 australianethical Financial Summary Profit After Tax ($m) Return On Equity (%) 1.7 1.2 1.0 1.1 0.4 20.6 18.8 17.1 12.5 5.9 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Year ending 30 June Year ending 30 June Funds Under Management ($m) Basic Earnings Per Share ($) 614 644 627 1.70 1.22 1.03 1.13 572 547 0.40 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 As at 30 June (before distribution) Year ending 30 June Revenue ($m) 14.1 14.1 13.1 Dividends Paid ($) 15.7 14.8 1.65 1.47 2.00 1.70 0.60 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Year ending 30 June Year ending 30 June Funds Under Management By Product Funds Under Management By Channel Managed Funds $225.55m Super $391.73m Advised $237.98m Direct $379.30m 6 Financial results Net profit after tax (NPAT): $0.402 million Full year underlying profit after tax (UPAT): $0.859 million Key factors impacting the result were: • Lower market values – The All Ordinaries Index dropped 11% over the period. As our revenues are primarily related to funds under management, this had a direct impact. • Impairment to building – A non-cash impairment charge of $210,000 was incurred arising from a three yearly revaluation of the property at Trevor Pearcey House in Bruce, ACT. The reduced value is due to the more subdued commercial property market in Canberra. Net profit after tax Revenue Expenses Operating profit Community grants EBITDA Depreciation/amortisation/options/rights Tax Net profit after tax Adjustments (gross) • Add back employment restructure expenses • Add back property revaluation • Add back legal costs for shareholder actions • Deduct acquisition fee Lawley House Tax on adjustments Underlying profit after tax * Restated. • Business restructuring – redundancy costs of $319,000 were incurred as the business restructured to reduce operating costs to position it for a more competitive, lower fee environment in the future. This has reduced staff numbers from 50 to 36. The full year benefit of these cost reductions were not felt in these results. • Shareholder action – during the year a group of shareholders called a general meeting. Direct costs incurred in respect of the campaign were $125,000 primarily in respect of legal costs incurred as a result numerous misleading allegations made. After taking these last three items into account, the result is a decrease in underlying NPAT of 12%. This result is summarised in the table below. 2011* ($,000) 2012 ($,000) % Change 15,744 (13,124) 14,793 (13,359) 2,620 (153) 2,467 (677) (665) 1,125 445 - - (651) 62 981 1,434 (53) 1,379 (658) (320) 401 319 210 125 0 (196) 859 (6%) (2%) (45%) (44%) 3% 52% (64%) (12%) 1800 021 227 | australianethical.com.au 7 australianethical Balance sheet Dividend The balance sheet holds a number of assets that the board believe are inappropriate for a company of our size and nature. The company is looking to realise these assets in an orderly manner and reinvest the proceeds in liquid and cash equivalents. In particular: • The company purchased its own premises in Canberra in 2006 and undertook significant renovations over the course of 2006 and 2007 to bring it to 6 star Green Star rating standard. Whilst the board is supportive of the company occupying appropriately rated premises, it is of the view that it is inappropriate for the company to own real estate. We have entered into a marketing and sales agreement with CBRE to sell the property. • The company has, over the past few years, supported the activities of the Climate Advocacy Fund (CAF) an index fund that engages in shareholder advocacy in relation to climate change. In particular it has purchased shares in the companies that the CAF was putting resolutions to on behalf of nominees in order to allow the resolutions to be put. Unrealised losses in respect of these activities amount to $106,000. We will be selling these investments over coming months. • The company has, in the past, invested some surplus cash in unit trusts that it manages. These will also be liquefied and reinvested into cash or cash equivalents. Final dividend: 35 cents per share, fully franked Total FY12 dividend: 60 cents per share, fully franked. In determining the final dividend, the board took into account the following: • Regulatory requirements, in particular the new capital requirements effective in November 2012; • The uncertainty in the market; • Future potential strategic requirements. Record date: 21 September 2012. Dividend payment date: 5 October 2012. (The dividend reinvestment plan will not operate in respect of the final dividend.) 2011 (cents per share) 2012 (cents per share) 45.0 100.0 25.0 170.0 25.0 35.0 - 60.0 Dividends Interim Final Special Total dividend 8 2012 Community Grants As prescribed in Australian Ethical’s constitution, 10% of our profit is donated to charitable, benevolent and conservation purposes as part of our contribution to a positive and sustainable society. This is one of the highest levels of corporate giving in Australia based on percentage of profits. It is something that the shareholders, staff and directors should be very proud of. Traditionally, the grant recipients have been shortlisted by a small committee of staff members and voted on by employees and directors of Australian Ethical. The committee ensure that each shortlisted organisation or project is of the highest quality and in keeping with the Australian Ethical Charter. This year, for the first time, we invited all our shareholders to vote on which organisation or project should receive grants. Shareholder involvement was high with votes from approximately 150 people received. Grant applications were received from almost 300 different organisations. There was a skew towards society based projects although the voting was overwhelmingly in favour of wildlife conservation. Australian Ethical will be donating a total of $40,000 to 11 organisations as part of its 2012 community grants scheme. This brings the total amount gifted to communities over the last 12 years to more than $1.3 million. This year’s grants range in size from $3,000 to $10,000 and include donations to charities that work across Australia and overseas. The following table shows the breakdown of grant recipients for 2012. 1800 021 227 | australianethical.com.au 9 australianethical Major grant recipient Rainforest Rescue – Gunung Leuser National Park, North Sumatra Rainforest Rescue provided us with a good overview of their project to save the last viable habitat of the Sumatran Orangutan through the protection of the World Heritage listed tropical rainforests of the Gunung Leuser National Park (GLNP) from deforestation and the expansion of illegal oil palm plantations. The GLNP also provides vital habitat for critically endangered species including the Sumatran Tiger, rhinoceros and elephant. Outcomes of this project will be to remove 60 hectares of illegally planted oil palms within the The 2012 allocation boundaries of the National Park, and replant with 60,000 rainforest trees. This work will be done by the local farming communities living alongside the GLNP, creating employment for economically disadvantaged people. These farmers already have an established co-operative where they will propagate and grow the trees in the nursery, and also monitor and patrol the site to prevent hunting and logging. More information can be found on the website rainforestrescue.org.au/ourprojects/save- arainforest-orangutan.html Organisation Project State Major Grant $10,000 Rainforest Rescue Minor Grants $3,000 Rainforest Rescue – Gunung Leuser National Park, North Sumatra Queensland Bonorong Wildlife Santuary Co-operative Eastern Quoll Breeding Programme Tasmania Communities @ Work Environment Victoria Yellow Van Home Planet Free the Bear Fund Solar Power for Sun Bears Greening Australia WA Transforming the Mortlock North Gunawirra Inner Suburbs Nutrition Project Perth Advocates for the Earth Planting for Black Cockatoos ACT Victoria Western Australia Western Australia New South Wales Western Australia Sea Turtle Foundation Sea Turtle Field Research & Monitoring Equipment Queensland The Orangutan Project Wildlife Protection Units Western Australia Trees for Evelyn & Atherton Tablelands Peterson Creek Freeman Revegetation Queensland 10 Directors’ Particulars australianethical André Morony, Chairman BEc (Hons), MEc André joined the board of Australian Ethical as a non-executive director in June 2008 and was appointed Chairman in February 2011. He chairs the People, Remuneration and Nominations Committee and is a member of the Investment Committee. André is a highly regarded and experienced individual within the Government and finance industry. His career spans over 40 years and started at the Commonwealth Treasury where he worked in a number of financial policy areas. He also represented Australia for three years at the Organisation for Economic Cooperation and Development (OECD) in Paris. After leaving Government in 1986, Andre's roles included Chief Economist and Chief Investment Officer at Bankers Trust Australia (now BT) and Chief Investment Officer for the Commonwealth Government's superannuation scheme (ARIA). He currently sits on the investment committee of GESB, the Western Australian Government employees’ superannuation fund. Phil Vernon, Managing Director BEc, MCom, MBA, FCPA, GAICD Phil joined Australian Ethical as Chief Executive Officer in December 2009 and was appointed Managing Director in July 2010. He is also a director of Australian Ethical Superannuation. Phil has 25 years experience in financial services including funds management and superannuation. Prior to Australian Ethical he was a member of the Executive Committee of Perpetual Limited heading up the Corporate Trust Division. He has extensive experience in strategy, people management and leadership, corporate governance and industry regulation. Phil's commitment to responsible investment commenced at a time when Perpetual were facing criticism from the environmental movement for its significant shareholding in Gunns. With relationships in the environment movement he had a unique insight to both sides of the debate. Phillip furthered his commitment in the area and is currently a Director of Planet Ark, a not for profit environmental organisation and RIAA, the Responsible Investment Association Australasia. 1800 021 227 | australianethical.com.au 11 Justine Hickey, Non-Executive Director BCom, SAFin, GAICD, ASIP Justine has been an independent non-executive director since March 2007. She chairs the Investment Committee and is a member of the People, Remuneration and Nominations Committee. Justine has over 20 years experience as a senior executive in the investment and funds management industry. Previously she was Head of Equities at Suncorp Investment Management in Brisbane and a Portfolio Manager at Flemings Investment Management (now JP Morgan) in the UK. Justine is a director of Rio Tinto Staff Super Fund Pty Ltd and a member of the investment committees of boutique fund manager, Dalton Nicol Reid and the University of Melbourne. Justine is the chairman of Evolve Foundation (previously the Youth Enterprise Trust Foundation), whose mission is to assist disadvantaged young people to transition into a confident and productive adulthood. She is also a director of RSPCA Queensland, the state's oldest, largest and leading animal welfare charity. Justine is a member of RIAA, the Responsible Investment Association of Australasia. Steve Newnham, Executive Director BA, LLB, DFP Steve joined the board in December 2010 as a non-executive director. In 2012, he became an executive director, chiefly responsible for sales and marketing. Steve has over 20 years experience in the financial industry. He was Head of Distribution at Zurich Financial Services, chairman of a financial planning dealer group Financial Lifestyle Solutions, director of a wrap platform and a financial planning administration business, and Executive Vice President of BT Financial Group. He was also an early member of the Financial Planning Association Future 2 Foundation awareness and fund raising committee. Steve has significant involvement with community and social justice activities, working on homeless shelter support schemes, indigenous fellowship programs, environmental and drought relief projects and mental health awareness initiatives. In addition, he has been a member of the Australian Rowing and Surf Lifesaving teams and spent 15 years as a surf lifesaver. Stephen Gibbs, Non-Executive Director BEc, MBA Stephen joined the board in July 2012 as a non-executive director. He is also on the Audit, Compliance & Risk and the People, Remuneration & Nominations committees; he has also been appointed as a director of Australian Ethical Superannuation Pty Limited. Stephen is a director of Hastings Funds Management and Chair of CAER (Corporate Analysis Enhanced Responsibility). He was formerly Chair of the Responsible Investment Academy Advisory Council. From early 2000 he was CEO of ARIA, the trustee of the PSS and CSS – the superannuation schemes for federal government employees. When Stephen left ARIA in January 2008 it had close to $A20 billion under management. Prior to ARIA Stephen was the Executive Officer of the Australian Institute of Superannuation Trustees (AIST). His earlier career was in the trade union movement. Other career highlights for Stephen include his personal invitation from the then UN General Secretary to join the steering committee and investor group which developed what became the United Nations Principles of Responsible Investment–UNPRI and membership of the ASX Corporate Governance Council from its inception until 2008. 12 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 2012. In compliance with the Corporations Act 2001, the directors report as follows: Directors The name of each person who was a director during the year ended 30 June 2012 and to the date of this report is set out in the table below. Name Time in office Term André Morony Phillip Vernon Justine Hickey Stephen Newnham Howard Pender Les Coleman Louise Herron Stephen Gibbs 4 years 2 years 5 years 2 years 19 years 3 years <1 year <1 year Full year Full year Full year Appointed 12 December 2011 Ceased 17 November 2011 Ceased 17 November 2011 Appointed 20 February 2012 Ceased 25 July 2012 Appointed 25 July 2012 Directors have been in office since the start of the financial year to the date of this report unless otherwise stated. Company secretaries Review of operations The name of each person who was a company secretary of the company as at the end of the financial year and to the date of this report is set out in the table below. Name Term Tom May Full year Gary Leckie Ceased 23 May 2012 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 entity’s activities during the year. The consolidated entity, Australian Ethical (Australian Ethical Investment Limited and its wholly owned subsidiary, Australian Ethical Superannuation Pty Ltd), recorded a consolidated net profit after income tax expense for the year ending 30 June 2012 of $402,155, a 64% decrease on the result of the previous financial year; based on restated 2011 consolidated net profit. Return on equity for the year is 5.9%, down from 17.1% in 2010-11. Earnings per share has decreased 64% to 40.1 cents per share and the cost to income ratio has increased to 93%. All of the comparisons in this paragraph are as against the restated 2011 consolidated net profit. Further details of business operations are included in the Chair and Managing Director’s report. Financial position At the year end, Australian Ethical’s net assets are $6,844,431. The company has no debt and is generating positive returns and cash flow. 1800 021 227 | australianethical.com.au 13 australianethical 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 2011 Special 2011 Interim 2012 Total 100 25 25 Declared after end of year 1,003,035 250,758 250,758 1,504,551 Franked Franked Franked 7/10/2011 7/10/2011 After balance sheet date, the directors declared the following dividend: Final 2012 35 351,062 Franked 7/10/122 2 Planned payment date Events subsequent to reporting date Upfront fees on all products were removed on 1 July 2012. This was done in response to two new pieces of legislation (Future of Financial Advice and MySuper) which have combined to impact fees in a number of ways. In general, this legislation has led to lower fees and a more competitive environment and in particular the abolition of up-front fees. The removal of up-front fees on all of our products was done in order to position us for this new environment. In August 2012 the company entered into a marketing agreement for the sale of Trevor Pearcey House; our preference is for a leaseback arrangement to be entered into following any sale. This was done following a review of the capital management policy which also took into account impending regulatory changes that will require the company to hold a greater proportion of its assets as liquid assets. Other than as outlined in this report, no matters or circumstances have arisen since the end of the financial year which have 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 2012. 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 not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice to the consolidated entity. 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 (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 14 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. Director’s 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 People, remuneration and nominations Audit, compliance and risk Eligible Attend Eligible Attend Eligible Attend Eligible Attend André Morony Phillip Vernon Justine Hickey Stephen Newnham Howard Pender Les Coleman Louise Herron Stephen Gibbs Ruth Medd 8 8 8 8 2 3 4 - - 8 8 8 7 2 3 4 - - 4 - 4 - 1 - - - - 4 - 4 - 1 - - - - 5 - 5 - - - 1 - - 5 - 5 - - - 1 - - - - - 4 - 6 1 - 6 - - - 4 - 6 1 - 6 Directorships held in other listed entities in the last three years Name Entity Period of directorship Justine Hickey Hyperion Flagship Investments Limited 4 years 1800 021 227 | australianethical.com.au 15 australianethical Directors’ relevant interests in securities of the company Parent entity directors Fully paid ordinary shares Share options Performance rights 2012 2011 2012 2011 André Morony Phillip Vernon Justine Hickey Stephen Newnham Howard Pender Les Coleman Louise Herron Stephen Gibbs - - - - 1,200 1,200 - - 49,852 49,852 - - - - - - - - - - - - - - - - - - 1,326 - - - 2012 - 2011 - 5,744 2,798 - - - - - - - - - - - - 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. 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 Termination payment provided under the contract Phillip Vernon Stephen Newnham David Macri Ongoing 12 weeks Ongoing 12 weeks Ongoing 12 weeks Adam Kirk Ongoing 12 weeks Philip George Paul Smith Ongoing 12 weeks Ongoing 4 weeks None except for accrued leave and payment in lieu of notice. Rights as at the date of this report Rights over unissued shares as at the date of this report are as follows: Performance rights reference Number of rights on issue AEFAW AEFAY AEFAA AEFAB 4,010 11,340 13,585 12,578 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. 16 Shares issued upon the exercise of options 4,760 ordinary shares of the company were issued during the year ended 30 June 2012 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 Qualifications Experience Ruth Medd BSc Dip Comp Science CPA MAICD Les Coleman B.Eng.(Hons), B.Sc.(Hons), M.Ec., PhD 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 committee. Ruth is currently on the board of the NFAW Ltd (National Foundation for Australian Women) and WOB Pty Ltd. 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. Les is on the Audit, Compliance & Risk committee and is also a director of Australian Ethical Superannuation Pty Limited. Les has been a trustee of two superannuation funds, and a director of ten companies involved in finance, retail and distribution. He has over 20 years experience in senior operational, planning and finance roles in Australia and overseas with Anglo American Corporation and ExxonMobil Corporation. He is currently a member of the investment committee of United Funds Management (a subsidiary of IOOF Holdings Limited), and since 2004 has taught in 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 newspaper, and has published several books and numerous articles and papers. Philip George BSc LLB ACIS Philip was on the board of Australian Ethical Superannuation Pty Tom May BA LLB MBA Ltd until his resignation on 29 August 2012. 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. 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. 1800 021 227 | australianethical.com.au 17 australianethical Remuneration Report 2012 This report sets out the remuneration arrangements for all key management personnel (KMP) for the year. KMP is defined under the Corporations Act 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 information contained in the Remuneration Report has been audited by the company’s external auditor and named directors and executives are key management personnel of the consolidated entity. At the 2011 AGM, the Remuneration Report received 40% of the vote against it. There were no specific comments at the Meeting criticising any aspect of the remuneration report. Australian Ethical Investment has a long history of paying below market salaries. This includes KMPs, the Managing Director and Non-executive Directors. The directors are of the view that the vote received against the 2011 Remuneration Report was not about the remuneration of KMP’s, rather, as a result of misleading information distributed by a few shareholders. We therefore encourage shareholders to read this remuneration report carefully before deciding on how to vote. A vote of greater than 25% against the 2012 Remuneration Report will result in the board being subjected to a spill motion. Remuneration policy and structure Australian Ethical Investment Limited’s remuneration policy is designed to create a motivating environment for staff where they feel appropriately paid and incentivised for the contribution they make to the performance of the company. The remuneration philosophy is consistent with the principles of the Australian Ethical Charter and Constitution. In particular: • it is designed to ensure that Australian Ethical facilitates “the development of workers participation in the ownership and control of their work organisations and places” (Charter element (a)) • • it is designed so as to not “exploit people through the payment of low wages or the provision of poor working conditions” (negative Charter element (ix)) the incentive structure meets the requirements of Rule 15.1(c) of the AEI Constitution which provides that: – prior to recommending or declaring any dividend, provision must be made for a bonus or incentive for staff to be paid of up to 30 percent (30%) of what the profit for that year would have been had not the bonus or incentive payment been deducted; and – these bonuses may be in cash or shares. This constraint applies only to the Profit Participation Scheme below. The other schemes outlined in this document are part of the remuneration structure. Principles guiding the design of the remuneration structure are as follows: • Pay people fairly for the work that they do • Build long term ownership in the company amongst employees • Reward people according to their contribution to the company’s performance • Align shareholder interests and the company’s capacity to pay • Attract and retain talented people • Promote the values of the Charter i) Non-executive Directors A review of Non-executive Directors remuneration is undertaken annually, taking into account recommendations from the People, Remuneration and Nominations Committee. The review includes the positions of Chairman and Non-executive Directors, duties undertaken, accountability and market rates, and has shown that Non-executive Directors’ remuneration has been consistently below that of comparative companies. However, there has been no increase in remuneration since 2008. In addition to fixed remuneration, Non- executive Directors are entitled to be paid reasonable expenses, remuneration of additional services and superannuation 18 contributions. They also receive payment for serving on board committees. Performance-based remuneration Non-executive Director remuneration is not linked to company performance and they are not eligible to participate in staff incentive plans. The company seeks to reward employees for results and ongoing commitment through the provision of cash bonus schemes and equity based schemes as outlined below: ii) Key Management Personnel a) Staff Bonus Plan The board seeks to reward KMP’s through the same process as all staff, based on positive contributions and company results. The remuneration structure for KMP’s is based on a number of factors including position in the company, the scope and impact of an individual’s contribution to the performance of the company and the achievement of agreed objectives. All remuneration for KMP’s is reviewed against market rates for roles requiring similar skills and experience. Managing Director and KMP performance An annual assessment of the Managing Director is completed by the Chair and is overseen by the board, with input from the People, Remuneration and Nominations Committee. The review includes a 360 review process, measurement of performance against agreed KPI’s and company performance. The bonus received by the Managing Director during 2011/12 is shown in Table 1. Remuneration Elements and relates to the previous financial year of 2010/2011. This flows from a formula linking the bonus to year on year profit changes and reflects an increase in the results for that previous financial year. The bonus paid in respect of the financial year ended 2011/2012 is lower ($22,000) reflecting the lower profits of this financial year. In addition, $20,000 was “clawed back” in respect of bonuses previously paid due to a restatement of previous year’s financial results (see paragraph below and Note 27 of the attached financial report). In turn, the Managing Director is responsible for reviewing the performance of senior management and whether performance requirements are met. Both quantitative and qualitative data is used to determine whether performance criteria are achieved. All permanent staff are eligible to participate in an annual staff bonus plan. 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: i) Set by reference to the profit of the company for that year; and ii) Can be up to 30% of the company profit. Historically, all staff across the organisation, irrespective of position (and including KMP), received the same bonus paid in cash under this constitutional provision. In the 2011/12 performance year, employees received a cash bonus of $5,000 in respect of the 2010/11 financial year. The amount accrued per person in respect of the 2011/12 financial year is $3,000 per person. The bonus is pro-rated for permanent part-time staff and staff who have not completed a full year with the company. b) Employee Share Incentive Schemes Under the employee share incentive scheme (ESIS), a pool of performance rights which would, if exercised, amount to less than 5% per annum of the company’s existing ordinary share capital, is made available. This scheme was originally approved by members at the 2008 Annual General Meeting. The ESIS is split into two categories: general and individual. The performance rights that have been issued during the current year are subject to the terms and conditions of the scheme rules. i) Individual Category The individual ESIS is provided to senior and eligible investment staff. The number of performance rights issued is based on company performance, individual performance and the achievement of agreed KPI’s. Performance rights issued under the individual category are linked to the performance of the company’s managed funds for eligible investment staff. The following attributes determine whether 1800 021 227 | australianethical.com.au 19 australianethical the performance rights convert into ordinary shares: • For all participants in the individual ESIS, employment must continue until a specified date. • For investment staff, the number of shares issued to each employee in respect of their performance rights under this category will be adjusted up or down by a maximum 20%, depending on the absolute performance of the company’s management investment schemes for which the employee has responsibility or provides significant input. The nominated managed investment scheme is agreed between the company and the employee and the performance is measured over the relevant performance period. ii) General Category All permanent employees, including KMP, participate in the general ESIS. The number of performance rights issued to each staff member is based on their relative remuneration. Performance rights issued under the general category have two hurdles. 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 established levels. The following attributes determine whether shares will be issued in respect of the rights: • Employment must continue until a specified date. • The arithmetic average return on equity (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 each six month period calculated using audited half-year financial statements. • The performance is measured over a rolling three year period. c) Individual Bonuses During the reporting year, five KMP’s were paid ‘at risk’ components as part of their remuneration. The general split of ‘at risk’ components is as follows: • 50% company results • 50% personal objectives Performance criteria were used to determine the amount of the payments and the payments are shown in the following tables. Proposed changes to remuneration structure from July 2012 A review of the company’s remuneration structure was conducted in 2011/12 covering: • Better alignment of incentive programs with the company’s capacity to pay • Better alignment of individual and company performance to short term incentive plans • Aligning payment more closely to the relevant performance year • The balance of reward options including cash and performance rights • Market based long term incentive structures • The capacity to issue additional long term incentives to key staff • Reducing retention risk through the provision of market-based incentive programs for identified staff The changes are aimed at strengthening the alignment of performance-based remuneration to shareholders’ interests and AEI’s strategic plan. 20 Conditions of Employment a) Employment Contracts 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. TABLE 1: REMUNERATION ELEMENTS 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 performance rights during the financial year. Non-executive directors receive their total remuneration as cash or superannuation contributions. No element is dependent on performance. All KMP’s have formal contracts of employment and are permanent employees of Australian Ethical Investment Ltd. None of the contracts contain a pre-determined duration of employment or a termination date. The contracts for service between the company and KMP’s are on a continuing basis; no changes to the contractual arrangements are expected in the immediate future. b) Consultancy Agreements The company also commenced a consultancy agreement with Morse Consulting Pty Limited for the provision of management services to the company’s finance team. The agreement commenced on 28 November 2011 and is due for review on 20 August 2012. The agreement may be terminated subject to a notice period of two weeks. Costs incurred amount to $191,800. c) Special Exertions The board approved a ‘special exertion’ with a rate variation to Ms Louise Herron, for the provision of additional work for the company. The agreement commenced on 4 May 2012 for a two month period, concluding on 25 July 2012. Costs incurred are included in Table 1: Remuneration Elements. 1800 021 227 | australianethical.com.au 21 australianethical Name Directors Position Andre Morony** Non-executive Director, Chairman Non-executive Director Term Full Year Phillip Vernon* Executive Director, Managing Director Full Year Justine Hickey Non-executive Director Full Year Steve Newnham*** Non-executive Director Howard Pender Executive Director Non-executive Director Executive Director Until 12 December 2011 Employment commenced 12 December 2011 Retired 17 November 2011 Employment ended 1 July 2011 Les Coleman Non-executive Director Directorship ended 17 November 2011 Ruth Medd Chairman, Australian Ethical Superannuation Full Year Louise Herron Non-executive Director Appointed 20 February 2012 Resigned 25 July 2012 Naomi Edwards James Thier**** Non-executive Director, Chairman Resigned 23 March 2011 Executive Director Steve Gibbs Non-executive Director Current Executives Retired 17 November 2010 Appointed 25 July 2012 David Macri* Chief Investment Officer Appointed 13 February 2012 161,798 5,000 16,144 4,492 60,151 Adam Kirk General Manager, Business Development Employment commenced 9 August 2011 Philip George* General Manager, Program Office Full Year Paul Smith General Manager, Strategy & Marketing Employment commenced 8 July 2011 Past Executives James Jordan* Chief Investment Officer Employment ended 28 March 2012 Gary Leckie* Chief Financial Officer Employment ended 23 May 2012 Tim Xirakis Head of Client Relationships Employment ended 8 August 2011 Paul Harding Davis Head of Distribution Employment ended 5 January 2011 101,316 10,250 11,502 -9,812 57,459 170,715 The five highest paid KMP's for the year ended 30 June 2012. * ** The increase in Andre Morony's fees reflects his appointment as Chairman of the board in March 2011 *** Stephen Newnham became an employee of the company in December 2011 **** James Thier was not a KMP in 2011/12 22 SHORT TERM BENEFITS POST EMPLOYMENT LONG TERM BENEFITS BENEFITS EQUITY Salary, fees and Leave STI Superannuation Leave Payments $ $ $ $ $ Termination Benefits $ Long Service Settled Share- based 5,751 5,483 52,870 40,316 2,668 -702 11,251 136,834 11,960 3,915 2,729 30,288 23,429 2,565 2,578 12,645 1,193 6,263 12,189 2,228 2,352 2,790 2,804 901 4,273 -88 12,221 14,440 3,477 11,196 92,681 Year 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 43,361 30,259 269,032 272,330 28,409 28,593 150,176 13,234 16,382 135,444 24,671 26,084 30,901 31,101 23,324 47,410 15,304 122,525 191,950 189,576 196,182 158,424 175,501 256,524 176,446 204,509 17,724 181,756 67,500 2,251 2,978 12,937 4,000 41,684 3,259 19,168 4,000 13,138 4,000 16,296 3,774 18,982 17,797 13,626 5,879 5,680 3,244 25,466 16,006 20,533 23,285 17,991 18,244 5,538 16,191 7,014 6,143 3,615 -8,277 -796 5,129 15,327 16,380 12,823 15,958 84,694 Total $ 47,276 32,988 425,441 343,809 30,974 31,171 165,489 14,427 158,777 173,822 26,898 28,436 33,691 33,905 24,224 51,683 110,327 163,859 247,585 212,020 252,840 239,665 175,294 244,732 304,538 217,220 234,856 133,121 223,034 Name Directors Position Andre Morony** Non-executive Director, Chairman Non-executive Director Term Full Year Phillip Vernon* Executive Director, Managing Director Full Year Justine Hickey Non-executive Director Full Year Steve Newnham*** Non-executive Director Until 12 December 2011 Executive Director Employment commenced 12 December 2011 Howard Pender Non-executive Director Executive Director Retired 17 November 2011 Employment ended 1 July 2011 Les Coleman Non-executive Director Directorship ended 17 November 2011 Ruth Medd Chairman, Australian Ethical Superannuation Full Year Louise Herron Non-executive Director Appointed 20 February 2012 Resigned 25 July 2012 Non-executive Director, Chairman Resigned 23 March 2011 Naomi Edwards James Thier**** Executive Director Steve Gibbs Non-executive Director Current Executives Retired 17 November 2010 Appointed 25 July 2012 David Macri* Chief Investment Officer Appointed 13 February 2012 Adam Kirk General Manager, Business Development Employment commenced 9 August 2011 Philip George* General Manager, Program Office Full Year Paul Smith General Manager, Strategy & Marketing Employment commenced 8 July 2011 Past Executives James Jordan* Chief Investment Officer Employment ended 28 March 2012 Gary Leckie* Chief Financial Officer Employment ended 23 May 2012 Tim Xirakis Head of Client Relationships Employment ended 8 August 2011 Paul Harding Davis Head of Distribution Employment ended 5 January 2011 * The five highest paid KMP's for the year ended 30 June 2012. ** The increase in Andre Morony's fees reflects his appointment as Chairman of the board in March 2011 *** Stephen Newnham became an employee of the company in December 2011 **** James Thier was not a KMP in 2011/12 SHORT TERM BENEFITS POST EMPLOYMENT BENEFITS LONG TERM BENEFITS Salary, fees and Leave $ STI $ Superannuation $ Long Service Leave $ EQUITY Settled Share- based Payments $ Termination Benefits $ 43,361 30,259 269,032 272,330 28,409 28,593 150,176 13,234 16,382 135,444 24,671 26,084 30,901 31,101 23,324 47,410 15,304 122,525 67,500 2,251 2,978 14,440 3,915 2,729 30,288 23,429 2,565 2,578 12,645 1,193 6,263 12,189 2,228 2,352 2,790 2,804 901 4,273 -88 12,221 5,751 5,483 52,870 40,316 2,668 -702 11,251 136,834 11,960 3,477 11,196 92,681 161,798 5,000 16,144 4,492 60,151 191,950 189,576 196,182 158,424 175,501 256,524 176,446 204,509 17,724 181,756 12,937 4,000 41,684 3,259 19,168 4,000 13,138 4,000 16,296 3,774 18,982 17,797 13,626 5,879 5,680 3,244 25,466 16,006 20,533 23,285 17,991 18,244 5,538 16,191 7,014 6,143 3,615 -8,277 -796 5,129 15,327 16,380 12,823 15,958 84,694 Total $ 47,276 32,988 425,441 343,809 30,974 31,171 165,489 14,427 158,777 173,822 26,898 28,436 33,691 33,905 24,224 51,683 110,327 163,859 247,585 212,020 252,840 239,665 175,294 244,732 304,538 217,220 234,856 133,121 223,034 101,316 10,250 11,502 -9,812 57,459 170,715 Year 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 2012 2011 1800 021 227 | australianethical.com.au 23 australianethical Equity based remuneration consisting of rights under the company’s employee share incentive scheme are provided above and in Note 25 of the attached financial report. Restatement of 2010/11 financial statements The 2010/11 financial statements were restated due to a change in accounting policy resulting in a reduction in net profit after tax by $157,502; this is explained more fully in Note 27 of the attached financial report. The People, Remuneration and Nominations Committee determined that a portion of the bonus issued to Mr Phillip Vernon for the 2010/11 year would be reversed ($20,000) as a result of the restatement. The committee determined that there would be no further claw-back of bonuses paid as a result of the restatement. TABLE 2: REMUNERATION RECEIVED The following table sets out the actual remuneration received by executives at Australian Ethical Investment including cash paid and the value of equity vested. Elements of remuneration related to performance Elements of remuneration not related to performance Non salary cash based incentives % Shares % Rights/ Options % Fixed Salary/ Fees % Total % Name Directors Andre Morony Phillip Vernon Justine Hickey Steve Newnham Howard Pender Les Coleman Louise Herron Current Executives David Macri Adam Kirk Philip George Paul Smith 0 15 0 0 0 0 0 0 0 3 0 Executives who left during the year James Jordan Gary Leckie Tim Xirakis 15 7 27 This directors’ report, incorporating the remuneration report, is signed in accordance with a resolution of the board of directors. André Morony Chairman Dated: 27 September 2012 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 12 0 0 0 0 0 24 0 10 0 0 0 26 100 73 100 100 100 100 100 76 100 87 100 85 93 47 100 100 100 100 100 100 100 100 100 100 100 100 100 100 24 Corporate Governance Statement 2012 Australian Ethical Investment Limited & Controlled Entity This statement has been prepared under the ASX Corporate Governance Principles and Recommendations with 2010 Amendments (2nd edition) (“Principles and Recommendations”) and discloses the extent to which Australian Ethical Investment Ltd (“company”) has followed the Principles and Recommendations during the reporting period. This statement will be posted to 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 • Approval of the issue of shares and options • 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 • 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 following general delegations are also in place. The Chair of the board – is delegated with all necessary authority to carry out the following functions: • Recommendation to shareholders on the aggregate level of directors’ fees Inside the boardroom • Approval of individual director fees • Appointment and removal of the CEO • Annual appraisal of the CEO • Approval of the annual operational and capital expenditure budget and any material revisions • Approval of major contracts, acquisitions or disposals which have not been approved in the budget • Authorisation of board project expenditure • Acceptance and sign-off of the annual audited accounts and directors’ report for the Australian Ethical group • 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; 1800 021 227 | australianethical.com.au 25 australianethical • Ensuring contributions by all board members and reaching consensus when making decisions; • Approval and maintenance of Employee Authorisations; • Employment, termination and suspension • Motivating board members and where of staff; appropriate dealing with underperformance; • Oversee the process for appraising board members individually and the board as a whole; • Overseeing conducting and finalising negotiations for the CEO’s employment and evaluating the CEO’s performance; • Assisting with the selection of board committee members. Outside the boardroom • Communicating with shareholders on matters of corporate governance; • Chairing shareholder meetings – annual and extraordinary general meetings (AGMs and EGMs); • Ensuring compliance with ASX Listing Rules and continuous disclosure requirements; • Speaking with large investors; • In conjunction with the CEO, communicating board views to staff. Board committees – are delegated with all necessary authority to carry out their functions as set out in board committee charters. 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 and 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; • 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 Executive performance is evaluated in accordance with the company’s annual performance review guidelines. The Chair conducts the CEO’s performance review. The CEO conducts the performance reviews of other senior executives. In relation to senior executives the CEO completes a draft performance review and discusses it with the relevant executive. The discussion also covers: • objectives for the coming year, aspirations and areas for improvement; • the executives competencies and qualifications to ensure they remain applicable. If not, a training program is developed to bring the executive to the appropriate level; and • where remuneration is subject to performance hurdles, the achievement of those hurdles is reviewed and the amount of any performance based remuneration is determined. In relation to the CEO, the process is for the Chair to solicit feedback from the senior management team, conduct the review and 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. An evaluation of the CEO and senior executives was undertaken in the financial year in accordance with the processes described above. 26 Principle 2–structure the board to add value Independent directors A director is an independent director if they are not a member of management (a non-executive director) and who: • is not a substantial shareholder (as defined in the Corporations Act) or an officer of, or otherwise associated directly with, a substantial shareholder of the company; • 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; • 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; • 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; • has no material contractual relationship with the company or another group member other than as a director of the company; • 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; • 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 reflects the relationships set out 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 set out below. Director Status André Morony (Chair) Justine Hickey Phillip Vernon Stephen Newnham Stephen Gibbs Louise Herron Independent non-executive director Independent non-executive director Non independent executive director Non independent executive director Non independent non-executive director Independent non-executive director Steve was a non-executive director at the start of the period; he commenced employment with the company on 12 December 2011 Steve was appointed on 25 July 2012. Louise was appointed on 20 February 2012 and resigned on 25 July 2012 to take up her appointment as Sydney Opera House CEO. Les Coleman Non independent non-executive director Directorship ended at the conclusion of the AGM held on 17 November 2011. Howard Pender Non independent Executive Director Directorship ended at the conclusion of the AGM held on 17 November 2011. 1800 021 227 | australianethical.com.au 27 australianethical On 1 July 2011 the board was evenly balanced between independent and non independent directors. Following the AGM on 17 November 2011 there were more independent directors than non independent directors. Over the course of the year a further independent director, Louise Herron, was appointed. On 30 June 2012 the board comprised of three independent non-executive directors and two executive directors. Steve Gibbs was appointed after the end of the period. Steve is the Chair of the Centre for Australian Ethical Research Pty Ltd which is a major supplier of ethical research services to the company. Consequently, because Steve is an officer of a material supplier, he is classified as a non 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 is to keep moving in this direction as it represents best corporate governance and alignment with the Australian Ethical Charter. Independent legal and other professional advice Subject to the qualifications below director’s have a 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. The right of directors to seek independent legal and other professional advice at the company’s expense is subject to them complying with the following requirements: • They must have the prior approval of the Chair to seek the specific independent legal and other professional advice; • They must ensure that the costs are reasonable; and • Any advice received must be made available to the rest of the board unless either the Chair or the board agree that the rest of the board does not need to see the advice. Chair of the board André Morony, the Chair during the reporting period, is considered an independent director. Nomination Committee The board has a People, Remuneration and Nominations Committee. André Morony and Justine Hickey were the members of the Committee at the commencement of the reporting period. Louise Herron was appointed on 22 February 2012. (Following Louise’s resignation on 25 July 2012 the Committee is once again comprised of André 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 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. 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. A review of the board Competency Matrix and training requirements was undertaken during the period. 28 Principle 3–promote ethical and responsible decision making The company is an ethical investment company that manages money in accordance with the Australian Ethical Charter. The Charter is in the company’s constitution and informs all aspects of the company’s operations. The Charter is available on the company’s website. • 75% of either gender up to 31 December 2016; or • 60% of either gender after 31 December 2016. As at 30 June 2012, 40% of the board and 11% of AEI’s Management were female. Principle 4–safeguard integrity in financial reporting Code of conduct The company has a code of conduct that applies to directors and staff. It is available on the company’s website. Share trading The company has a share trading policy that 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 diversity policy that includes measurable objectives for achieving gender diversity and requires annual assessment against the objectives and progress in achieving them. In November 2011, the board of directors approved a Diversity Policy that includes objectives for achieving gender diversity. The Diversity Policy States: “AEI’s board of directors will establish measurable objectives for achieving gender diversity in the workplace and will undertake a review of progress against these objectives annually.” The following Gender Diversity Targets have been adopted: Target Date Target 30 June 2013 • 25% of the AEI board will be female • 25% of Management at AEI will be female 31 December 2016 • 40% of the AEI board will be female • 40% of Management at AEI will be female While this policy is aimed at increasing female representation at no time will AEI have more than: Audit Committee Throughout the period, the board had an Audit Committee consisting of three members being one external member (Ruth Medd, Chair of the Audit Committee and also independent Chair of the company’s subsidiary, Australian Ethical Superannuation Pty Ltd) and two independent non-executive directors. In relation to the non-executive directors on the Audit Committee: Steve Newnham left the Committee after he became an employee; Steve was replaced by Louise Herron who was on the Committee from 22 February 2012 to the end of the period. The other one non-executive director throughout the period was Les Coleman. 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. A summary of the Audit Committee’s Charter is on the company’s website. As the Audit Committee consists of two non- executive directors of the company and one external member, Ruth Medd who is not a director of the company, it does not strictly speaking comply with recommendation 4.2 “consists solely of non-executive directors”. However, the board is of the view that notwithstanding this the structure of the Audit Committee is consistent with the spirit of the recommendations and the Committee is able to perform its functions with independence and diligence. In particular it is noted that: • the Audit Committee is comprised only of non- executives, is chaired by an independent chair who is not the Chair of the board and has three members; • at a number of meetings the Audit Committee speaks directly to the external auditor in the absence of executive management. The Audit Committee considers the performance and independence of the external auditor over the course of a reporting period. In selecting an 1800 021 227 | australianethical.com.au 29 australianethical 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; the website also provides shareholders with guidance on a range of issues concerning the management of their shareholdings; • a facility is available to shareholders to be advised via e-mail when announcements are made; • the company has a regular sequence of communication points with investors and members including a newsletter, Aim High, for trust and superannuation investors; • since listing the company has also produced a shareholder newsletter; • the board recently resolved to hold AGM’s in various locations to promote participation and dissemination of information to all shareholders not just those based in Canberra; • the company also produces a sustainability report using Global Reporting Initiative guidelines. The sustainability report is available on the company’s website; and • the company complies with the corporate governance guidelines for notices of meeting. 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 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. 30 Principle 8–remunerate fairly and responsibly People, Remuneration and Nominations Committee The board has a People, Remuneration and Nominations Committee. The members of the Committee at the commencement of the relevant period were André Morony and Justine Hickey. Louise Herron was appointed to this Committee on 22 February 2012; her membership ended on 25 July 2012 when she resigned from the board. Steve Gibbs was appointed in her place. Details of attendance at meetings of the committee are provided in the directors’ report. The Committee’s Charter is available in the corporate governance section of the company’s website. Details of remuneration Details of remuneration paid to directors and key management personnel 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 superannuation contributions. They do not participate in bonus or equity schemes designed for the remuneration of executives. 1800 021 227 | australianethical.com.au 31 australianethical Auditor’s Independence Declaration 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 2012, 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. 32 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 2012 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 to of the directors’ report for the year ended 30 June 2012. 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 2012, complies with Section 300A of the Corporations Act 2001. THOMAS DAVIS & CO. J G RYAN PARTNER Chartered Accountants SYDNEY, 27 September 2012 Liability limited by a scheme approved under Professional Standards Legislation. 1800 021 227 | australianethical.com.au 33 australianethical Financial Statements Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Statement of financial position as at 30 June 2012 Notes Consolidated entity Parent entity 2012 $ 2011 Restated* $ 2012 $ 2011 Restated* $ 7 8 9 13 10 11 12 9 13 14 15 16 15 16 2,309,587 1,715,999 350,412 19,156 173,598 2,554,689 3,245,297 496,423 - 232,306 2,102,684 1,073,168 350,412 46,554 142,323 2,298,126 2,698,177 496,423 - 189,988 4,568,752 6,528,715 3,715,141 5,682,714 3,621,747 17,746 33,757 396,685 4,040,747 45,355 61,820 607,503 3,621,747 17,745 349,757 395,170 4,040,747 45,355 377,820 606,108 4,069,935 4,755,425 4,384,419 5,070,030 8,638,687 11,284,140 8,099,560 10,752,744 1,538,173 - 283,589 2,587,710 443,545 533,024 1,123,761 - 283,589 2,339,705 443,545 533,024 1,821,762 3,564,279 1,407,350 3,316,274 35,087 74,117 34,926 56,123 35,087 74,117 34,926 56,123 109,204 91,049 109,204 91,049 1,930,966 3,655,328 1,516,554 3,407,323 6,707,721 7,628,812 6,583,006 7,345,421 17 6,038,301 302,071 367,349 5,915,219 1,131,904 581,689 6,038,301 302,071 242,634 5,915,219 1,131,904 298,298 6,707,721 7,628,812 6,583,006 7,345,421 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 Deferred tax liabilities Other long-term provisions Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity *see note 27 The accompanying notes form part of these financial statements 16 34 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Statement of comprehensive income for the year ended 30 June 2012 Notes Consolidated entity Parent entity 2012 $ 2011 Restated* $ 2012 $ 2011 Restated* $ Revenue 3 14,792,790 15,744,031 12,642,119 14,928,938 Commissions paid to advisers ( 146,750) ( 175,660) ( 8,481) ( 15,048) External services ( 3,469,806) ( 3,024,619) ( 1,701,853) ( 1,318,507) Employee benefits expense ( 6,753,962) ( 7,628,517) ( 6,727,978) ( 7,611,134) Depreciation Occupancy costs Communication costs Other expenses ( 426,395) ( 421,258) ( 426,395) ( 421,258) ( 276,680) ( 271,218) ( 276,680) ( 262,184) ( 729,448) ( 748,853) ( 708,888) ( 747,597) ( 2,003,796) ( 1,531,231) ( 1,738,669) ( 1,440,464) Impairment charge on building 11 ( 210,000) - ( 210,000) - Profit before community grants and income tax expense 775,953 1,942,675 843,175 3,112,746 Community grants expense 1 (h) ( 53,327) ( 152,802) ( 53,327) ( 152,802) Profit before income tax 722,626 1,789,873 789,848 2,959,944 Income tax expense Profit for the year Other comprehensive income 4 ( 320,471) ( 664,842) ( 229,015) ( 516,024) 402,155 1,125,031 560,833 2,443,920 Net gain/(loss) on revaluation of available-for-sale investments Other comprehensive income for the period, net of tax ( 50,172) ( 50,172) ( 26,580) ( 26,580) ( 50,172) ( 50,172) ( 26,580) ( 26,580) Total comprehensive income for the period 351,983 1,098,451 510,661 2,417,340 Profit attributable to members of the parent entity 402,155 1,125,031 560,833 2,443,920 Total comprehensive income attributable to members of the parent entity Basic earnings per share (cents per share) Diluted earnings per share (cents per share) *see note 27 and note 3 351,983 1,098,451 510,661 2,417,340 6 6 40.1 39.4 113.0 112.2 The accompanying notes form part of these financial statements 17 1800 021 227 | australianethical.com.au 35 australianethical Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Consolidated entity Statement of changes in equity for year ended 30 June 2012 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 Net effect of a correction of an error: Share-based payment expense Note Issued capital ordinary $ 5,791,147 - - - 124,072 - - 5,915,219 17 5 Asset revaluation reserve $ Share-based payment reserve $ ( 40,677) - ( 26,580) ( 26,580) 909,826 - - - Retained earnings $ 1,395,432 1,282,533 - 1,282,533 Total $ 8,055,728 1,282,533 ( 26,580) 1,255,953 - - - ( 67,257) ( 124,072) - 255,905 1,041,659 - ( 1,938,772) - 739,191 - ( 1,938,772) 255,905 7,628,812 - - 157,502 ( 157,502) - Restated balance at 30 June 2011 5,915,219 ( 67,257) 1,199,161 581,689 7,628,812 Balance at 1 July 2011 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 Transfer from share-based payments reserve to retained earnings Share-based payment expense Balance at 30 June 2012 Parent entity 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 Net effect of a correction of an error: Share-based payment expense 5,915,219 - - - ( 67,257) - ( 50,172) ( 50,172) 1,199,161 - - - 581,689 402,155 - 402,155 7,628,812 402,155 ( 50,172) 351,983 17 5 123,082 - - - ( 123,082) - - ( 1,504,553) - ( 1,504,553) - 6,038,301 - ( 117,429) ( 888,057) 231,478 419,500 888,057 - 367,349 - 231,478 6,707,721 Note Issued capital y ordinary $ Asset revaluation reserve $ Share-based payment reserve $ Retained earnings $ g Total $ 5,791,147 - - - ( 40,677) - ( 26,580) ( 26,580) 909,826 - - - ( 206,850) 2,601,422 - 2,601,422 6,453,446 2,601,422 ( 26,580) 2,574,843 17 5 124,072 - - 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 - - 157,502 ( 157,502) - Restated balance at 30 June 2011 5,915,219 ( 67,257) 1,199,161 298,298 7,345,421 Balance at 1 July 2011 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 Transfer from share-based payments reserve to retained earnings Share-based payment expense Balance at 30 June 2012 5,915,219 - - - ( 67,257) - ( 50,172) ( 50,172) 1,199,161 - - - 298,298 560,833 - 560,833 7,345,421 560,833 ( 50,172) 510,661 17 5 123,082 - - - ( 123,082) - - ( 1,504,553) - ( 1,504,553) - 6,038,301 - ( 117,429) ( 888,057) 231,478 419,500 888,057 - 242,634 - 231,478 6,583,006 The accompanying notes form part of these financial statements. 18 36 Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Consolidated entity Statement of changes in equity for year ended 30 June 2012 Restated balance at 30 June 2011 5,915,219 ( 67,257) 1,199,161 581,689 7,628,812 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 Net effect of a correction of an error: Share-based payment expense Balance at 1 July 2011 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 Transfer from share-based payments reserve to owners: Shares issued during the period Dividends paid or provided for retained earnings Share-based payment expense Balance at 30 June 2012 Parent entity 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 Net effect of a correction of an error: Share-based payment expense Balance at 1 July 2011 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 retained earnings Share-based payment expense Balance at 30 June 2012 Transfer from share-based payments reserve to Asset Share-based Issued capital revaluation Note ordinary reserve $ $ payment reserve $ 5,791,147 ( 40,677) 909,826 ( 26,580) ( 26,580) Retained earnings $ 1,395,432 1,282,533 Total $ 8,055,728 1,282,533 ( 26,580) 1,282,533 1,255,953 17 5 124,072 ( 124,072) 255,905 - ( 1,938,772) ( 1,938,772) 255,905 5,915,219 ( 67,257) 1,041,659 739,191 7,628,812 157,502 ( 157,502) 5,915,219 ( 67,257) 1,199,161 ( 50,172) ( 50,172) 581,689 402,155 402,155 7,628,812 402,155 ( 50,172) 351,983 17 5 123,082 ( 123,082) - ( 1,504,553) ( 1,504,553) 6,038,301 ( 117,429) 367,349 6,707,721 ( 888,057) 888,057 231,478 419,500 231,478 Asset Share-based Issued capital revaluation Note ordinary y reserve $ $ payment reserve $ Retained earnings g $ Total $ 5,791,147 ( 40,677) 909,826 ( 206,850) 6,453,446 ( 26,580) ( 26,580) 2,601,422 2,601,422 ( 26,580) 2,601,422 2,574,843 17 5 124,072 ( 124,072) 255,905 - ( 1,938,772) ( 1,938,772) 255,905 5,915,219 ( 67,257) 1,041,659 455,800 7,345,421 157,502 ( 157,502) 5,915,219 ( 67,257) 1,199,161 ( 50,172) ( 50,172) 298,298 560,833 560,833 7,345,421 560,833 ( 50,172) 510,661 17 5 123,082 ( 123,082) - ( 1,504,553) ( 1,504,553) 6,038,301 ( 117,429) 242,634 6,583,006 ( 888,057) 888,057 231,478 419,500 231,478 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Restated balance at 30 June 2011 5,915,219 ( 67,257) 1,199,161 298,298 7,345,421 The accompanying notes form part of these financial statements. Australian Ethical Investment Limited A.B.N. 47 003 188 930 and controlled entity Statement of cash flows for the year ended 30 June 2012 Notes Consolidated entity Parent entity 2012 $ 2011 $ 2012 $ 2011 $ 15,869,290 ( 13,705,086) - 95,589 ( 550,692) ( 191,533) ( 152,801) 21,360,606 ( 18,429,046) - 95,885 ( 357,731) ( 184,026) ( 125,396) 13,320,548 ( 11,601,735) 372,055 86,805 ( 418,912) ( 191,533) ( 152,801) 18,497,823 ( 16,282,198) 1,665,953 76,271 ( 87,001) ( 184,026) ( 125,396) 22 (b) 1,364,767 2,360,292 1,414,427 3,561,426 100,306 ( 201,218) ( 33,564) - 29,160 656,109 ( 273,142) ( 191,352) - 48,820 100,306 ( 201,218) ( 33,564) 29,160 656,109 ( 273,142) ( 191,352) - 48,820 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 ( 105,316) 240,435 ( 105,316) 240,435 Cash flows from financing activities Proceeds from share issue Share buy-back payment Dividends paid - - ( 1,504,553) - - ( 1,938,772) - - ( 1,938,772) ( 1,504,553) Net cash provided by (used in) financing activities ( 1,504,553) ( 1,938,772) ( 1,504,553) ( 1,938,772) Net increase (decrease) in cash held ( 245,102) 661,955 ( 195,442) 1,863,089 Cash at beginning of financial year 2,554,689 1,892,734 2,298,126 435,037 Cash at end of financial year 22 (a) 2,309,587 2,554,689 2,102,684 2,298,126 The accompanying notes form part of these Financial Statements 18 1800 021 227 | australianethical.com.au 37 19 australianethical 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 2012 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, except for cash flow information 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. 20 38 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 2012 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 21 1800 021 227 | australianethical.com.au 39 australianethical 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 2012 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 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. 22 40 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 2012 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. 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. Upon the exercise of options and rights the proceeds received, net of any directly attributable transaction costs, are credited to share capital. 23 1800 021 227 | australianethical.com.au 41 australianethical 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 2012 Note 1 - Statement of significant accounting policies – continued 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) 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) (ii) 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" "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". Provision for community grants expense has been made in the current year. i) 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. j) Cash and cash equivalents Cash and cash equivalents include cash on hand and deposits held at call with banks. k) 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). l) 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. 24 42 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 2012 Note 1 - Statement of significant accounting policies - continued 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 three 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 $44,659, and a staff loan for $7,455. 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. 25 1800 021 227 | australianethical.com.au 43 australianethical 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 2012 • 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. 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. 26 44 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 2012 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 2012 $ 2011 Restated* $ 2012 $ 2011 Restated* $ 39,900 - 39,188 5,900 35,000 - 34,538 5,900 - Tax and other accounting advice 4,000 3,462 4,000 3,462 Note 3 - Revenue Operating activities - Management fees net of rebates - Entry fees - Member & Withdrawal Fees - Reimbursed expenses - Dividend from wholly owned subsidiary - Interest/distributions - Wholly owned entity fee - Other revenue 10,088,674 1,010,122 775,276 2,668,095 - 93,014 - 157,609 14,792,790 11,235,864 1,107,289 697,654 1,819,105 - 98,246 - 785,873 15,744,031 4,032,129 50,435 - 1,597,624 372,055 84,229 6,403,976 101,671 12,642,119 4,602,218 80,839 - 1,598,522 1,665,953 78,632 6,167,594 735,180 14,928,938 Total revenue 14,792,790 15,744,031 12,642,119 14,928,938 *Other fees for 2011 have been restated to reflect changed accounting treatment for expenses that the company pays and subsequently seeks reimbursement from the Managed Trusts and Superannuation Fund. Other fees reflects the full amount of expenses recovered for the Managed Trusts and Superannuation Fund. There has been a corresponding adjustment to external services (Statement of Comprehensive Income) reflecting the full cost of services provided by third parties to the Managed Trusts and Superannuation Fund. 27 1800 021 227 | australianethical.com.au 45 australianethical 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 2012 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% (2011:30%) - 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 Tax allowance on capital investment Consolidated entity Parent entity 2012 $ 2011 Restated* $ 2012 $ 2011 Restated* $ 87,992 232,479 320,471 828,581 (163,739) 664,841 (3,584) 232,599 229,015 679,763 (163,739) 516,024 216,788 - 536,962 - - 236,954 - 887,983 - - 91,456 148,818 34,241 69,443 943 321,415 2,130 124,022 2,483 665,597 34,236 69,443 943 433,032 2,076 124,022 2,483 1,165,382 - ( 944 ) - - ( 755 ) - ( 111,617 ) ( 944 ) ( 499,785) ( 755) - Income tax expense attributable to entity 320,471 664,842 320,471 664,842 Allocation of income tax expense to wholly owned entity under the tax sharing agreement - - ( 91,456) ( 148,818) Income tax expense attributable to entity 320,471 664,842 229,015 516,024 The applicable weighted average effective tax rates are as follows: 44% 37% 29% 17% 28 46 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 2012 Note 5 - Dividends (a) Distributions paid Final fully franked dividend of 100 (2011: 50) cents per share franked at the tax rate of 30% (2011:30%) Special fully franked dividend of 25 (2011: 100) cents per share franked at the tax rate of 30% (2011:30%) Interim fully franked dividend of 25 (2011: 45) cents per share franked at the tax rate of 30% (2011:30%) (b) Distributions declared Final fully franked dividend of 35 (2011: 100) cents per share franked at the tax rate of 30% (2011: 30%) Special final fully franked dividend of 0 (2011: 25) cents per share franked at the tax rate of 30% (2011: 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 2012 $ 2011 Restated* $ 2012 $ 2011 Restated* $ 1,003,036 496,570 1,003,036 496,570 250,758 993,141 250,758 993,141 250,759 1,504,553 449,061 1,938,772 250,759 1,504,553 449,061 1,938,772 351,062 997,913 351,062 997,913 - 249,478 - 249,478 871,804 1,380,710 150,455 721,349 534,596 846,114 (a) Earnings used to calculate basic EPS and dilutive EPS 402,155 1,125,031 (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 1,001,859 18,751 996,004 6,886 1,020,610 1,002,890 300 185,773 2,123,514 2,309,587 300 171,559 2,382,830 2,554,689 300 5,958 2,096,426 2,102,684 300 10,000 2,287,826 2,298,126 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. 29 1800 021 227 | australianethical.com.au 47 australianethical 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 2012 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: - Listed securities at fair value - Units in unit trust at fair value - Shares in wholly owned entity at cost b. Loans comprise - Loan to other entity - Loan to staff Consolidated entity Parent entity 2012 $ 2011 $ 2012 $ 2011 $ 1,711,718 4,281 - 1,715,999 3,238,499 6,798 - 3,245,297 1,057,697 4,281 11,190 1,073,168 2,623,778 6,798 67,601 2,698,177 332,055 52,114 384,169 33,757 350,412 108,947 223,108 - 332,055 44,659 7,455 52,114 476,902 81,341 558,243 61,820 496,423 137,036 339,866 - 476,902 69,091 12,250 81,341 648,055 52,114 700,169 349,757 350,412 108,947 223,108 316,000 648,055 44,659 7,455 52,114 792,902 81,341 874,243 377,820 496,423 137,036 339,866 316,000 792,902 69,091 12,250 81,341 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 Fringe Benefits Tax interest rate set by the ATO. Note 10 - Other current assets Other Prepayments 1,442 172,156 173,598 11,857 220,449 232,306 1,442 140,881 142,323 11,858 178,130 189,988 30 48 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 2012 Note 11 - Property, plant and equipment Consolidated entity Parent entity 2012 $ 2011 $ 2012 $ 2011 $ Land and buildings Leasehold land At cost Total land Buildings At cost Accumulated depreciation Impairment loss Total buildings Total land and buildings Plant and equipment At cost Accumulated depreciation Total plant and equipment 230,000 230,000 230,000 230,000 230,000 230,000 230,000 230,000 2,784,117 ( 440,241 ) ( 210,000 ) 2,133,876 2,784,117 ( 368,642 ) - 2,415,475 2,784,117 ( 440,241) ( 210,000) 2,133,876 2,784,117 ( 368,642) - 2,415,475 2,363,876 2,645,475 2,363,876 2,645,475 2,964,106 ( 1,706,235) 1,257,871 2,809,022 ( 1,413,750) 1,395,272 2,964,106 ( 1,706,235) 1,257,871 2,809,022 ( 1,413,750) 1,395,272 Total property, plant and equipment 3,621,747 4,040,747 3,621,747 4,040,747 Movements in carrying amounts Land Balance at the beginning of year Additions Disposals Carrying amount at the end of year Carrying amount at the end of year Buildings Balance at the beginning of year Additions Disposals Depreciation expense Impairment loss 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 - - 230,000 230,000 230,000 - - 230,000 230,000 2,415,475 2,487,032 2,415,475 2,487,032 - ( 71,599) ( 210,000) 2,133,876 - ( 71,557) - 2,415,475 - ( 71,599) ( 210,000) 2,133,876 - ( 71,557) - 2,415,475 1,395,272 193,588 ( 3,966) ( 327,023) 1,257,871 1,498,136 256,948 ( 36,793) ( 323,019) 1,395,272 1,395,272 193,588 ( 3,966) ( 327,023) 1,257,871 1,498,136 256,948 ( 36,793) ( 323,019) 1,395,272 Total 3,621,747 4,040,747 3,621,747 4,040,747 As at 30 June 2012 a valuation of the Property asset (land and buildings) was conducted in accordance with the company's policy. Based on advice received from independent valuers the directors determined that the value of the property was below its carrying value and have noted an impairment of $210,000. 31 1800 021 227 | australianethical.com.au 49 australianethical 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 2012 Note 12 - Intangible Assets Website development At cost Accumulated amortisation Total intangibles Website development 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 Loss on sale of financial instrument Building impairment Audit fees Amounts recognised directly in equity Financial asset revaluations Movements Opening balance at 1 July Credited (charged) to the income statement Credited (charged) to equity Closing balance at 30 June Note 14 - Trade and other payables Trade payables Sundry payables and accrued expenses Employee bonus 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 2012 $ 2011 $ 2012 $ 2011 $ 69,560 ( 51,814 ) 17,746 85,540 ( 40,185) 45,355 69,560 ( 51,814) 17,746 85,540 ( 40,185) 45,355 45,355 7,630 ( 7,467) ( 27,772) 17,746 46,297 25,740 - ( 26,682) 45,355 45,355 7,630 ( 7,467) ( 27,772) 17,746 46,297 25,740 - ( 26,682) 45,355 19,156 19,156 - - 46,554 46,554 - - 252,295 15,998 1,930 63,000 13,136 346,359 50,326 396,685 396,685 607,503 ( 232,320) 21,502 396,685 517,881 46,578 - - 14,220 578,679 28,824 607,503 607,503 435,083 161,029 11,391 607,503 252,295 15,998 1,930 63,000 11,621 344,844 50,326 395,170 395,170 606,108 ( 232,320) 21,382 395,170 517,881 46,578 - - 12,825 577,284 28,824 606,108 606,108 433,688 161,029 11,391 606,108 243,197 1,195,633 99,343 1,538,173 411,535 1,971,145 205,029 2,587,710 26,452 997,966 99,343 1,123,761 394,251 1,740,426 205,029 2,339,705 - - 443,545 443,545 - - 443,545 443,545 30,896 4,191 35,087 34,926 161 - 35,087 30,896 4,030 34,926 34,805 121 - 34,926 30,896 4,191 35,087 34,926 161 - 35,087 30,896 4,030 34,926 34,805 121 - 34,926 32 50 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 2012 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 997,913 (2011 - 993,141) shares Issue of share capital Shares issued during the year under the employee share ownership plan: Consolidated entity Parent entity 2012 $ 2011 $ 2012 $ 2011 $ 283,589 283,589 533,024 533,024 283,589 283,589 533,024 533,024 74,117 74,117 56,123 56,123 74,117 74,117 56,123 56,123 5,915,219 5,791,147 5,915,219 5,791,147 4,772 on 23 November 2010 (rights exercised) - 124,072 - 124,072 5,122 on 22 September 2011 (rights exercised) 123,082 - 123,082 - Balance 30 June 1,003,035 (2011 - 997,913) shares 6,038,301 5,915,219 6,038,301 5,915,219 At 30 June 2012 there were 1,003,035 fully paid ordinary shares which have no par value. Options/rights (i) For detailed information relating to the Australian Ethical Investment Limited employee share ownership plan, (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 an Australian Ethical trust 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. The company will comply with the new capital rules (as per CO 11/1140 ) with effect from 1 November 2012. These new capital rules require the company to: (i) Maintain net tangible assets (NTA) of 0.5% of managed investment scheme assets (approximately $3M based on current funds under management) if not acting as its own custodian. (ii) Hold 50% of the NTA requirement in cash or cash equivalents (iii) Hold the balance of NTA requirement in liquid assets (convertible within 6 months) 33 1800 021 227 | australianethical.com.au 51 australianethical 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 2012 Consolidated entity Parent entity 2012 $ 2011 $ 2012 $ 2011 $ Note 18 – Events after the balance sheet date Since the end of the financial year, the following material events have occurred: 1. In August 2012 an agreement was entered into to market Trevor Pearcey House for sale. 2. Upfront fees on all products were removed from 1 July 2012. 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 Liabilities 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 3,013,871 10,927,089 13,940,960 3,249,481 18,472,200 21,721,681 1,365,919 10,199,487 11,565,406 1,957,613 17,710,906 19,668,519 Rights of indemnities for liabilities incurred by the consolidated entity and parent entity not recorded in the financial statements were: 13,940,960 21,721,681 11,565,406 19,668,519 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. 34 52 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 2012 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 and 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 Managed funds Super Total Managed funds Super 30 June 2012 30 June 2011 $ $ $ $ $ Total Restated* $ 5,781,860 6,403,976 84,229 8,917,917 - 8,784 14,699,777 6,403,976 93,013 7,016,759 6,167,594 78,632 8,629,026 - 19,614 15,645,785 6,167,594 98,246 Total segment revenue 12,270,065 8,926,701 21,196,766 13,262,985 8,648,640 21,911,625 Inter-segment eliminations Total group revenue (6,403,976) 14,792,790 (6,167,594) 15,744,031 Segment net profit before tax 963,268 556,404 1,519,672 2,622,030 795,165 3,417,195 Reconciliation of segment result to group net profit/loss after tax Income tax expense (229,015) (91,456) (320,471) (516,024) (148,818) (664,842) Unallocated items - Depreciation and amortisation - Other corporate overheads * Group net profit after tax (426,395) (370,651) 402,155 (421,258) (1,206,064) 1,125,031 * Other corporate overheads includes staff bonus, community grants expense and staff options/rights expense. (ii) Segment assets 30 June 2012 30 June 2011 Managed funds $ Super $ Total $ Managed funds $ Super $ Total $ Assets 8,099,560 893,714 8,993,274 10,752,744 914,998 11,667,742 Inter-segment eliminations Total group assets (iii) Segment liabilities (354,587) 8,638,687 (383,602) 11,284,140 Liabilities 1,516,554 453,000 1,969,554 3,407,323 315,606 3,722,929 Inter-segment eliminations Total group liabilities (38,588) 1,930,966 (67,601) 3,655,328 35 1800 021 227 | australianethical.com.au 53 australianethical 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 2012 Consolidated entity Parent entity 2012 $ 2011 Restated* $ 2012 $ 2011 Restated* $ 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 300 185,773 2,123,514 2,309,587 300 171,559 2,382,830 2,554,689 300 5,958 2,096,426 2,102,684 300 10,000 2,287,826 2,298,126 (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 investment Share options/rights expensed Share options/rights expensed Impairment loss Changes in assets and liabilities (Increase) decrease in trade & other receivables (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 402,155 1,125,031 560,833 2,443,920 426,395 ( 668,631) 11,433 6,432 231,478 231,478 210,000 421,258 75,178 27,246 ( 6,449) 413,407 413,407 - 426,395 ( 668,631) 11,433 6,432 231,478 231,478 210,000 421,258 75,178 27,246 ( 6,449) 413,407 413,407 - 1,529,355 58,709 232,320 ( 612,336) ( 462,701) 160 ( 199,654) 104,888 ( 136,555) 92,276 443,545 121 1,557,465 47,665 232,440 (778,745) (422,497) 160 ( 30,088) 107,296 52,958 ( 319,365) 375,944 121 Net cash provided by (used in) operating activities 1,364,769 2,360,292 1,414,428 3,561,426 36 54 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 2012 Consolidated entity Parent entity 2012 $ 2011 $ 2012 $ 2011 $ 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 Cash Trust, Australian Ethical Larger Companies Trust, Australian Ethical International Equities Trust, Australian Ethical World Trust, Australian Ethical Property Trust, Australian Ethical Fixed Interest 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 balance date: Amounts receivable from wholly owned entity: Taxation and other - - - - - - - - - - 6,403,976 6,167,594 91,456 148,818 6,347,842 6,401,445 372,055 1,665,953 38,587 67,601 37 1800 021 227 | australianethical.com.au 55 australianethical 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 2012 Consolidated Entity Parent Entity 2012 $ 2011 $ 2012 $ 2011 $ 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 Cash Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical Property Trust - Climate Advocacy Fund 3,459,096 4,039,271 360,548 1,717,663 1,442,241 296,802 23,775 2,841,322 3,923,345 435,383 1,582,941 1,059,980 686,211 57,185 2,841,322 3,923,345 435,383 1,582,941 1,059,980 686,211 57,185 (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 Cash Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical Property Trust - Climate Advocacy Fund 253,495 204,500 88,251 130,247 102,249 34,201 - 240,292 194,334 84,361 123,348 97,167 34,384 - 240,292 194,334 84,361 123,348 97,167 34,384 - 3,459,096 4,039,271 360,548 1,717,663 1,442,241 296,802 23,775 253,495 204,500 88,251 130,247 102,249 34,201 - (iii) Transactions whereby Australian Ethical Investment Limited seeks expense reimbursement from the Australian Ethical Trusts in accordance with the trust deed. Trusts in accordance with the trust deed. - Australian Ethical Balanced Trust - Australian Ethical Smaller Companies Trust - Australian Ethical Cash Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical Property Trust - Climate Advocacy Fund 19,765 29,584 3,678 17,633 ( 1,004) 28 - 19,765 29,584 3,678 17,633 ( 1,004) 28 - 26,885 32,012 1,963 20,885 4,502 121 - 26,885 32,012 1,963 20,885 4,502 121 - (iv) Transaction whereby Australian Ethical Investment Limited received a distribution payment from the Australian Ethical Balanced Trust and Climate Advocacy Fund 2,883 4,665 2,883 4,665 38 56 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 2012 Note 23 – Related party transactions - continued Consolidated Entity Parent Entity 2012 $ 2011 $ 2012 $ 2011 $ b) Outstanding balances at balance date: 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 Cash Trust - Australian Ethical Larger Companies Trust - Australian Ethical International Equities Trust - Australian Ethical World Trust - Australian Ethical Property Trust - Climate Advocacy Fund 438,059 491,102 93,853 235,973 168,801 6,501 64,300 6,992 189,557 330,638 24,397 193,177 88,584 - 59,896 5,174 189,557 330,638 24,397 193,177 88,584 - 59,896 5,174 438,059 491,102 93,853 235,973 168,801 6,501 64,300 6,992 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 223,108 233,479 223,108 233,479 - 106,386 - 102,452 4,281 - 3,316 3,482 4,281 - 3,316 3,482 39 1800 021 227 | australianethical.com.au 57 australianethical 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 2012 Consolidated entity Parent entity 2012 $ 2011 $ 2012 $ 2011 $ 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) ( 291,298) 232,201 959,687 1,026,450 775,276 697,654 1,070,471 226,299 ( 172,722) 52,372 (ii) Contribution fee/ (rebate of contribution fee) 141,416 175,916 (iii) Member admin fee/ (rebate of member admin fee) (iv) Other reimbursables/ (rebate of other reimbursables) 384,674 350,798 149,880 37,623 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. - - - - - - - - - - - - - - - - 40 58 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 2012 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 Howard Pender Justine Hickey Les Coleman Stephen Newnham Louise Herron André Morony Phillip Vernon Position Director, non-executive Director, non-executive Director, non-executive Director, Business Development, executive Director, non-executive Chairperson, non-executive Managing Director ,executive Other key management personnel Name Gary Leckie Tim Xirakis Adam Kirk Paul Smith Philip George James Jordan David Macri Position Chief Financial Officer Head of Client Relationships General Manager, Business Development General Manager, Strategy & Communications Head of Product & Client Services Chief Investment Officer Chief Investment Officer b) Key management personnel compensation Ceased 17 November 2011 Ceased 17 November 2011 Appointed (full time) 12 December 2011 Appointed 20 February 2012, ceased July 25, 2012 Resigned 23 May 2012 Resigned 8 August 2011 Appointed 9 August 2011 Appointed 11 July 2011 Resigned 28 March 2012 Appointed 13 February 2012 Short term employment benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments Total compensation Economic Entity 2012 $ 1,978,000 167,914 34,939 221,528 151,310 2,553,691 2011 $ 1,698,879 151,363 19,073 57,459 127,143 2,053,917 Parent Entity 2012 $ 1,956,070 164,567 34,939 221,528 151,310 2,528,414 2011 $ 1,661,759 148,016 19,073 57,459 127,143 2,013,450 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 James Jordan AEFAV 2012 Total 2011 Total AEFAV 2012 Total 2011 Total AEFAU 2012 Total 2011 Total AEFAU 2012 Total 2011 Total AEFAU 2012 Total 2011 Total AEFAU 2012 Total 2011 Total 1,364 1,364 2,881 1,326 1,326 2,839 2,169 2,169 4,638 1,919 1,919 3,686 1,895 1,895 3,671 1,243 1,243 2,389 - - - - - - - - - - - - - - - - - - ( 1,364) ( 1,364) ( 1,517) ( 1,326) ( 1,326) ( 1,513) ( 2,169) ( 2,169) ( 2,469) ( 1,919) ( 1,919) ( 1,767) ( 1,895) ( 1,895) ( 1,776) ( 1,243) ( 1,243) ( 1,146) - - - - - - - - - - - - - - - - - - - 1,364 - - 1,326 - - 2,169 - - 1,919 - - 1,895 - - 1,243 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 41 1800 021 227 | australianethical.com.au 59 australianethical 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 2012 Note 24 - Key management personnel compensation - continued Rights Holdings Number of Rights held by key management personnel. 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 KMP Rights Holdings Parent Entity Directors James Thier Howard Pender Phillip Vernon Gary Leckie Tim Xirakis James Jordan David Macri AEFAY AEFAW 2012 Total 2011 Total AEFAY AEFAW 2012 Total 2011 Total AEFAB AEFAA AEFAY AEFAW 2012 Total 2011 Total 689 319 1,008 319 736 320 1,056 320 - - 2,481 317 2,798 317 AEFAB AEFAA AEFAY AEFAW 2012 Total 2011 Total AEFAB AEFAA AEFAY AEFAW 2012 Total 2011 Total AEFAB AEFAY AEFAW 2012 Total 2011 Total AEFAB AEFAA AEFAY AEFAW 2012 Total 2011 Total AEFAB AEFAA AEFAY AEFAW 2012 Total 2011 Total 985 501 1,486 501 - - 1,008 506 1,514 506 982 493 1,475 493 - - 868 409 1,277 1,271 - - 666 150 816 150 - - - 689 - - - 736 1,474 1,472 - - 2,946 2,481 390 1,105 - - 1,495 985 696 1,134 - - 1,830 1,008 646 - - 646 982 1,803 1,457 - - 3,260 915 2,362 827 - - 3,189 666 ( 689) ( 319) ( 1,008) - - - - - - - - - - - - - - - - - ( 696) ( 1,134) ( 1,008) ( 506) ( 3,344) - - ( 982) ( 493) ( 1,475) - ( 1,803) ( 1,457) ( 868) ( 409) ( 4,537) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ( 909) - - - - - - - - - 1,008 736 320 1,056 1,056 1,474 1,472 2,481 317 5,744 2,798 390 1,105 985 501 2,981 1,486 - - - - - 1,514 646 - - 646 1,475 - - - - - 1,277 2,362 827 666 150 4,005 816 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Named executives (including other key management personnel) Philip George - Share Holdings Number of Shares held by key management personnel. Parent Entity Directors James Thier Howard Pender Justine Hickey Balance at beginning of year 2012 2011 2012 2011 2012 2011 66,576 65,846 50,683 51,883 1,200 700 Named executives (including other key management personnel) Philip George Paul Harding Davis James Jordan 2012 2011 2012 2011 2012 2011 1,104 1,104 760 1,598 909 - Acquired / Granted as Remuneration On exercise of options/ rights Net Change other (1) Balance at end of year (2) & (3) - - - - - - - - - - - - - - - - - - - - - - - 909 405 730 ( 801) ( 1,200) - 500 - - ( 760) ( 838) ( 909) - 66,981 66,576 49,882 50,683 1,200 1,200 1,104 1,104 - 760 - 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 Key Management Personnel $ 2012 2011 12,250.11 43,358.14 $ 778.30 1,860.30 $ - - Write-off $ Balance at end of year No. of Individuals at end of year $ 7,454.99 12,250.11 - - 1 1 (a) The Loan is repayable on 30 November 2013 and currently bears interest at 7.4 % per annum that is the FBT interest rate set by the ATO. (b) In the 2011 -12 reporting period, there were no loans to individuals that exceeded $100,000 at any time. 42 60 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 2012 Note 25 - Share based payments The following share-based payment arrangements existed at 30 June 2012: During this reporting period, Australian Ethical Investment Limited issued 5,122 ordinary shares on conversion of 5,122 AEFAZ performance rights for nil consideration granted under its employee share incentive scheme in April 2011. This conversion of performance rights resulted in an increase in ordinary shares of 5,122. During 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 2011 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. During the reporting period 33,837 performance rights in two classes (identifiers: AEFAA and AEFAB) 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 AEFAA 19,195 Number Granted AEFAB 14,642 Attributes - employment must continue until 30 June 2014 - 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 2011/12, 2012/13 and 2013/14. - employment must continue until 1 July 2012; - 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 2011 to 30 June 2012 Performance rights reconciliation Outstanding at the beginning of the financial year Granted Forfeited Exercised Expired Outstanding at year-end Exercisable at year-end Consolidated Entity Parent Entity 2012 Number of Rights 2011 Number of Rights 32,416 34,199 ( 19,980) ( 5,122) - 41,513 - 14,476 25,569 ( 2,857) ( 4,772) - 32,416 - 2012 Number of Rights 2011 Number of Rights 32,416 34,199 ( 19,980) ( 5,122) - 41,513 14,476 25,569 ( 2,857) ( 4,772) - 32,416 - - - - 43 1800 021 227 | australianethical.com.au 61 australianethical 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 2012 Fair value - Rights All rights were calculated at grant date based on the underlying share prices minus estimated net present value of future dividends that the holders of rights are not entitled for. Weighted average fair value - Options Consolidated Entity 2012 2011 Parent Entity 2012 2011 Number of Options Weighted Average Exercise Price $ Number of Options Weighted Average Exercise Price $ Number of Options Weighted Average Exercise Price $ Outstanding at the beginning of the financial year Granted Forfeited Exercised Expired Outstanding at year-end Exercisable at year-end 32,394 - - - ( 32,394) - - 32.27 - - - 32.27 - - 68,682 - ( 4,435) - ( 31,853) 32,394 - 44.00 - 32.27 - 57.57 32.27 - 32,394 - - - ( 32,394) - - 32.27 - - - 32.27 - - There were no options outstanding at 30 June 2012. Weighted Average Exercise Price $ 44.00 - 32.27 - 57.57 32.27 - Number of Options 68,682 - ( 4,435) - ( 31,853) 32,394 - Included under employee benefits expense in the income statement is : $14,070 (2011: $75,860) relating to options issued under the employee share ownership plan. $217,407 (2011: $180,045) relating to rights issued under the employee share ownership plan. 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 13). 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: Cash and cash equivalents Trade and other receivables Financial assets Total financial assets Trade and other payables Total financial liabilities Weighted average effective interest rate Floating interest rate Fixed interest rate within 1 year 2012 % 2011 % 2012 $ 2011 $ 2012 $ 2011 $ 4 9 5 9 2,309,287 2,554,389 5,202 4,862 2,314,489 2,559,251 - - 13,155 13,155 - - - - Fixed interest rate within 1 to 5 years Non-interest bearing - - Total - - 14,659 14,659 - - 2012 $ 2011 $ 2012 $ 2011 $ 2012 $ 2011 $ Cash Trade and other receivables Financial assets Total financial assets Trade and other payables Total financial liabilities - - 33,757 33,757 - - - - 61,820 61,820 - - 300 1,715,999 332,055 300 3,245,297 476,902 2,309,587 1,715,999 384,169 2,554,689 3,245,297 558,243 2,048,354 3,722,499 4,409,755 6,358,229 1,538,173 2,587,710 1,538,173 2,587,710 1,538,173 2,587,710 1,538,173 2,587,710 44 62 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 2012 (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. 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 the finance committee risk considerations mentioned earlier in this note. 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 the finance committee 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 2012 $ 1,234,874 303,299 - 1,538,173 2011 $ $ 2,052,383 535,327 - 2,587,710 Parent Entity 2012 $ 2011 $ 820,462 303,299 - 1,123,761 1,806,802 535,327 - 2,342,129 Note 27 - Restatement of financial statements as a result of change in accounting policy and correction of an error When finalising the 31 December 2011 interim financial statements it was determined that the timing of recognition of expenses associated with share based payments granted to employees was incorrect. In general the accounting treatment previously adopted was to recognise the expense related to share based payments from the date of issue of the equity instrument (rights) through to vesting date. However the correct accounting treatment under the Australian Accounting Standards is to recognise the expense from the date at which a constructive obligation to pay the share based payment exists. Whilst this impacts financial results for periods since the inception of the employee share based payment scheme in 2009, it only materially impacts the 2010-11 prior period. Specifically, in December 2011 a tranche of performance rights were issued to investment and management employees with a vesting date 1 July 2012. The value of the rights issued/owing was estimated as $311,427. Previously this amount would have been recognised as an expense over the period December 2011 (issue date) to June 2012 (vesting date). However on further investigation it was determined that these rights were in respect to performance of investment and management employees during the year ended 30 June 2011 (year 1) vesting at 1 July 2012 (year 2). Accordingly approximately half of this amount should have been recognised as an expense in the year ended 30 June 2011. The statement of financial position for 30 June 2011 included this error and hence resulted in the restatement of the following line items for the year ended 30 June 2011. • Options/Rights reserve increased by $157,502 • Retained earnings decreased by $157,502 In addition the profit for 30 June 2011 was overstated by this error and hence resulted in the restatement of the following line items for the year ended 30 June 2011 • Options/Rights expense increased by $157,502 • Net profit after tax decreased by $157,502 30 June 2011 Comparative year Consolidated statement of financial position (extract) Equity Issued Capital Reserves Retained earnings Total Equity Actual 30 June 2011 $ Correction of Error Adj $ Restated Actual 30 June 2011 $ 5,915,219 974,402 739,191 7,628,812 157,502 (157,502) - 5,915,219 1,131,904 581,689 7,628,812 45 1800 021 227 | australianethical.com.au 63 australianethical Independent Auditor’s Report 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 2012 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 28 September 2012 Liability limited by a scheme approved under Professional Standards Legislation 15 64 Shareholder Information Australian Ethical Investment Ltd Analysis of Holdings as at 18 September 2012 Security Classes Fully Paid Shares Holdings Ranges Holders Total Units 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001+ Totals 697 79 9 14 1 800 174,813 171,416 65,781 406,604 196,472 % 17.221 16.887 6.480 40.056 19.355 1,015,086 100.000 1800 021 227 | australianethical.com.au 65 australianethical Australian Ethical Investment Ltd Fully Paid Shares Top 20 Holdings as at 18 September 2012 Holder Name Balance % Substantial Shareholder Select Managed Funds Pty Ltd 196,472 19.355 Citicorp Nominees Pty Ltd J A Thier H Pender C M Le Couteur TR Lee J M Boag B A & A M McGregor HB Sarjeant & Assoc Pty Ltd E Y W & P B Y Tse E A Iceton D Thier J I Ajani P A & M W & K A Anderson Garrett Smythe Ltd A S Cook M & A Beuchat Skeet Nominees Pty Ltd R M Myer UBS Wealth Managemnent Australia Nominees Pty Ltd 57,112 51,367 49,852 49,436 36,933 33,683 24,447 20,140 18,080 16,500 14,879 13,000 10,613 10,562 9,892 9,667 9,140 7,332 7,160 5.626 5.060 4.911 4.870 3.638 3.318 2.408 1.984 1.781 1.625 1.466 1.281 1.046 1.041 0.974 0.952 0.900 0.722 0.705 Yes Yes Yes 66 Contact us Phone: Email: Address: Web: 1800 021 227 enquiries@australianethical.com.au Reply Paid 3993, Sydney NSW 2001 australianethical.com.au Fibre used in this paper comes from FSC certified forests which are well managed according to strict environmental, social and economic standards. 40967 171012 

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