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2023 ReportANNUAL REPORT 2018 CONTENTS Overview 01 Highlights Performance 02 Operating and Financial Review 06 Directors’ Report (Including Remuneration Report) 15 Lead Auditor’s Independence Declaration Financial Statements 16 Statement of Profit or Loss 17 Statement of Comprehensive Income 18 Statement of Financial Position 19 Statement of Changes in Equity 20 Statement of Cash Flows 21 Notes to the Financial Statements 59 Directors’ Declaration 60 Independent Auditor’s Report Other Information 65 Shareholder Information 67 Directory Bell Financial Group – ABN 59 083 194 763 HIGHLIGHTS Bell Financial Group Ltd is an Australian-based provider of stockbroking, investment and financial advisory services to private, institutional and corporate clients. Bell Financial Group has over 650 employees, operates across 16 offices in Australia and has offices in New York, London, Hong Kong and Kuala Lumpur. Full Year Dividend 7.0 cents 11.8% Gross dividend yield Earnings per share 8.5 cents Increased by 9% Revenue $220 million Increased by 7% Net Profit After Tax $24.7 million Increased by 20% Funds Under Advice $46.8 billion Decreased by 1% 01 Annual Report 2018 – Bell Financial Group CAPITALFXCOMMODITIES OPERATING AND FINANCIAL REVIEW 2018 was a significant year for Bell Financial Group. In addition to a strong operating performance we moved to 100% ownership of Third Party Platform, opened a New York office and launched a new investment service, the “Bell Potter Guided Portfolio Service”. Group revenue increased by 7% to $220 million producing a net profit after tax of $24.7 million, a 20% increase on the previous year (2017: $20.6 million). The Board declared a final fully franked dividend of 4.25 cents per share, taking the full year dividend to 7.0 cents per share, fully franked. Based on our year end closing price of 85 cents per share this represents a grossed up dividend yield of 11.8%. Third Party Platform Acquisition The acquisition of Third Party Platform (TPP), which took our ownership from 56.63% to 100%, was completed on 3rd July 2018. The transaction, executed via a renounceable rights issue, received strong support with 99.7% of eligible shareholders voting in favour of the acquisition and 95.4% of eligible shareholders taking up their entitlements. This is an important transaction for the Group. Investment in technology and platforms is a core strategy which brings value through diversification and growth of non-traditional revenue streams and provides us with a significant competitive edge. The TPP platform through its brand names, Bell Direct, Desktop Broker and Bell Potter Online, plus its white label partners Macquarie Online and HSBC Online provides access to the only fully integrated open architecture platform in Australia. It has a high degree of operating leverage and we anticipate will be an important contributor to the Group. In addition we expect to achieve significant regulatory capital and operating synergies as TPP’s platform and technologies are rolled out and integrated across the Group. Bell Potter Guided Portfolio Service – (www.bellpotter. com.au/gps) At the end of the year we launched a new investment service, the Bell Potter Guided Portfolio Service (GPS). GPS is an efficient, cost effective way for clients to invest in a number of professionally designed model portfolios while retaining ownership and control of the underlying assets. We anticipate this product will have particular appeal to clients of Bell Direct and Desktop Broker and to certain private clients of Bell Potter Securities. Bell Potter New York Office Our US licence application was approved in July and the Bell Potter New York office is now fully operational. We are confident New York will be a positive addition to the Group and will provide a new dimension to our international institutional capabilities. In addition to Australia we now have a presence in Hong Kong, the UK and the US. 02 Annual Report 2018 – Bell Financial Group Technology Technology is the key to our future growth. Our intellectual property (IP) provides efficiencies across all areas of our business. It has applications for marketing, business development, compliance, trade execution, clearing and settlement, customer service, price discovery, and adviser efficiency and education. It is already a crucial element in our staff recruitment programme. We have a dedicated technology team of 69 across the Group. In addition to IT infrastructure and support staff, we employ professional developers and programmers who not only maintain and enhance our existing platforms, but also have a number of projects in the development stage. IQ – our price discovery and trade execution platform is being progressively rolled out across the network. We believe we will have the opportunity to market IQ to third party users in the future. FUSION – our unique client relationship management (CRM) and compliance desktop application, purpose built for Adviser productivity. TPP – our fully integrated open architecture execution and clearing platform. We also provide product and platform services such as cash, margin lending, superannuation, portfolio administration, fixed income and managed funds which utilise third party technologies. Aggregate revenues across these various products and services in 2018 was $52.1 million representing 24% of Group gross revenue. Platform, Product and Service Fee Income ($Am) 2014–2018 Equity Capital Markets Revenue ($Am) 2014–2018 60 50 40 30 20 10 0 52.1 18.3 13.0 17.5 47.8 16.2 12.1 16.1 41.7 14.4 10.7 13.6 3.1 2016 3.4 2017 3.3 2018 35.0 13.5 7.0 11.4 3.1 2014 37.2 13.4 8.5 12.1 3.1 2015 Other PAS Bell Direct Finance Income (inc. Bell Potter Capital) 70 60 50 40 30 20 10 0 66.6 54.7 46.3 41.9 31.1 2014 2015 2016 2017 2018 Revenue Growth The Group provides a range of products and services to customers across our network. These produce a diversified revenue stream, leverage to the market, growth opportunities, scalability and most importantly reinforce the value and sustainability of our business model. Revenue ($Am) 2014–2018 250 200 150 100 50 0 220.0 205.8 175.6 184.3 153.2 2014 2015 2016 2017 2018 2018 was another consecutive year of consistent growth with gross revenues up 7% on the previous year. The increase was broadly based with a strong contribution from Equity Capital Markets (ECM) division. 03 Annual Report 2018 – Bell Financial Group Over the course of the year our ECM division successfully completed 120 transactions raising $1.7 billion in new equity capital and generating nearly $67 million in fee income. This was the divisions strongest performance to date and underpins our belief that Bell Potter Securities is the Equity Capital Markets leader in the Australian equities small and mid-cap sector. Portfolio Administration Service Revenue ($Am) 2014–2018 20 16 12 8 4 0 17.5 16.1 13.6 11.4 12.1 2014 2015 2016 2017 2018 The Portfolio Administration Service (PAS) produced its fifth consecutive year of revenue growth with an increase of 9% in 2018. We believe this is a high quality service which now has 2,350 clients with $3.3 billion in assets under administration across our Portfolio Administration, Super Solutions and Super Command products. OPERATING AND FINANCIAL REVIEW continued Bell Potter Capital ($Am) 2014–2018 Third Party Platform ($Am) 2014–2018 12 10 8 6 4 2 0 10.5 9.6 7.8 6.6 6.5 2.6 2.1 3.2 1.4 1.4 2014 2015 2016 2017 2018 16 12 8 4 0 15.2 14.2 12.4 10.1 8.6 0.4 2014 1.2 2015 2.0 2.7 2.3 2016 2017 2018 Bell Potter Capital revenue grew by 9% in 2018 to $10.5 million. Third Party Platform (TPP) revenue grew by 7% to $15.2 million. While average loan and cash balances were generally higher during the year, the extremely volatile market conditions experienced in the 4th quarter resulted in only modest loan book growth of 4% to $296 million. The cash book was actually down by 13% to $276 million reflecting repayment of margin loans. There were additional development costs incurred over the course of the year with the rollout of new products such as GPS and IQ plus one-off set up costs relating to new Desktop Broker clients involving Chi-X, Bloomberg and Omgeo connectivity resulting in a small net profit decline for the year. Profit before tax grew by 22% to $3.2 million as a result of the higher average cash and loan balances throughout the course of the year and steady margins. The business now has 130,000 active clients with sponsored holdings of $16.5 billion and client cash of $115 million. TPP operates out of three offices in Sydney, Perth and Kuala Lumpur and will play an increasingly important role in consolidation of systems and operations across the entire Group. Funds Under Advice ($Am) 2014–2018 Net Profit/(Loss) After Tax ($Am) 2014–2018 50 40 30 20 10 0 47.2 46.8 38.8 33.1 30.1 2014 2015 2016 2017 2018 25 20 15 10 5 0 24.7 20.6 15.9 16.4 5.8 2014 2015 2016 2017 2018 Funds under Advice at the end of the year also reflected the sharp 4th Quarter market sell off and at $46.8 billion were slightly lower than $47.2 billion at the end of 2017. $5.2 billion of this was held in various fee for service products, marginally ahead of the $5 billion in 2017. • Net profit after tax: $24.7 million • Earnings per share: 8.5 cents • Final dividend: 4.25 cents per share (fully franked) • Full year dividend: 7.0 cents per share (fully franked) • Gross dividend yield1: 11.8% • PE multiple1: 11 times 1. Based on 31 December 2018 share price. 04 Annual Report 2018 – Bell Financial Group Outlook There are presently too many variables in play to make an accurate assessment of likely market outcomes for 2019. Globally, uncertainty surrounds Brexit, the European economy and the ongoing trade war between China and the US. Domestically, we have an uncertain interest rate environment, a continuing downturn in the residential property market and the prospect of upcoming State and Federal elections. We expect market volatility to continue to be a factor in the short to medium term. What we do know is our business and business model are both robust which has enabled us to successfully navigate many different economic cycles over the last four decades. Additionally, we have a solid pipeline of work and we remain committed to investing in and growing our business. Colin Bell Executive Director Alastair Provan Managing Director 05 Annual Report 2018 – Bell Financial Group DIRECTORS’ REPORT For the year ended 31 December 2018 The Directors of Bell Financial Group Limited (Bell Financial or the Company) present their report, together with the financial report, on the consolidated entity (Group) consisting of Bell Financial and its controlled entities for the financial year ended 31 December 2018. Board of Directors The names and details of the Directors of the Company holding office during the financial year and as at the date of this report are listed below. Directors were in office for the entire period, unless otherwise stated. Colin Bell BEcon (Hons) Alastair Provan Craig Coleman BComm Mr Bell was the Executive Chairman of Bell Financial during the financial year with responsibility for the business development of Bell Financial and all associated businesses within the Group. Mr Bell founded Bell Commodities in 1970 after working with the International Bank for Reconstruction and Development in Washington DC, USA. Mr Bell temporarily stepped down as Chairman on 24 January 2019, however remains on the Board as an Executive Director. Mr Provan is the Managing Director of Bell Financial and is responsible for the day-to-day management of all businesses within the Group. Since 24 January 2019, Mr Provan has also held the role of Acting Chairman. Mr Provan joined Bell Commodities in 1983 and held a number of dealing and management roles prior to becoming Managing Director in 1989. Mr Provan is a member of the Remuneration Committee. Mr Coleman was appointed as a Director in July 2007 and has been a Non-Executive Director since October 2007. He is a member of the Group Risk and Audit Committee and the Remuneration Committee. Mr Coleman is Executive Chairman of private and public equities fund manager, Viburnum Funds Pty Ltd. Previously, he was Managing Director and a Non-Executive Director of Home Building Society Limited. Prior to joining Home Building Society, Mr Coleman held a number of senior executive positions and directorships with ANZ, including Managing Director – Banking Products, Managing Director – Wealth Management and Non-Executive Director of Etrade Australia Limited. Other listed companies – past three years Chairman, Pacific Star Network Ltd (November 2017–present) Chairman, Universal Biosensors Inc (June 2016–present) Chairman, Rubik Financial Limited (December 2006–May 2017) Non-Executive Director, Pulse Health Limited (January 2010–May 2017) Non-Executive Director, Keybridge Capital Limited (March 2014–May 2016) Non-Executive Director, Amcom Telecommunications Limited (October 2008–July 2015) Graham Cubbin BEcon (Hons), FAICD Mr Cubbin was appointed as a Non-Executive Director in September 2007 and is an independent Director. He is the Chairman of the Group Risk and Audit Committee and the Remuneration Committee. Mr Cubbin was a senior executive with Consolidated Press Holdings Limited (CPH) from 1990 until September 2005, including Chief Financial Officer for 13 years. Prior to joining CPH, he held senior finance positions with a number of major companies including Capita Financial Group and Ford Motor Company. Mr Cubbin has over 20 years’ experience as a Director and Audit Committee member of public companies in Australia and the US. He is a Non-Executive Director of Teys Australia Pty Ltd. Other listed companies – past three years Chairman, McPherson’s Limited (September 2010–present) Non-Executive Director, WPP AUNZ Limited (May 2008–present) Non-Executive Director, White Energy Company Limited (February 2010–present) Non-Executive Director, Challenger Limited (January 2004–October 2018) 06 Annual Report 2018 – Bell Financial Group Brian Wilson AO MComm (Hons), Hon DUniv Mr Wilson was appointed as a Non-Executive Director in October 2009 and is an independent Director. He is a Senior Advisor to The Carlyle Group and a member of the Payments System Board of the Reserve Bank of Australia. Mr Wilson is the former Chairman of the Foreign Investment Review Board and a former Chancellor of University of Technology Sydney. He was a member of the Commonwealth Government Review of Australia’s Superannuation System and a member of the ATO Superannuation Reform Steering Committee. Mr Wilson retired in 2009 as a Managing Director of the global investment bank Lazard, after co-founding the firm in Australia in 2004 and prior to that was a Vice-Chairman of Citigroup Australia and its predecessor companies. Brenda Shanahan BComm, FAICD Ms Shanahan was appointed as a Non-Executive Director in June 2012 and ceased on 20 November 2018. Ms Shanahan was an independent Director and a member of the Group Risk and Audit Committee and the Remuneration Committee. She has served in senior executive and board roles in Australia and overseas, primarily in the finance and stockbroking industries, during a career spanning more than 30 years. Ms Shanahan is the Chair of the Aikenhead Centre for Medical Discovery, a Director of the Kimberley Foundation Australia and a Non-Executive Director of DMP Asset Management Ltd. Ms Shanahan has previously been an Executive Director of JM Financial Group Limited, May Mellor, Equitlink Limited and Mercer. Other listed companies – past three years Non-Executive Director, Clinuvel Pharmaceuticals Limited (February 2007–present) Non-Executive Director, Phoslock Environmental Technologies Limited (September 2017–present) Non-Executive Director, Challenger Limited (April 2011–October 2017) 07 Annual Report 2018 – Bell Financial Group DIRECTORS’ REPORT continued For the year ended 31 December 2018 Principal activities Bell Financial is an Australian-based provider of stockbroking, investment and financial advisory services to private, institutional and corporate clients. The Group has over 650 employees, operates across 16 offices in Australia and has offices in New York, London, Hong Kong and Kuala Lumpur. Review and results of operations Information on the operations and financial position of the Group is set out in our Operating and Financial Review on pages 2 to 5. Dividends On 20 February 2019, the Directors resolved to pay a fully franked final dividend of 4.25 cents per share. Dividends paid to shareholders during the year ended 31 December 2018 were as follows: Dividend Final 2017 ordinary Interim 2018 ordinary Per share 5.50 cents 2.75 cents Total $’000 14,570 8,742 Fully Franked Yes Yes Date of payment 21 March 2018 29 August 2018 Significant changes in the state of affairs There were no significant changes in Bell Financial’s state of affairs or the nature of its principal activities during the financial year ended 31 December 2018. Business strategies, prospects and likely developments The Operating and Financial Review sets out key information on Bell Financial’s operations and financial position, and provides an overview of its business strategies and prospects for future financial years. Details likely to result in unreasonable prejudice to the Group (e.g. information that is commercially sensitive, confidential or which could give a third party a commercial advantage) have not been included. Events after the end of the financial year There has not arisen in the interval between the end of the financial year and the date of this report, any matter or circumstance that has significantly affected, or may significantly affect, in the opinion of the Directors of Bell Financial: (a) the Group’s operations in future financial years, or (b) the results of those operations in future financial years, or (c) the Group’s state of affairs in future financial years. Directors’ meetings The number of Board and Committee meetings held during the year that each Director was eligible to attend, and the number of meetings attended by each Director were: Director Colin Bell Alastair Provan Craig Coleman Graham Cubbin Brian Wilson AO Brenda Shanahan1 Board Group Risk and Audit Committee Remuneration Committee Independent Directors Committee2 Eligible to attend 5 5 5 5 5 5 Attended 2 5 5 5 5 5 Eligible to attend – – 4 4 – 3 Attended – – 4 4 – 3 Eligible to attend – 1 1 1 – 1 Attended – – 1 1 – 1 Eligible to attend – – – 5 5 5 Attended – – – 5 5 4 1. Ceased on 20 November 2018. 2. For the purposes of the acquisition of 43.37% of Third Party Platform Ltd and the underwritten entitlement offer. 08 Annual Report 2018 – Bell Financial Group Directors’ shareholdings in Bell Financial Group As at the date of this report, the relevant interests of each Director in BFG ordinary shares, as notified to the ASX in accordance with the Corporations Act, are set out below. No Directors held options over BFG shares during the year ended 31 December 2018. Director Colin Bell Alastair Provan Craig Coleman Graham Cubbin Brian Wilson AO Fully paid ordinary shares 4,324,361 4,699,070 2,126,740 216,000 1,200,000 Deemed relevant interest 146,230,3501 146,230,3501 – – – Total 150,554,711 150,929,420 2,126,740 216,000 1,200,000 1. Bell Group Holdings Pty Limited (BGH) holds 143,998,350 BFG ordinary shares. BGH’s wholly-owned subsidiary, Bell Securities Pty Limited (BSPL) holds 2,232,000 BFG ordinary shares. Colin Bell and Alastair Provan each hold more than 20% of BGH and therefore under the Corporations Act they are each deemed to have a relevant interest in the 146,230,350 BFG ordinary shares held by BGH and BSPL. Company Secretary Cindy-Jane Lee, BEc, LLB, GAICD was appointed as Company Secretary on 10 January 2014 and is also the Group’s General Counsel. Before joining Bell Financial, Ms Lee held the position of Regional Legal Counsel, South Asia with Mercer. Ms Lee has over 18 years’ experience in corporate and financial services law working in law firms and multinational companies in Australia, London and Singapore. Ms Lee holds a Bachelor of Economics and a Bachelor of Laws from Monash University. Corporate Governance Bell Financial recognises the importance of good corporate governance. As required under the ASX listing rules, Bell Financial has a Corporate Governance Statement which has been lodged with the ASX, disclosing the extent to which it has followed the recommendations set by the ASX Corporate Governance Council during the reporting period. A copy of our Corporate Governance Statement is located at the Corporate Governance section of our website: www.bellfg.com.au/corporategovernance. Copies of Bell Financial’s charters (Board Charter, Group Risk and Audit Committee Charter, and Remuneration Committee Charter) and policies (Code of Conduct, Diversity Policy, Disclosure and Communication Policy, Risk Management Policy Summary, and Trading Policy) are also located here. Directors’ and officers’ indemnity and insurance Bell Financial has agreed to indemnify the Directors against all liabilities to another person (other than Bell Financial or related entity) that may arise from their position as officers of Bell Financial or its controlled entities, except where the liability arises out of conduct including a lack of good faith. Except for the above, neither Bell Financial nor any of its controlled entities has indemnified any person who is or has been an officer or auditor of Bell Financial or its controlled entities. Since the end of the previous financial year Bell Financial has paid a premium for an insurance policy for the benefit of the Directors, officers, company secretaries and senior executives. The insurance policy prohibits disclosure of the premium payable under the policy and the nature of the liability covered. Environmental regulation The operations of the Group are not subject to any particular and significant environmental regulation under a law of the Commonwealth or of a State or Territory. Non-audit services During the year, Bell Financial’s auditor, KPMG, performed certain other services in addition to its statutory auditor duties. Details of the amounts paid to KPMG for audit and non-audit services during the year are set out in Note 39 of the Financial Statements. The Directors are satisfied, based on advice provided by the Group Risk and Audit Committee, that the provision of these non- audit services during the year by the auditor is compatible with, and does not compromise, the general standard of independence for auditors imposed by the Corporations Act 2001, for the following reasons: • services provided during the year are not considered to be materially in conflict with the role of the auditor; and • the Directors are unaware of any matter relating to the provision of non-audit services which would impair the impartial and objective judgement of the auditor. A copy of the Lead Auditor’s Independence Declaration is set out on page 15. 09 Annual Report 2018 – Bell Financial Group DIRECTORS’ REPORT continued For the year ended 31 December 2018 Remuneration Report (audited) This Remuneration Report describes Bell Financial’s ‘Key Management Personnel’ (KMP) remuneration arrangements as required by the Corporations Act. 1. KMP Bell Financial’s KMP during the reporting period were: Directors Colin Bell Alastair Provan Craig Coleman Executive Chairman Managing Director Non-Executive Director Graham Cubbin Non-Executive Director Brian Wilson AO Non-Executive Director Brenda Shanahan Non-Executive Director (ceased on 20 November 2018) Senior Executives Lewis Bell Head of Compliance Andrew Bell Executive Director – Bell Potter Securities Ltd Dean Davenport Chief Financial Officer Rowan Fell Executive Director – Bell Potter Capital Ltd In this report, “Executive KMP” refers to the above persons excluding Non-Executive Directors. 2. Overview of remuneration policy and framework Bell Financial remunerates Executive KMP and other executives, management and advisers by one or more of fixed salary, commission entitlements and other short-term and long-term incentives. Non-Executive Directors receive a fixed fee and the superannuation guarantee rate only for their role on the Board. Where remuneration is linked to performance, net profit/(loss) after tax and Earnings per Share are key performance measures, in addition to individual objectives. In considering the Group’s performance and benefits for shareholder wealth, the Remuneration Committee and the Board have regard to the following financial indicators in respect of the current financial year and previous financial years. Net profit/(loss) after tax $’000 Share price at year end $ Earnings per Share (cents) Dividends paid $’000 2014 $5,952 $0.43 2.3 $3,852 2015 $16,399 $0.575 6.2 $8,948 2016 $16,905 $0.725 6.2 $12,502 2017 $21,443 $0.75 7.8 $15,196 2018 $25,070 $0.85 8.5 $23,312 The Company has established two equity-based plans to assist in the attraction, retention and motivation of Executive KMP, management and employees of the Company, the Long-Term Incentive Plan (LTIP) and the Employee Share Acquisition (Tax Exempt) Plan. Each plan contains customary and standard terms for dealing with the administration of an employee share plan, and the termination and suspension of the plan. Participants in the plans must not enter into a transaction or arrangement or otherwise deal in financial products which operate to limit the economic risk of the unvested Bell Financial securities issued under the plans. 3. Fixed compensation Fixed compensation consists of base compensation as well as employer contributions to superannuation funds. Compensation levels are reviewed annually through a process that considers individual performance and that of the overall Group. 4. Commission Commission entitlements are determined by the Board from time to time and aim to align the remuneration of Executive KMP and advisers with the Company’s performance. Certain executives and advisers are paid a commission based on revenue generated by the individual during the year. This creates a strong incentive for key executives and advisers to maximise the Company’s revenue and performance. 10 Annual Report 2018 – Bell Financial Group 5. Performance linked compensation Performance linked compensation includes both short-term and long-term incentives and is designed to reward Executive KMP for meeting or exceeding their financial and individual objectives. The short-term incentive is an ‘at risk’ bonus provided in the form of cash, while the long-term incentive is provided as options or performance rights over ordinary shares of the Company. 6. Short-term incentive bonus The Company may pay Executive KMP and other executives a short-term incentive (STI) annually. The Company’s Remuneration Committee is responsible for determining who is eligible to participate in STI arrangements, as well as the structure of those arrangements. There are two types of STI arrangements, being: • the STI payable to executives who are not remunerated by reference to commission, which is a discretionary annual cash bonus determined based on the Company’s financial performance during the year, key performance indicators, industry competitive measures and individual performance over the period; and • the STI payable to the Executive Chairman and the Managing Director, which is a discretionary annual cash bonus, up to three times annual salary, determined based on the Company’s financial performance during the year, key performance indicators and individual performance over the period. These STI arrangements aim to ensure that executive remuneration is aligned with the Company’s financial performance and growth. 7. Long-term incentive plan (LTIP) The LTIP is part of the Company’s remuneration strategy and is designed to align the interests of the Company’s Executive KMP, other executives and advisers with the interests of shareholders to assist the Company in the attraction, motivation and retention of Executive KMP, other executives and advisers. In particular, the LTIP is designed to provide relevant Executive KMP, other executives and advisers with an incentive for future performance, with conditions for the vesting and exercise of the options or performance rights under the LTIP, therefore encouraging them to remain with the Company and contribute to its future performance. Eligible persons participating may be granted options or performance rights on the terms and conditions in the LTIP rules and as determined by the Board from time to time. An option or performance right is a right, subject to the satisfaction of the applicable vesting conditions and exercise conditions, to subscribe for a share in the Company. If persons become entitled to participate in the LTIP and their participation requires approval under Chapter 10 of the ASX listing rules, they will not participate in the LTIP until that shareholder approval is received. No options or performance rights were granted under the LTIP in 2018. 8. Service agreements 8.1 Executive Chairman and Managing Director Bell Financial entered into service agreements with its Executive Chairman, Colin Bell, and its Managing Director, Alastair Provan, effective from listing in December 2007. These agreements set out the terms of each appointment, including responsibilities, duties, rights and remuneration. A summary of the remuneration packages including benefits under the short-term and long-term incentive plans for each of Mr Bell and Mr Provan is set out in the KMP remuneration table in Section 8.4 below. Bell Financial may terminate either service agreement on 12 months’ notice, or immediately for cause. If either agreement is terminated on 12 months’ notice, Bell Financial has agreed to vest early any unvested options under the LTIP and to allow their early exercise. Mr Bell and Mr Provan may terminate their respective service agreements on six months’ notice. Mr Bell and Mr Provan have entered into non-competition covenants with Bell Financial which operate for six months from termination of their respective service agreements. 8.2 Senior Executives All key executives are permanent employees of Bell Financial. Each executive has an employment contract with no fixed end date. Any executive may resign from their position by giving four weeks’ written notice. The Company may terminate an employment contract by providing written notice and making payment in lieu of notice in accordance with the Company’s termination policies. The Company may terminate an employment contract at any time for serious misconduct. 11 Annual Report 2018 – Bell Financial Group DIRECTORS’ REPORT continued For the year ended 31 December 2018 Remuneration Report (audited) (continued) 8. Service agreements (continued) 8.3 Non-Executive Directors On appointment to the Board, each Non-Executive Director was provided with a letter of appointment setting out the terms of their appointment, including responsibilities, duties, rights and remuneration, relevant to the office of director. Non-Executive Directors do not receive bonuses, incentive payments or equity-based pay. They receive a fixed annual fee inclusive of compulsory superannuation contributions. Their remuneration for the reporting period was: Name Craig Coleman Brian Wilson AO Graham Cubbin Brenda Shanahan1 1. Ceased on 20 November 2018 8.4 KMP remuneration Details of the remuneration of each KMP are tabled below. Directors’ fees $ 91,324 91,324 91,324 83,714 Superannuation $ 8,676 8,676 8,676 7,953 Total $ 100,000 100,000 100,000 91,667 Directors Executive Directors Colin Bell, Executive Chairman Alastair Provan, Managing Director Non-Executive Directors Craig Coleman Graham Cubbin Brian Wilson AO Brenda Shanahan2 Total compensation: Directors (consolidated) Senior Executives Lewis Bell, Head of Compliance Andrew Bell, Executive Director of Bell Potter Securities Dean Davenport, Chief Financial Officer 3 Rowan Fell, Director – Investment Services3 Total compensation: Executives (consolidated) Salary & fees $ 599,710 600,168 523,985 524,443 91,324 166,324 91,324 91,324 91,324 91,324 83,714 91,324 1,481,381 1,564,907 369,212 369,670 498,531 516,189 300,999 318,053 272,001 264,463 1,440,743 1,468,375 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Short-term STI cash bonus $ Non-monetary benefits $ 250,000 250,000 250,000 250,000 – – – – – 500,000 500,000 – – – – 200,000 200,000 300,000 200,000 500,000 400,000 – – – – – – – – – – – – – – – – – – – – – Total $ 849,710 850,168 773,985 774,443 91,324 166,324 91,324 91,324 91,324 91,324 83,714 91,324 1,981,381 2,064,907 369,212 369,670 498,531 516,189 500,999 518,053 572,001 464,463 1,940,743 1,868,375 1. Voluntary super contributions above the minimum legislative requirements are classified as post-employment benefits. 2. Ceased on 20 November 2018. 3. For Executive KMP, the short-term incentive bonus is for performance during the financial year ended 31 December 2018 using the criteria set out in Section 6 of the Remuneration Report. 12 Annual Report 2018 – Bell Financial Group Post-employment Superannuation benefits1 $ Share-based payments Other long term Termination Total amortisation benefits value of LTI options Proportion of remuneration performance related % 20,290 19,832 20,290 19,832 8,676 8,676 8,676 8,676 8,676 8,676 7,953 8,676 74,561 74,368 20,290 19,832 11,976 25,000 22,078 19,832 25,000 30,000 79,344 94,664 $ – – – – – – – – – – – – – – – – – – 26,923 12,115 32,999 35,537 59,922 47,652 $ – – – – – – – – – – – – – – – – – – – – – – – – $ – – – – – – – – – – – – – – – – – – – – – – – – Total $ 870,000 870,000 794,275 794,275 100,000 175,000 100,000 100,000 100,000 100,000 91,667 100,000 2,055,942 2,139,275 389,502 389,502 510,507 541,189 550,000 550,000 630,000 530,000 2,080,009 2,010,691 29% 29% 31% 31% 0% 0% 0% 0% 0% 0% 0% 0% 24% 23% 0% 0% 100% 100% 36% 36% 48% 38% 49% 47% Remuneration Report (audited) (continued) 8. Service agreements (continued) 8.3 Non-Executive Directors On appointment to the Board, each Non-Executive Director was provided with a letter of appointment setting out the terms of their appointment, including responsibilities, duties, rights and remuneration, relevant to the office of director. Non-Executive Directors do not receive bonuses, incentive payments or equity-based pay. They receive a fixed annual fee inclusive of compulsory superannuation contributions. Their remuneration for the reporting period was: Name Craig Coleman Brian Wilson AO Graham Cubbin Brenda Shanahan1 1. Ceased on 20 November 2018 8.4 KMP remuneration Details of the remuneration of each KMP are tabled below. Directors’ fees Superannuation $ 91,324 91,324 91,324 83,714 $ 8,676 8,676 8,676 7,953 Total $ 100,000 100,000 100,000 91,667 Directors Executive Directors Colin Bell, Executive Chairman Alastair Provan, Managing Director Non-Executive Directors Craig Coleman Graham Cubbin Brian Wilson AO Brenda Shanahan2 Short-term STI cash Non-monetary bonus benefits 250,000 250,000 250,000 250,000 Salary & fees $ 599,710 600,168 523,985 524,443 91,324 166,324 91,324 91,324 91,324 91,324 83,714 91,324 369,212 369,670 498,531 516,189 300,999 318,053 272,001 264,463 1,440,743 1,468,375 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 $ – – – – – – – – – 200,000 200,000 300,000 200,000 500,000 400,000 Total $ 849,710 850,168 773,985 774,443 91,324 166,324 91,324 91,324 91,324 91,324 83,714 91,324 1,981,381 2,064,907 369,212 369,670 498,531 516,189 500,999 518,053 572,001 464,463 1,940,743 1,868,375 $ – – – – – – – – – – – – – – – – – – – – – Total compensation: Directors (consolidated) 1,481,381 1,564,907 500,000 500,000 Senior Executives Lewis Bell, Head of Compliance Andrew Bell, Executive Director of Bell Potter Securities Dean Davenport, Chief Financial Officer 3 Rowan Fell, Director – Investment Services3 Total compensation: Executives (consolidated) 1. Voluntary super contributions above the minimum legislative requirements are classified as post-employment benefits. 2. Ceased on 20 November 2018. Section 6 of the Remuneration Report. 3. For Executive KMP, the short-term incentive bonus is for performance during the financial year ended 31 December 2018 using the criteria set out in Post-employment Superannuation benefits1 $ Share-based payments Other long term $ Termination benefits $ Total amortisation value of LTI options $ 20,290 19,832 20,290 19,832 8,676 8,676 8,676 8,676 8,676 8,676 7,953 8,676 74,561 74,368 20,290 19,832 11,976 25,000 22,078 19,832 25,000 30,000 79,344 94,664 – – – – – – – – – – – – – – – – – – 26,923 12,115 32,999 35,537 59,922 47,652 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Total $ 870,000 870,000 794,275 794,275 100,000 175,000 100,000 100,000 100,000 100,000 91,667 100,000 2,055,942 2,139,275 389,502 389,502 510,507 541,189 550,000 550,000 630,000 530,000 2,080,009 2,010,691 Proportion of remuneration performance related % 29% 29% 31% 31% 0% 0% 0% 0% 0% 0% 0% 0% 24% 23% 0% 0% 100% 100% 36% 36% 48% 38% 49% 47% 13 Annual Report 2018 – Bell Financial Group DIRECTORS’ REPORT continued For the year ended 31 December 2018 Remuneration Report (audited) (continued) 8. Service agreements (continued) 8.5 Options and equity instruments No options over the Company’s shares or other equity instruments are held by KMP. 9. Loans to KMP and their related parties All loans to KMP and their related parties are margin loans provided in the ordinary course of business on standard terms and conditions that are no more favourable than those provided to other employees or clients, including the interest rate and security required. Details on the aggregate loans provided to KMP and their related parties are as follows. Opening balance Closing balance1 Interest charged 31 Dec 18 $ 3,808,983 3,039,829 165,932 1. The aggregate loan amount at the end of the reporting period includes loans to 6 KMP. Details of KMP (including their related parties) with an aggregate of loans above $100,000 during the reporting period are as follows: Colin Bell2 Craig Coleman Lewis Bell2 Andrew Bell2 Rowan Fell Dean Davenport Balance 1 Jan 18 $ 1,292,752 1,009,222 539,027 300,000 583,958 84,024 Balance 31 Dec 18 $ 373,315 952,734 475,515 300,000 837,786 100,479 Interest paid and payable in period $ 45,596 35,607 25,639 13,092 42,050 3,948 Highest balance in period1 $ 2,403,008 1,045,850 1,140,754 473,283 1,119,179 124,651 1. Represents the highest loan balance during the reporting period for the individual KMP. All other items in the table relate to KMP and their related parties. 2. In addition to the loans detailed above, Colin Bell, Lewis Bell, Andrew Bell and Alastair Provan have joint control over one entity with a margin loan. The balance at 1 January 2018 was $6,062,473, the balance at 31 December 2018 was $6,661,712 and the highest balance in the reporting period was $6,661,712. The interest paid and payable in the reporting period was $346,280. Lead auditor’s independence declaration The lead auditor’s independence declaration is set out on page 15 and forms part of the Directors’ Report for the financial year ended 31 December 2018. Rounding of amounts Bell Financial is an entity to which ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 applies. Amounts in this report have been rounded off in accordance with that instrument to the nearest thousand dollars, or in certain cases, to the nearest dollar. This report is made on 20 February 2019 in accordance with a resolution of the directors. Alastair Provan Managing Director 20 February 2019 14 Annual Report 2018 – Bell Financial Group LEAD AUDITOR’S INDEPENDENCE DECLARATION For the year ended 31 December 2018 15 Annual Report 2018 – Bell Financial Group KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.Liability limited by a scheme approved under ProfessionalStandards Legislation.Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of Bell Financial Group Limited I declare that, to the best of my knowledge and belief, in relation to the audit of Bell Financial Group Limited for the financial year ended 31 December 2018 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. KPM_INI_01 KPMG Christopher Wooden Partner Melbourne 20 February 2019 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 STATEMENT OF PROFIT OR LOSS For the year ended 31 December 2018 Rendering of services Finance income Investment (losses)/gains Other income Total revenue Employee expenses Depreciation and amortisation expenses Occupancy expenses Systems, communication and ASX expenses Professional expenses Finance expenses Other expenses Total expenses Profit/(loss) before income tax Income tax expense Profit/(loss) for the year Attributable to: Equity holders of the Company Non-controlling interests Profit/(loss) for the year Earnings per share: Basic earnings per share Diluted earnings per share Note 6 10 8 9 7 11 16, 17 10 Consolidated 2018 $’000 202,223 18,250 (927) 470 220,016 (134,344) (1,471) (11,920) (19,075) (2,301) (5,007) (9,898) (184,016) 2017 $’000 188,783 16,226 (106) 860 205,763 (125,447) (1,523) (11,528) (18,044) (2,962) (4,585) (10,515) (174,604) 36,000 31,159 12 (10,930) (9,716) 25,070 21,443 24,692 378 25,070 Cents 8.5 8.5 20,635 808 21,443 Cents 7.8 7.8 29 29 The notes on pages 21 to 58 are an integral part of these Consolidated Financial Statements. 16 Annual Report 2018 – Bell Financial Group STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2018 Profit/(loss) for the year Other comprehensive income Items that may be classified to profit or loss Change in fair value of cash flow hedge Foreign operations – foreign currency translation differences Other comprehensive income for the year, net of tax Consolidated 2018 $’000 25,070 2017 $’000 21,443 (51) 328 277 24 (189) (165) Total comprehensive income for the year 25,347 21,278 Attributable to: Equity holders of the Company Non-controlling interests Total comprehensive income for the year 24,969 378 25,347 20,470 808 21,278 Other movements in equity arising from transactions with owners are set out in note 27. The notes on pages 21 to 58 are an integral part of these Consolidated Financial Statements. 17 Annual Report 2018 – Bell Financial Group STATEMENT OF FINANCIAL POSITION As at 31 December 2018 Assets Cash and cash equivalents Trade and other receivables Prepayments Financial assets Derivative assets Loans and advances Deferred tax assets Property, plant and equipment Goodwill Intangible assets Total assets Liabilities Trade and other payables Deposits and borrowings Current tax liabilities Derivative liabilities Employee benefits Provisions Total liabilities Net assets Equity Contributed equity Other equity Reserves Non-controlling interests Retained earnings Total equity attributable to equity holders of the Company Consolidated 2018 $’000 2017 $’000 Note 13 14 15 31 20 19 16 17 17 21 22 23 31 25 24 27 27 27 27 27 193,622 120,659 960 1,045 – 296,217 7,624 703 130,413 10,654 761,897 213,190 312,441 162 132 32,643 – 558,568 197,976 101,360 737 3,812 102 286,188 9,492 731 130,413 8,738 739,549 185,850 317,380 2,682 24 31,463 300 537,699 203,329 201,850 204,237 (28,858) (455) – 28,405 203,329 167,886 1,806 (693) 5,826 27,025 201,850 The notes on pages 21 to 58 are an integral part of these Consolidated Financial Statements. 18 Annual Report 2018 – Bell Financial Group STATEMENT OF CHANGES IN EQUITY Share Capital $‘000 167,886 Other Equity $‘000 1,806 Treasury Shares Reserve $‘000 (2,106) Share Based Payments Reserve $‘000 2,324 Cash Flow Hedge Reserve $‘000 (48) Foreign Currency Reserve $‘000 529 Non- Controlling Interests $‘000 5,018 Balance at 1 January 2017 Total comprehensive income Profit/(loss) for the year Other comprehensive income Change in fair value of cash flow hedges Translation of foreign currency reserve Total other comprehensive income Total comprehensive income for the year Transactions with owners, directly in equity Transfer of retained earnings Employee options expired Share based payments Employee share awards exercised Dividends Balance at 31 December 2017 Balance at 1 January 2018 Total comprehensive income Profit/(loss) for the year Other comprehensive income Change in fair value of cash flow hedges Translation of foreign currency reserve Total other comprehensive income Total comprehensive income for the year Transactions with owners, directly in equity Increase in Share Capital Decrease in Non-controlling interests Transfer of retained earnings Purchase of treasury shares Share based payments Employee share awards exercised Decrease in other equity Dividends Balance at 31 December 2018 – – – – – – – – – – – – – – – – – – – – – – – – – – 167,886 167,886 – – 1,806 1,806 710 – (1,396) (1,396) – – – – – 36,351 – – – – – – – – – – – – – – – – – – – – – – (323) – – – – 204,237 – (30,664) – (28,858) 407 – – (1,312) – – – – – – (1,627) 400 (710) – 387 387 – – – – – – – – – 284 (407) – – 264 – 24 – 24 24 – – – – – (24) (24) – (51) – (51) – – (189) (189) (189) – – – – – 340 340 – – 328 328 (51) 328 – – – – – – – – (75) – – – – – – – – 668 The notes on pages 21 to 58 are an integral part of these Consolidated Financial Statements. 19 Annual Report 2018 – Bell Financial Group Retained Earnings $‘000 19,959 Total Equity $‘000 195,368 21,443 21,443 – – – 24 (189) (165) 21,443 21,278 – – – – – 808 – – – – 5,826 5,826 (808) 1,627 – – – 400 – (15,196) 27,025 27,025 – (15,196) 201,850 201,850 – 25,070 25,070 – – – – – – – – (51) 328 277 25,070 25,347 – 36,351 (6,204) 378 – – – (378) – – (6,204) – (323) 284 – – – – – – (23,312) 28,405 – (30,664) (23,312) 203,329 Note 26 STATEMENT OF CASH FLOWS For the year ended 31 December 2018 Cash flows from/(used in) operating activities Cash receipts from customers and clients Cash paid to suppliers and employees Net cash from client related receivables and payables Cash generated from operations1 Dividends received Interest received Interest paid Income taxes paid Net cash from operating activities Cash flows from/(used in) investing activities Net proceeds from sale of investments Acquisition of property, plant and equipment Proceeds of property, plant and equipment Acquisition of other investments Net cash from/(used in) investing activities Cash flows from/(used in) financing activities Dividends paid On market share purchases Acquisition of Third Party Platform Pty Ltd Proceeds from issue of share capital Bell Potter Capital (Margin Lending) Deposits (used in)/from client cash balances Drawdown of margin loans Drawdown of borrowings Net cash used in financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 December 13, 26 The notes on pages 21 to 58 are an integral part of these Consolidated Financial Statements. Consolidated 2018 $’000 215,607 (193,513) 9,387 31,481 15 18,247 (5,007) (11,549) 33,187 2,093 (255) – (259) 1,579 (23,312) (323) (36,868) 36,351 (40,939) (10,029) 36,000 (39,120) (4,354) 197,976 193,622 2017 $’000 202,850 (173,986) 22,114 50,978 7 16,171 (4,585) (7,647) 54,924 402 (298) – (1,309) (1,205) (15,196) – – – 28,413 (58,790) – (45,573) 8,146 189,830 197,976 1. ‘Cash generated from operations’ includes Group cash reserves and client balances. Refer to note 13 for further information on cash and cash equivalents. 20 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2018 Bell Financial Group Ltd (“Bell Financial” or the “Company”) is domiciled in Australia. The address of the Company’s registered office is Level 29, 101 Collins Street, Melbourne, VIC. The Consolidated Financial Statements of the Company comprise the Company, and its controlled entities (the “Group” or “Consolidated Entity”). The Group is a for-profit entity. Bell Financial Group Ltd is an Australian-based provider of broking, investment and financial advisory services. 1. Significant accounting policies Set out below is a summary of significant accounting policies adopted by the Company and its subsidiaries in the preparation of the Consolidated Financial Statements. (a) Basis of preparation Statement of compliance The financial report is a general purpose financial report prepared in accordance with Australian Accounting Standards (AASBs) (including Australian Accounting Interpretations) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial report of the Group and the financial report of the Company comply with International Financial Reporting Standards (IFRS) and interpretations adopted by the International Accounting Standards Board (IASB). The Financial Statements were approved by the Board of Directors on 20 February 2019. Functional and presentation currency These Consolidated Financial Statements are presented in Australian dollars, which is the Company’s functional currency and the functional currency of the majority of the Group. The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instruments 2016/191 and in accordance with that Instrument, all financial information presented in Australian dollars has been rounded to the nearest thousand dollars unless otherwise stated. Removal of parent entity financial statements The Group has applied amendments to the Corporations Act 2001 that remove the requirement for the Group to lodge parent entity financial statements. Parent entity financial statements have been replaced by the specific parent entity disclosures in note 33. Comparative amounts 2017 comparative amounts for rendering of services revenue and employee expenses have been restated by $2,815,000 in order to present the amounts on a consistent basis with the way they are presented in 2018. There is no impact on the 2017 profit after tax or equity. (b) Principles of consolidation Business combinations The Group applies AASB 3 Business Combinations (2008) and amended AASB 127 Consolidated and Separate Financial Statements (2008) for business combinations. The accounting policies set out below, except as noted, have been applied consistently to all periods presented in these Consolidated Financial Statements, and have been consistently applied by all entities within the consolidated entity. Basis of measurement These Consolidated Financial Statements have been prepared under the historical cost convention, except for financial assets and liabilities (including derivative instruments) at fair value through the profit or loss. Subsidiaries Subsidiaries are all entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the Consolidated Financial Statements from the date that control commenced until the date that control ceases. All controlled entities have a 31 December balance date. 21 Annual Report 2018 – Bell Financial Group Intra-group balances, and any unrealised income and expenses arising from intra-group transactions, are eliminated in preparing the Consolidated Financial Statements. Non-controlling interest (NCI) NCI are measured at their proportionate share of the acquiree’s identifiable net assets at the date of acquisition. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. AASB 15 Revenue from Contracts with Customers The Group has initially applied AASB 15 Revenue from Contracts with Customers from 1 January 2018. AASB 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced AASB 118 Revenue and related interpretations. It requires identification of discrete performance obligations within a transaction and an associated transaction price allocation to these obligations. Revenue is recognised upon satisfaction of these performance obligations, which occur when control of the goods or services are transferred to the customer. The Group has adopted AASB 15 using the cumulative effect method (without practical expedients), with the effect of initially applying this standard recognised at the date of initial application (1 January 2018). Accordingly, the information presented for 2017 has not been restated. Under AASB 15, revenue is recognised when a customer obtains control of the goods or services. Determining the timing of the transfer of control – at a point in time or over time – requires judgement. AASB 15 specifically excludes financial instruments recognised under AASB 9 Financial Instruments. As such, the impacted revenue streams for Bell Financial are limited to fee-based revenue items such as brokerage, fee income, commissions and portfolio administration fees. in the foreseeable future. Deferred tax is measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis or their tax assets and liabilities will be realised simultaneously. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Future taxable profits are determined based on the reversal of relevant taxable temporary differences. If the amount of taxable temporary differences is insufficient to recognise a deferred tax asset in full, then future taxable profits, adjusted for reversals of existing temporary differences, are considered, based on the business plans for individual subsidiaries in the Group. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised; such reductions are reversed when the probability of future taxable profits improves. Tax consolidation Effective 1st January 2003, the Company elected to apply the tax consolidation legislation. All current tax amounts relating to the Group have been assumed by the head entity of the tax-consolidated group, Bell Financial Group. Deferred tax amounts in relation to temporary differences are allocated as if each entity continued to be a taxable entity in its own right. 1. Significant accounting policies (continued) (c) Revenue recognition (continued) AASB 15 Revenue from Contracts with Customers Based on the Group’s assessment of revenue streams, there is no impact on the Group’s consolidated financial statements upon adoption and no transition adjustment has been made to opening retained earnings. The application of the requirements of AASB 15 are broadly consistent with the Group’s current accounting policies. Revenue under AASB 15 is recognised when the Group transfers control over a service to a customer. The Group measures revenue based on the consideration specified in a contract with a customer. The following specific criteria must also be met before revenue can be recognised. Rendering of services Revenue arising from brokerage, fee income and corporate finance transactions are recognised by the Group when performance obligations under the contract with a customer are satisfied. Brokerage is recognised when a trade is executed and payment is received upon settlement, which is normally 2 days after the trade. Portfolio administration fees are recognised over time as the service is provided and are collected on a quarterly basis. Corporate fees are recognised at a point in time when the Group satisfies its performance obligation, which is usually upon the successful completion of the transaction. Payment is normally received within 7 days of the completion of the transaction. Other revenue streams Other revenue is recognised to the extent that it is probable that the economic benefit will flow to the Group and the revenue can be reliably measured. Interest income Interest income is recognised as it accrues using the effective interest rate method, in accordance with AASB 9. Dividend income Dividend income is recognised when the right to receive the payment is established, in accordance with AASB 9. (d) Statement of Cash Flows The Statement of Cash Flows is prepared on the basis of net cash flows in relation to settlement of trades. This is consistent with the Group’s revenue recognition policy whereby the entity acts as an agent and receives and pays funds on behalf of its clients, however only recognises as revenue, the Group’s entitlement to brokerage commission. For the purpose of the Statement of Cash Flows, cash and cash equivalents comprise cash at bank and on hand, investments in money market instruments maturing within less than 14 days (net of bank overdrafts) and short-term deposits with an original maturity of 3 months or less. It is important to note that the Statement of Financial Position discloses trade debtors and payables that represent net client accounts being the accumulation of gross trading. (e) Income tax Income tax expense or benefit for the period comprises current and deferred tax. Income tax is recognised in the Statement of Profit or Loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustments to tax payable in respect of previous years. Deferred tax is recognised using the balance sheet method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for the following temporary differences: the initial recognition of goodwill, the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they probably will not reverse 22 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 (f) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Tax Office (ATO). 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 are stated with the amount of GST excluded. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the Statement of Financial Position. Cash flows are included in the Statement of Cash Flows on a gross basis. The GST components of cash flows arising from investing and financing activities that are recoverable from, or payable to, the ATO are classified as operating cash flows. (g) Cash and cash equivalents Cash and cash equivalents comprise cash balances, investments in money market instruments maturing within less than 14 days and short-term deposits with original maturity of less than three months. Bank overdrafts that are repayable on demand are included as a component of cash and cash equivalents for the purpose of the Statement of Cash Flows. Cash held in trust for clients (refer to note 13) is included as cash and cash equivalents and is included within trade and other payables. (h) Derivatives Derivative financial instruments are contracts whose value is derived from one or more underlying price indices or other variables. They include swaps, forward rate agreements, options or a combination of all three. Certain derivative instruments are held for trading for the purpose of making short-term gains. These derivatives do not qualify for hedge accounting. The right to receive options arising from the provision of services to corporate fee clients are valued using the Black Scholes model. On disposal of options any realised gains/losses are taken to the Statement of Profit or Loss. Derivatives are recognised initially at fair value and attributable transaction costs are recognised in profit or loss when incurred. Derivative financial instruments are also used for hedging purposes to mitigate the Group’s exposure to interest rate risk. The Group applied the new general hedge accounting model in AASB 9 Financial Instruments from 1 January 2018 (refer to Note 1q)iii for further information). Derivative financial instruments are recognised initially at fair value. An impairment loss, with the exception of goodwill, is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost and available-for-sale financial assets that are debt securities the reversal is recognised in profit or loss. (j) Trade and other receivables Trade debtors to be settled within 2 trading days are carried at amortised cost. Term debtors are also carried at amortised cost. Recoverability of Trade and other receivables is assessed using the lifetime expected credit loss approach. (k) Trade and other payables Liabilities for trade creditors and other amounts are carried at cost, which is the fair value of the consideration to be paid in the future for goods and services received, whether or not billed to the parent entity or Group. Trade accounts payable are normally settled within 60 days. (l) Leased assets Leases in terms of which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Other leases are operating leases and are not recognised on the Group’s Statement of Financial Position. (m) Borrowing costs Borrowing costs are recognised as expenses in the period in which they are incurred. Where the derivative is designated effective as a hedging instrument, the timing of the recognition of any resultant gain or loss is dependent on the hedging designation. The Group designated interest rate swaps as cash flow hedges during the period. Details of the hedging instruments are outlined below: Cash flow hedges Changes in the fair value of cash flow hedges are recognised directly in equity to the extent that the hedges are effective. To the extent hedges are ineffective, changes in the fair value are recognised in the profit or loss. Hedge effectiveness is tested at each reporting date and is assessed against the hedge effectiveness criteria in AASB 9. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, the hedge accounting is discontinued prospectively. The cumulative gain or loss previously recognised in equity remains there until the forecast transaction occurs. (i) 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 its recoverable amount is expensed to the Statement of Profit or Loss. 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. 23 Annual Report 2018 – Bell Financial Group i. Classification and measurement of financial assets and financial liabilities AASB 9 largely retains the existing requirements in AASB 139 for the classification and measurement of financial liabilities. However, it eliminates the previous AASB 139 categories for financial assets of held to maturity, loans and receivables and available for sale. The impact of AASB 9 on the classification and measurement of financial assets is set out below. Under AASB 9, on initial recognition, a financial asset is classified as measured at: amortised cost; fair value through other comprehensive income (FVTOCI) – debt investment; FVTOCI – equity investment; or fair value through profit or loss (FVTPL). The classification of financial assets under AASB 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. A financial asset is measured at amortised cost if it meets both of the following conditions and is not designated as at FVTPL: • It is held within a business model whose objective is to hold assets to collect contractual cash flows; and • Its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. All financial assets not classified as measured at amortised cost or FVTOCI are measured at FVTPL. On initial recognition, the Group may irrevocably designate a financial asset that otherwise meets the requirements to be measured at amortised cost or at FVTOCI as at FVTPL if doing so eliminates or significantly reduces an accounting mismatch that would otherwise arise. The following accounting policies apply to the subsequent measurement of financial assets held by the Group. 1. Significant accounting policies (continued) (n) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Customer lists Customer lists that are acquired by the Group, which have finite lives, are measured at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised in the profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives are as follows: Software Customer list 2018 10 years 10 years 2017 10 years 10 years (o) Deposits and borrowings All deposits and borrowings are recognised at amortised cost, being the fair value of the consideration received net of issue costs associated with the borrowings. (p) Goodwill and intangible assets Goodwill Goodwill on acquisition is initially measured at cost being the excess of the costs of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less accumulated impairment losses. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying amount is impaired. An impairment loss in respect to goodwill is not reversed. Other intangible assets Research and development Expenditure on research activities is recognised in profit or loss as incurred. Development expenditure is capitalised only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable and the Group intends to and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognised in profit or loss as incurred. Subsequent to initial recognition, development expenditure is measured at cost less accumulated amortisation and any accumulated impairment losses. (q) Financial instruments All investments are initially recognised at fair value of the consideration given, plus directly attributable transaction costs. Subsequent to initial recognition, investments, which are classified as financial assets are measured as described below. Fair value measurement AASB 13 Fair Value Measurement that establishes a single framework for measuring fair value and making disclosures about fair value measurements when such measurements are required or permitted by other AASBs. It unifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. AASB 9 Financial Instruments The Group has initially applied AASB 9 Financial Instruments from 1 January 2018. AASB 9 sets out requirements for recognising and measuring financial assets and financial liabilities. This standard replaces AASB 139 Financial Instruments: Recognition and Measurement. No material change to recognition and measurement of financial assets and financial liabilities, however disclosure requirements of AASB 9 apply. The details of new significant accounting policies and the nature and effect of the changes to previous accounting policies are set out below. 24 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 Financial assets at amortised cost These assets are subsequently measured at amortised cost using the effective interest method. The amortised cost is reduced by impairment losses (see (ii) below). Interest income, foreign exchange gains and losses and impairment are recognised in profit or loss. Any gain or loss on derecognition is recognised in profit or loss. Financial assets at FVTPL These assets are subsequently measured at fair value. Net gains and losses, including any interest or dividend income, are recognised in profit or loss. The Group does not have any debt or equity investments at FVTOCI. Business model assessment The Group will determine the business model at the level that reflects how groups of financial assets are managed using all relevant evidence that is available at the date of the assessment, including: • The stated policies and objectives for the portfolio and the operation of those policies in practice; • How the performance of the portfolio is evaluated and reported to the Group’s management; • The risks that affect the performance of the business model (and the financial assets held within that business model) and how those risks are managed; and • How managers of the business are compensated. Assessment whether contractual cash flows are solely payments of principal and interest (SPPI) For the purposes of this assessment, ‘principal’ is defined as the fair value of the financial asset on initial recognition. ‘Interest’ is defined as consideration for the time value of money and for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs (e.g. liquidity risk and administrative costs), as well as profit margin. In assessing whether the contractual cash flows are SPPI, the Group considers the contractual terms of the instrument. This includes assessing whether the financial asset contains a contractual term that could change the timing or amount of contractual cash flows such that it would not meet this condition. ii. Impairment of financial assets AASB 9 replaces the ‘incurred loss’ model in AASB 139 with an ‘expected credit loss’ (ECL) model. The new impairment model applies to financial assets measured at amortised cost. Under AASB 9, credit losses are recognised earlier than under AASB 139. Under AASB 9, loss allowances are measured on either of the following bases: • 12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and • Lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument. For all financial assets at amortised cost, the Group measures loss allowances at an amount equal to lifetime ECLs, except for loans and advances, which are measured at 12-month ECLs where credit risk has not increased significantly since initial recognition and lifetime ECLs where credit risk has increased significantly since initial recognition. When determining whether credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes quantitative and qualitative information and analysis based on the Group’s historical experience and forward-looking information. The Group assumes that the credit risk on a financial asset has increased significantly if it is more than 30 days past due or the expected probability of default has increased significantly. The Group considers a financial asset to be in default when: • The borrower is unlikely to pay its credit obligations to the Group in full, without recourse by the Group to actions such as realising security (if any is held); or • The financial asset is more than 90 days past due. Measurement categories of financial assets Cash and cash equivalents, Trade and other receivables, and Loans and advances are now classified as amortised cost. Financial assets and Derivative assets are now classified as mandatorily at FVTPL. Modifications of financial assets and financial liabilities Financial assets If the terms of a financial asset are modified, the Group evaluates whether the cash flows of the modified asset are substantially different. If the cash flows are substantially different, the contractual rights to cash flows from the original financial asset are deemed to have expired. The original financial asset is derecognised and a new financial asset is recognised at fair value. If the cash flows of the modified asset are not substantially different, the Group recalculates the gross carrying amount of the financial asset and recognises the derecognition as a modification gain or loss in profit or loss. If such a modification is carried out because of financial difficulties of the borrower, the gain or loss is presented together with impairment losses. Financial liabilities The Group derecognises a financial liability when its terms are modified and the cash flows of the modified liability are substantially different. A new financial liability based on the modified terms is recognised at fair value. The difference between the carrying amount of the financial liability extinguished and the new financial liability with modified terms is recognised in profit or loss. There was no impact to opening retained earnings on the carrying amounts of financial assets or financial liabilities at 1 January 2018 from the adoption of AASB 9. 25 Annual Report 2018 – Bell Financial Group 1. Significant accounting policies (continued) (q) Financial instruments (continued) ii. Impairment of financial assets (continued) The maximum period considered when estimating ECLs is the maximum contractual period over which the Group is exposed to credit risk. Measurement of ECLs ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). ECLs are discounted at the effective interest rate of the financial asset. Credit-impaired financial assets At each reporting date, the Group assesses whether financial assets carried at amortised cost are credit- impaired. A financial asset is ‘credit- impaired’ when one or more events that have a detrimental impact on the estimated future cash flows of the financial asset have occurred. Presentation of impairment Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets. Impairment losses are presented separately in the Consolidated Statement of Profit or Loss and OCI. There were no impairment losses for the year ended 31 December 2018 (2017: Nil). Trade and other receivables ECLs are calculated based on actual historical credit loss experience. Exposures are segmented based on past events, current conditions and reasonable and supportable information about future events and economic conditions. There were no significant changes during the period to Group’s exposure to credit risk and there was no significant impact to credit provisioning over trade and other receivables as at 1 January 2018. Loans and advances ECLs are calculated based on actual historical credit loss experience. Exposures are segmented based on past events, current conditions and reasonable and supportable information about future events and economic conditions. There were no significant changes during the period to Group’s exposure to credit risk and there was no significant impact to credit provisioning over loans and advances as at 1 January 2018. iii. Hedge accounting The Group has elected to adopt the new general hedge accounting model in AASB 9. This requires the Group to ensure that hedge accounting relationships are aligned with its risk management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness. The Group only uses interest rate swaps to hedge exposure to fluctuations in interest rates. The Group has determined that there was no material impact arising from the application of AASB 9’s hedge accounting requirements at 1 January 2018. iv. Transition Changes in accounting policies resulting from the adoption of AASB 9 have been applied retrospectively, except as described below. • The Group has taken an exemption not to restate comparative information for prior periods with respect to classification and measurement (including impairment) requirements. • The following assessments have been made on the basis of the facts and circumstances that existed at the date of initial application. • The determination of the business model within which a financial asset is held. • The designation and revocation of previous designations of certain financial assets and financial liabilities as measured at FVTPL. • Changes to hedge accounting policies have been applied prospectively. • All hedging relationships designated under AASB 139 at 31 December 2017 met the criteria for hedge accounting under AASB 9 at 1 January 2018 and are therefore regarded as continuing hedging relationships. Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Dividends Dividends are recognised as a liability in the period in which they are declared, being appropriately authorised and no longer at the discretion of the Company. Treasury shares When share capital recognised as equity is repurchased, the amount of the consideration paid is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the reserve until sold or reissued. (r) Property, plant and equipment Property, plant and equipment is included at cost less accumulated depreciation and any impairment in value. All property, plant and equipment is depreciated over its estimated useful life, commencing from the time assets are held ready for use. Items of property, plant and equipment are depreciated/amortised using the straight-line method over their estimated useful lives. The depreciation rates for each class of asset are as follows: Leasehold improvements Office equipment Furniture and fittings 2018 2017 20 – 25% 20 – 25% 20 – 50% 20 – 50% 20 – 50% 20 – 50% 26 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 (s) Employee entitlements Wages, salaries and annual leave The provisions for entitlements to wages, salaries and annual leave expected to be settled within 12 months of reporting date represent the amounts which the Group has a present obligation to pay resulting from employees’ services provided up to reporting date. Long-service leave The provision for salaried employee entitlements to long-service leave represents the present value of the estimated future cash outflows to be made resulting from employees’ service provided up to reporting date. Liabilities for employee entitlements, which are not expected to be settled within twelve months, are discounted using the rates attaching to national government securities at balance date, which most closely match the terms of maturity of the related liabilities. In determining the liability for employee entitlements, consideration has been given to future increases in wage and salary rates, and experience with staff departures. Related on-costs have also been included in the liability. Bonuses The Company recognises a liability and an expense for bonuses. The Company recognises a provision where contractually obliged or where there is a past performance that has created a constructive obligation. Defined contribution plans A defined contribution plan is a post- employment benefit plan under which the Company pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised as an employee expense in profit or loss when they are due. Share-based payments The Company has adopted a number of share-based equity incentive plans in which employees and Directors participate. The grant date fair value of shares expected to be issued under the various equity incentive plans, including options, granted to employees and Directors is recognised as an employee expense, with a corresponding increase in equity over the period in which the employees become unconditionally entitled to the shares. The fair value of options at grant date is independently determined using the Black Scholes option pricing model that takes into account the exercise price, the vesting period, the vesting and performance criteria, the impact of dilution, the share price at grant date and the expected price volatility of the underlying share and the risk free interest rate for the vesting period. (t) Earnings per share The Group presents basic and diluted Earnings Per Share (EPS) data for its ordinary shares. Basic earnings per share Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares and share options granted to employees and Directors. (u) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated to the functional currency of the Group at exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the foreign exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on available-for-sale equity instruments that are recognised directly in equity. 27 Annual Report 2018 – Bell Financial Group Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into Australian dollars at the exchange rates at the reporting date. The income and expenses of foreign operations are translated into Australian dollars at the exchange rates at the dates of the transactions. Foreign currency differences are recognised in OCI and accumulated in the translation reserve, except to the extent that the translation difference is allocated to NCI. (v) Segment reporting The Group determines and presents operating segments based on the information that is internally provided to the Chief Decision Makers in accordance with AASB 8 Operating Segments. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. An operating segment’s results are reviewed regularly by management to make decisions about resources to be allocated to the segment and assess its performance. Segment results that are reported to management include items directly attributable to a segment as well as to those that can be allocated on a reasonable basis. (w) New standards and interpretations not yet adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 1 January 2019, and have not been applied in preparing these Consolidated Financial Statements. Those which may be relevant to the Group are set out below. The Group does not plan to adopt these standards early. AASB 16 Leases AASB 16 Leases introduces a single, on-balance sheet accounting model for lessees. A lessee recognises a right-of- use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short-term leases and leases of low value items. 1. Significant accounting policies (continued) (w) New standards and interpretations not yet adopted (continued) AASB 16 Leases (continued) Lessor accounting remains similar to the current standard – i.e. lessors continue to classify leases as finance or operating leases. AASB 16 Leases replaces existing leases guidance including AASB 117 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease. The standard is effective for annual periods beginning on or after 1 January 2019. Early adoption is permitted for entities that apply AASB 15 Revenue from Contracts with Customers at or before the initial date of initial application of AASB 16. The Group has assessed the potential impact on its Consolidated Financial Statements resulting from the application of AASB 16 and whilst there will be an impact on certain line items of the Consolidated Financial Statements, the Group does not expect there to be a material impact to the profit or net assets of the Group. The Group has a number of property leases. At transitional date, a right of use asset of approximately $31m will be recorded as an asset, with a corresponding lease liability of approximately $39.7m. There will be a reduction in trade & other payables of $8.6m. 2. Significant accounting judgements, estimates and assumptions In applying the Group’s accounting policies management continually evaluates judgements, estimates and assumptions based on experience and other factors, including expectations of future events that may have an impact on the Group. All judgements, estimates and assumptions made are believed to be reasonable based on the most current set of circumstances available to management and are reviewed on an ongoing basis. Actual results may differ from the judgements, estimates and assumptions. Significant judgements, estimates and assumptions made by management in the preparation of these financial statements are outlined below: Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences. (Refer to note 19). Impairment of loans and advances The Company assesses impairment of all loans at each reporting date by evaluating the expected credit loss on those loans. In the Directors’ opinion, no such impairment exists beyond that provided at 31 December 2018 (2017: Nil). (Refer to note 20). Long service leave provisions The liability for long service leave is recognised and measured as the present value of the estimated future cash flows to be made in respect of all employees at balance date. In determining the present value of a liability, attrition rates and pay increases through promotion and inflation have been taken into account. A discount rate equal to the government bond rate has been used in determining the present value of the obligation. (Refer to note 25). Legal provision From time to time claims are made against the Group. The recognition of any provision requires judgement to determine managements best estimate of the provision. As at 31 December 2018, no provision has been accrued to reflect potential claims. In the Directors’ opinion, no provision is required. (Refer to note 24). Intangible assets The customer lists acquired have been valued using the net present value of the unlevered free cash flow from each business’ client list and software development costs incurred are initially measured at cost and are amortised over the useful life. These valuations are outlined below: Bell Foreign Exchange and Futures business The amortisation period for the acquired intangible assets of the Foreign Exchange and Futures business is deemed to be 10 years. This was determined by analysing the average length of the relationship clients have with the business. Development costs Amortisation period for the incurred intangible asset development costs is deemed to be 10 years. This was determined by assessing the average length of the useful life of the assets. Impairment of goodwill Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. For the purpose of impairment testing, goodwill is allocated to Retail and Wholesale which represents the lowest level at which it is monitored for internal management purposes. The recoverable amount of the business to which each goodwill component is allocated to a cash-generating unit is estimated based on its value in use and is determined by discounting the future cash flows generated from continuing use. At 31 December 2018, goodwill allocated to the cash-generating units was $57.5 million for Retail and $72.9 million for the Wholesale segment. Key assumptions used in discounted cash flow projections The assumptions used for determining the recoverable amount are based on past experience and expectations for the future. Projected cash flows for each group of cash-generating units are discounted using an appropriate discount rate and a terminal value multiple is applied. The following assumptions have been used in determining the recoverable amount of each cash-generating unit: Discount rates: A post-tax discount rate of 11% was used for each cash-generating unit, based on the risk free rate, adjusted for a risk premium to reflect both the increased risk of investing in equities and specific risks associated with the business. 28 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 Terminal value multiple: A terminal value multiple of 7 times was used for each cash-generating unit. The multiple was applied to extrapolate the discounted future maintainable after tax cash flows beyond the five year forecast period. Brokerage revenue: An increase in brokerage revenue of 2.7% p.a. average growth over the five year forecast period for Retail and 5.9% p.a. average growth over the five year forecast period for Wholesale. This assumption reflects past experience. Corporate fee income: Corporate fee income maintained at current levels for the five year forecast period for Retail. An increase in corporate fee income of 3.7% p.a. average growth over the five year forecast period for Wholesale. This assumption reflects past experience. Sensitivity analysis As at 31 December 2018, the recoverable amounts for the retail and wholesale segments exceeds the carrying values. The recoverable amounts are sensitive to several key assumptions and a change in these assumptions could cause the carrying amounts to exceed the recoverable amounts. Using the discount rate above, if brokerage and corporate fee revenue decreases by approximately 4.5% for retail and 34% for wholesale from the estimated amounts in each of the five years of the forecast period, the estimated recoverable amounts would be equal to the carrying amounts. If the discount rate increased to 14% for retail and 21.5% for wholesale, the estimated recoverable amounts would be equal to the carrying amounts. Further, if the terminal value multiple decreased to approximately 5.7 times for retail and 3.3 times for wholesale, the estimated recoverable amounts would be equal to the carrying amounts at that date. 3. Financial risk management Overview The Group’s principal financial instruments comprise listed securities, derivatives, term deposits and cash. The Group has exposure to the following risks from its use of financial instruments: • Market risk • Credit risk • Liquidity risk Risk Management Framework The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Board has established the Group Risk and Audit Committee (GRAC), which is responsible for developing and monitoring risk management policies. The Committee reports regularly to the Board of Directors on its activities. Risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to develop a disciplined and constructive control environment in which all employees understand their roles and obligations. The Group Risk and Audit Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. Internal Audit assists the Group Risk and Audit Committee in its oversight role. Internal Audit undertakes both regular and ad hoc reviews of risk management controls and procedures, the results of which are reported to the Group Risk and Audit Committee. The risk management framework incorporates active management and monitoring of a range of risks. These include operational, information technology, cyber, market, credit, liquidity, legal, regulatory, reputation, fraud and systemic risks. The Board of Directors recognises that cyber risk is an increasing area of concern across the financial services industry, and is committed to the ongoing development of cyber security measures through awareness training, implementation of network security measures, and preventive controls to protect our assets and networks. Cyber resilience is an integral component of effective risk management. Market risk Market risk is the risk that changes in market prices, such as interest rates, equity prices and foreign exchange rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control exposures within acceptable parameters, while optimising returns. Equity price risk All instruments are subject to the risk that future changes in market conditions may make an instrument less valuable. As trading instruments are valued with reference to the market or Black Scholes model, changes in equity prices directly affect reported income in each period. The Group continually monitors equity price movements to ensure the impact on the Group’s activities is managed. Interest rate risk Interest rate risk arises from the potential for change in interest rates to have an adverse effect on the Group’s net earnings. The Group continually monitors movements in interest rates and manages exposure accordingly. The Board has also approved the use of derivatives, in the form of interest rate swaps, to mitigate its exposure to interest rate risk. Changes in the fair value and effectiveness of interest rate swaps (which are designated cash flow hedging instruments) are monitored on a six-monthly basis. 29 Annual Report 2018 – Bell Financial Group 3. Financial risk management (continued) Market risk (continued) Currency risk The Group is exposed to currency risk on monetary assets and liabilities held in a currency other than the respective functional currency of the Group. The Group ensures the net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates where necessary to address short-term imbalances. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing this risk is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding requirements. The Group manages liquidity by maintaining reserves, banking facilities and reserve borrowing facilities and by continuously monitoring forecast and actual cash flows and matching up maturity profiles of financial assets and liabilities. With respect to the maturity of financial liabilities, the Group also: • holds financial assets for which there is a liquid market and that they are readily saleable to meet liquidity needs; and • has committed borrowing facilities or other lines of credit that it can access to meet liquidity needs. Credit risk Credit risk is the financial loss to the Group if a debtor or counterparty to a financial instrument fails to meet its contractual obligations. Trade and other receivables The credit risk for these accounts is that financial assets recognised on the balance sheet exceed their carrying amount, net of any provisions for doubtful debts. In relation to client debtors, the Group’s credit risk concentration is minimised as transactions are settled on a delivery versus payment basis with a settlement regime of trade day plus two days. Margin lending Management monitors exposure to credit risk on an ongoing basis. The Group requires collateral in respect of margin loans made in the course of business. This collateral is generally in the form of the underlying security the margin loan is used to invest in. Loan-to-value ratios (LVRs) are assigned to determine the amounts of lending allowed against each security. Loans balances are reviewed daily and are subject to margin calls once the geared value falls 10% lower than the loan balance. Warnings are sent between 5% and 10%. The lender can also require the borrower to repay on demand part or all of the amount owing at any time, whether or not the borrower or any guarantor is in default. Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Capital consists of ordinary shares and retained earnings of the Group. The Group is required to comply with certain capital and liquidity requirements imposed by regulators as a licensed broking firm. All capital requirements are monitored by the Board and the Group was in compliance with all requirements throughout the year. Security arrangements The ANZ Bank has a Registered Mortgage Debenture over the assets |and undertakings of the Company. 4. Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined and disclosed based on the following methods. Where applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability. Investments in equity The fair values of financial assets at fair value through profit or loss are determined with reference to the quoted bid price, or if unquoted determined using a valuation model at reporting date. Derivatives The fair value of interest rate swaps is based on a mark-to-market model with reference to prevailing fixed and floating interest rates. These quotes are tested for reasonableness by discounting estimated future cash flows based on term to maturity of each contract and using market interest rates for a similar instrument at the measurement date. The fair value of currency swaps is determined using quoted forward exchange rates at the reporting date and present value calculations based on high quality yield curves in the respective currencies. The fair value of options is determined using the Black Scholes option- pricing model. Share based payments The fair value of employee stock options is determined using a Black Scholes model. Measurement inputs include share price, exercise price, volatility, weighted average expected life of the instrument, expected dividends and risk free interest rate. Service and non-market conditions are not taken into account in determining fair value. 30 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 5. Segment Reporting Business segments The segments reported below are consistent with internal reporting provided to the chief decision makers: • Retail – equities, Bell Direct, futures, foreign exchange, corporate fee income, portfolio administration services, margin lending and deposits; and • Wholesale – equities, Desktop Broker, white label clients and corporate fee income. 31 December 2018 Revenue from operations Profit/(loss) after tax Segment assets Total assets Segment liabilities Total liabilities Other segment details Interest revenue Interest expense Depreciation/amortisation 31 December 2017 Revenue from operations Profit/(loss) after tax Segment assets Total assets Segment liabilities Total liabilities Other segment details Interest revenue Interest expense Depreciation/amortisation Retail $’000 160,526 11,996 667,939 667,939 542,634 542,634 18,250 (5,007) (1,418) Retail $’000 161,727 13,023 660,087 660,087 526,958 526,958 16,226 (4,585) (1,479) Wholesale $’000 59,490 13,074 93,958 93,958 Consolidated $’000 220,016 25,070 761,897 761,897 15,934 15,934 558,568 558,568 – – (53) 18,250 (5,007) (1,471) Wholesale $’000 44,036 8,420 79,462 79,462 Consolidated $’000 205,763 21,443 739,549 739,549 10,741 10,741 537,699 537,699 – – (44) 16,226 (4,585) (1,523) Geographical segments The Group operates predominantly within Australia and has offices in Hong Kong, London and New York. 6. Rendering of services Brokerage Fee income Portfolio administration fees Other1 1. 2017 comparative amounts have been restated. Refer to Note 1(a) for further information. 31 Annual Report 2018 – Bell Financial Group Consolidated 2018 $’000 112,880 66,826 17,548 4,969 202,223 2017 $’000 112,997 55,057 16,112 4,617 188,783 7. Revenue The below Group’s revenue is derived from contracts with customers. In the following table, revenue is disaggregated by major products and service lines. The table also includes a reconciliation of the disaggregated revenue with the Group’s reportable segments in note 5. Brokerage Fee income Portfolio administration fees Other1 Retail Wholesale Consolidated 2018 $’000 94,263 26,118 17,548 4,804 142,733 2017 $’000 96,102 28,333 16,112 4,200 144,747 2018 $’000 18,617 40,708 – 165 59,490 2017 $’000 16,895 26,724 – 417 44,036 2018 $’000 112,880 66,826 17,548 4,969 202,223 2017 $’000 112,997 55,057 16,112 4,617 188,783 1. 2017 comparative amounts have been restated. Refer to Note 1(a) for further information. 8. Investment gains/(losses) Dividends received Profit/(loss) on financial assets held at fair value through profit or loss 9. Other income Sundry income 10. Finance income and expenses Interest income on bank deposits Interest income on loans and advances Total finance income Bank interest and fee expense Interest expense on deposits Total finance expense Net finance income/(expense) Consolidated 2018 $’000 15 (942) (927) 2017 $’000 7 (113) (106) Consolidated 2018 $’000 470 470 2017 $’000 860 860 Consolidated 2018 $’000 3,173 15,077 18,250 (1,601) (3,406) (5,007) 13,243 2017 $’000 2,965 13,261 16,226 (919) (3,666) (4,585) 11,641 32 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 11. Employee expenses Wages and salaries1 Superannuation Payroll tax Other employee expenses Equity-settled share-based payments 1. 2017 comparative amounts have been restated. Refer to Note 1(a) for further information. 12. Income tax expense Current tax expense Current period Taxable loss/(income) not recognised/(utilised) Adjustment for prior periods Utilisation of tax losses Deferred tax expense Recognition of previously unrecognised tax losses Relating to origination and reversal of temporary differences Consolidated 2018 $’000 (119,283) (6,829) (6,523) (1,425) (284) (134,344) 2017 $’000 (111,081) (6,703) (6,079) (1,184) (400) (125,447) Consolidated 2018 $’000 10,977 2 (6) (1,713) 9,260 – 1,670 2017 $’000 10,115 (44) 199 – 10,270 – (554) Total income tax expense/(benefit) 10,930 9,716 Numerical reconciliation between tax expense and pre-tax profit Accounting profit/(loss) before income tax Income tax using the Company’s domestic tax rate Non-deductible expenses Adjustments in respect of current income tax of previous year Income tax credit not recognised/(utilised) Consolidated 2018 Consolidated 2017 % 30.00% 0.38% (0.03%) 0.01% 30.36% $’000 36,000 10,800 136 (9) 3 10,930 % 30.00% 1.32% 0.01% (0.14%) 31.19% $’000 31,159 9,348 410 2 (44) 9,716 Tax consolidation Bell Financial Group Ltd and its wholly owned Australian controlled entities are a tax-consolidated group. On 3 July 2018, the Group acquired the remaining shares it did not already own in Third Party Platform Pty Ltd, increasing its ownership from 56.63% to 100%. Third Party Platform Pty Ltd joined the Bell Financial Group Ltd tax consolidated group at this time and income tax losses of $16.5m were transferred from Third Party Platform Pty Ltd to the Bell Financial Group Ltd tax consolidated group. 33 Annual Report 2018 – Bell Financial Group 13. Cash and cash equivalents Group cash reserves1 Cash on hand Cash at bank Margin lending cash Cash at bank Client cash Cash at bank (Trust account) Cash at bank (Segregated account) Cash and cash equivalents in the Statement of Cash Flows Cash on hand and at bank earns interest at floating rates based on daily bank deposit rates. Segregated cash and Trust bank balances earn interest at floating rates based on daily bank rates. Consolidated 2018 $’000 14 86,942 86,956 19,585 19,585 33,512 53,569 87,081 193,622 2017 $’000 12 84,962 84,974 34,001 34,001 55,754 23,247 79,001 197,976 Segregated cash and Trust bank balances are client funds, and are not available for general use by the Group. A corresponding liability is recognised within trade and other payables (note 21). The Group’s exposure to interest rate risk for financial assets and liabilities is disclosed in note 31. 1. Group Cash – summary of key movements Group cash – 1 January 2018 Cash profit Cash Revenue Less Cash Expenses Employee expenses Occupancy expenses Systems, communications and ASX expenses Professional expenses Finance expenses Other expenses Total Expenses Net Cash operating profit Balance Sheet Tax instalments paid Dividend paid Clearing house deposits paid Financial asset sales (net) General working capital movement Group cash – 31 December 2018 2018 $’000 84,974 2017 $’000 69,430 217,859 205,409 (135,080) (12,081) (19,075) (2,301) (5,007) (9,898) (183,442) 34,417 (11,549) (23,312) (278) 1,834 870 86,956 (118,901) (9,560) (18,044) (2,962) (4,585) (10,515) (164,567) 40,842 (7,647) (15,196) 905 (223) (3,137) 84,974 34 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 14. Trade and other receivables Trade debtors Less: provision for impairment Clearing house deposits Segregated deposits with clearing brokers Less: provision for impairment Sundry debtors No impairment allowance in respect of loans and receivables noted during the year (2017: Nil). 15. Financial assets Held at fair value through profit or loss Shares in listed corporations Options held in listed corporations Consolidated 2018 $’000 77,187 – 77,187 4,715 32,275 – 36,990 6,482 120,659 2017 $’000 70,071 – 70,071 4,420 21,463 – 25,883 5,406 101,360 Consolidated 2018 $’000 555 490 1,045 2017 $’000 2,584 1,228 3,812 35 Annual Report 2018 – Bell Financial Group 16. Property, plant and equipment Consolidated Cost Balance at 1 January 2017 Additions Disposals Effect of movements in exchange rates Balance at 31 December 2017 Balance at 1 January 2018 Additions Disposals Effect of movements in exchange rates Balance at 31 December 2018 Accumulated depreciation Balance at 1 January 2017 Depreciation charge for the year Disposals Effect of movements in exchange rates Balance at 31 December 2017 Balance at 1 January 2018 Depreciation charge for the year Disposals Effect of movements in exchange rates Balance at 31 December 2018 Carrying amount At 1 January 2017 At 31 December 2017 At 31 December 2018 Fixtures and fittings $’000 Office equipment $’000 Leasehold improvements $’000 1,776 104 – 2 1,882 1,882 50 – 9 1,941 (1,546) (84) – (1) (1,631) (1,631) (60) – (8) (1,699) 230 251 242 4,592 194 – 2 4,788 4,788 205 – 11 5,004 (4,352) (159) – (3) (4,514) (4,514) (171) – (12) (4,697) 240 274 307 6,323 – – – 6,323 6,323 – – 8 6,331 (6,048) (69) – – (6,117) (6,117) (52) – (8) (6,177) 275 206 154 Total $’000 12,691 298 – 4 12,993 12,993 255 – 28 13,276 (11,946) (312) – (4) (12,262) (12,262) (283) – (28) (12,573) 745 731 703 36 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 17. Goodwill and intangible assets Cost Balance at 1 January 2017 Acquisitions – internally developed Balance at 31 December 2017 Balance at 1 January 2018 Acquisitions – internally developed Balance at 31 December 2018 Accumulated amortisation and impairment losses Balance at 1 January 2017 Amortisation Balance at 31 December 2017 Balance at 1 January 2018 Amortisation Balance at 31 December 2018 Carrying amount At 1 January 2017 At 31 December 2017 At 31 December 2018 Goodwill $’000 Identifiable intangibles $’000 130,413 – 130,413 130,413 – 130,413 – – – – – – 130,413 130,413 130,413 11,240 2,873 14,113 14,113 3,104 17,217 4,164 1,211 5,375 5,375 1,188 6,563 7,076 8,738 10,654 Total $’000 141,653 2,873 144,526 144,526 3,104 147,630 4,164 1,211 5,375 5,375 1,188 6,563 137,489 139,151 141,067 37 Annual Report 2018 – Bell Financial Group 18. Non-Controlling interest (NCI) The following table summarises the information relating to each of the Group’s subsidiaries that has material NCI, before any intra-group eliminations. At 31 December 2018, the non-controlling interest in Third Party Platform Pty Ltd was nil (2017: 43.37%). Effective 3 July 2018, Bell Financial Group Ltd acquired the remaining shares in Third Party Platform Pty Ltd that it did not already own, increasing its ownership from 56.63% to 100%. Assets Liabilities Net Assets Carrying amount of NCI Revenue Profit/(loss) after tax Total Comprehensive Income Profit allocated to NCI Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Net increase/(decrease) in cash and cash equivalents 19. Deferred tax assets and liabilities The movement in deferred tax balances are as follows: Consolidated 2018 Property, plant and equipment Employee benefits Carry forward tax loss Utilisation of tax losses Other items Consolidated 2017 Property, plant and equipment Employee benefits Carry forward tax loss Other items Third Party Platform Pty Ltd 2018 $’000 – – – – 7,583 871 871 378 5,987 (118) (500) 5,369 2017 $’000 40,216 (26,784) 13,432 5,825 14,355 1,863 1,863 808 3,704 (12) (2,000) 1,692 Balance as at 1 January $’000 8 3,081 5,254 – 1,149 9,492 Balance as at 1 January $’000 17 2,837 5,920 830 9,604 Recognised in profit or loss $’000 (7) 23 (198) (1,713) 27 (1,868) Recognised in profit or loss $’000 (9) 244 (666) 319 (112) Balance at 31 December $’000 1 3,104 5,056 (1,713) 1,176 7,624 Balance at 31 December $’000 8 3,081 5,254 1,149 9,492 Unrecognised deferred tax assets relating to tax losses at 31 December 2018: $19,000 (2017: $17,000). Management has determined there is sufficient evidence that there will be profits available in future periods against which the tax losses will be utilised as set out in note 2. The assessment was based on forward projections that indicate tax losses will be fully utilised against profits within a 5-year period. 38 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 20. Loans and advances Margin lending Consolidated 2018 $’000 296,217 296,217 2017 $’000 286,188 286,188 Loans and advances are repayable on demand. There were no impaired, past due or renegotiated loans at 31 December 2018 (2017: nil). There is significant turnover in loans and advances. Based on historical experience the Group’s expectation is all but approximately 6% of loans may be realised in the next 12 months (2017: 8%), with the balance being realised after 12 months. Refer to note 31 for further detail on the margin lending loans. 21. Trade and other payables Settlement obligations Sundry creditors and accruals Segregated client liabilities Consolidated 2018 $’000 92,842 20,948 99,400 213,190 2017 $’000 101,688 20,923 63,239 185,850 Settlement obligations are non-interest bearing and are normally settled on 2-day terms. Sundry creditors are normally settled on 60-day terms. 22. Deposits and borrowings This note provides information about the contractual terms of the Group’s interest-bearing deposits and borrowings. For more information about the Group’s exposure to interest rate and foreign currency risk, see note 31. Deposits (cash account)1 Bell Cash Trust2 Cash advance facility3 1. Deposits relate to Margin Lending/Cash Account business (Bell Potter Capital) which are largely at call. 2. Represents funds held on behalf of Bell Potter Capital Limited in the Bell Cash Trust which are held at call. 3. Represents drawn funds from the Bell Potter Capital cash advance facility of $100m (2017: $100m). Interest rate risk exposures Details of the Group’s exposure to interest rate changes on borrowings are set out in note 31. Consolidated 2018 $’000 1,644 274,797 36,000 312,441 2017 $’000 3,806 313,574 – 317,380 39 Annual Report 2018 – Bell Financial Group 22. Deposits and borrowings (continued) Terms and debt repayment schedule Terms and conditions of outstanding deposits and borrowings were as follows: Consolidated Cash advance facility Deposits (Cash Account) Bell Cash Trust Average effective interest rate 2018 2017 2018 % 2.66 1.08 1.08 2017 % N/A 1.21 1.21 Face value $’000 36,000 1,644 274,797 312,441 Carrying amount $’000 36,000 1,644 274,797 312,441 Face value $’000 – 3,806 313,574 317,380 Carrying amount $’000 – 3,806 313,574 317,380 2018 Balance at 1 January 2018 Changes from financing cash flows Deposits/(withdrawals) from client cash balances Drawdown/(repayment) of borrowings Total changes from financing cash flows Cash advance facility $’000 – Liabilities Deposits (Cash Account) $’000 3,806 Bell Cash Trust $’000 313,574 – 36,000 36,000 (2,162) – (2,162) – (38,777) (38,777) Changes in fair value – – – Other charges Liability-related Interest expense Interest paid Total liability-related other changes 752 (752) – 171 (171) – 3,253 (3,253) – Balance at 31 December 2018 36,000 1,644 274,797 Derivatives (assets)/ liabilities held to hedge long-term borrowings Interest rate swap contracts used for hedging Assets $’000 – Liabilities $’000 24 Total $’000 317,404 – – – – – – – – – – – 51 – – – (2,162) (2,777) (4,939) 51 4,176 (4,176) – 75 312,516 40 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 Cash advance facility $’000 – Liabilities Deposits (Cash Account) $’000 42,894 Bell Cash Trust $’000 246,073 Derivatives (assets)/ liabilities held to hedge long-term borrowings Interest rate swap contracts used for hedging Assets $’000 – Liabilities $’000 48 Total $’000 289,015 – – – – – – – – (39,088) – (39,088) – 67,501 67,501 – – 537 (537) – 3,201 (3,201) – 3,806 313,574 – – – – – – – – – – – (39,088) 67,501 28,413 (24) (24) – – – 3,738 (3,738) – 24 317,404 2017 Balance at 1 January 2017 Changes from financing cash flows Deposits/(withdrawals) from client cash balances Drawdown/(repayment) of borrowings Total changes from financing cash flows Changes in fair value Other charges Liability-related Interest expense Interest paid Total liability-related other changes Balance at 31 December 2017 23. Current tax liabilities The current tax liability of the Group is $161,555 (2017: $2,682,269). This amount represents the amount of income taxes payable in respect of current and prior financial periods. 41 Annual Report 2018 – Bell Financial Group 24. Provisions Legal provision Balance at 1 January Arising during the year: Legal/other Utilised: Legal/other Balance at 31 December Consolidated 2018 $’000 – – 300 75 (375) – 2017 $’000 300 300 750 20 (470) 300 Legal provision This amount represents a provision for certain legal claims brought against the Group. In the Directors’ opinion, the provision is appropriate to cover losses that are quantifiable or measureable at 31 December 2018. 25. Employee benefits Salaries and wages accrued Liability for annual leave Total employee benefits Liability for long-service leave Total employee benefits Consolidated 2018 $’000 23,422 5,251 28,673 3,970 32,643 2017 $’000 22,987 4,910 27,897 3,566 31,463 The present value of employee entitlements not expected to be settled within twelve months of balance date have been calculated using the following inputs or assumptions at the reporting date: Assumed rate of increase on wage/salaries Discount rate Settlement term (years) Number of employees at year end Consolidated 2018 $’000 3.0% 2.5% 7 690 2017 $’000 3.0% 2.5% 7 668 42 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 26. Reconciliation of cash flows from operating activities Cash flows from operating activities Profit after tax: Adjustments for: Depreciation & amortisation Net loss on investments Equity settled share-based payments (Increase) client receivables (Increase) other receivables (Increase)/decrease derivative asset (Increase) other assets Decrease deferred tax assets (Increase) intangibles Increase client payables Increase other payables Increase derivative liability Increase/(decrease) current tax liabilities Increase provisions Increase deferred tax liability Net cash from operating activities Reconciliation of cash For the purpose of the cash flow statement, cash and cash equivalents comprise: Group cash reserves Cash on hand Cash at bank Margin lending cash Cash at bank Client cash Cash at bank (Trust account) Segregated cash at bank (client) Consolidated 2018 $’000 2017 $’000 25,070 21,443 1,471 933 284 27,758 (18,223) (1,076) 102 (223) 1,231 (3,104) 27,643 25 57 (2,520) 880 637 33,187 14 86,942 86,956 19,585 19,585 33,512 53,569 87,081 193,622 1,523 110 400 23,476 (22,886) (7,116) (102) (52) 112 (2,873) 44,667 9,714 – 1,957 8,027 – 54,924 12 84,962 84,974 34,001 34,001 55,754 23,247 79,001 197,976 43 Annual Report 2018 – Bell Financial Group 27. Capital and reserves Ordinary shares On issue at 1 January Share issue 3 July 20181 On issue at 31 December Consolidated 2018 $’000 167,886 36,351 204,237 2017 $’000 167,886 – 167,886 1. On 3 July 2018, the Group completed a renounceable pro rata entitlement offer and issued 53,457,468 shares at $0.68 per share, raising $36,351,078. Proceeds from the share issue were used to fund the acquisition of the remaining 43.37% of Third Party Platform Pty Ltd the Group did not already own, increasing its ownership from 56.63% to 100%. Movements in ordinary share capital Date 1 January 2017 31 December 2017 1 January 2018 Share issue 3 July 2018 31 December 2018 Detail Opening balance Balance Opening balance Balance Number of shares 267,286,480 267,286,480 267,286,480 53,457,468 320,743,948 Ordinary Shares The authorised capital of the Group is $204,236,590 representing 320,743,948 fully paid ordinary shares. The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at meetings of the Company. All ordinary shares rank equally with regard to the Company’s residual assets. Treasury shares As at 31 December 2018, there were 2,845,906 treasury shares outstanding (2017: 3,004,922). Retained earnings As at 31 December 2018, there were retained profits of $28.4m (2017: $27m). Non-controlling interests The non-controlling interests relate to ownership of Third Party Platform Pty Ltd at 0.00% (2017: 43.37%). Balance at 31 December 2018: Nil (2017: $5.8m). Effective 3 July 2018, Bell Financial Group Ltd acquired the remaining shares in Third Party Platform Pty Ltd that it did not already own, increasing its ownership from 56.63% to 100%. Foreign currency reserve The foreign currency reserve comprises of any movements in the translation of foreign currency balances. Balance at 31 December 2018: $668,000 (2017: $340,000). Other equity Other equity comprises movements in equity as a result of transactions with subsidiaries in Bell Financial Group Ltd’s capacity as a shareholder. Balance at 31 December 2018: $28,858,000 debit (2017: $1,806,000 credit). The decrease in other equity of $30,664,000 related to the difference between the consideration paid for the remaining 43.37% of Third Party Platform Pty Ltd and the non-controlling interest derecognised at that time. 44 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 Cash flow hedging reserve The cash flow hedging reserve comprises the effective portion of the cumulative net change in the fair value of the interest rate swap related to hedged transactions. Balance at 31 December 2018: $75,000 (2017: $24,000). Share based payments reserve The share based payments reserve arises on the grant of options, performance rights and deferred share rights to select employees under the Company’s equity-based remuneration plans. Balance at 31 December 2018: $264,000 (2017: $387,000). Treasury shares reserve The treasury shares reserve represents the cost of shares held by the Employee Share Trust that the Group is required to include in the Consolidated Financial Statements. Balance at 31 December 2018: $1.3m (2017: $1.4m). 28. Dividends Dividends recognised in the current year by the Group are: 2018 Interim 2018 ordinary dividend Final 2018 ordinary dividend 2017 Interim 2017 ordinary dividend Final 2017 ordinary dividend Cents per share Total amount $‘000 Franked/ unfranked Date of payment 2.75 – 2.00 5.50 8,742 – 5,286 14,570 Franked – 29 August 2018 – Franked 13 September 2017 21 March 2018 Franked Dividend franking account 30 percent franking credits available to shareholders of Bell Financial Group Ltd for subsequent financial years Company 2018 $ ‘000 2017 $ ‘000 28,292 26,801 The above available amounts are based on the balance of the dividend franking account at year-end adjusted for: 1. Franking credits that will arise from the payment of current tax liabilities. 2. Franking debits that will arise from payment of dividends recognised as a liability at year-end. 3. Franking credits that will arise from the receipt of dividends recognised as receivable at year-end. The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. The impact on the dividend franking account of dividends declared but not recognised as a liability is to reduce it by $5.8m (2017: $6.2m). 45 Annual Report 2018 – Bell Financial Group 29. Earnings per share Earnings per share at 31 December 2018 based on profit after tax and a weighted average number of shares outlined below was 8.5 cents (2017: 7.8 cents). Diluted earnings per share at 31 December 2018 was 8.5 cents (2017: 7.8 cents). Reconciliation of earnings used in calculating EPS Basic earnings per share Profit/(loss) after tax Profit attributable to ordinary equity holders used for basic EPS Adjustments for calculation of diluted earnings per share Profit attributable to ordinary equity holders used to calculate basic EPS Effect of stock options issued Profit attributable to ordinary equity holders used for diluted EPS Weighted average number of ordinary shares used as the denominator Weighted average number of ordinary shares used to calculate basic EPS (net of treasury shares) Weighted average number of ordinary shares at year-end Weighted average number of ordinary shares used to calculate diluted EPS Consolidated 2018 $’000 25,070 24,692 24,692 – 24,692 2017 $’000 21,443 20,635 20,635 – 20,635 Consolidated 2018 291,266,813 291,266,813 291,266,813 2017 263,913,293 263,913,293 263,913,293 30. Share-based payments Long-Term Incentive Plan (LTIP) The Board is responsible for administering the LTIP Rules and the terms and conditions of specific grants of options or performance rights to participants in the LTIP. The LTIP Rules include the following provisions: • The Board may determine which persons will be eligible to participate in the LTIP from time to time. Eligible persons may be invited to apply to participate in the LTIP. The Board may in its discretion accept such applications. • A person participating in the LTIP (“Executive”) may be granted options or performance rights on conditions determined by the Board. • The options or performance rights will vest on, and become exercisable on or after, a date predetermined by the Board (“the Vesting Date”), provided that the Executive remains employed as an executive of the Company as at that date. These terms may be accelerated at the discretion of the Board under specified circumstances. • An unvested option or performance right will generally lapse at the expiry of the exercise period applicable to that option or performance right. • Following the Vesting Date, the vested option or performance right may be exercised by the Executive subject to any exercise conditions and the payment of the exercise price (if any), and the Executive will then be allocated or issued shares on a one for one basis. • The Company has established an Employee Share Trust for the purpose of acquiring and holding shares in the Company for the benefit of participants. Fair value of options granted There were no share options granted during the year to 31 December 2018 (2017: Nil). During 2017, remaining outstanding options of 19,550,000 lapsed. Performance Rights Under the LTIP Rules, performance rights are deferred equity taken as 100% shares, with the conditions, including vesting and the period of deferral, governed by the terms of the grant. Unvested performance rights are forfeited in certain situations set out in the LTIP Rules. Ordinary shares allocated under the LTIP on exercise of performance rights may be held in trust beyond the deferral period. The issue price for the 2015 performance rights is based on the closing price of the shares traded on the ASX on the grant date and performance hurdles are time related. 46 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 Reconciliation of outstanding performance rights: Outstanding 1 January Granted during the year Forfeited during the year Exercised during the year Outstanding balance 31 December Expenses arising from share-based payment transactions Employee share options Performance rights Employee share issue Total expense recognised as employee costs Consolidated 2018 000 334 – – (334) – 2017 000 667 – – (333) 334 Consolidated 2018 $’000 – 29 255 284 2017 $’000 – 160 240 400 31. Financial instruments Exposure to credit, interest rate, currency and liquidity risks arise in the normal course of the Group’s business. Credit risk Management has a process in place to monitor the exposure to credit risk on an ongoing basis. The Group requires collateral in respect of margin loans made in the course of business within Bell Potter Capital. This collateral is generally in the form of the underlying security the margin loan is used to invest in. A loan-to-value ratio (LVR) is determined for each security with regard to market weight, index membership, liquidity, volatility, dividend yield, industry sector and advice from Bell Financial’s research department. A risk analyst performs a review of the LVR and the recommendation is submitted to management. Management does not expect any counterparty to fail to meet its obligations. Advisers and clients are provided with early warning of accounts in deficit from 5% up to 10% and clients receive a margin call if their account is in deficit by more than 10%. Margin calls are made based on the end-of-day position but can be made intraday at management’s discretion. The maximum exposure to credit risk is represented by the carrying amount of each financial asset in the Statement of Financial Position as outlined below: Trade debtors Clearing house deposits Segregated deposits with clearing brokers Loans and advances Sundry debtors Consolidated 2018 $’000 77,187 4,715 32,275 296,217 6,482 2017 $’000 70,071 4,420 21,463 286,188 5,406 Note 14 14 14 20 14 47 Annual Report 2018 – Bell Financial Group 31. Financial instruments (continued) Credit risk (continued) The ageing of trade receivables at reporting date is outlined below: Consolidated Ageing of receivables Not past due Past due 0 – 30 days Past due 31 – 365 days More than one year Gross 2018 $’000 77,043 133 11 – Impairment 2018 $’000 – – – – Gross 2017 $’000 69,939 122 10 – Impairment 2017 $’000 – – – – Collectability of trade receivables is reviewed on an ongoing basis. Debts that are known to be uncollectible are written off. A provision for impairment of trade receivables is established based on lifetime expected credit losses. This assessment is based on past events, current conditions and reasonable and supportable information about future events and economic conditions. Liquidity risk The following are the contractual maturities of financial liabilities, including estimated interest and excluding the impact of netting agreements. Consolidated 2018 Non-derivative liabilities Trade & other payables Cash deposits Cash advance facilities Bell Cash Trust Derivative liabilities Hedging derivative Foreign currency swap Consolidated 2017 Non-derivative liabilities Trade & other payables Cash deposits Cash advance facilities Bell Cash Trust Derivative liabilities Hedging derivative Carrying Amount $’000 Contracted Cashflow $’000 6 months or less $’000 6–12 months $’000 1–2 years $’000 2–5 years $’000 5+ years $’000 213,190 1,644 36,000 274,797 (213,190) (1,644) (36,000) (274,797) (213,190) (1,644) (36,000) (274,797) 75 57 (75) (57) (75) (57) – – – – – – – – – – – – – – – – – – – – – – – – Carrying Amount $’000 Contracted Cashflow $’000 6 months or less $’000 6–12 months $’000 1–2 years $’000 2–5 years $’000 5+ years $’000 185,850 3,806 – 313,574 (185,850) (3,806) – (313,574) (185,850) (3,806) – (313,574) 24 (24) (24) – – – – – – – – – – – – – – – – – – – – The Group manages liquidity by maintaining reserves, banking facilities and reserve borrowing facilities and by continuously monitoring forecast and actual cash flows and matching up maturity profiles of financial assets and liabilities. Rolling cash projections are used to monitor cash flow requirements and optimise cash returns on investments. A bank facility is also available to be drawn upon in order to meet both short and long-term liquidity requirements. 48 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 Market risk Market risk is the risk that changes in market prices, such as interest rates, equity prices and foreign exchange rates will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control exposures within acceptable parameters, while optimising returns. Interest rate risk The Group’s investments in fixed-rate debt securities and its fixed-rate borrowings are exposed to a risk of change in their fair value due to changes in interest rates. The Group’s investments in variable-rate debt securities and its variable-rate borrowings are exposed to a risk of change in cash flows due to changes in interest rates. Interest rate swaps are used to hedge exposure to fluctuations in interest rates. Changes in the fair value of these derivative hedging instruments are recognised directly in equity to the extent that the hedge is effective. To the extent the hedge is ineffective, changes in the fair value are recognised in profit or loss. In managing interest rate risk the Group aims to reduce the impact of short-term fluctuations on the Group’s earnings. Over the longer-term, however, permanent changes in interest rates will have an impact on profit. Investments in equity securities and short-term receivables and payables are not exposed to interest rate risk. Equity price risk All instruments are subject to the risk that future changes in market conditions may make an instrument less valuable. As trading instruments are valued with reference to the market or Black Scholes model, changes in equity prices directly affect reported income each period. The Group monitors equity price movements to ensure there is no material impact on the Group’s activities. The Group is exposed to equity price risks through its listed and unlisted investments. These investments are classified as financial assets or liabilities at fair value through the profit or loss. Foreign currency risk The Group is exposed to insignificant currency risk on monetary assets and liabilities held in a currency other than the respective functional currency of the Group. The Group ensures the net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates where necessary to address short-term imbalances. Sensitivity analysis Interest rate risk At 31 December 2018, it is estimated that a general decrease of one-percentage point in interest rates would decrease the Group’s profit before income tax by approximately $1,700,000 (2017: $1,600,000 decrease to profit) and would decrease equity by approximately $1,190,000 (2017: $1,120,000 decrease to equity). Interest rate swaps have been included in this calculation. A general increase of one-percentage point in interest rates would have an equal but opposite effect. Equity price risk At 31 December 2018, it is estimated that a 10% decrease in equity prices would decrease the Group’s profit before income tax by approximately $100,000 (2017: $380,000 decrease to profit) and would decrease equity by approximately $70,000 (2017: $266,000 decrease to equity). A 10% increase in equity prices would have an equal but opposite effect. 49 Annual Report 2018 – Bell Financial Group 31. Financial instruments (continued) Effective interest rates In respect of income-earning financial assets and interest-bearing financial liabilities, the following tables indicate their average effective interest rates at the reporting date and the expected periods in which they mature. 2018 2017 Consolidated Fixed rate instruments Loans and advances Deposits and borrowings Cash advance facility Variable rate instruments Cash and cash equivalents Loans and advances Deposits and borrowings Bell Cash Trust Average Effective interest rate % Note Total $’000 6 months or less $’000 6 – 12 months $’000 1 – 2 years $’000 2 – 5 years $’000 More than 5 years $’000 20 22 22 13 20 22 22 4.44% 0.00% 2.66% 96,851 – (36,000) 60,851 92,897 – (36,000) 56,897 1.50% 5.07% 1.08% 1.08% 193,622 199,366 (1,644) (274,797) 116,547 193,622 199,366 (1,644) (274,797) 116,547 704 – – 704 – – – – – 3,250 – – 3,250 – – – – – – – – – – – – – – – – – – – – – – – Fair value measurements (a) Accounting classifications and fair values The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. 31 DECEMBER 2018 Financial assets measured at fair value Equity securities/unlisted options Note 15 Financial assets not measured at fair value Trade and other receivables Cash and cash equivalents Loans and advances Financial liabilities measured at fair value Interest rate swaps used for hedging Foreign currency swap Financial liabilities not measured at fair value Trade and other payables Deposits and borrowings 14 13 20 21 22 Carrying Amount Designated at fair value $’000 Fair value hedging instruments $’000 Loans and receivables $’000 Other financial liabilities $’000 1,045 1,045 – – – – – – – – – – – – – – – – 75 57 132 – – – – – 120,659 193,622 296,217 610,498 – – – – – – Total $’000 1,045 1,045 120,659 193,622 296,217 610,498 75 57 132 – – – – – – – – – 201,726 312,441 514,167 201,726 312,441 514,167 50 Annual Report 2018 – Bell Financial Group 98,759 89,614 2,070 7,075 6 – 12 months 1 – 2 years 2 – 5 years More than 5 years $’000 $’000 $’000 2,070 $’000 7,075 – – – – – – – – – – – – – – – – – – – – – – – – – Average Effective interest rate % 4.35% 0.0% N/A 1.50% 4.53% 1.21% 1.21% Total $’000 6 months or less $’000 98,759 89,614 – – 197,976 187,429 (3,806) (313,574) 68,025 197,976 187,429 (3,806) (313,574) 68,025 Fair Value Level 1 $’000 Level 2 $’000 Level 3 $’000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – Total $’000 1,045 1,045 75 57 132 555 555 – – – – – – – – – – 490 490 – – – – – – – 75 57 132 NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 31. Financial instruments (continued) Effective interest rates In respect of income-earning financial assets and interest-bearing financial liabilities, the following tables indicate their average effective interest rates at the reporting date and the expected periods in which they mature. Consolidated Note % Average Effective interest rate 6 months 6 – 12 Total $’000 or less $’000 months 1 – 2 years 2 – 5 years $’000 $’000 $’000 More than 5 years $’000 Fixed rate instruments Loans and advances Deposits and borrowings Cash advance facility Variable rate instruments Cash and cash equivalents Loans and advances Deposits and borrowings Bell Cash Trust 20 22 22 13 20 22 22 96,851 92,897 704 3,250 4.44% 0.00% 2.66% – – (36,000) (36,000) 60,851 56,897 704 3,250 1.50% 5.07% 1.08% 1.08% 193,622 199,366 193,622 199,366 (1,644) (1,644) (274,797) (274,797) 116,547 116,547 Fair value measurements (a) Accounting classifications and fair values in the fair value hierarchy. The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels 31 DECEMBER 2018 Note $’000 $’000 $’000 Carrying Amount Designated Fair value at fair hedging Loans and value instruments receivables Other financial liabilities $’000 – – – – – – – – – – – – – – – – 75 57 132 – – – – – – – – – – – – – – – 120,659 193,622 296,217 610,498 – – – – – – – – – – – – – – – – – – – – – – – – – – – Total $’000 1,045 1,045 120,659 193,622 296,217 610,498 75 57 132 201,726 312,441 514,167 201,726 312,441 514,167 Financial assets measured at fair value Equity securities/unlisted options Financial assets not measured at fair value Trade and other receivables Cash and cash equivalents Loans and advances Financial liabilities measured at fair value Interest rate swaps used for hedging Foreign currency swap Financial liabilities not measured at fair value Trade and other payables Deposits and borrowings 15 14 13 20 21 22 1,045 1,045 – – – – – – – – – – 2018 2017 6 months or less $’000 6 – 12 months $’000 1 – 2 years $’000 2 – 5 years $’000 More than 5 years $’000 Average Effective interest rate % 4.35% 0.0% N/A 1.50% 4.53% 1.21% 1.21% Total $’000 98,759 – – 98,759 197,976 187,429 (3,806) (313,574) 68,025 89,614 – – 89,614 197,976 187,429 (3,806) (313,574) 68,025 Fair Value Level 1 $’000 Level 2 $’000 Level 3 $’000 555 555 – – – – – – – – – – 490 490 – – – – 75 57 132 – – – – – – – – – – – – – – – 7,075 – – 7,075 – – – – – – – – – – – – – – – – – – – – – – – 2,070 – – 2,070 – – – – – Total $’000 1,045 1,045 – – – – 75 57 132 – – – 51 Annual Report 2018 – Bell Financial Group Fair Value Level 1 $’000 Level 2 $’000 Level 3 $’000 2,584 2,584 1,228 102 1,330 – – – – – – – – – – – – – – – – – 24 24 Total $’000 3,812 102 3,914 – – – – – – – 24 24 – – – – – – – – – – – – 31. Financial instruments (continued) 31 DECEMBER 2017 Financial assets measured at fair value Equity securities/unlisted options Currency swaps Financial assets not measured at fair value Trade and other receivables Cash and cash equivalents Loans and advances Financial liabilities measured at fair value Interest rate swaps used for hedging Financial liabilities not measured at fair value Trade and other payables Deposits and borrowings Note 15 14 13 20 21 22 Carrying Amount Designated at fair value $’000 Fair value hedging instruments $’000 Loans and receivables $’000 Other financial liabilities $’000 3,812 102 3,914 – – – – – – – – – – – – – – – – 24 24 – – – – – – 101,360 197,976 286,188 585,524 – – – – – Total $’000 3,812 102 3,914 101,360 197,976 286,188 585,524 24 24 – – – – – – – – – 174,982 317,380 492,362 174,982 317,380 492,362 (b) Accounting classifications and fair values The following shows the valuation techniques used in measuring level 1, 2 and 3 values, as well as the significant unobservable inputs used. Level 1 – Equity securities – the valuation is based on quoted prices in active markets for identical assets and liabilities. Level 2 – Unlisted options – the valuation technique uses observable inputs. The observable inputs include strike price, expiry date and market price. The valuation is based on Black Scholes model. Level 2 – Interest rate swaps – the fair values are based on broker quotes. Similar contracts are traded in an active market and the quotes reflect the actual transactions in similar instruments. Level 2 – Currency swaps – the fair value is determined using quoted forward exchange rates at the reporting date and present value calculations based on high quality yield curves in the respective currencies. 52 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 31. Financial instruments (continued) 31 DECEMBER 2017 Note $’000 $’000 $’000 Carrying Amount Designated Fair value at fair hedging Loans and value instruments receivables Other financial liabilities $’000 Financial assets measured at fair value Equity securities/unlisted options Currency swaps Financial assets not measured at fair value Trade and other receivables Cash and cash equivalents Loans and advances Financial liabilities measured at fair value Interest rate swaps used for hedging Financial liabilities not measured at fair value Trade and other payables Deposits and borrowings (b) Accounting classifications and fair values inputs used. 15 14 13 20 21 22 3,812 102 3,914 – – – – – – – – – Total $’000 3,812 102 3,914 101,360 197,976 286,188 585,524 24 24 – – – – – – – – – 174,982 317,380 492,362 174,982 317,380 492,362 – – – – – – – – – – 24 24 101,360 197,976 286,188 585,524 – – – – – – – – The following shows the valuation techniques used in measuring level 1, 2 and 3 values, as well as the significant unobservable Level 1 – Equity securities – the valuation is based on quoted prices in active markets for identical assets and liabilities. Level 2 – Unlisted options – the valuation technique uses observable inputs. The observable inputs include strike price, expiry date and market price. The valuation is based on Black Scholes model. Level 2 – Interest rate swaps – the fair values are based on broker quotes. Similar contracts are traded in an active market and the quotes reflect the actual transactions in similar instruments. Level 2 – Currency swaps – the fair value is determined using quoted forward exchange rates at the reporting date and present value calculations based on high quality yield curves in the respective currencies. Fair Value Level 1 $’000 Level 2 $’000 Level 3 $’000 2,584 – 2,584 1,228 102 1,330 – – – – – – – – – – – – – 24 24 – – – – – – – – – – – – – – – Total $’000 3,812 102 3,914 – – – – 24 24 – – – 53 Annual Report 2018 – Bell Financial Group 32. Operating lease commitments Leases as lessee Future minimum rental payments under the non-cancellable operating leases at 31 December are as follows: Less than one year Between one and five years More than five years Consolidated 2018 $’000 10,850 28,325 5,177 44,352 2017 $’000 8,894 32,847 8,032 49,773 The Group has entered into commercial property leases for its office accommodation. These leases have a remaining life of up to 10 years. The Group has no other capital or lease commitments. 33. Parent entity disclosures As at, and throughout the financial year ending 31 December 2018 the parent company of the Group was Bell Financial Group Ltd. Results of the parent entity Profit for the year Total comprehensive income for the year Financial position of parent entity at year end Current assets Non-current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Contributed equity Reserves Retained earnings/(losses) Total equity There are currently no complaints or claims made against the parent entity. Consolidated 2018 $’000 2017 $’000 23,615 23,615 15,379 15,379 2,298 209,260 211,558 22,483 22,483 204,237 (1,057) (14,105) 189,075 – 169,918 169,918 17,456 17,456 167,886 (1,018) (14,406) 152,462 54 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 34. Related parties The following were key management personnel of the Group at any time during the reporting period: Executive Directors C Bell A Provan Senior Executives L Bell A Bell R Fell D Davenport Non-Executive Directors C Coleman G Cubbin B Wilson AO B Shanahan (Ceased 20 November 2018) Key management personnel compensation The key management personnel compensation comprised: Short-term employee benefits Other long-term benefits Post-employment benefits Termination benefits Share-based payments Consolidated 2018 3,922,124 59,922 153,905 – – 4,135,951 2017 3,933,282 47,652 169,032 – – 4,149,966 Loans to key management personnel and their related parties Details regarding loans outstanding at the reporting date to key management personnel and their related parties at any time in the reporting period, are as follows: Total for key management personnel 2018 Total for key management personnel 2017 Total for other related parties 2018 Total for other related parties 2017 Total for key management personnel and their related parties 2018 Total for key management personnel and their related parties 2017 Opening balance $ 3,808,983 5,155,432 – – Closing balance $ 3,039,829 3,808,983 – – Interest paid and payable in the reporting period $ 165,932 160,663 – – Number in Group at 31 December1 36 32 – – 3,808,983 3,039,829 165,932 5,155,432 3,808,983 160,663 36 32 1. Number in Group includes KMP and other related parties with loans at any time during the year. Interest is payable at prevailing market rates on all loans to key management persons and their related entities. These rates are available to all clients and may vary marginally depending on individual negotiations. The principal amounts are repayable per terms agreed on an individual basis. Interest received on the loans totalled $165,932 (2017: $160,663). No amounts have been written-down or recorded as allowances for impairment, as the balances are considered fully collectable. 55 Annual Report 2018 – Bell Financial Group 34. Related parties (continued) Movements in shares 2018 The movement during the reporting period in the number of ordinary shares in Bell Financial Group Ltd held, directly, indirectly or beneficially, by each Director and key management person, including their related parties, is as follows: Directors C Bell2 A Provan2 C Coleman G Cubbin B Wilson AO B Shanahan 3 Senior Executives LM Bell2 AG Bell2 R Fell D Davenport Held at 1 January 2018 35,364,230 35,676,488 1,772,283 180,000 1,000,000 401,000 34,802,065 26,325,554 700,000 184,949 Purchases 7,718,924 7,781,375 354,457 36,000 200,000 80,200 7,746,490 5,764,418 140,000 36,990 Received on exercise of options Held at 31 December 2018 Sales – – – – – – – – – – – – – – – – – – – – 43,083,154 43,457,863 2,126,740 216,000 1,200,000 – 42,548,555 32,089,972 840,000 221,939 2. The number of shares held by Colin Bell, Alastair Provan, Lewis Bell and Andrew Bell includes those held indirectly through Bell Group Holdings Pty Limited and Bell Securities Pty Ltd. 3. Brenda Shanahan ceased to be a related party as at 20 November 2018 therefore her shareholding as at 31 December 2018 is not shown. Movements in shares 2017 Directors C Bell2 A Provan2 C Coleman G Cubbin B Wilson AO B Shanahan Senior Executives LM Bell2 AG Bell2 R Fell D Davenport Held at 1 January 2017 34,215,800 34,528,058 1,772,283 180,000 1,000,000 250,000 33,502,635 25,710,843 610,000 184,949 Purchases 1,148,430 1,148,430 – – – 151,000 1,299,430 614,711 90,000 – Received on exercise of options Held at 31 December 2017 Sales – – – – – – – – – – – – – – – – – – – – 35,364,230 35,676,488 1,772,283 180,000 1,000,000 401,000 34,802,065 26,325,554 700,000 184,949 2. The number of shares held by Colin Bell, Alastair Provan, Lewis Bell and Andrew Bell includes those held indirectly through Bell Group Holdings Pty Limited. Other key management personnel transactions Craig Coleman, currently a non-executive director, provided consultancy services to a Group company in 2017 and was paid for those services (2018: Nil, 2017: $75,000). Effective 3 July 2018, Global U & I Management Pty Ltd, a wholly owned subsidiary of Bell Financial Group Limited, acquired shares that it did not already own in Third Party Platform Pty Ltd from Colin Bell (16,620 shares for $6,022,099), Alistair Provan (16,620 shares for $6,022,099), Craig Coleman (639 shares for $231,536) and Dean Davenport (1,799 shares for $651,850). There are no other transactions with key management persons or their related parties other than those that have been disclosed in this report. 56 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 Ultimate parent Bell Group Holdings Pty Ltd is the ultimate parent company of Bell Financial Group Ltd. There are no outstanding amounts owed by or to the ultimate parent entity at 31 December 2018 (2017: nil). There is no interest receivable or payable at 31 December 2018 (2017: nil). Subsidiaries The table below outlines loans made by the Company to wholly owned subsidiaries. Subsidiary Bell Potter Platforms Pty Ltd1 Third Party Platform Pty Limited2 Bell Potter Capital Limited3 Bell Potter (US) Holdings Inc1 Bell Potter Securities (US) LLC 1. Loan is interest free and unsecured. 2018 $ 2017 $ 463 174,438 8,121,666 1,932,809 1,912 10,231,288 232 1,000,000 8,078,137 456,734 – 9,535,103 2. The loan from the parent entity to Third Party Platform Pty Limited represents a subordinated loan that attracts interest at 3.33% per annum (2017: 3.21% per annum). 3. The loan from the parent entity to Bell Potter Capital Limited represents a subordinated loan that attracts interest at 3.00% per annum (2017: 3.00% per annum). Loans made by wholly owned subsidiaries to the Company: $22,483,326 (2017: $15,200,378). During the course of the financial year subsidiaries conducted transactions with each other on terms equivalent to those on an arm’s length basis. They are fully eliminated on consolidation. As at 31 December 2018, all outstanding amounts are considered fully collectable. 35. Group entities Bell Financial Group Ltd Significant subsidiaries Bell Potter Securities Limited Bell Potter Capital Limited Third Party Platform Pty Ltd Bell Potter Securities Limited (UK) Bell Potter Securities (HK) Limited Bell Potter (US) Holdings Inc Incorporation Interest Consolidated 2018 2017 Australia Australia Australia United Kingdom Hong Kong United States 100% 100% 100% 100% 100% 100% 100% 100% 56.63% 100% 100% 100% 57 Annual Report 2018 – Bell Financial Group 36. Guarantees From time to time Bell Financial has provided financial guarantees in the ordinary course of business which amount to $6.6m (2017: $6.6m) and are not recorded in the Statement of Financial Position as at 31 December 2018. 37. Contingent liabilities and contingent assets The Company has agreed to indemnify its wholly owned subsidiary, Bell Potter Securities Limited, in the event that any contingent liabilities of Bell Potter Securities Limited results in a loss. 38. Subsequent events There were no significant events from 31 December 2018 to the date of this report. Final Dividend On 20 February 2019, the Directors resolved to pay a fully franked final dividend of 4.25 cents per share. 39. Auditor’s remuneration Audit services Auditor of the Company KPMG: Audit and review of financial reports Total remuneration for audit services Audit related services Auditor of the Company KPMG Australia: Other regulatory audit services Total remuneration for audit related services Non-audit related services Consolidated 2018 $ 2017 $ 347,584 412,750 347,584 412,750 104,000 104,000 39,000 490,584 117,500 117,500 30,000 560,250 58 Annual Report 2018 – Bell Financial Group NOTES TO THE FINANCIAL STATEMENTS continuedFor the year ended 31 December 2018 DIRECTORS’ DECLARATION 1. In the opinion of the Directors of Bell Financial Group Limited (‘the Company’): (a) the Consolidated Financial Statements and notes that are set out on pages 16 to 58 and the Remuneration Report on pages 10 to 14 in the Directors’ Report, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 31 December 2018 and of its performance, for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. The Directors have been given the declarations required by section 295A of the Corporations Act 2001 from the Managing Director and Chief Financial Officer for the financial year ended 31 December 2018. 3. The Directors draw attention to note 1(a) of the Consolidated Financial Statements which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the Directors: Dated at Sydney this 20th day of February 2019. Alastair Provan Managing Director 20 February 2019 59 Annual Report 2018 – Bell Financial Group INDEPENDENT AUDITOR’S REPORT 60 Annual Report 2018 – Bell Financial Group KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.Liability limited by a scheme approved under Professional Standards Legislation. Independent Auditor’s Report To the shareholders of Bell Financial Group Ltd Report on the audit of the Financial Report Opinion We have audited the Financial Report of Bell Financial Group Ltd (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: •giving a true and fair view of the Group’s financial position as at 31 December 2018 and of its financial performance for the year ended on that date; and •complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises : •Consolidated statement of financial position as at 31 December 2018 •Consolidated statement of profit or loss, Consolidated statement of comprehensive income, Consolidated statement of changes in equity, and Consolidated statement of cash flows for the year then ended •Notes including a summary of significant accounting policies •Directors’ Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. 61 Annual Report 2018 – Bell Financial Group Key Audit Matters Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. This matter was addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on this matter. Valuation of Goodwill ($130,413,000) Refer to Note 17 to the financial report The key audit matter How the matter was addressed in our audit A key audit matter for us was the Group’s annual testing of goodwill for impairment given the size of the balance (being 17% of total assets). We focused on the significant forward-looking assumptions the Group applied in their value in use model, including: •Forecast cash flows – the Group has continued to experience competitive market conditions in the current year as a result of volatility in the global investment market. This increases the risk of inaccurate forecasts for us to consider and goodwill being impaired. •Forecast growth rates and terminal multiples – in addition to the uncertainties described above, the Group’s models are highly sensitive to small unfavourable changes in these assumptions, reducing available headroom. This drives additional audit effort specific to their feasibility and consistency of application to the Group’s strategy. •Discount rates - these are complicated in nature and vary according to the conditions and environment the specific Cash Generating Unit (CGU) is subject to from time to time. The Group’s modelling is highly sensitive to small changes in the discount rate. We involved our valuation specialists with the assessment. The Group uses a complex model to perform their annual testing of goodwill for impairment. The model uses historical performance adjusted for a range of internal and external sources as inputs to the assumptions. Certain CGU’s of the Group have Working with our valuation specialists, our procedures included the following: •We considered the appropriateness of the value in use method applied by the Group to perform the annual test of goodwill for impairment against the requirements of the accounting standards. •We assessed the integrity of the value in use model used, including the accuracy of the underlying formulas. •We assessed the accuracy of previous Group forecasts to inform our evaluation of forecasts incorporated in the model. We noted previous trends where forecasts for certain CGU’s were not achieved and how they impacted the business, for use in our testing. •We considered the sensitivity of the model by varying key assumptions, such as forecast growth rates, terminal multiples and discount rates, within a reasonably possible range, to identify those CGUs at higher risk of impairment and to focus our further procedures. •We challenged the Group’s significant forecast cash flow and growth assumptions in light of competitive market conditions. We applied increased scepticism to forecasts in the CGU’s where previous forecasts were not achieved. We compared forecast expense growth rates to published studies and considered differences for the Group’s operations. We used our knowledge of the INDEPENDENT AUDITOR’S REPORT continued 62 Annual Report 2018 – Bell Financial Group not met prior forecasts in some instances historically, increasing our audit effort in assessing the reliability of current forecasts for each CGU. Complex modelling, using forward-looking assumptions tends to be prone to greater risk for potential bias, error and inconsistent application. These conditions necessitate additional scrutiny by us, in particular to address the objectivity of sources used for assumptions, and their consistent application. We involved valuation specialists to supplement our senior audit team members in assessing this key audit matter. Group, the Group’s past performance, business and customers, and our industry experience. •We checked the consistency of the growth rate to the past performance of the Group, and our experience regarding the feasibility of these in the industry in which they operate and compared the forecast cash flows contained in the value in use model to those contained within the Board reviewed goodwill impairment assessment memorandum. •We assessed the current net profit after tax multiples and to those of comparable companies. •We independently developed a discount rate range considered comparable using publicly available market data for comparable entities to the Group and the industry it operates in. •We assessed the Group’s analysis of the market capitalisation compared to net assets of the Group. This included consideration of the market capitalisation range implied by recent share price trading ranges to the Group’s net assets. •We assessed the disclosures in the Financial Report using our understanding of the issues obtained from our testing and against the requirements of the accounting standards. 63 Annual Report 2018 – Bell Financial Group Other Information Other Information is financial and non-financial information in Bell Financial Group Ltd’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: •preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 •implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error •assessing the Group and Company’s ability to continue as a going concern and whether the use of the going concern basis of accounting is appropriate. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group and Company or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: •to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and •to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf This description forms part of our Auditor’s Report. INDEPENDENT AUDITOR’S REPORT continued 64 Annual Report 2018 – Bell Financial Group Report on the Remuneration Report Opinion In our opinion, the Remuneration Report of Bell Financial Group Ltd for the year ended 31 December 2018, complies with Section 300A of the Corporations Act 2001. Directors’ responsibilities The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 10 to 14 of the Directors’ report for the year ended 31 December 2018. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPM_INI_01 PAR_SIG_01 PAR_NAM_01 PAR_POS_01 PAR_DAT_01 PAR_CIT_01 KPMG Chris Wooden Partner Melbourne 20 February 2019 SHAREHOLDER INFORMATION The following information is current as at 31 January 2019. Distribution of shares Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Number of shareholders 280 686 443 1,122 225 2,756 Number of shares 154,153 2,118,837 3,494,112 38,037,990 276,938,856 320,743,948 % of issued capital 0.05 0.66 1.09 11.86 86.34 100.00 There were 163 shareholders who held less than a marketable parcel (less than $500 of shares). Twenty largest shareholders Rank Name 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. BELL GROUP HOLDINGS PTY LIMITED EQUITAS NOMINEES PTY LIMITED BELL POTTER NOMINEES LIMITED CITICORP NOMINEES PTY LIMITED MR ANAND SELVARAJAH MR JAMES GORDON MAXWELL MOFFATT NATIONAL NOMINEES LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED COLIN BELL PTY LTD J P MORGAN NOMINEES AUSTRALIA PTY LIMITED MORSON HOLDINGS PTY LTD FRANUNTA SUPER PTY LTD ‹FRANUNTA SUPER FUND A/C› MR ALASTAIR PROVAN + MRS JANIS PROVAN ‹A & J PROVAN SUPER FUND A/C› MR LEE WILLIAM MUCO BELL SECURITIES PTY LIMITED CERTUS CAPITAL PTY LTD MR LIONEL ALEXANDER MCFADYEN + MRS JENNIFER JUNE MCFADYEN ‹THE MCFADYEN FAMILY A/C› BOND STREET CUSTODIANS LIMITED MR ALASTAIR PROVAN + MRS JANIS PROVAN ‹ALASTAIR & JANIS PROVAN A/C› MR COLIN BELL 18. 19. 20. Number of shares 143,998,350 21,772,959 5,163,906 4,698,264 3,892,334 3,700,000 3,364,848 3,022,735 2,814,627 2,626,856 2,609,699 2,400,000 2,400,000 2,300,000 2,232,000 2,079,623 1,687,480 1,669,097 1,560,876 1,458,194 % of issued capital 44.90 6.79 1.61 1.46 1.21 1.15 1.05 0.94 0.88 0.82 0.81 0.75 0.75 0.72 0.70 0.65 0.53 0.52 0.49 0.45 65 Annual Report 2018 – Bell Financial Group SHAREHOLDER INFORMATION continued Substantial shareholdings The following shareholders were registered by the Company as substantial shareholders, having declared a relevant interest in accordance with the Corporations Act: Substantial shareholder BELL GROUP HOLDINGS PTY LIMITED ALASTAIR PROVAN COLIN BELL LEWIS BELL AHMED FAHOUR Number of shares 146,230,350 150,929,420 150,554,711 149,650,112 21,772,959 % of issued capital 45.591 47.061,2 46.941,3 46.661,4 6.79 1. Bell Group Holdings Pty Limited (BGH) holds 143,998,350 BFG ordinary shares. BGH’s wholly-owned subsidiary, Bell Securities Pty Limited (BSPL) holds 2,232,000 BFG ordinary shares. Colin Bell, Alastair Provan and Lewis Bell each hold more than 20% of BGH and therefore under the Corporations Act they are each deemed to have a relevant interest in the 146,230,350 BFG ordinary shares held by BGH and BSPL. 2. Alastair Provan has a relevant interest in 4,699,070 BFG ordinary shares. 3. Colin Bell has a relevant interest in 4,324,361 BFG ordinary shares. 4. Lewis Bell has a relevant interest in 3,419,762 BFG ordinary shares. Voting rights Bell Financial has one class of fully paid ordinary shares. On a show of hands, every member present at the meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no voting rights attached to the options or performance rights. On-market buy-back There is no current on-market buy-back. 66 Annual Report 2018 – Bell Financial Group DIRECTORY Bell Financial Group Ltd ABN 59 083 194 763 Directors Alastair Provan, Acting Chairman & Managing Director Colin Bell, Executive Director Craig Coleman, Non-Executive Director Graham Cubbin, Non-Executive Director Brian Wilson AO, Non-Executive Director Company Secretary Cindy-Jane Lee Registered Office Level 29, 101 Collins Street Melbourne VIC 3000 Telephone 03 9256 8700 Share Registry Computershare Investor Services Pty Limited 452 Johnston Street Abbotsford VIC 3067 Telephone 03 9415 5000 ASX Code BFG Shares are listed on the Australian Securities Exchange Banker Australia and New Zealand Banking Group Limited Auditor KPMG Website Address www.bellfg.com.au 67 Annual Report 2018 – Bell Financial Group Bell Financial Group Limited Level 29, 101 Collins Street Melbourne VIC 3000 Australia GPO Box 4718 Melbourne VIC 3001 Australia www.bellfg.com.au
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