Centrepoint Alliance
Annual Report 2019

Plain-text annual report

ANNUAL FINANCIAL REPORT 2019 For the year ended 30 June 2019 Centrepoint Alliance Limited ands its Controlled Entities ABN 72 052 507 507 FY19 Highlights $2.4m EBITDA $1.2m Profit before tax Strategy on track $3.2m Cashflow 86% Fee-based service offer successful Existing firms retained Compelling value proposition 80% Increase in new advisers Contents. Letter from the Chairman CEO Report Directors’ Report Remuneration Report Auditor’s Independence Declaration Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Changes in Equity Notes to the Consolidated Financial Statements Directors’ Declaration Independent Auditor’s Report ASX Additional Information Corporate Directory 01 02 05 12 21 22 23 24 25 26 76 77 84 86 Our year ahead To sum up, FY19 was a year in which we achieved our strategic objectives, launched our new pricing model and built significant momentum behind our business transformation. Our business is well positioned for the future and we are confident that our strategy will create opportunities for growth. We will continue implementing our strategic priorities, launching a fee-based offer for self- licensed advisers, investing in technology and data to enable greater scale and superior service to advice firms, and driving continued growth in our licensed network. On behalf of everyone at Centrepoint, thank you for your continued support. Alan Fisher Chairman Centrepoint Alliance PAGE 1 Letter from the Chairman Dear Shareholders, This has been an important year for Centrepoint Alliance Limited (Centrepoint). We embarked on a new strategy to focus on providing services to advisers and introduced a new pricing model which repositions our business for growth. Today, Centrepoint offers a complete suite of governance, advice, business management and client growth services that enable advisers to spend more time providing advice to their clients. Centrepoint has led by example, being one of the first in the market to move to a fee-based revenue model, as we move the business towards a revenue mix sourced predominantly from service fees paid by advisers. Profit turnaround The result has been a turnaround in profit for the financial year, with a profit before tax of $1.2m (compared to FY18 $3.4m loss) and an EBITDA of $2.4m (compared to FY18 $1.6m loss). Our business transformation is progressing well, and we remain focused on assessing partnerships, acquisition opportunities and enhancing shareholder value. Financial advice market Underlying demand for financial advice remains strong, although advisers themselves are experiencing significant disruption. Rising costs, increasing regulatory requirements and revised education standards are transforming the industry. Centrepoint is committed to supporting advisers through this change. This is why we implemented a model where both self- licensed and corporate licensed advisers can access our suite of business services and support. With the quality and scale of our offer, we are well placed to support advisers as they adapt to this new landscape by providing the tools and services they need to succeed. Validation of our strategy Already we have seen our strategy validated with 86% of firms in our authorised representative network transitioning to the new pricing model, and an 80% increase in new onboarded advisers. We continue to assess more firms as they are increasingly attracted to our service offer. Annual Report 2019 | Letter from the ChairmanCEO Report PAGE 2 Centrepoint’s strategy Centrepoint announced a new strategy in August 2018 and has now had 12 months of focused delivery. This included a redesign of the service offer to enable financial advisers to provide quality advice and run their business. Centrepoint is now repositioned as a provider of business services to advisers, offering a complete suite of services: • Governance and compliance systems to help advisers manage regulatory obligations • Advice tools, technologies and services to help advisers provide quality advice • Business management services and support to help improve advisers’ business performance • Client growth templates, guides and methodologies to engage existing and new clients Centrepoint has a distinctive value proposition, with a clear focus on serving the needs of advisers. As a listed company, Centrepoint brings scale and discipline together with an uncompromising focus on quality services to its community of advisers. A focus on compliance and governance, earned through many years of delivering advice under regulatory scrutiny, sets Centrepoint apart from other mid-sized providers. To support the delivery of the new offer, Centrepoint invested in its digital and data capabilities to enable greater scale and superior service. The service offer, incorporating a core bundle with a range of variable extras, is one of the first fee-based revenue models launched in the post Royal Commission environment. Centrepoint developed the new offer in collaboration with its community of advisers, helping to ensure transparency of pricing and support from the adviser community. This has enabled Centrepoint to position itself in the market as a contemporary advice services firm. The value of this proposition has clearly resonated with the market, resulting in 86% of existing licensed firms retained and transitioned to the new fee model and a record number of new advisers joining Centrepoint following the launch of the new service offer and fee model. FOCUS RECREATE GROW Conduct portfolio review of businesses Implement new organisation structure Build new relationship Service Model Review adviser governance and standards Introduce new governance and standards framework Launch education transition support model Harness internal data for efficiency gains Design new Centrepoint Service Offering Create new advice life-stage segments Introduce new pricing packages and bundles Create long-term data ecosystem strategy Launch new Centrepoint Service Offering Develop ‘transition’ package for advisers moving to the new model First stage of data ecosystem built with new Adviser Portal Identify targeted segments for growth Aligned (licensed) adviser community Self-licenced business partnerships Introduce new governance and standards framework Launch education transition support model Harness internal data for efficiency gains Annual Report 2019 | CEO ReportPAGE 3 FY19 Progress This financial year was a critical juncture for the business, with the conversion of its community of financial advisers to the new fee model requiring a focused transition plan to minimise attrition and maintain confidence. The transformation was achieved by redirecting or redeploying resources to new capability areas as required. At the same time, the runoff in legacy rebates continued to accelerate, validating the underlying assumptions of our strategic refresh. The result is a return to profitability, with a profit before tax of $1.2m and a new model for licensed advisers in place to help mitigate revenue risk. Pleasingly, legacy claims have seen a significant reduction from the last financial year, with no significant new legacy claims in FY19. Further, Centrepoint’s cash balance of $7.9m at 30 June 2019 provides a strong and stable balance sheet through the Centrepoint transformation. In a challenging year, all key strategic and operational milestones were achieved. Outlook for FY20 Underlying consumer demand for advice remains strong and Centrepoint is unwavering in its belief in the value of advice. Demand for advice is driven by changing demographics, particularly retirement of the Baby Boomers, and a maturing superannuation system. As ever more Australians transition from full time work to retirement, or from accumulation to pension phase, they need good financial advice. Clearly, the underlying need for advice is currently tempered by distrust in the wake of the Hayne Royal Commission. This is why Centrepoint is determined to build its business on a transparent fee for service model. The financial advice industry is today facing unprecedented disruption as ramifications of the Royal Commission unfold, particularly in the banking sector. More than 1,500 advisers have been displaced by AFSL closures in the 18 months to June 2019. A further 4,900 will be affected in some way by recently announced strategic changes among the largest advice providers*. The changes will accelerate the migration of planners from the Top 6 providers to small and self-licensed firms that has been unfolding for several years now. * Source: (ASIC Financial Adviser Register, NMG Adviser Model) The trend towards smaller, independent advice firms will favour Centrepoint’s strategy. As a service provider focused on advice, Centrepoint enables advisers to select the products and services that are in their clients’ best interest. Centrepoint is equally able to provide licensing services to those advisers who want to operate under a corporate licence or provide business support to advisers who prefer to maintain their own licence. A key focus of the business will be to attract a healthy share of displaced advisers who seek a quality and sustainable service provider. The context of industry disruption presents an ideal marketing platform to launch Centrepoint’s new fee-based service for self-licensed advisers, which is a critical deliverable in FY20. The coming year will also see the launch of a new digital content portal for advisers, Centrepoint Connect, which provides intuitive access to over 700 essential policies and documents. The phased roll out of Centrepoint.AI, Centrepoint’s data-driven practice management dashboard, will continue as the platform is upgraded during the year. With these enhancements, Centrepoint continues to develop its contemporary value proposition, investing in services and capabilities that support advice firms and the financial advice industry to provide quality advice and make a meaningful difference to the Australian community. Angus Benbow Chief Executive Officer Centrepoint Alliance Annual Report 2019 | CEO Report“ ... Centrepoint brings scale and discipline together with an uncompromising focus on quality services to its community of advisers. ” PAGE 5 Directors’ Report for the Year Ended 30 June 2019 The Directors of Centrepoint Alliance Limited (the Company) present their report together with the financial statements of the consolidated entity, being the Company and its controlled entities (the Group) for the year ended 30 June 2019. Directors Alan Fisher BCom, FCA, MAICD Chairman of the Board, Independent Non-Executive Director. Appointed on 12 November 2015. Martin Pretty BA, CFA, GAICD, Graduate Diploma of Applied Finance Independent Non-Executive Director. Appointed on 27 June 2014. Experience and expertise Experience and expertise Alan has extensive and proven experience in restoring and enhancing shareholder value. He spent 24 years at world-leading accounting firm Coopers & Lybrand where he headed and grew the Melbourne Corporate Finance Division. Following this tenure, he developed his own corporate advisory business specialising in M&A, strategic advice, business restructuring and capital raisings. Alan holds a Bachelor of Commerce from Melbourne University, is a Fellow of the Institute of Chartered Accountants in Australia and a member of the Australian Institute of Company Directors. Martin brings to the Board over 19 years’ experience in the finance sector. The majority of this experience was gained within ASX-listed financial services businesses, including Hub24, Bell Financial Group and IWL Limited. Martin has also previously worked as a finance journalist with The Australian Financial Review. Martin holds a Bachelor of Arts (Honours) from The University of Melbourne, and a graduate Diploma of Applied Finance from Finsia. Martin is a CFA charterholder and a Graduate of the Australian Institute of Company Directors. Other Current Directorships Other Current Directorships • Non-Executive Director and Chairman of IDT Australia No other directorships of Australian listed entities. Limited (ASX:IDT). • Non-Executive Director and Chairman of Audit and Risk Committees of Bionomics Limited (ASX:BNO),Thorney Technologies Limited (ASX:TEK) and Simavita Limited (ASX:SVA). Special responsibilities • Chairman of the Board. • Chairman of the Nomination, Remuneration and Governance Committee. • Member of the Group Audit, Risk & Compliance Committee. Interests in shares and options Nil Special responsibilities • Member of the Group Audit, Risk & Compliance Committee. • Member of the Nomination, Remuneration and Governance Committee. Interests in shares and options 105,000 Annual Report 2019 | Directors’ ReportPAGE 6 Georg Chmiel Diplom-Informatiker, MBA, CPA (USA), FAICD Independent Non-Executive Director, Chairman of the Group Audit, Risk & Compliance Committee Appointed on 7 October 2016. Experience and expertise Georg brings over 25 years of experience in the financial services industry, online media and real estate industry. Previously he was Managing Director and CEO of iProperty Group, the owner of Asia’s No. 1 network of property portal sites and related real estate services. He played a key role in finalising the sale of iProperty Group to REA Group, Southeast Asia’s largest ever internet buyout. Prior to iProperty Group, Georg was Managing Director and CEO of LJ Hooker Group with 700 offices across nine countries providing residential and commercial real estate as well as financial services. Georg holds a Master of Business Administration from INSEAD, a Diplom- Informatiker (Computer Science Degree) from Technische Universität München and is a member of the American Institute of Certified Public Accountants and a Fellow of the Australian Institute of Company Directors Other Current Directorships • Executive Director and Chairman of iCar Asia Limited (ASX: ICQ). Former Directorships • Director of iProperty Group Limited (ASX:IPP) (from 1 January 2011 to 16 February 2016). • Non-Executive Director of Mitula Group Limited (ASX: MUA) (from 18 Jan 2017 to 8 Jan 2019). Special responsibilities • Chairman of the Group Audit, Risk & Compliance Committee. • Member of the Nomination, Remuneration and Governance Committee. Interests in shares and options 150,000 Annual Report 2019 | Directors’ ReportPAGE 7 Company Secretary Debra Anderson B. Law (LLB) Hons, Post Graduate Diploma in Legal Practice, Diploma of Financial Planning, AGIA, ACIS, MAICD Senior Corporate Counsel & Company Secretary Marty Carne BM, BBus, LLB, LLM, MBA (Grad), GDLP, GCAIF Chief Legal Officer & Company Secretary Experience and expertise Experience and expertise Debra is a lawyer who began her career in private practice in Australia and worked in New Zealand and Hong Kong, before joining the Company in 2003. She has gained extensive experience in financial services over the past 15 years and was appointed Company Secretary in November 2013. Debra is a member of the Queensland Law Society and is a qualified Chartered Secretary and is an Associate of the Institute of Chartered Secretaries and Administrators and the Governance Institute of Australia and a member of the Australian Institute of Company Directors. Marty joined the Company in April 2016 and holds executive responsibility for Legal, Professional Standards, Risk and Claims Management. Marty has over 26 years’ experience in regulation and financial services. Marty has held senior positions with a range of financial services companies and the Australian Securities Commission. Marty has strong commercial and client-centric skills and experience in the delivery of strategic legal advice and management of risk. Marty was appointed as joint Company Secretary on 27 April 2017. Marty holds qualifications in law and business and is a member of the Queensland Law Society and the Association of Financial Advisers. Annual Report 2019 | Directors’ ReportPAGE 8 Meetings of Directors The following table sets out the number of Directors’ meetings (including meetings of committees of Directors) held during the financial year and the number of meetings attended by each Director (while they were a Director or committee member). Members A. D. Fisher H. W. Robertson# M. P. Pretty G. Chmiel A. E. Slattery* Board of Directors Nomination, Remuneration & Governance Committee Group Audit, Risk & Compliance Committee Held Attended 25 7 24 24 5 25 2 24 24 5 Held 3** 1 3 1*** 1 Attended Held Attended 3 0 3 1 1 5 - 5 5 - 5 - 5 5 - #retired effective 29 October 2018 *appointed 6 November 2018 and resigned 31 January 2019 **Change of membership effective 6 November 2018 & 31 January 2019 ***Change of membership effective 31 January 2019. Principal Activities Centrepoint Alliance Limited (the Parent Entity) and its controlled entities (the Group) operates in the financial services industry within Australia and provides a range of financial advice and licensee support services (including licensing, systems, compliance, training and technical advice) and investment solutions to financial advisers, accountants and their clients across Australia, as well as lending mortgage aggregation services to mortgage brokers. Operating and Financial Review Operating Review In August 2018 we announced our Strategic Refresh program, which was the culmination of a critical review of all aspects of the Centrepoint business. Having taken on feedback from our community of financial advisers, and studying the market disruption externally, we felt it important and timely to reset the Centrepoint business. We have a strong community of financial advisers and our focus is concentrated on supporting advisers both as professionals providing quality advice to clients and as business owners. Over the past year we have been building and investing in a new service offering that provides specialist advisory and business services to help advisers navigate what is an increasingly complex operating and regulatory environment. We have made steady progress in bringing the new service offering to life, which includes significant investment in digital capability and the provision of data-led insights. This, combined with our scale and resources, means our strong and connected community of advisers will be well placed to meet both the challenges and opportunities that come from the changing landscape around us. Annual Report 2019 | Directors’ Report PAGE 9 Financial Performance For the financial year to 30 June 2019, the Group reported a net loss after tax of $1.6m compared to a net loss after tax for the financial year to 30 June 2018 of $6.9m. Gross profit from contracts with customers Gross profit Expenses Profit/(Loss) before tax Net (loss) for the year *Refer note 21 on restatement to prior year comparative for details 2019 $’000 2018 restated * $’000 30,016 30,664 31,048 32,275 (29,444) (35,666) 1,220 (1,576) (3,391) (6,884) The Group held $7.9m in cash and cash equivalents as at 30 June 2019 (2018: $9.5m). Cash provided by continuing operations was $3.2m (2018: $6.4m) from which $4.5m was paid out in claims (2018: $5.3m), $1.3m for acquisition of software (2018: $0.1m). $1.2m was received for the Neos divestment and loan repayment (2018: Nil). The Group has net assets at 30 June 2019 of $16.9m (2018: $19.0m) and net tangible assets of $11.8m (2018: $12.5m) representing net tangible assets per share of 7.92 cents (2018: 7.96 cents). Dividends No dividends were paid during the year. No dividends have been declared since the end of the financial year to the date on this report. Shares and Performance Rights During the year, under a Long-Term Incentive (LTI) award CESP21, 6,850,000 performance rights were issued on 7 February 2019 and 2,700,000 performance rights on 28 February 2019. A performance right is a right that can be converted to an ordinary fully paid share in the Company for no monetary consideration subject to specific performance criteria being achieved. These are legally held by the Centrepoint Alliance Services Pty Ltd ATF the Centrepoint Employee Share Plan Trust (CESPT) and not converted into fully paid ordinary shares until satisfaction of the vesting conditions. The LTI awards CAESP17 and CAESP18 were terminated in the prior year. The 8,050,000 ordinary shares (associated with these plans) legally held by Centrepoint Alliance Services Pty Ltd ATF the Centrepoint Alliance Employee Share Plan Trust (CAESPT) were cancelled in the current financial year, following approval by shareholders at the 2018 Annual General Meeting. In March 2019, 400,000 options expired unvested and 2,000,000 performance rights issued under LTI award CESP19 have been forfeited. No shares have been issued as a result of the exercise of options during the financial year and up to the reporting date. Significant Changes in the State of Affairs In December 2018 Centrepoint entered an agreement with Australian Life Development Pty Limited, trading as NEOS Life (‘ALD’) that changed the nature of its investment in ALD from a convertible note to a loan capitalising interest that requires a faster return of capital to Centrepoint. The Convertible Note and Option Deed were replaced with a loan agreement, pursuant to which principal and interest repayments are required to be made in 6 monthly tranches between June 2019 and June 2021. In addition, the shares owned in ALD by Centrepoint were sold to a related party of ALD for full value on vendor finance. The first payment to the Group was paid on 31 December 2018 and the second is due on 31 December 2021. In June 2019 a key milestone was reached in the Strategic Refresh program with 195 of Centrepoint’s 227 licensed adviser firms being contracted to transition to the Group’s new transparent pricing arrangements, commencing 1 July 2019. The new licensee service offering was launched in March 2019 and the transition was completed successfully. Annual Report 2019 | Directors’ ReportPAGE 10 Events After The Financial Year Other Than Outlined Above There are no matters or events which have arisen since the end of the financial year which have significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. Likely Developments Likely developments in the operations of the Group and the expected results of those operations in future financial years have been addressed in the Operating and Financial Review and in the subsequent events disclosure. The Directors are not aware of any other significant material likely developments requiring disclosure. Environmental Regulation The Group’s operations are not regulated by any significant environmental regulation under a law of the Commonwealth or of a State or Territory. Corporate Governance Statement and Practices The Group’s Corporate Governance Statement for the financial year ended 30 June 2019 was approved by the Board on 22 August 2019. The Corporate Governance Statement is available on our website: http://www.centrepointalliance.com.au/investor-centre/corporate-governance/ Indemnification and Insurance of Directors and Officers During the financial year, the Group paid a premium for a policy insuring all Directors of the Company, the Company Secretaries and all executive officers against any liability incurred by such director, secretary or executive officer to the extent permitted by the Corporations Act 2001 (the Act). The liabilities insured are legal costs that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings, other than where such liabilities arise out of conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else to cause detriment to the Group. Details of the amount of the premium paid in respect of insurance policies are not disclosed as such disclosure is prohibited under the terms of the contract. The Company has not otherwise during or since the end of the financial year, indemnified or agreed to indemnify any officer of the Company against a liability incurred as such officers. Indemnification of auditors To the extent permitted by law, the Company has agreed to indemnify its auditors, Deloitte Touche Tohmatsu, as part of the terms of its audit engagement agreement against claims by third parties arising from the audit (for an unspecified amount). No payment has been made to indemnify Deloitte Touche Tohmatsu during or since the end of the financial year. Rounding The Company is a company of the kind referred to in ASIC Corporation’s (Rounding in Financial/Directors’ Reports) Instrument 2016/191, dated 24 March 2016 and in accordance with that Instrument, amounts in the financial report are presented in Australian dollars and have been rounded off to the nearest thousand dollars, unless otherwise stated. Restatement to prior year comparative During the year, the Company completed the cancellation of shares for the closure of the Centrepoint Alliance Employee Share Plan (‘Plan’). Upon full review by the Group, it was identified that a receivable under the Plan in the 31 December 2017 and 30 June 2018 financial reports was incorrectly recognised. As a result, the receivable and related income and tax impacts have been adjusted in the comparative figures disclosed in these financial statements. Refer to note 21 for details. Annual Report 2019 | Directors’ Report“ ...there is an opportunity for Centrepoint to become a leader in providing advice and business services, focused on supporting advisers of a similar mindset. ” Remuneration Report This Remuneration Report for the year ended 30 June 2019 outlines the remuneration arrangements of the Key Management Personnel of the Group in accordance with the requirements of the Act and its regulations. This information has been audited as required by section 308(3C) of the Act. PAGE 12 The Remuneration Report is presented under the following sections: • Key Management Personnel • Remuneration philosophy • Group performance • Nomination, Remuneration & Governance committee (NRGC) • Employment contracts • Remuneration of Key Management Personnel • Short-term incentives • Long-term incentives For the purposes of this Report, Key Management Personnel (KMP) of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Group, directly or indirectly, including any Director (whether executive or otherwise) of the Company. Key Management Personnel The Key Management Personnel of the Company during the financial year were as follows: A. D. Fisher Chairman & Director (non-executive) H. W. Robertson Director (non-executive) – Resigned 29 October 2018 M. P. Pretty G. Chmiel J. S. Cowan Director (non-executive) Director (non-executive) Chief Financial Officer – Resigned 6 November 2018 A.G.R. Benbow Chief Executive Officer - Appointed 2 April 2018 P. Loosmore Interim Chief Financial Officer – Appointed 17 December 2018 A.E. Slattery Director (non-executive) – Appointed 6 November 2018 and Resigned 31 January 2019 There were no changes of KMP after the reporting date and before the signing of this Report. Remuneration Philosophy The performance of the Company depends on the quality of its Directors, executives and employees. To prosper, the Company must attract, motivate and retain skilled and high performing individuals. Accordingly, the Company’s remuneration framework is structured to provide competitive rewards to attract the highest calibre people. The level of fixed remuneration is set to provide a base level of remuneration that is appropriate to the position and competition in the market. It is not directly related to the performance of the Company. Fixed remuneration is reviewed annually and the process consists of a review of company-wide, business unit and individual performance, relevant comparative remuneration in the market, internal relativities where appropriate and external advice on policies and practices. Short-term incentives in the form of potential cash bonuses are made available to Executive KMP. Any award is based on the achievement of pre-determined objectives. Long-term incentives are made available to certain Executive KMP in the form of performance rights, shares or options. The Directors consider these to be the best means of aligning incentives of Executive KMP with the interests of shareholders. The remuneration of Non-Executive Directors of the Company consists only of Directors’ fees. Annual Report 2019 | Remuneration ReportPAGE 13 Group Performance Shareholder returns for the last five years have been as follows: GROUP Net (loss)/profit after tax EPS (basic) - (cents per share) EPS (diluted) - (cents per share) Share price ($) Dividends paid - (cents per share) *Refer note 21 on restatement to prior year comparative for details 2019 $’000 2018 restated * $’000 (1,576) (6,884) (1.06) (1.06) 0.10 - (4.62) (4.62) 0.38 9.40 2017 $’000 6,544 4.41 4.11 0.63 3.45 2016 $’000 4,262 2.94 2.75 0.41 2.20 2015 $’000 5,880 4.14 3.96 0.50 3.20 Nomination, Remuneration & Governance Committee (NRGC) The role of the NRGC includes the setting of policy and strategy for the appointment, compensation and performance review of Directors and Executives, approving senior executive service agreements and severance arrangements, overseeing the use of equity-based compensation and ensuring appropriate communication and disclosure practices are in place. Non-Executive Directors are not employed under specific employment contracts but are subject to provisions of the Act in terms of appointment and termination. The Company applies the ASX listing rules that specify aggregate remuneration shall be determined from time to time by shareholders in a general meeting. The maximum aggregate remuneration for the financial year ended 30 June 2019, which was approved by a resolution of shareholders at the Annual General Meeting on 29 November 2016, is $550,000. The remuneration of the Non-Executive Directors does not currently incorporate a component based on performance. Within the limits approved by Company shareholders, individual remuneration levels are set by reference to market levels. Executive Directors and executives are employed under contracts or agreed employment arrangements that specify remuneration amounts and conditions. The Board has introduced for Executives and senior employees an incentive system based on issuing performance rights in the Company. The Company’s Securities Trading Policy prohibits Directors from entering into margin lending arrangements and also forbids Directors and senior executives from entering into hedging transactions involving the Company’s securities. Details of current incentive arrangements for KMPs, where they exist, are shown under the disclosure of their contracts below. Employment Contracts Details of the terms of employment of the named KMP Executives are set out below: Angus Benbow – Chief Executive Officer Employment commencement date: 2 April 2018 Term: No term specified Discretionary Incentives: Sign-on incentive A one-off equity allocation of fully paid ordinary Centrepoint Alliance Limited shares up to a value of $120,000. The sign-on incentive of $120,000 was paid during the financial year to purchase shares on-market which was completed on 5 July 2019. Annual Report 2019 | Remuneration ReportPAGE 14 Short-term incentive A short-term incentive to a value of $237,500 at target (50% of fixed salary) up to a potential STI to a value of $356,250 (75% of fixed salary) and subject to Transitional Terms (refer to page 17 for further details). A short-term incentive of $178,125 was paid in October 2018 in recognition of the CEO’s achievements based on the structure outlined in the CEO Transitional Terms disclosed in the Remuneration Report. A short-term incentive for the 2019 financial year will be payable based on the structure outlined in the CEO Transitional Terms disclosed in the Remuneration Report. Long-term incentive A long-term incentive to a value between $142,500 up to a potential value of $285,000, subject to Transitional Terms (refer to page 17 for further details). Issue of up to 2,700,000 performance rights at $0.0199 cents per performance right, that are legally held by the CESPT until satisfaction of the vesting conditions determined on 1 September 2021 as disclosed in the long-term incentive plans. These performance rights were issued as part of a scheme of performance rights to be issued in 3 tranches of 2,700,000 rights each (the 2 future tranches to be approved by shareholders). This scheme replaced the contractual rights formerly agreed with the CEO. Required notice by Executive and Company: 6 months. Termination Entitlement: Statutory entitlements and so much of the total fixed remuneration as is due and owing on the date of termination. John Cowan - Chief Financial Officer Employment period: 12 January 2015 – 6 November 2018 Term: Resigned as Chief Financial Officer effective 6 November 2018 Incentives: Short-term incentive Eligible from the date of appointment to participate in the Company’s short-term incentive plan as amended or varied from time to time by the Company in its absolute discretion and without any limitation on its capacity to do so. A short-term incentive of $62,000 was paid after the end of the 2018 financial year based on the Group-wide short-term incentive scheme structure outlined in the Remuneration Report. A retention incentive of $100,000 was paid in October 2018. Long term incentive – (Refer to page 17 for further details) CESP19 Issue of up to 750,000 performance rights at 51.0 cents per performance right, that are legally held by the CESPT until satisfaction of the vesting conditions is determined on 9 December 2019 as disclosed in the long-term incentive plans. The three-year performance period for this award ended on 30 June 2019. The Performance Conditions have not been met and the performance rights will be forfeited unvested. CESP20 Issue of up to 250,000 performance rights at 41.0 cents per performance right, that are legally held by the CESPT until satisfaction of the vesting conditions determined on 25 September 2020 as disclosed in the long- term incentive plans. Peter Loosmore – Interim Chief Financial Officer Employment period: 17 December 2018 – current Term: 12 months Required notice by Executive and Company: 4 weeks Termination Entitlements: Not applicable Those Executives that do not meet the KMP definition are not included here.  Annual Report 2019 | Remuneration Report  % % $ $ s e r a h S $ e c n a m r o f r e P s t h g R i $ g n o L i e c v r e S e v a e L $ h s a C $ $ s e v i t n e c n I n o i t a u n n a r e p u S h s a C s u n o B $ e r a h S d e t a e R l e c n a m r o f r e P d e t a e R l l a t o T n o i t a n m r e T i s t n e m y a P s t n e m y a P d e s a B - e r a h S s t fi e n e B m r e T - g n o L t s o P t n e m y o p m E l s t fi e n e B m r e T - t r o h S s y a D f o . o N n o i t a r e n u m e R r a e Y : l w o e b e b a t l e h t n i n w o h s e r a p u o r G e h t f o P M K h c a e f o n o i t a r e n u m e r e h t f o t n e m e e h c a e l f o t n u o m a d n a e r u t a n e h t f o s l i a t e D 5 1 E G A P n o i t a r e n u m e r f o s l i a t e D - - - - - - - - - - - - - - - - - - - - - - 0 0 0 5 3 1 , 0 0 0 5 3 1 , 6 1 4 5 3 , 3 3 3 8 2 , 0 0 0 5 8 , 0 0 0 5 8 , 0 0 0 5 8 , 0 0 0 5 8 , 0 0 0 5 8 , 8 7 3 0 2 , - - - - - - - - - - % 7 9 6 4 . 7 9 1 , 9 3 2 , 1 0 0 5 0 4 4 , % 0 3 6 1 . % 3 8 2 2 . , 6 2 3 0 8 7 - - - - 9 5 4 3 1 1 , 0 0 0 8 3 2 , - 6 0 5 4 4 1 , - - - - % 1 8 2 2 . % 6 8 2 2 . , 6 1 7 8 0 7 4 6 1 , 3 3 2 % 8 5 4 3 . 5 0 4 4 1 7 , - - - - - - - - - - - - - - - - - - - - - - - - - 0 0 0 0 2 1 , 4 6 1 , 7 - - - - - - - 7 6 6 , 1 6 1 , 3 5 7 0 8 0 2 , , 3 8 9 6 3 6 2 , 0 0 5 0 4 4 , - - 4 6 1 , 3 3 2 0 0 0 0 2 1 , , 1 3 8 8 6 1 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2 1 7 , 1 1 2 1 7 , 1 1 2 7 0 3 , 8 5 4 2 , 4 7 3 7 , 4 7 3 7 , 4 7 3 7 , 4 7 3 7 , 4 7 3 7 , 8 6 7 , 1 - 5 7 9 4 1 , 8 9 1 , 5 2 1 0 5 , 8 6 5 0 2 , 0 0 0 5 2 , 0 0 0 5 2 , 4 5 2 6 7 , 1 9 0 7 8 , - - - - - - - - - - & y r a a S l s e e F $ 8 8 2 3 2 1 , 8 8 2 3 2 1 , 4 4 3 2 3 , 5 7 8 5 2 , 6 2 6 7 7 , 6 2 6 7 7 , 6 2 6 7 7 , 6 2 6 7 7 , 6 2 6 7 7 , 0 1 6 8 1 , 5 6 3 5 6 3 9 4 1 1 2 1 5 6 3 5 6 3 5 6 3 5 6 3 5 6 3 7 8 6 4 1 9 2 1 8 4 0 2 8 5 , 4 7 6 , 1 0 2 - 8 0 3 9 3 1 , 5 2 1 , 8 7 1 9 6 4 4 5 4 , 5 6 3 - - 7 4 4 8 0 1 , 0 0 0 8 3 2 , 9 8 9 1 1 0 0 0 2 6 1 , 5 8 8 6 2 1 , 9 2 1 8 4 0 2 2 3 , 7 5 3 7 6 3 , 5 6 3 5 2 1 , 0 4 3 , 9 7 3 2 4 1 , 1 , 6 9 0 4 0 9 , 6 9 2 5 0 2 , 1 9 1 0 2 8 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 9 1 0 2 8 1 0 2 9 1 0 2 8 1 0 2 ₁ y s s e n h g u a h S O ' . A . J r e h s i F . D . A 2 n o s t r e b o R W H . . y t t e r P . P . M l i e m h C . J . G 5 t r a w Z e d . M . J 6 5 s i k a g r a C . E 6 w o b n e B . R . G . A 4 e r o m s o o L . P 5 n a w o C . S . J l a t o T l a t o T 4 3 y r e t t a S l . . E A r a e y r o i r p e h t g n i r u d d e t n o p p A i 6 r a e y r o i r p e h t g n i r u d d e n g i s e R 5 r a e y e h t g n i r u d d e t n o p p A i 4 r a e y e h t g n i r u d d e n g i s e R 3 r a e y e h t g n i r u d d e r i t e R 2 r a e y r o i r p e h t g n i r u d d e r i t e R 1 Annual Report 2019 | Remuneration Report r a e y n i . o N r a e y . o N r a e y . o N d e t i e f r o F n i d e s p a L n i d e t s e V e t a d y r i p x E e s i c r e x E e c i r p $ e t a D g n i t s e V l e u a v r i a F t n a r g t a e t a d $ . o N s e r a h s r o s n o i t p o , s t h g R i e t a d t n a r G r a e y n i d e t n a r g r a e Y e m a N d e t i e f r o f d n a d e s p a l , d e t s e v , d e d r a w a s n o i t p o d n a s e r a h s , s t h g i r e c n a m r o f r e P 6 1 E G A P - - - - - - - - - 4 2 0 2 t p e S 1 3 2 0 2 p e S 5 2 2 2 0 2 c e D 9 - - - 9 1 0 2 c e D 9 0 2 0 2 t p e S 5 2 1 4 0 . 1 5 0 . 7 1 0 2 t c O 2 0 0 0 0 5 2 , 6 1 0 2 c e D 9 1 0 0 0 0 5 7 , 1 2 0 2 t p e S 1 9 9 1 0 0 . 9 1 0 2 b e F 8 2 , 0 0 0 0 0 7 2 , 9 1 0 2 8 1 0 2 7 1 0 2 * s t h g i r e c n a m r o f r e P w o b n e B . R . G . A n a w o C . S . J . o N . o N . o N $ e u a V l . o N $ e u a V l . o N $ e u a V l . o N $ e u a V l . o N . o N d e t s e v n U l e b a s i c r e x e d o i r e p e h t f o d n e d o i r e p d o i r e p d o i r e p e h t d n a d e t s e V e h t t a e c n a a B l e h t g n i r u d d e t i e f r o F e h t g n i r u d d e s p a L g n i r u d d e s i c r e x E s a d e t n a r G g n i r u d n o i t a s n e p m o c d o i r e p e h t t a e c n a a B l f o t r a t s e h t d o i r e p e h t r a e Y e m a N l P M K y b d e h s t h g i r e c n a m r o f r e p d n a s e r a h s , s n o i t p o f o e u a v l r i a f d n a r e b m u n e h t f o n o i t a i l i c n o c e R 0 0 0 0 5 2 , 0 0 0 0 5 7 , , 0 0 0 0 0 7 2 , - - - - 0 0 0 0 5 2 , , 0 0 0 0 0 7 2 , - - - - - - - - - - - - - - - - - - - - 0 3 7 3 5 , - - , 0 0 0 0 0 7 2 , - 0 0 0 0 5 2 , 0 0 0 0 5 7 , 9 1 0 2 8 1 0 2 7 1 0 2 * s t h g i r e c n a m r o f r e P w o b n e B . R . G . A n a w o C . S . J : e t o N T P S E C y b d e h e r a l s t h g i r e c n a m r o f r e P * Annual Report 2019 | Remuneration Report PAGE 17 Shareholdings of Key Management Personnel Shares held in Centrepoint Alliance Limited (Number) A. D. Fisher M. P. Pretty G. Chmiel A. G. R. Benbow P Loosmore3 Former KMP's J. S. Cowan1 H. W. Robertson2 A. E. Slattery1 3 Balance 1 July 2018 Ordinary Granted as remuneration Ordinary On exercise of options Ordinary Net change other # Ordinary Balance 30 June 2019 Ordinary - - 25,000 - - - - - - - - 571,8784 - - - - - - - - - - - - - 105,000 125,000 - 50,000 - - - - 105,000 150,000 571,878 50,000 - - - 1Resigned during the year 2Retired during the year 3Appointed during the year 4Shares acquired on-market as part of Sign-on incentive (refer page 14) *Includes shares held directly, indirectly and beneficially by KMP #All equity transactions with KMP other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the Company would have adopted if dealing at arm’s length. Short-term incentives Long-term incentives The objective of long-term incentives (LTI) is to reward Executives in a manner that aligns remuneration with the creation of shareholder wealth. As such, LTI grants are only made to executives who are able to significantly influence the generation of shareholder wealth and thus have an impact on the Group's performance against the relevant long-term performance hurdle. LTI awards to Executives are made under the Executive LTI plans and are delivered in the form of shares or rights. Shares vest in tranches over a specified time period and may also have other performance hurdle requirements, typically related to shareholder return, as determined by the NRGC. Performance rights are rights that can be converted to fully paid ordinary shares in the Company for no monetary consideration subject to specific performance criteria being achieved. The performance rights will only vest if certain profit targets are met. Objective Structure The objective of short-term incentives (STI) is to link the achievement of the Group's operational targets with the remuneration received by the executives charged with meeting those targets. The total potential STI available is set at a level so as to provide sufficient incentive to the executive to achieve the operational targets and the cost to the Group is reasonable. The purpose of STI is to focus the Group’s efforts on those performance measures and outcomes that are priorities for the Group for the relevant financial year and to motivate the employees to strive to achieve stretch performance objectives. In August 2017 the Directors approved a new executive STI scheme based on EBITDA and the achievement of underlying organisational and team goals. The Target EBITDA is approved by the Board for each financial year. To be eligible for a STI payment a threshold EBITDA must be met and executives must achieve at least 70% of their individual performance objectives and minimum job competency and core values ratings. The Target STI payable to Executives is 40% (CEO is 50%) of Total Fixed Remuneration. The Maximum STI payable for Executives is 60% (CEO 75%) of Total Fixed Remuneration. On an annual basis, after consideration of performance against KPIs the NRGC will review results and determine individual amounts approved for payment. For other employees there is a STI scheme where a bonus pool based on results and approved by the Board is weighted by a two-tiered approach with weightings assigned to each level, being Centrepoint Group results and individual KPIs. Annual Report 2019 | Remuneration Report Awards Short-term incentives Long-term incentives PAGE 18 CAESP17 and CAESP18 On 21 November 2017, the Board and the CAESPT approved the termination of participants (including the former Managing Director & Chief Executive Officer and other senior executives) of the CAESP17 and CAESP18 plans. The participants loan shares were purchased by the CAESPT at $0.59 per share (which was the equivalent to the ASX market close price of CAF shares on 17 November 2017) in accordance with the plan rules. The LTI awards CAESP17 and CAESP18 were terminated in the prior year. The 8,050,000 ordinary shares (associated with these plans) legally held by the CAESPT were cancelled in the current period, following approval by shareholders at the 2018 Annual General Meeting. CESP19 The Board approved the grant of 3,750,000 performance rights on 19 December 2016 to the former Managing Director and Chief Executive Officer and other senior executives of the Group under the CESP at 51.0 cents per performance right. These are legally held by the CESPT and not converted into fully paid ordinary CAF shares until satisfaction of the vesting conditions determined on 9 December 2019 based on the following: If the Total Shareholder Return1 (TSR) for the peer group for 30 June 2019 financial year is: • Below 25th percentile, none will vest; • Between 25th percentile and 49th percentile, 25% of the performance rights will vest; • Between 50th percentile and 74th percentile, 50% of the performance rights will vest; • Above 75th percentile, 100% of the performance rights will vest. CESP20 The Board approved the grant of 700,000 performance rights on 2 October 2017 to the senior executives of the Group under the CESP at 41.0 cents per performance right. These are legally held by the CESPT and not converted into fully paid ordinary CAF shares until satisfaction of the vesting conditions determined on 25 September 2020 based on the following: If the Total Shareholder Return1 (TSR) for the peer group for 30 June 2020 financial year is: • Below 25th percentile, none will vest; • Between 25th percentile and 49th percentile, 25% of the performance rights will vest; • Between 50th percentile and 74th percentile, 50% of the performance rights will vest; • Above 75th percentile, 100% of the performance rights will vest The TSR of Centrepoint is compared and ranked to the TSR of each peer group constituent. The rank is converted to a percentile ranking which is used to determine the proportion of awards vesting based on the above set vesting schedule. 1TSR is a measure of investment return in percentage terms, adjusted for dividends and capital movements, from the start to the end of the performance period Annual Report 2019 | Remuneration ReportPAGE 19 Awards Short-term incentives Long-term incentives CESP21 The Board approved the grant of 6,850,000 performance rights on 7 February 2019 to the senior executives and other senior leaders of the Group under the CESP at 0.0144 cents per performance right. The Board approved the grant of 2,700,000 performance rights on 28 February 2019 to the CEO under the CESP at 0.0199 cents per performance right. These are legally held by the CESPT and not converted into fully paid ordinary CAF shares until satisfaction of the vesting conditions determined on 1 September 2021 based on the following: If the absolute Total Shareholder Return1 (TSR) for 30 June 2021 financial year is: • Target share price hurdle of 28.0 cents, 50% of the performance rights will vest; • Stretch share price hurdle of 32.0 cents, 100% of the performance rights will vest The VWAP2 at the start of the performance period i.e. 1 February 2019 was $0.10 for the awards granted on 7 February 2019. The VWAP at the start of the performance period i.e. 25 February 2019 was $0.12 for the awards granted on 28 February 2019. CEO Transitional Terms (short-term and long-term incentives) The CEO will be entitled to STI (50% - 75%) and LTI (40% - 60%) benefit limits, varied in accordance with the below commencement and ending periods: • On or before 2 April 2018 to 30 September 2018, pro-rata portion of STI and LTI benefit • • 1 October 2018 to 30 June 2019, pro-rata portion of STI and LTI benefit 1 July 2019 to 30 June 2020 Successive annual periods Option holdings of Key Management Personnel No options to purchase shares were held by KMP. Other transactions with Key Management Personnel and their related parties Directors of the Company, or their related entities, conduct transactions with the Company or its controlled entities within a normal employee, customer or supplier relationship on terms and conditions no more favourable than those with which it is reasonable to expect the entity would have adopted if dealing with the Director or Director related entity at arm’s length in similar circumstances. There are no transactions by Directors in the current or prior financial year other than the ones disclosed above. 1TSR is a measure of investment return in percentage terms, adjusted for dividends and capital movements, from the start to the end of the performance period 2Volume Weighted Average Price of Centrepoint Shares traded on the Australian Securities Exchange and Chi-X Australia during the 10 trading days prior to and including the start date of the performance period. Annual Report 2019 | Remuneration ReportPAGE 20 Auditor Independence and Non-Audit Services The auditor, Deloitte Touche Tohmatsu, has provided a written independence declaration to the Directors in relation to its audit of the financial report for the year ended 30 June 2019. The Independence Declaration which forms part of this report is on page 21. The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Act. The nature and scope of non-audit services provided means that auditor independence was not compromised. Fees payable to the Group’s auditor for the non-audit services to the Company and other controlled entities Taxation services Other non-audit services 2019 $ 3,000 72,900 75,900 2018 $ 2,450 14,000 16,450 Signed in accordance with a resolution of the Directors. A. D. Fisher Chairman 22 August 2019 Annual Report 2019 | Remuneration ReportPAGE 21 Annual Report 2019 | Auditor’s Independence DeclarationConsolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 30 June 2019 PAGE 22 Revenue Revenue from contracts with customers Contractual payments to advisers Gross profit from contracts with customers Interest income Other revenue Gross Profit Expenses Interest charges Employee related expenses Marketing and promotion Travel and accommodation Property costs Restructuring provision Subscriptions & licences Professional services Client claims IT and communication expenses Depreciation and amortisation Fair value loss on financial instrument Impairment expenses Other general and administrative expenses Profit/(Loss) before tax Income tax expense Net (loss) for the year Other comprehensive income Items that will not be reclassified subsequently to profit or loss Net fair value loss on equity investment designated at FVTOCI^ TOTAL COMPREHENSIVE LOSS FOR THE YEAR Net (loss) attributable to: Owners of the parent Net (loss) for the year Total comprehensive (loss) attributable to: Owners of the parent Total comprehensive (loss) for the year Note 4(a) 4(a) 4(b) 4(c) 2019 $’000 2018 restated * $’000 116,859 121,991 (86,843) (90,943) 30,016 31,048 628 20 511 716 30,664 32,275 4(b) 4(a) (26) (35) (18,990) (18,246) 15(a) 8.3.2 5(a) (420) (907) (1,122) - (1,551) (2,108) (363) (912) (777) (286) (84) (1,898) (579) (827) (1,142) (550) (1,504) (2,072) (6,056) (888) (923) - (837) (2,007) (29,444) (35,666) 1,220 (2,796) (1,576) (3,391) (3,493) (6,884) (600) (2,176) (1,576) (1,576) (2,176) (2,176) - (6,884) (6,884) (6,884) (6,884) (6,884) Earnings per share for profit attributable to the ordinary equity holders of the parent Basic loss cents per share Diluted loss cents per share 10 10 Cents Cents (1.06) (1.06) (4.62) (4.62) *Refer note 21 on restatement to prior year comparative for details ^Fair value through other comprehensive income. The Consolidated Statement of Profit or Loss and Other Comprehensive Income is to be read in conjunction with the attached Notes. Annual Report 2019 | Consolidated Statement of Profit or Loss and Other Comprehensive IncomePAGE 23 Consolidated Statement of Financial Position As at 30 June 2019 Note 2019 $’000 2018 restated * $’000 ASSETS Current Cash and cash equivalents Trade and other receivables Loan receivables Other assets Current tax asset Total current assets Non-current Loan receivables Investments Other assets Property, plant & equipment Intangible assets & goodwill Deferred tax assets Total non-current assets TOTAL ASSETS LIABILITIES Current Trade and other payables Lease incentives Provisions Total current liabilities Non-current Lease incentives Provisions Total non-current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Contributed equity Reserves Accumulated losses Equity attributable to shareholders Non-controlling interests TOTAL EQUITY * Refer note 21 on restatement to prior year comparative for details The Consolidated Statement of Financial Position is to be read in conjunction with the attached Notes. 6(a) 8.1.2 8.1.3 8.1.3-4 8.1.5 13 14 5(d) 8.1.6 15 15 11(a) 12 7,917 9,183 2,572 756 - 9,469 9,754 345 788 286 20,428 20,642 4,007 116 886 531 2,675 2,409 10,624 31,052 9,430 19 4,221 6,572 2,482 890 951 1,651 4,868 17,414 38,056 9,715 82 8,781 13,670 18,578 - 502 502 14,172 16,880 34,673 12,610 (30,521) 16,762 118 19 455 474 19,052 19,004 34,673 12,174 (27,961) 18,886 118 16,880 19,004 Annual Report 2019 | Consolidated Statement of Financial Position Consolidated Statement of Cash Flows For the year ended 30 June 2019 PAGE 24 CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers Cash paid to suppliers and employees Cash provided by operations Restructure costs Claims and litigation settlements Regulatory costs associated with the Royal Commission Net cash flows (used in) operating activities CASH FLOWS FROM INVESTING ACTIVITIES Interest received Payments to acquire financial assets Repayments on convertible loan Proceeds from investment Acquisition of intangible assets Acquisition of property, plant & equipment Dividend received from investments Net cash flows provided by/(used in) investing activities CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid Net cash flows (used in) financing activities Note 2019 $’000 2018 $’000 128,456 134,503 (125,239) (128,090) 3,217 (550) 15(a) (4,520) - 6(b) (1,853) 398 - 500 750 (1,336) (11) - 301 - - 14 13 9(a) 6,413 (1,441) (5,315) (77) (420) 505 (6,700) - - (15) (322) 199 (6,333) (15,020) (15,020) Net (decrease) in cash & cash equivalents (1,552) (21,773) Cash & cash equivalents at the beginning of the year Cash & cash equivalents at the end of the year The Consolidated Statement of Cash Flows is to be read in conjunction with the attached Notes. 9,469 7,917 31,242 9,469 Annual Report 2019 | Consolidated Statement of Cash Flows4 0 0 9 1 , ) 4 8 3 ( ) 6 7 1 , 2 ( ) 0 6 5 2 ( , - 6 3 4 - 0 8 8 6 1 , 7 1 6 , 1 4 ) 4 8 8 6 ( , ) 4 8 8 6 ( , ) 9 0 7 ( ) 0 2 0 5 1 ( , 4 0 0 9 1 , l a t o T y t i u q e 0 0 0 $ ’ - - - - - 8 1 1 8 1 1 - - - - - 8 1 1 8 1 1 - n o N g n i l l o r t n o c s t s e r e t n i 0 0 0 $ ’ 6 8 8 8 1 , ) 4 8 3 ( ) 6 7 1 , 2 ( l a t o T 0 0 0 $ ’ ) 0 6 5 2 ( , ) 0 6 5 2 ( , - 6 3 4 - 2 6 7 6 1 , 9 9 4 , 1 4 ) 4 8 8 6 ( , ) 4 8 8 6 ( , ) 9 0 7 ( 6 8 8 8 1 , ) 0 2 0 5 1 ( , - - ) 1 2 5 0 3 ( , ) 3 6 8 8 ( , ) 4 8 8 6 ( , ) 4 8 8 6 ( , ) 4 1 2 2 1 ( , - - ) 1 6 9 7 2 ( , ) 4 8 3 ( ) 6 7 1 , 2 ( ) 1 6 9 7 2 ( , 5 1 5 9 5 6 , 1 1 3 7 6 4 3 , l d e t a u m u c c A s e s s o l 0 0 0 $ ’ r e h t O s e v r e s e r 0 0 0 $ ’ d n e d v D i i e v r e s e r 0 0 0 $ ’ y r a n d r O i s e r a h s 0 0 0 $ ’ e t o N y t i u q E n i s e g n a h C f o t n e m e t a t S d e t a d i l o s n o C 9 1 0 2 e n u J 0 3 d e d n e r a e y e h t r o F 5 2 E G A P - - - 6 3 4 - 1 5 9 4 2 2 , 1 - - - - 5 1 5 ) 9 0 7 ( t n e m u r t s n i - - - - - - - 9 5 6 , 1 1 5 6 4 4 1 , - 4 1 2 2 1 , 9 5 6 , 1 1 ) 0 2 0 5 1 ( , - - - - - - - - - - 3 7 6 4 3 , 3 7 6 4 3 , ) a ( 2 1 t n e m y a p d e s a b - e r a h S * * r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T t n e m u r t s n i l i a c n a n fi n o s s o l e u a v l r i a F * d e t a t s e r 8 1 0 2 y u J l 1 t a e c n a a B l r a e y e h t r o f s s o L r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o T 9 1 0 2 e n u J 0 3 t a e c n a a B l 7 1 0 2 y u J l 1 t a e c n a a B l r a e y e h t r o f s s o L i d a p s d n e d v D i i e v r e s e r d n e d v d o t i i r e f s n a r T ) a ( 2 1 t n e m y a p d e s a b - e r a h S i d a p s d n e d v D i i l i a c n a n fi e h t n o s s o l l e u a v r i a f 9 B S A A f o n o i t p o d a l a n o i t i s n a r t e h t o t e u d s i r a e y e h t r o f e m o c n i e v i s n e h e r p m o c l a t o t n e e w t e b e c n e r e ff d e h T * * i 3 7 6 4 3 , * d e t a t s e r 8 1 0 2 e n u J 0 3 t a e c n a a B l s l i a t e d r o f e v i t a r a p m o c r a e y r o i r p o t t n e m e t a t s e r n o 1 2 e t o n r e f e R * Annual Report 2019 | Consolidated Statement of Changes in Equity PAGE 26 Notes to the Consolidated Financial Statements Basis of preparation 1. Corporate information ..................................................................................................................................................................................27 2. Summary of significant accounting policies ........................................................................................................................................27 Financial performance 3. Segment information ....................................................................................................................................................................................33 4. Revenue and expenses .................................................................................................................................................................................36 5. Income tax ........................................................................................................................................................................................................38 6. Notes to statement of cash flows .............................................................................................................................................................42 Working Capital 7. Commitments ..................................................................................................................................................................................................43 8. Financial assets, liabilities and related financial risk management .............................................................................................43 Shareholder returns 9. Dividends ..........................................................................................................................................................................................................59 10. Earnings per share .........................................................................................................................................................................................60 Capital and funding structure 11. Contributed equity .........................................................................................................................................................................................61 12. Reserves ............................................................................................................................................................................................................62 Capital Investment 13. Property, plant and equipment ...................................................................................................................................................................62 14. Intangible assets .............................................................................................................................................................................................64 Risk Management 15. Provisions ..........................................................................................................................................................................................................68 16. Contingent liabilities .....................................................................................................................................................................................70 Other information 17. Remuneration of auditors .............................................................................................................................................................................71 18. Information relating to Centrepoint Alliance Limited ........................................................................................................................71 19. Related party disclosures ..............................................................................................................................................................................72 20. Share-based payment plans .........................................................................................................................................................................73 21. Restatement to prior year comparative ..................................................................................................................................................75 22. Events after the financial year ......................................................................................................................................................................75 Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 27 1. Corporate information The consolidated financial statements of Centrepoint Alliance Limited (the Company or the Parent Entity) and its subsidiaries (the Group) for the year ended 30 June 2019 were authorised for issue in accordance with a resolution of the Directors’ on 22 August 2019. The nature of the operations and principal activities of the Group are described in the Directors’ Report. Information on the Group’s structure and other related party disclosures is provided in Note 19. 2. Summary of significant accounting policies Basis of preparation The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Act, Australian Accounting Standards, Interpretations and other authoritative pronouncements of the Australian Accounting Standards Board (AASB). The financial report has also been prepared on a historical cost basis. For the purposes of preparing the consolidated financial statements, the Group is a for-profit entity. The financial report has been prepared on the going concern basis which contemplates continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of business. The Company has responded to changes in the regulatory and operating environment where traditional product commissions and platform rebates are reducing by replacing these revenues with new pricing arrangements with adviser firms through a contemporary advice and business service offer. During this financial year the business transitioned the majority of adviser firms to contracts reflecting the new pricing arrangements. Subsequent to this financial year ended 30 June, the Group is entering a phase-in period for transition to the new pricing arrangement. The Group has prepared cash flow forecasts which indicate that the current cash resources will be sufficient to cover a range of reasonably likely scenarios which consider the reduction in product commissions and platform rebates and the transition to the new pricing arrangements. Based on the Group’s cash flow forecast, the Directors believe that the Group will be able to continue as a going concern. Compliance with International Financial Reporting Standards The financial report complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Standards and interpretations issued but not yet effective The Australian Accounting Standards and Interpretations, that have recently been issued or amended but are not yet effective and have not been adopted by the Group for the annual reporting year ended 30 June 2019 are set out below. AASB 16 Leases The Standard was issued during 2016 and will replace existing accounting requirements for leases. Under current requirements, leases are classified based on their nature as either finance leases, which are recognised on the Statement of Financial Position, or operating leases, which are not recognised on the Statement of Financial Position. The application of AASB 16 will result in the recognition of all leases on the Statement of Financial Position in the form of a right-of-use asset and a corresponding ease liability, except for leases of low value assets and leases with a term of 12 months or less. As a result, the new standard is expected to impact leases which are currently classified by the Group as operating leases which is primarily the leases over premises. Currently, a detailed review and assessment is being undertaken for leases in Sydney (expire February 2021), Melbourne (expire January 2020) and Gold Coast (expire November 2021). The impact of bringing these on balance sheet will be immaterial to the financial statements, refer to commitments Note 7. AASB Interpretation 23 Uncertainty over Income Tax Treatment The standard was issued during 2019 regarding uncertainty over the appropriate tax treatment of a transaction or class of transactions, and whether treatment will be acceptable by the Australian Taxation Office. In cases, where there is uncertainty over tax authority acceptance on income tax treatment, the Entity is required to recognise and measure its current or deferred tax asset/liability by applying standard AASB 112 based on taxable profit/(loss), tax bases, unused tax losses/credit and tax rates. The Group takes the view the tax authority will accept tax treatment applied in preparation of income tax calculation. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 28 The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. New and revised Standards AASB 15 Revenue from contracts with customers AASB 15 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. A detailed review of each contract has been undertaken in order to identify the performance criteria of each contract. The results of which has ensured the Group’s current revenue recognition continues to comply with requirements of the standard. Type of service Authorised Representative Fees – fees charged to authorised representatives Advice Revenue – commissions paid by product manufacturers Nature of performance obligations Ongoing use of Australian Financial Services License (AFSL) by authorised representatives (ARs) Use of approved product list by the ARs with own AFSLs Virtual Services – software licenses offered to advisers Educational and administration services Investment Product Revenue – platform rebates Investor directed portfolio services and investment management services Significant judgements used to identify performance obligations Performance obligation identified as per the terms of the individual contracts with similar revenue streams Recognition (at a point in time or over time) Over time: revenue is recognised on a monthly basis as services are provided to the advisers Performance obligation identified as per the terms of the individual contracts with similar revenue streams Performance obligation identified as per the terms of the individual contracts with similar revenue streams Performance obligation identified as per the terms of the individual contracts with similar revenue streams Over time: revenue is recognised on a monthly basis as services are provided to the advisers Over time: revenue is recognised on a monthly basis as services are provided to the advisers Over time: revenue is recognised monthly basis as services are provided to the advisers Revenue recognition policy under AASB 15 Nature of change in accounting policy No impact No impact No impact No impact Performance obligations satisfied over time throughout the contract period Performance obligations satisfied over time throughout the contract period Performance obligations satisfied over time throughout the contract period Performance obligations satisfied over time throughout the contract period Revenue recognition policy under AASB 118 Ongoing revenue is recorded monthly for the ongoing services provided to clients Ongoing revenue is recorded monthly or quarterly for the ongoing services provided to clients Ongoing revenue is recorded monthly or quarterly for the ongoing services provided to clients The fee charged is calculated based on a fixed percentage of Funds Under Management (FUM) as stated in the contract with the customer. Revenue is recognised as the service is provided given the customer is receiving and consuming the benefits as they are provided by the Group. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 29 AASB 9 Financial Instruments In the current year, the Group has applied AASB 9 (as revised) and the related consequential amendments to other Accounting Standards for the first time. AASB 9 introduces new requirements for: 1. 2. 3. the classification and measurement of financial assets and liabilities; impairment of financial assets; and General hedge accounting. The classification and measurement, and impairment requirements are applied retrospectively by adjusting opening retained earnings at 1 July 2018. The Group has elected not to restate comparative figures on adoption of the new standard. Details of these new requirements as well as their impact on the Group’s consolidated financial statements are described below. Classification and measurement All recognised financial assets that are within the scope of AASB 9 are required to be subsequently measured at amortised cost or fair value on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Specifically: • • • debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, are subsequently measured at amortised cost; debt investments that are held within a business model whose objective is both to collect the contractual cash flows and to sell the debt instruments, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding, are subsequently measured at fair value through other comprehensive income (FVTOCI); and all other debt investments and equity investments are subsequently measured at fair value through profit or loss (FVTPL). However, at initial recognition of a financial asset: • • the Group may irrevocably elect to present subsequent changes in fair value of an equity investment that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination to which AASB 3 Business Combinations applies in other comprehensive income; and the Group may irrevocably designate a debt investment that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. Equity instruments designated at FVTOCI are subsequently measured at fair value with gains and losses arising from changes in fair value recognised in other comprehensive income and accumulated in the investments revaluation reserve. The cumulative gain or loss is not be reclassified to profit or loss on disposal of the equity investments, instead, it is transferred to retained earnings. Dividends on these investments in equity instruments are recognised in profit or loss in accordance with AASB 9. When a debt investment measured at FVTOCI is derecognised, the cumulative gain or loss previously recognised in other comprehensive income is reclassified from equity to profit or loss as a reclassification adjustment. In contrast, for an equity investment designated as measured at FVTOCI, the cumulative gain or loss previously recognised in other comprehensive income is not subsequently reclassified to profit or loss. Debt instruments that are subsequently measured at amortised cost or at FVTOCI are subject to impairment. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 30 The directors of the company reviewed and assessed the Group’s existing financial assets as at 1 July 2018 based on the facts and circumstances that existed at that date and concluded that the initial application of AASB 9 has had the following impact on the Group’s financial assets in regards to their classification and measurement: • Financial assets classified as loans and receivables under AASB 139 that were measured at amortised cost continue to be measured at amortised cost under AASB 9 as they are held within a business model to collect contractual cash flows and these cash flows consist solely of payments of principal and interest on the principal amount outstanding; • Group’s convertible notes were previously classified as loans and receivables under AASB 139 that were measured at amortised cost are now classified as FVTPL; and • The Group’s other investments in unlisted equity instruments (neither held for trading nor a contingent consideration arising from a business combination) that were previously classified as available-for-sale financial assets and were measured at cost under AASB 139 have been designated as at FVTOCI. The change in fair value on these equity instruments will be accumulated in the investment revaluation reserve. No adjustment has been made within the financial statements due to immateriality; The table below illustrates the classification and measurement of financial assets and financial liabilities under AASB 9 and AASB 139 at the date of initial application of 1 July 2018: Type of financial instrument Financial assets AASB 139 measurement category AASB 9 measurement category AASB 139 Carrying Amount $’000 Additional Loss Allowance $’000 AASB 9 Carrying Amount $’000 Loans and receivables Loans and receivables Amortised cost Amortised cost Amortised cost Amortised cost FVTPL (mandatory) FVTOCI – equity (designated) Cash and cash equivalents Trade and other receivables – Commissions receivables Trade and other receivables Loans Loans and receivables Loans and receivables Convertible notes Loans and receivables Cost Investments in unlisted shares Financial Liabilities Trade and other payables 9,469 7,937 1,817 478 6,439 600 - - - - NA NA 9,469 7,937 1,817 478 6,055 600 Amortised cost Amortised cost 9,715 NA 9,715 Impairment of financial assets AASB 9 requires impairment to be measured using an Expected Credit Loss (ECL) model as opposed to AASB 139’s incurred credit loss model. The expected credit loss model requires the Group to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition of the financial assets. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised. Specifically, AASB 9 requires the Group to recognise a loss allowance for expected credit losses on debt investments subsequently measured at amortised cost or at FVTOCI. AASB 9 requires the Group to measure the loss allowance for a financial instrument at an amount equal to the lifetime ECL if the credit risk on that financial instrument has increased significantly since initial recognition. On the other hand, if the credit risk on a financial instrument has not increased significantly since initial recognition (except for purchased or originated credit-impaired financial assets), the Group is required to measure the loss allowance for that financial instrument at an amount equal to a 12 month ECL. AASB 9 also provides a simplified approach for measuring the loss allowance at an amount equal to lifetime ECL for trade receivables, contract assets and lease receivables in certain circumstances. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 31 As at 1 July 2018, the directors of the company reviewed and assessed the Group’s existing financial assets for impairment using reasonable and supportable information that is available without undue cost or effort in accordance with the requirements of AASB 9 to determine the credit risk of the respective items at the date they were initially recognised, and compared that to the credit risk as at 1 July 2018. The result of the assessment is as follows; Items existing as at 1 July 18 that are subject to the impairment provisions of AASB 9 Cash and cash equivalents Loans Trade and other receivables Credit risk attributes at 1 July 18 Cumulative additional loss allowance recognised on 1 July 18 - - - Management believes that cash and cash equivalents and due from other financial institutions are subject to a very low credit risk at initial recognition with negligible default probability. As a result, the corresponding ECL on these financial assets is immaterial. Management have developed a model to assess the credit risk of each loan. A lifetime credit risk is recognised on loans considered to have experienced a significant increase in credit risk. A 12 month ECL is recognised on those loans on which credit risk has not increased since initial recognition. Simplified approach to assessing impairment has been performed which requires the recognition of lifetime expected credit losses. Under this approach, the Group considers forward-looking assumptions and information regarding expected future conditions affecting historical customer default rates. The trade receivables were grouped into various customer segments with similar loss patterns. No additional credit loss allowance has been recognised against opening retained earnings on 1 July 2018. Disclosure relating to initial application of classification and measurement requirements of AASB 9 The following table is a reconciliation of the carrying amounts in the Group’s statement of financial position from AASB 139 to AASB 9 as at 1 July 2018; AASB 139 carrying amount 30 Jun 18 $‘000 Reclassification Re-measurement $‘000 $‘000 AASB 9 carrying amount 1 Jul 18 $‘000 Retained earnings impact 1 Jul 18 $‘000 6,439 (6,439) - - - 6,439 (384) 6,055 600 - (600) 600 - - - 600 - 384 - - Convertible notes Loans and receivables under AASB 139 Reclassification to FVTPL under AASB 9 Investment in unlisted shares At cost under AASB 139 Reclassification to FVTOCI under AASB 9 Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 32 Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 30 June 2019. Subsidiaries are entities that are controlled by the Company. The financial results and financial position of the subsidiaries are included in the consolidated financial statements from the date control commences until the date control ceases. A list of the Company’s controlled entities (subsidiaries) is included in Note 19. Significant accounting judgements, estimates and assumptions The key assumptions concerning the future and other key sources of estimation and uncertainty at the end of the financial year, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Group based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Group. Such changes are reflected in the assumptions when they occur. Intangible assets and goodwill recoverable amounts – Note 14 Accounting estimates with significant areas of uncertainty and critical judgements have been applied to the following: • • Provision for client claims - Note 15 • Recognition of deferred tax assets - Note 5 • Convertible loan write-down - Note 8.1.4 • Adviser service fees - Note 16 Foreign currency Both the functional and presentation currency of the Group is Australian dollars ($). Transactions in foreign currencies are initially recorded by the Group’s entities at their respective functional currency spot rates at the date the transaction first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates of exchange at the reporting date. Exchange differences relating to monetary items are included in the statement of Profit or Loss and Other Comprehensive Income, as exchange gains or losses, in the year when the exchange rates change. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the initial transaction. Comparative information Certain adjustments have been made to the prior year’s financial statements to enhance comparability with the current year’s financial statements, refer Note 21. As a result, certain line items have been amended in the financial statements. Comparative amounts have been adjusted to conform to the current year’s presentation. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 33 3. Segment information Key Accounting Policies Operating Segments Under AASB 8 Operating Segments, the Group determines and presents operating segments based on the nature of the products and services provided and the markets in which it operates. Board, corporate finance, company secretarial and other administration functions of the Group not allocated to the above reportable segments are identified as Corporate and Unallocated. Business segment Operations Licensee and advice services Fund management and administration Corporate and unallocated This segment represents the business that provides Australian Financial Services License services to financial advisers and their clients and mortgage broking services This segment provides investor directed portfolio services and investment management services to financial advisers, accountants and their clients This segment represents Board, corporate finance, company secretarial and other administration functions of the Group The Group operated only in Australia during the financial year. A detailed review of these segments is included in the Director’s report. The accounting policies of the reportable segments are the same as the Group’s accounting policies. The Group does not currently manage its assets and liabilities on an individual segment basis. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 34 Licensee & Advice Services (wealth) $’000 Funds Management & Administration (wealth) $’000 Corporate & Unallocated $’000 Total $’000 5,185 86,044 12,177 546 (81,971) (693) 21,288 56 16 21,360 (13) (363) (639) - (84) (17,739) 1,024 (3,810) (2,786) - - 12,903 - - (4,179) 8,724 236 3 8,963 - - (35) - - - 4 - - - - 4 5,185 86,048 25,080 546 (81,971) (4,872) 30,016 336 1 628 20 341 30,664 (13) - (103) (286) - (26) (363) (777) (286) (84) - (2,769) 20,508 5,651 1,142 (5,455) 1,220 (128) (2,796) 6,793 (5,583) (1,576) 3. Segment information (cont.) Year-ended 30 June 2019 Segment revenue Revenue from contracts with customers - Authorised representative fees - Advice revenue - Investment products revenue - Virtual services Contractual payments to advisers - Advice revenue paid to advisers - Fees paid to advisers/fund managers Gross profit from contracts with customers Interest income Other revenue Total segment gross profit Segment results - Interest charges - Client claims - Depreciation & amortisation - Fair value loss on the financial instrument - Impairment of assets - Inter-segment expenses* Segment profit/(loss) before tax Income tax (expense)/benefit Segment (loss)/profit after tax Other comprehensive income Items that will not be reclassified subsequently to profit or loss Net fair value loss on equity investment designated at FVTOCI - - (600) (600) Total comprehensive (loss)/income for the year (2,786) 6,793 (6,183) (2,176) Addback: Legacy claims expense Segment profit/(loss) before tax (excl legacy claims) Statement of Financial Position at 30 June 2019 Total assets Total liabilities Net assets 162 1,186 18,201 (8,658) 9,543 - - 162 5,651 (5,455) 1,382 4,041 (568) 3,473 8,810 31,052 (4,946) (14,172) 3,864 16,880 *The Inter-segment expenses represent employee related costs and other expenses paid centrally which are allocated to the segments in which they are incurred. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 35 3. Segment information (cont.) Year-ended 30 June 2018 restated Segment revenue Revenue from contracts with customers - Authorised representative fees - Advice revenue - Investment products revenue - Virtual services Contractual payments to advisers - Advice revenue paid to advisers - Fees paid to advisers/fund managers Gross profit from contracts with customers Interest income Other revenue Total segment gross profit Segment results - Interest charges - Client claims - Depreciation & amortisation - Impairment of assets - Inter-segment expenses* Licensee & Advice Services $’000 Funds Management & Administration (wealth) $’000 Corporate & Unallocated $’000 Total $’000 5,297 89,348 14,182 210 (85,202) (1,053) 22,782 223 1,139 24,144 (22) (6,056) (817) 63 - - 12,950 - - (4,688) 8,262 196 (1,000) 7,458 (1) - (74) - (16,974) (3,605) - 4 - - - - 4 5,297 89,352 27,132 210 (85,202) (5,741) 31,048 92 577 673 511 716 32,275 (12) (35) - (6,056) (32) (900) 20,579 (923) (837) - Segment profit/(loss) before tax Income tax benefit/(expense) Segment (loss)/profit after tax Addback: Legacy claims expense Segment profit/(loss) before tax (excl legacy claims) (2,346) 766 5,358 3,012 3,948 (1,184) (4,993) (3,391) (3,075) (3,493) (6,884) - - 5,358 3,948 (4,993) 1,967 Statement of Financial Position at 30 June 2018 restated Total assets Total liabilities Net assets 16,640 (12,887) 3,753 3,566 (609) 2,957 17,850 38,056 (5,556) (19,052) 12,294 19,004 *The Inter-segment expenses represent employee related costs and other expenses paid centrally which are allocated to the segments in which they are incurred. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 36 4. Revenue and expenses a) Revenue from contracts with customers (AASB 15 Revenue from contracts with customers) Authorised representative fees: On a monthly basis, the financial advisers are billed for AFSL licensing fees in line with the contract between the Group and the adviser. The Group’s obligation under this contract is to provide support to advisers and access to one of the Group’s AFSLs to enable them to sell financial advice. The fees charged to the adviser are based on a fixed fee structure outlined in the contract with the adviser. Revenue is recognised on a monthly basis as services are provided to the advisers. Advice revenue: Commission is received from product providers earned either at inception or renewal of products on the approved product list. Under the contract with the adviser, the Group receive the full commission from the product provider and subsequently pay on the portion relating to the adviser. The Group’s obligation is to act as an intermediary between the product provider and the adviser. Where the advisers are employed by the Group, the commission earned is retained in the Group. Investment products revenue: The Group earns revenue from its customers through the provision of fund management services to its customers. Under this arrangement, the fee charged is calculated based on a fixed percentage of Funds Management and Administration (FUMA) as stated in the contract with the customer. Revenue is recognised as the service is provided given the customer is receiving and consuming the benefits as they are provided by the Group. Included within investment products revenue are rebates paid to the Group by platform providers who offer the advisers an integrated insurance, superannuation and investment web-based solution. The Group performance obligation is to act as an agent for the platform providers, enabling them access to their adviser network. The rebate earned by the Group is dependent on the nature of the underlying product sold, either based on in-force policies or funds under management invested through the platform. Revenue is recognised monthly based on Management’s best estimate using the most recent information provided by the platform provider and is trued up based on rebate receipts as and when they are received from the platform provider. Virtual services: As part of the authorised representative fee charged to the adviser, advisers may also add software packages to their monthly fee. The Group’s obligation under this contract is to provide the adviser with the use of the software licenses of the Group. The fees charged are variable dependent on the volume of users that require access to the software. Revenue is recognised on a monthly basis as services are provided to the advisers. b) Interest Income (AASB 9 Financial instruments) Per AASB 9 Financial Instruments interest income from a financial asset is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that assets’ net carrying amount on initial recognition. c) Other revenue Other revenue represents other sundry income received by the Group. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 37 4. Revenue and expenses (cont.) Note 2019 $’000 2018 restated * $’000 Revenue Revenue from contracts with customers 4(a) - Authorised representative fees - Advice revenue - Investment products revenue - Virtual services 5,185 86,048 25,080 546 5,297 89,352 27,132 210 Total revenue from contracts with customers 116,859 121,991 Contractual payments to advisers - Advice revenue paid to advisors - Fees paid to advisers/fund managers Total contractual payments to advisers (81,971) (4,872) (85,202) (5,741) (86,843) (90,943) Gross profit from contracts with customers 30,016 31,048 Interest income 4(b) 628 511 Other revenue - Cost recoveries from advisers - Retail and wholesale asset and service fees - Other Total other revenue Gross profit * Refer note 21 on restatement to prior year comparative for details Employee related expenses - Wages and salaries - Share-based compensation expense - Termination costs Total employee related expenses 4(c) 8 10 2 20 331 201 184 716 30,664 32,275 2019 $’000 2018 $’000 Note 4(a) 18,422 436 132 17,103 354 789 18,990 18,246 Annual Report 2019 | Notes to the Consolidated Financial Statements5. Income tax a) Income tax expense The major components of income tax expense for the years ended 30 June 2019 and 2018 are: PAGE 38 Current income tax Current income tax charge Adjustment to current tax of prior period Deferred income tax Deferred income tax charge Income tax expense 2019 $’000 2018 restated * $’000 - 338 2,458 2,796 (980) - 4,473 3,493 b) Amounts charged or credited directly to equity No income tax was charged directly to equity for the year ended 2019 (2018: Nil). c) Reconciliation between aggregate tax expense recognised in the income statement and tax expense calculated per the statutory income tax rate The difference between income tax expense provided in the financial statements and the prima facie income tax expense is reconciled as follows: Profit/(loss) before tax At the Company's statutory income tax rate of 30% (2018: 30%) Non-deductible expenses Amounts not included in assessable income Effective tax losses not recognised Aggregate income tax expense * Refer note 21 on restatement to prior year comparative for details 2019 $’000 2018 restated * $’000 1,220 (3,391) 366 217 - 2,213 2,796 (1,017) 65 (28) 4,473 3,493 In the current year there has been a significant reduction in provisions that gave rise to deferred tax assets. Given the size of the reduction in provisions, particularly those related to legacy claims and doubtful debts, the reduction in deferred tax asset was greater than current tax profit generated in the financial year. Accordingly, a significant deferred tax expense has been recognised in the current year as no further tax losses are being recognised as noted below. In the prior year the Group decided to reduce the deferred tax asset by removing the tax benefit of past losses previously recognised due to the initial investment to drive the new strategy. The recognition of this asset was subject to estimation uncertainty as the utilisation of the deferred tax asset is dependent on estimates of future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences. The Group is forecasting to generate future taxable profits in excess of the profits arising from the reversal of existing taxable temporary differences however the timing of these taxable profits is inherently uncertain. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 39 5. Income tax (cont.) d) Recognised deferred tax assets and liabilities Deferred income tax relates to the following: Statement of Financial Position Statement of Comprehensive Income 2019 $'000 2018 restated * $’000 2019 $'000 2018 restated * $’000 - - 378 625 - 253 92 110 951 - 2,409 2,409 (7) (7) 1,626 1,096 165 91 121 730 1,046 - 4,875 4,868 7 7 (1,247) (471) (165) 162 (28) (619) (94) - (2,462) 185 185 223 (403) 165 13 (74) 167 47 (4,473) (4,335) Deferred tax liabilities Deferred revenue Gross deferred tax liabilities Deferred tax assets Provisions for claims Provisions for doubtful debts Provision for restructure Provision for impairment of loan receivables Provision for leases General accruals and other costs Employee benefits Tax losses available Gross deferred tax assets Net deferred tax assets e) Unrecognised tax losses The Group has the following Australian tax losses for which no deferred tax assets are recognised at reporting date. Revenue losses Capital losses Total unrecognised losses 2019 $’000 27,642 35,953 63,595 2018 restated * $’000 23,969 35,953 59,922 The utilisation of certain acquired tax losses is also subject to fractioning under Australian tax legislation which effectively prescribes the rate at which such acquired tax losses may be offset against the Group’s taxable income. Given that the available fraction of the transferred losses is based on the relative market value of the Group, the determination of the available fraction is subject to some uncertainty. The above losses are available indefinitely for offset against future taxable income and capital gains subject to continuing to meet relevant statutory tests. Unrecognised tax loss were increased by $3.7m. f) Tax consolidation Tax effect accounting by members of the tax consolidated group a) Measurement method adopted under AASB interpretation 1052 Tax Consolidation Accounting The Parent Entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the ‘separate taxpayer within group’ approach whereby the Group measures its current and deferred taxes as if it continued to be a separately taxable entity in its own right, with adjustments for its transactions that do not give rise to a tax Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 40 5. Income tax (cont.) consequence for the Group or that have a different tax consequence at the level of the Group. The current and deferred tax amounts are measured by reference to the carrying amount of assets and liabilities in the Statement of Financial Position and their tax bases applying under the tax consolidation, this approach being consistent with the broad principles in AASB 112 Income Taxes. The nature of the tax funding agreement is discussed further below. In addition to its own current and deferred tax amounts, the head entity also recognises current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. b) Nature of the tax funding agreement Centrepoint Alliance Limited and its wholly owned Australian controlled entities implemented tax grouping under the tax consolidation legislation as of 1 July 2007. The Parent Entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the Group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. Members of the tax consolidated group have entered into a tax funding agreement. Under the funding agreement the funding of tax within the Group is based on taxable profit. The tax funding agreement requires payments to/from the Parent Entity to be recognised via an inter-entity receivable (payable) which is at call. The amounts receivable or payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. These amounts are payable at call. Key accounting policies Taxation i) Income Tax The income tax expense for the year represents the tax payable on the pre-tax accounting profit adjusted for changes in the deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and unused tax losses. Income taxes relating to items recognised directly in equity are recognised in equity and not in the Statement of Profit or Loss and Other Comprehensive Income. a) Current Tax Current tax assets and liabilities for the year are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date in the countries where the Group operates and generates taxable income. b) Deferred Tax Deferred tax assets and liabilities are recognised for all deductible and taxable temporary differences at the tax rates that are expected to apply to the year when the asset is realised or liability is settled, based on tax rates (and tax laws) that have been enacted or substantially enacted at the reporting date. Deferred income tax liabilities are recognised on all taxable temporary differences except: • When the deferred income tax liability arises from the initial recognition of Goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or Annual Report 2019 | Notes to the Consolidated Financial Statements PAGE 41 5. Income tax (cont.) • In respect of taxable temporary difference associated with investments in subsidiaries, associates or interests in joint ventures, when the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences, carry forward tax credits and any unused tax losses. Deferred tax assets are recognised to the extent that it is probable that taxable profit will be available against which deductible temporary differences, unused tax credits and unused tax losses can be utilised, except: • When a deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or • In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are recognised only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available toallow all or part of the deferred income tax asset to be utilised. Unrecognised deferred tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow a deferred tax asset to be recovered. Deferred tax assets and deferred tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. The deferred tax balance will be written down if there are changes in circumstances and forecasts are not met. ii) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except: • When the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as an expense item as applicable; and • When receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, a taxation authority is included as part of receivables or payables in the Statement of Financial Position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, a taxation authority, are classified as part of operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, a taxation authority. Annual Report 2019 | Notes to the Consolidated Financial Statements6. Notes to Statement of Cash flows a) Reconciliation of cash & cash equivalents Cash at bank Total PAGE 42 2019 $’000 2018 $’000 7,917 7,917 9,469 9,469 b) Reconciliation of net profit after tax to net cash provided by operating activities Net loss after income tax Adjustments to reconcile profit before tax to net cash flows: Depreciation and amortisation Fair value loss on financial instrument Impairment of investments Expected credit losses Loss on disposal of non-current assets Interest received Interest expense Dividend received from investments Share-based compensation (income)/expense Tax expense current year Working capital adjustments: (Increase)/decrease in assets: Trade and other receivables Other assets Deferred tax assets (Decrease)/increase in liabilities: Trade and other payables Provisions for employee entitlements Provision for client claims Provision for property make good Provision for onerous lease Provision for restructure costs Provision for tax Net cash from operating activities * Refer note 21 on restatement to prior year comparative for details 2019 $’000 2018 restated * $’000 (1,576) (6,884) 777 286 - 86 39 (398) - - 436 - 813 26 2,221 (368) 301 (4,157) (24) (88) (550) 323 (1,853) 923 - 900 (63) 17 (505) - (199) (709) (980) 2,437 (128) 4,150 424 (406) 742 - (255) 550 (434) (420) Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 43 7. Commitments Contracted operating lease expenditure The Group has entered into commercial leases on certain properties expiring at various times up to 5 years from reporting date. The leases have varying terms, options and rent renewals. On renewal, if applicable, the terms are renegotiated. The Group has also entered into corporate services agreements for IT and telecommunications hardware and support. The agreements have terms between 1 and 3 years with options to renew at expiry of the initial term on a month to month basis. Not later than one year Later than one year but not later than five years Total 2019 $’000 2018 $’000 788 457 1,245 1,341 1,349 2,690 8. Financial assets, liabilities and related financial risk management 8.1. Categories of financial instruments Financial assets Cash and cash equivalents Trade and other receivables Loans Note Classification 8.1.1 8.1.2 8.1.3 Amortised Cost Amortised Cost Amortised Cost Convertible notes 8.1.4 FVTPL Investments in unlisted shares 8.1.5 FVTOCI – equity (designated) Total financial assets Financial Liabilities Trade and other payables 8.1.6 Amortised Cost Total financial liabilities * Refer note 21 on restatement to prior year comparative for details Accounting policies Financial instruments 2019 $’000 2018 restated * $’000 7,917 9,183 6,049 530 116 9,469 9,754 478 6,439 2,482 23,795 28,622 9,430 9,430 9,715 9,715 Financial assets and financial liabilities are recognised in the Group’s statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Recognised financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at FVTPL) are added to, or deducted from, the fair value on recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at FVTPL are recognised immediately in profit or loss. If the transaction price differs from fair value at initial recognition, the Group will account for such difference as follows: • • if fair value is evidenced by a quoted price in an active market for an identical asset or liability or based on a valuation technique that uses only data from observable markets, then the difference is recognised in profit or loss on initial recognition (i.e. day 1 profit or loss); and in all other cases, the fair value will be adjusted to bring it in line with the transaction price (i.e. day 1 profit or loss will be deferred by including it in the initial carrying amount of the asset or liability). Annual Report 2019 | Notes to the Consolidated Financial Statements   PAGE 44 8.1. Categories of financial instruments (cont.) After initial recognition, the deferred gain or loss will be released to profit or loss on a rational basis, only to the extent that it arises from a change in a factor (including time) that market participants would take into account when pricing the asset or liability. Financial assets Financial assets are recognised on the trade date when the purchase is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned. Financial assets are initially measured at fair value, plus transaction costs, except for those financial assets classified as at FVTPL. Transaction costs directly attributable to the acquisition of financial assets classified as at FVTPL are recognised immediately in profit or loss. All recognised financial assets that are within the scope of AASB 9 are required to be subsequently measured at amortised cost or fair value on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. Specifically: • debt instruments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal amount outstanding (SPPI), are subsequently measured at amortised cost; • debt instruments that are held within a business model whose objective is both to collect the contractual cash flows and to sell the debt instruments, and that have contractual cash flows that are SPPI, are subsequently measured at FVTOCI; • all other debt instruments (e.g. debt instruments managed on a fair value basis, or held for sale) and equity investments are subsequently measured at FVTPL. However, the Group may make the following irrevocable election / designation at initial recognition of a financial asset on an asset-by-asset basis: • • the Group may irrevocably elect to present subsequent changes in fair value of an equity investment that is neither held for trading nor contingent consideration recognised by an acquirer in a business combination to which AASB 3 applies, in OCI; and the Group may irrevocably designate a debt instrument that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch (referred to as the fair value option). Debt instruments at amortised cost or at FVTOCI The Group assesses the classification and measurement of a financial asset based on the contractual cash flow characteristics of the asset and the Group’s business model for managing the asset. For an asset to be classified and measured at amortised cost or at FVTOCI, its contractual terms should give rise to cash flows that are solely payments of principal and interest on the principal outstanding (SPPI). For the purpose of SPPI test, principal is the fair value of the financial asset at initial recognition. That principal amount may change over the life of the financial asset (e.g. if there are repayments of principal). Interest consists of consideration for the time value of money, for the credit risk associated with the principal amount outstanding during a particular period of time and for other basic lending risks and costs, as well as a profit margin. The SPPI assessment is made in the currency in which the financial asset is denominated. Contractual cash flows that are SPPI are consistent with a basic lending arrangement. Contractual terms that introduce exposure to risks or volatility in the contractual cash flows that are unrelated to a basic lending arrangement, such as exposure to changes in equity prices or commodity prices, do not give rise to contractual cash flows that are SPPI. An originated or an acquired financial asset can be a basic lending arrangement irrespective of whether it is a loan in its legal form. An assessment of business models for managing financial assets is fundamental to the classification of a financial asset. The Group determines the business models at a level that reflects how groups of financial assets are managed together to achieve a particular business objective. The Group’s business model does not depend on management’s intentions for an individual instrument, therefore the business model assessment is performed at a higher level of aggregation. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 45 8.1. Categories of financial instruments (cont.) When a debt instrument measured at FVTOCI is derecognised, the cumulative gain/loss previously recognised in OCI is reclassified from equity to profit or loss. Debt instruments that are subsequently measured at amortised cost or at FVTOCI are subject to impairment. Financial assets at FVTPL Financial assets at FVTPL are: • • assets with contractual cash flows that are not SPPI; or/and assets that are held in a business model other than held to collect contractual cash flows or held to collect and sell; or • assets designated at FVTPL using the fair value option. Such assets are measured at fair value, with any gains/losses arising on re-measurement recognised in profit or loss. Equity investments On initial recognition, the Group classifies the investment in equity instruments either at FVTPL if it is held for trading or at FVTOCI if designated as measured at FVTOCI. When an equity investment designated as measured at FVTOCI is derecognised, the cumulative gain/loss previously recognised in OCI is not subsequently reclassified to profit or loss but transferred within equity. Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the asset’s cash flows expire (including expiry arising from a modification with substantially different terms), or when the financial asset and substantially all the risks and rewards of ownership of the asset are transferred to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset’s carrying amount and the sum of the consideration received and receivable and the cumulative gain/loss that had been recognised in OCI and accumulated in equity is recognised in profit or loss, with the exception of equity investment designated as measured at FVTOCI, where the cumulative gain/loss previously recognised in OCI is not subsequently reclassified to profit or loss. Reclassifications If the business model under which the Group holds financial assets changes, the financial assets affected are reclassified. The classification and measurement requirements related to the new category apply prospectively from the first day of the first reporting period following the change in business model that results in reclassifying the Group’s financial assets. During the current financial year and previous accounting period there was no change in the business model under which the Group holds financial assets and therefore no reclassifications were made. Financial liabilities A financial liability is a contractual obligation to deliver cash or another financial asset or to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the Group or a contract that will or may be settled in the Group’s own equity instruments and is a non-derivative contract for which the Group is or may be obliged to deliver a variable number of its own equity instruments, or a derivative contract over own equity that will or may be settled other than by the exchange of a fixed amount of cash (or another financial asset) for a fixed number of the Group’s own equity instruments. Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. The Group does not have any financial liabilities which are classified at FVTPL. Other financial liabilities, including trade and other payables, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method. Annual Report 2019 | Notes to the Consolidated Financial Statements8.1. Categories of financial instruments (cont.) 8.1.1. Cash and cash equivalents Cash and Cash equivalents Total Cash and cash equivalents 8.1.2. Trade and other receivables Current Commissions receivable Trade receivables Other Total * Refer note 21 on restatement to prior year comparative for details Refer to Note 8.2.3.1 for ageing analysis PAGE 46 2019 $’000 7,917 7,917 2018 $’000 9,469 9,469 2019 $’000 2018 restated * $’000 7,431 1,609 143 9,183 7,937 1,817 - 9,754 Group applies simplified approach for assessing impairment which requires the recognition of lifetime expected credit losses. Under this approach, the Group considers forward-looking assumptions and information regarding expected future conditions affecting historical customer default rates. The trade receivables were grouped into various customer segments with similar loss patterns. Trade receivables generally have 30-90 day terms and no interest is charged on outstanding debts. The Group measures the loss allowance for trade receivables at an amount equal to lifetime expected credit loss. Collectability of trade receivables is reviewed on an ongoing basis. Debts that are known to be uncollectible are written off when identified. A loss allowance for trade receivables is raised using a provision matrix to analyse past default activity and a review of the debtors’ current financial position adjusted for factors that are specific to the debtors and an assessment of both the current as well as the forecast direction of conditions at the reporting date. The Group has recognised a loss allowance of 100% against all receivables over 90 days past due (with exception of legal agreements for recoverability) because historical experience has indicated that these receivables are generally not recoverable. The amount of the expected credit loss is recognised in the profit or loss within other expenses. When a trade receivable for which an expected credit loss allowance has been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in profit or loss. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 47 8.1. Categories of financial instruments (cont.) 8.1.3. Loans Current Loan receivables Loan receivables - financial advisers Expected credit losses Total current loans Non-current Loan receivables Loan receivables - financial advisers Expected credit losses Total non-current loans Total loans Loans - ALD 2019 $’000 2018 $’000 2,500 72 - 2,572 3,399 680 (602) 3,477 6,049 - 435 (90) 345 - 603 (470) 133 478 The Group has $5.9m invested in ALD, represented by the current and non-current loan receivables above. As part of the strategy review, the Group declined to take up an additional option in the current year. The convertible loan of $5.1m was replaced with a new loan agreement with interest capitalising at the rate of 2.5% above the 6 month Bank Bill Swap Rate as published by the Australian Financial Markets Association (the BBSR) or 12.35% if any Repayment Amount (or part thereof) is not repaid by the date required under the Loan Agreement. During the year, the Group also sold a 5% equity stake in ALD for $1.75m (book value) to Astle Capital Ltd (‘Astle’). This was settled with a cash payment of $0.75m received from Astle and an interest- bearing loan of $1.0m to Astle (related company of ALD) which will become due on or by 31 December 2021. A repayment of $0.5m on the ALD interest-bearing loan was received in June 2019. Loans – Financial Advisers Loans due from financial advisers have terms ranging from 1 to 5 years and varying interest terms at or above commercial rates. The majority of these loans were secured through charges over assets, by guarantees, or by retention of financial advice fees. Expected Credit Losses Allowance for expected credit losses Opening Balance Movement in the allowance for expected credit losses Closing balance Expected credit losses expense Expected credit losses expense Bad debts (recovery)/written-off directly Total expense For details on expected credit losses against loans see section 8.2.3.1 2019 $’000 2018 $’000 557 45 602 45 39 84 585 (28) 557 (28) (35) (63) Annual Report 2019 | Notes to the Consolidated Financial Statements8.1. Categories of financial instruments (cont.) 8.1.4. Convertible Notes Convertible loan Total current loans Convertible notes PAGE 48 2019 $’000 2018 $’000 530 530 6,439 6,439 The Group subscribed to $1.2m in a convertible note in RFE to provide seed funding to the business. The first advance of $1.0m was made on 6 July 2017 and a further $0.2m was advanced on 28 February 2018. The Group has subsequently fair valued the convertible note to $0.5m. The Group has a 15% interest in the business and had invested in convertible notes which if converted would increase our interest by 12% to 27%. 8.1.5. Investments in unlisted shares This represents investments in equity securities which have been classified fair value through other comprehensive income. Investments Fair value adjustment Total investments 2019 $’000 2018 $’000 716 (600) 116 3,382 (900) 2,482 In October 2016, an investment of $1.5m was made in RFE unlisted shares which represents a 15% stake of equity. An impairment provision of $0.9m was raised against this investment in 2018 financial year. RFE has reduced their revenue growth forecast to reduce cash strain and focus on profitability. During the year, the Group has further reduced the value of its investment in RFE to nil with a reassessment of current and projected levels of profitability. In September 2016 $0.1m was invested in Ginger Group, which increased the Group’s equity interest to 50% from 37.5%. Ginger Group has a 37.5% shareholding in Kepa. During the year, the Group also sold a 5% equity stake in ALD for $1.75m (book value) to Astle Capital Ltd (‘Astle’). This was settled with a cash payment of $0.75m received from Astle and an interest-bearing loan of $1.0m to Astle (related company of ALD) which will become due on or by 31 December 2021. 8.1.6. Trade and other payables Current Amounts payable to financial advisers Trade payables Other creditors and accrued expenses Total 2019 $’000 2018 $’000 5,694 1,959 1,777 9,430 5,474 1,696 2,545 9,715 Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 49 8.2. Financial risk management 8.2.1. Risk exposures and responses The Group’s principal financial instruments comprise cash and cash equivalents, trade receivables and payables, loans, investments in unlisted shares and convertible notes. The Group manages its exposure to key financial risks in accordance with the Group’s financial risk management policy. The objective of the policy is to support the delivery of the Group’s financial targets whilst protecting future financial security. The main risks arising from the Group’s financial instruments are credit risk, interest rate risk, and liquidity risk. The Group uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to interest rate and assessments of market forecasts for interest rates. Ageing analyses and monitoring of expected credit loss allowances are undertaken to manage credit risk and liquidity risk is monitored through the development of regular short and long-term cash flow forecasts. Primary responsibility for identification and control of financial risks rests with the GARC Committee under the authority of the Board. The Board reviews and agrees policies for managing each of the risks identified below. 8.2.2. Credit Risk Credit risk arises from the financial assets of the Group, which comprise cash and cash equivalents, loans and trade and other receivables. The Group’s exposure to credit risk arises from potential default of the counter- party, with a maximum exposure equal to the carrying amount of these assets (as outlined in each applicable Note). The Group’s maximum exposure to credit risk for loans and trade receivables at the reporting date is limited to Australia. The Group trades only with recognised, creditworthy third parties and the majority of the Group’s cash balances are held with National Australia Bank Limited (credit rating: Aa2) and Westpac Banking Corporation (credit rating: Aa2). It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures. In addition, all receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is monitored and managed. 8.2.3. Sources of credit risk Key sources of credit risk for the Group predominantly emanate from its business activities including loans and trade and other receivables. The Group monitors and manages credit risk by class of financial instrument. The table below outlines such classes of financial instruments identified, their relevant financial statement line item, maximum exposure to credit risk at the reporting date and expected credit loss recognised: Class of financial instrument Note Financial statement line Cash and cash equivalents Trade and other receivables Loans Total 8.1.1 8.1.2 8.1.3 Cash and cash equivalents Trade and other receivables Loans Maximum exposure to credit risk $’000 Expected credit loss $’000 7,917 11,265 6,651 25,833 - 2,082 602 2,684 Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 50 8.2. Financial risk management (cont.) Accounting policies Impairment of financial assets The Group recognises loss allowances for ECLs on loans and trade and other receivables that are not measured at FVTPL. ECLs are required to be measured through a loss allowance at an amount equal to: • • 12-month ECL, i.e. lifetime ECL that result from those default events on the financial instrument that are possible within 12 months after the reporting date, (referred to as stage 1); or full lifetime ECL, i.e. lifetime ECL that result from all possible default events over the life of the financial instrument, (referred to as stage 2 and stage 3). A loss allowance for full lifetime ECL is required for a financial instrument if the credit risk on that financial instrument has increased significantly since initial recognition. For all other financial instruments, ECLs are measured at an amount equal to the 12-month ECL. For trade receivables, the Group has applied the simplified approach in AASB 9 to measure the loss allowance at lifetime ECL. The Group determines the expected credit losses on these items by using a provision matrix, estimated based on historical credit loss experience based on the past due status of the debtors, adjusted as appropriate to reflect current conditions and estimates of future economic conditions. Accordingly, the credit risk profile of these assets is presented based on their past due status in terms of the provision matrix. Definition of default The Group considers the following as constituting an event of default: • • the borrower is past due more than 90 days on any material credit obligation to the Group; or the borrower is unlikely to pay its credit obligations to the Group in full. The definition of default is appropriately tailored to reflect different characteristics of different types of assets. When assessing if the borrower is unlikely to pay its credit obligation, the Group takes into account both qualitative and quantitative indicators. The information assessed depends on the type of the asset, for example in corporate lending a qualitative indicator used is the breach of covenants, which is not relevant for retail lending. Quantitative indicators, such as overdue status and non-payment on another obligation of the same counterparty are key inputs in this analysis. Write off Loans, receivables and debt securities are written off when the Group has no reasonable expectations of recovering the financial asset (either in its entirety or a portion of it). This is the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write off. A write off constitutes a derecognition event. The Group may apply enforcement activities to financial assets written off. Recoveries resulting from the Group’s enforcement activities will result in impairment gains. Key estimates and judgements Significant increase in credit risk ECL are measured as an allowance equal to 12-month ECL for stage 1 assets, or lifetime ECL assets for stage 2 or stage 3 assets. An asset moves to stage 2 when its credit risk has increased significantly since initial recognition. AASB 9 does not define what constitutes a significant increase in credit risk. In assessing whether the credit risk of an asset has significantly increased the Group takes into account qualitative and quantitative reasonable and supportable forward-looking information. Models and assumptions used The Group uses models and assumptions in measuring fair value of financial assets as well as in estimating ECL. Judgement is applied in identifying the most appropriate model for each type of asset, as well as for determining the assumptions used in these models, including assumptions that relate to key drivers of credit risk. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 51 8.2. Financial risk management (cont.) Forward looking scenarios The Group establishes the number and relative weightings of forward-looking scenarios for each type of product/market and determines the forward-looking information relevant to each scenario. When measuring ECL the Group uses reasonable and supportable forward-looking information, which is based on assumptions for the future movement of different economic drivers and how these drivers will affect each other. Probability of default (PD) PD constitutes a key input in measuring ECL. PD is an estimate of the likelihood of default over a given time horizon, the calculation of which includes historical data, assumptions and expectations of future conditions. Loss Given Default (LGD) LGD is an estimate of the loss arising on default. It is based on the difference between the contractual cash flows due and those that the lender would expect to receive, taking into account cash flows from collateral and integral credit enhancements. 8.2.3.1. Measurement of Expected Credit Loss (ECL) The key inputs used for measuring ECL are: • probability of default (PD); • • loss given default (LGD); and exposure at default (EAD). PD is an estimate of the likelihood of default over a given time horizon. It is estimated as at a point in time. The Group has developed a PD model for loans and advances based on the likelihood of a default event occurring within the next 12 months, based on the current status of each loan. A lifetime PD is also computed where appropriate. Historical data on loan behaviours is captured to enable projections on loans going into default. This provides statistical data that is used in the PD model for calculating the probability of default. LGD is an estimate of the loss arising on default. EAD is an estimate of the exposure at a future default date, taking into account expected changes in the exposure after the reporting date, including repayments and principal and interest, and expected drawdowns on committed facilities. The Group has developed a single EAD model to cover all applicable loan exposures. The Group measures ECL considering the risk of default over the maximum contractual period (including extension options) over which the entity is exposed to credit risk and not a longer period. The risk of default is assessed by considering historical data as well as forward looking information through a macroeconomic overlay and management judgement. The Group’s risk function constantly monitors the ongoing appropriateness of the ECL model and related criteria, where any proposed amendments will be reviewed and approved by the Group’s management committees. Incorporation of forward-looking information The Group uses forward-looking information that is available without undue cost or effort in its assessment of significant increase of credit risk as well as in its measurement of ECL. The Group uses this information to generate a ‘base case’ scenario of future forecast of relevant economic variables along with a representative range of other possible forecast scenarios. The Group applies probabilities to the forecast scenarios identified. The base case scenario is the single most- likely outcome and consists of information used by the Group for strategic planning and budgeting. The Group has identified and documented key drivers of credit risk and credit losses for each loan historical data and has estimated relationships between macro-economic variables, credit risk and credit losses. The principal macroeconomic indicators included in the economic scenarios used at 1 July 2018 and 31 June 2019 are GDP, GDP index, GDP index change and unemployment. Management have derived that Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 52 8.2. Financial risk management (cont.) GDP has economic correlations to inflation and unemployment, which generally have a corresponding impact on loan performance. The base case scenario is derived from forecasted changes to GDP, CPI and unemployment rates, using management’s judgement. Adjustments to these forecasts are made to develop a further 2 scenarios for less likely but plausible economic expectations. A weighting is applied to each scenario, based on management’s judgement as to the probability of each scenario occurring. These economic forecasts are then applied to a statistical model to determine the macroeconomic effects on the expected loss allowance on the lending portfolios. The incorporation of forward-looking information on the assessment of ECL on other assets required to be assessed for impairment is a qualitative approach. A range of economic outlooks, from an economist, the RBA and OECD, have been considered in making an assessment of whether there are economic forecasts that would indicate a potential impairment on the assets being assessed. Significant increase in credit risk The Group monitors all financial assets that are subject to impairment requirements to assess whether there has been a significant increase in credit risk since initial recognition. If there has been a significant increase in credit risk the Group will measure the expected loss allowance based on lifetime rather than 12-month ECL. The Group has used the assumption that 30 days past due represents significant increase in credit risk. The Group considers 90 days past due as representative of a default having occurred and a loan being credit impaired. The Group has identified the following three stages in which financial instruments have been classified in regard to credit risk; • • • stage 1 - Performing exposure on which loss allowance is recognised as 12 month expected credit loss; stage 2 - Where credit risk has increased significantly and impairment loss is recognised as lifetime expected credit loss; and stage 3 - Assets are credit impaired and impairment loss is recognised as lifetime expected credit loss. Interest is accrued on a net basis, on the amortised cost of the loans after the ECL is deducted. The table below shows analysis of each class of financial asset subject to impairment requirements by stage at the reporting date: Class of financial instrument Maximum expsoure to credit risk Expected credit loss Stage 1 $'000 Stage 2 $'000 Stage 3 $'000 Cash and cash equivalents 7,917 - Trade and other receivables* Loans Total 11,265 - - - 6,651 6,651 7,917 11,265 6,651 25,833 Total $'000 7,917 11,265 - - Stage 1 $'000 Stage 2 $'000 Stage 3 $'000 Total $'000 - - - - - 2,082 - - - 2,082 - 602 602 2,082 602 2,684 *There are no trade receivables at stage 1, because the Group’s accounting policy is to apply the simplified approach to measure lifetime credit losses on trade receivables Movement in gross carrying amounts and expected credit losses There has been no significant movement in gross carrying amount and expected credit losses of financial assets of the Group therefore the movement has not been disclosed. Summary of movements in expected credit loss by financial instrument The following table summarises the movement in expected credit loss by financial instruments for the financial year: Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 53 8.2. Financial risk management (cont.) Expected credit loss Loans $’000 Trade and other receivables $’000 Loss allowance as at 1 July 2018 Loss allowance recognised during the year Loss allowance at 30 June 2019 557 45 602 3,653 (1,571) 2,082 Total $’000 4,210 (1,526) 2,684 Credit risk concentrations are diversified across a large number of advisers and are geographically based within Australia. They are mainly derived from the financial services industry and the main business segments include Professional Investment Services Pty Ltd. At 30 June 2019, the Group made a downward estimate of the fair value of the RFE convertible note based on future expected cash flows discounted at a determined weighted average cost of capital (WACC). The downward adjustment was attributed to the risk in the RFE business and profitability forecasts. As per AASB 9 transitional provisions, the Group revised the fair value of the convertible note at 1 July 2018 to $0.8m with a further fair value reduction at 30 June 2019 of $0.3m. Financial instruments classified at FVTPL The maximum exposure to credit risk of the convertible notes held designated at FVTPL is their carrying invested amount, which was $0.5m at 30 June 2019 (2018: $1.2m). The change in fair value due to credit risk is $0.2m for the year (2018: $nil) and $0.5m on a cumulative basis as at 30 June 2019 (2018: $0.3m). The Group uses the performance of the portfolio to determine the change in fair value attributable to changes in credit risk. Equity instruments classified at FVTOCI The maximum exposure to credit risk of the equity instrument designated at FVTOCI is their carrying amount. Total $'000 9,183 752 Total $'000 9,754 1,038 0-30 Days $'000 8,907 12 0-30 Days $'000 9,472 157 31-60 Days $'000 8 7 31-60 Days $'000 21 4 2019 61-90 Days PDNI $'000 - 7 2018 61-90 Days PDNI $'000 20 4 61-90 Days CI $'000 - - 61-90 Days CI $'000 - - +91 Days PDNI $'000 268 106 +91 Days PDNI $'000 241 404 +91 Days CI $'000 - 620 +91 Days CI $'000 - 469 Ageing Analysis Trade receivables Loan receivables - advisers Ageing Analysis Trade receivables Loan receivables - advisers * Past due not impaired (PDNI) 8.2.4. Market risk 8.2.5. Interest rate risk Interest rate risk is the potential for loss of earnings to the Group due to adverse movements in interest rates. The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s debt obligations as disclosed below. The Group adopts a policy to minimise exposure to interest rate risk by depositing excess funds in interest-bearing accounts at a variable rate or with short date maturities. The Group’s objective is to minimise exposure to adverse risk and therefore it continuously analyses its interest rate exposure. Within this analysis consideration is given to potential renewals of existing positions, alternative financing, alternative hedging positions and the mix of fixed and variable interest rates. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 54 8.2. Financial risk management (cont.) The Group’s exposure to interest rate risks and the effective interest rates of financial assets and financial liabilities, both recognised and unrecognised at the balance date, are as follows: 2019 Weighted average effective interest rate % Fixed ≤ 6 Months $'000 Fixed > 6 Months $'000 Financial Assets Cash and cash equivalents 1.46% 3,664 Trade and other receivables Loans Convertible notes Investments in unlisted shares 3.28% 2.87% - 36 - - - - 716 - - Non- interest bearing $'000 Total carrying amount per balance sheet $'000 - 9,183 - - 116 7,917 9,183 6,049 530 116 Variable $'000 4,253 - 5,297 530 - Total financial assets 3,700 716 10,080 9,299 23,795 Financial Liabilities Trade and other payables Total financial liabilities Net Exposure - - - - - - 3,700 716 10,080 9,430 9,430 (131) 9,430 9,430 14,365 2018 Weighted average effective interest rate % Fixed ≤ 6 Months $'000 Fixed > 6 Months $'000 Financial Assets Cash and cash equivalents 2.90% 4,904 Trade and other receivables Loans Convertible notes Investments in unlisted shares 2.77% 3.02% - 181 - - - - 857 - - Variable $'000 4,565 - - 6,439 - Total financial assets 5,085 857 11,004 Financial Liabilities Trade and other payables Total financial liabilities Net Exposure 8.2.6. Price risk - - - - - - 5,085 857 11,004 Non- interest bearing $'000 Total carrying amount per balance sheet $'000 - 9,754 - - 2,482 12,236 9,715 9,715 2,520 9,469 9,754 1,038 6,439 2,482 29,182 9,715 9,715 19,467 The Group’s exposure to commodity and equity securities price risk is significant because a portion of the Group’s net advice and investment products revenue is governed by the amount of funds under management or under advice, which is impacted by the market price of equities and other investment assets. This risk is effectively a feature of the financial advice industry and cannot easily be managed. However, the increasing proportion of fee for service revenue and the ability of the Group to adjust resource inputs in relation to market movements decreases the level of risk. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 55 8.2. Financial risk management (cont.) 8.2.7. Liquidity risk The Group’s objective is to maintain a balance between continuity of funding and flexibility through the use of instruments such as bank overdrafts, bank loans, subordinated debt, preference shares, finance leases and other committed available credit lines from time to time as required. The Group’s policy is to match debt with the nature and term of the underlying assets. At reporting date over 88% of the Group’s financial assets mature in less than 12 months. The table below reflects all contractually fixed pay offs and receivables for settlement, repayments and interest resulting from recognised financial liabilities. The respective undiscounted cash flows for the respective upcoming fiscal years are presented. Cash flows for financial liabilities without fixed amount or timing are based on the conditions existing as at reporting date. Maturity analysis of financial assets and liability based on management’s expectation. The risk implied from the values shown in the table below, reflects a balanced view of cash inflows and outflows. Leasing obligations, trade payables and other financial liabilities mainly originate from the financing of assets used in ongoing operations such as property, plant, equipment and investments in working capital e.g. trade receivables. These assets are considered in the Group’s overall liquidity risk. To monitor existing financial assets and liabilities as well as to enable an effective controlling of future risks, the Group has established reporting requirements which monitor maturity profiles and anticipated cash flows from Group assets and liabilities. The tables below are based on the carrying values at reporting date and includes future interest receivable or payable. Financial Assets Cash and cash equivalents Trade and other receivables Loans Convertible notes Investments in unlisted shares Total financial assets Financial Liabilities Trade and other payables Total financial liabilities Net Maturity 2019 ≤ 6 Months $'000 6-12 Months $'000 1-5 Years $'000 Total $'000 7,917 9,007 36 - - 16,960 9,430 9,430 7,530 - - 716 - - 716 - - 716 - 176 - 530 116 822 - - 822 7,917 9,183 753 530 116 18,499 9,430 9,430 9,069 Annual Report 2019 | Notes to the Consolidated Financial Statements 8.2. Financial risk management (cont.) PAGE 56 2018 ≤ 6 Months $'000 6-12 Months $'000 1-5 Years $'000 Total $'000 9,469 9,625 181 - - 19,275 9,715 9,715 9,560 - 29 857 - - 886 - - 886 - 100 - 6,439 2,482 9,021 - - 9,021 9,469 9,754 1,038 6,439 2,482 29,182 9,715 9,715 19,468 Financial Assets Cash and cash equivalents Trade and other receivables Loans Convertible notes Investments in unlisted shares Total financial assets Financial Liabilities Trade and other payables Net Maturity 8.2.8. Foreign currency risk The Group undertakes transactions denominated in foreign currencies (THB, NZD, USD and EURO); consequently, exposures to exchange rate fluctuations arise. The transactions include the annual conference and recruitment agency fees. 8.3. Fair value measurements Some of the Group’s financial assets and financial liabilities are measured at fair value at the end of each financial year. The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped by fair value hierarchy level. 8.3.1. Financial instruments measured at fair value on recurring basis 30 June 2019 Investment securities mandatorily measured at FVTPL Convertible notes Equity instruments designated at FVTOCI Unlisted shares Total assets 30 June 2018 Investment securities mandatorily measured at FVTPL Convertible notes Equity instruments designated at FVTOCI Unlisted shares Total assets Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 - - - - - - 530 530 116 646 116 646 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 - - 6,439 6,439 - - - - 2,482 8,921 2,482 8,921 There are no financial liabilities which are measured at fair value. There have been no transfers between level 1 and level 2 categories of financial instruments. Annual Report 2019 | Notes to the Consolidated Financial Statements PAGE 57 8.3. Fair value measurements (cont.) 8.3.2. Reconciliation of Level 3 fair value measurements of financial assets 30 June 2019 Balance at beginning of year Fair value loss on adoption of AASB 9 Conversion of convertible loan to interest bearing loan Sale of investment Total gains or losses: - in profit or loss - in other comprehensive income Balance at end of year 30 June 2018 Balance at beginning of year Total gains or losses: - in profit or loss Purchases Balance at end of year Accounting policies Fair value measurements FVTOCI Unlisted shares $’000 FVTPL Convertible notes $’000 2,482 - - (1,750) (16) (600) 116 6,439 (384) (5,239) - (286) - 530 FVTOCI Unlisted shares $’000 FVTPL Convertible notes $’000 1,632 6,439 (900) 1,750 2,482 - - 6,439 The Group measures some of its assets and liabilities at fair value on either a recurring or non-recurring basis, depending on the requirements of the applicable Accounting Standard. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly (i.e. unforced) transaction between independent, knowledgeable and willing market participants at the measurement date. As fair value is a market-based measure, the closest equivalent observable market pricing information is used to determine fair value. Adjustments to market values may be made having regard to characteristics of the specific asset or liability. The fair values of assets and liabilities that are not traded in an active market are determined using one or more valuation techniques. These valuation techniques maximise, to the extent possible, the use of observable market data. To the extent possible, market information is extracted from either the principal market for the asset or liability (i.e. the market with greatest volume and level of activity for the asset or liability) or, in the absence of such a market, the most advantageous market available to the entity at the end of the financial year (i.e. the market that maximises the receipts from the sale of the asset or minimises the payments made to transfer the liability, after taking into account transaction costs and transport costs). For non-financial assets, the fair value measurement also takes into account a market participant’s ability to use the asset in its highest and best use or to sell it to another market participant that would use the asset in its highest and best use. In measuring fair value, the Group uses valuation techniques that maximise the use of observable inputs and minimise the use of unobservable inputs. Assets and liabilities measured at fair value are classified, into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are received at each reporting date and transfers between levels are determined based on a reassessment of the lowest level input that is significant to the fair value measurement. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 58 8.3. Fair value measurements (cont.) The categories are as follows: • Level 1 - measurements based on quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date. • Level 2 - measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. • Level 3 - measurement based on unobservable inputs for the asset or liability. The fair values of assets and liabilities that are not traded in an active market are determined using one or more valuation techniques. These valuation techniques maximise, to the extent possible, the use of observable market data. If all significant inputs required to measure fair value are observable, the asset or liability is included in Level 2. If one or more significant inputs are not based on observable market data, the asset or liability is included in Level 3. The Group financial assets and liabilities are measured at fair value that approximates the carrying amount. 8.3.3. Summary of valuation methodologies applied in determining fair value of financial instruments Each valuation technique requires inputs that reflect the assumptions that buyers and sellers would use when pricing the asset or liability, including assumptions about risks. When selecting a valuation technique, the Group gives priorities to those techniques that maximise the use of observable inputs and minimise the use of unobservable inputs. Inputs that are developed using market data (such as publicly available information on actual transactions) and that reflect the assumptions that buyers and sellers would generally use when pricing the asset or liability are considered observable, whereas inputs for which market data is not available and therefore are developed using the best information available about such assumptions are considered unobservable. The fair value of liabilities and the entity’s own equity instruments (excluding those related to share-based payment arrangements) may be valued, where there is no observable market price in relation to the transfer of such financial instrument, by reference to observable market information where such instruments are held in assets. Where this information is not available, other valuation techniques are adopted and where significant, are detailed in the respective note to the financial statements. The Group selects a valuation technique that is appropriate in the circumstances and for which sufficient data is available to measure fair value. The availability of sufficient and relevant data primarily depends on the specific characteristics of the asset or liability being measured. The valuation techniques selected by the economic entity are consistent with one or more of the following valuation approaches: • Market approach - valuation techniques that use prices and other relevant information generated by market transactions for identical or similar assets or liabilities. • Income approach - valuation techniques that convert estimated future cash flows or income and expenses into a single discounted present value. • Cost approach - valuation techniques that reflect the current replacement cost of an asset at its current service capacity. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 59 8.3. Fair value measurements (cont.) Financial Asset/Liability Fair value assumptions Cash and Cash equivalents Fair value approximates the carrying amount as these assets are receivable on demand or short term in nature. For fixed rate loans, excluding impaired loans, fair value is determined by discounting expected future cash flows by the RBA Indicator Lending Rate for small business loans adjusted using quoted BBSW interest rates to reflect the average remaining term of the loans as at 30 June 2019. Loans The calculated fair value using this Level 3 methodology approximates carrying value. Increasing the interest rate used to discount future cash flows by 1% would reduce fair value by less than $7,721 (2018: $10,353). For variable rate loans, excluding impaired loans, fair value approximates the carrying amount as they are repriced frequently. The carrying values of variable rate trade and other receivables approximate their fair value as they are short term in nature and reprice frequently. The carrying values of variable rate trade and other payables approximate their fair value as they are short term in nature and reprice frequently. Trade and other receivables Trade and other payables 9. Dividends Dividends payable are recognised when declared by the Group. a) Dividends paid or payable The following fully franked dividends were provided for or paid during the year: Dividends paid on ordinary shares Special dividends paid on ordinary shares Total dividends 2019 $’000 2018 $’000 - - - 4,035 10,985 15,020 2019 $’000 2018 $’000 b) Franking credit balance Franking account balance as at the end of the financial year 17,563 17,563 The tax rate at which paid dividends were franked is 30%. Franking credits are reported on a tax paid basis. Annual Report 2019 | Notes to the Consolidated Financial Statements PAGE 60 10. Earnings per share Key accounting policies Basic Earnings Per Share (EPS) is calculated as net profit attributable to members of the Company, adjusted to exclude any costs of servicing equity (other than dividends) and preference dividends, divided by the weighted average number of ordinary shares, adjusted for any bonus element. • Diluted EPS is calculated as net profit attributable to members of the Company, adjusted for: • Costs of servicing equity (other than dividends) and preference share dividends; • The after-tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; and • Other non-discretionary changes in revenues or expenses during the year that would result from the dilution of potential dividend by ordinary shares. The following reflects the income used in the basic and diluted Earnings per share computations: 2019 $’000 2018 restated * $’000 a) Profit used in calculating profit per share Net (loss) attributable to ordinary equity holders of the Company (1,576) (6,884) b) Weighted average number of shares Weighted average number of ordinary shares Effect of dilution: Performance rights and LTI shares Weighted average number of ordinary shares (excluding reserved shares) adjusted for the effect of dilution Basic loss cents per share Diluted loss cents per share * Refer note 21 on restatement to prior year comparative for details No. of shares No. of shares 148,882,969 148,882,969 9,101,781 12,321,644 157,984,750 161,204,613 (1.06) (1.06) (4.62) (4.62) There have been no other transactions involving ordinary shares or potential ordinary shares that would significantly change the number of ordinary shares or potential ordinary shares outstanding between the reporting date and the date of completion of these financial statements. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 61 11. Contributed equity Key accounting policies Ordinary shares are classified as equity and recognised at the fair value of the consideration received by the Group. Any transaction cost arising on the issue of ordinary shares is recognised, net of tax, directly in equity as a reduction of the share proceeds. Paid up capital Ordinary shares Reserved shares i) Ordinary shares (issued & fully paid) Balance at start of year Movements during the year:- - cancellation of shares On issue at end of year ii) Reserved shares Balance at start of year Movements during the year:- - cancellation of shares On issue at end of year Reference 2019 $’000 2018 $’000 (i) (ii) 34,673 - 34,673 39,108 (4,435) 34,673 Number of shares 2019 $’000 Number of shares 2018 $’000 156,932,969 39,108 156,932,969 39,108 (8,050,000) (4,435) - - 148,882,969 34,673 156,932,969 39,108 (8,050,000) (4,435) (8,050,000) (4,435) 8,050,000 4,435 - - - - (8,050,000) (4,435) Total contributed equity 148,882,969 34,673 148,882,969 34,673 Capital management The Company’s capital is currently only comprised of shareholder funds. When managing capital, management’s objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital available to the entity. Subsequent to balance date the Directors resolved not to declare a final dividend having referred to the dividend policy and strategic direction of the business. Annual Report 2019 | Notes to the Consolidated Financial Statements12. Reserves Employee equity benefits reserve Dividend reserve Total a) Employee equity benefits reserve Balance at start of year Value of share-based payments provided or which vested during the year Value of share based payments expired during the year Balance at end of year PAGE 62 2019 $’000 2018 $’000 951 11,659 12,610 515 11,659 12,174 2019 $’000 2018 $’000 515 436 - 951 1,224 354 (1,063) 515 The employee equity benefits reserve is used to record the value of share-based payments provided to employees, including KMP, as part of their remuneration. During the current year, 9,550,000 performance rights were issued to the chief executive officer and senior executives and other senior leaders of the Group as follows: Performance rights Chief Executive Officer Number of shares Vesting period 2,700,000 2.50 years Senior Executives and other senior leaders 6,850,000 2.58 years b) Dividend reserve Balance at start of year Dividends paid Transfer from current year profits Balance at end of year 13. Property, plant and equipment Key accounting policies Issue price Fair Value at issue date $0.1350 $0.1150 $0.0199 $0.0144 2019 $’000 2018 $’000 11,659 - - 11,659 14,465 (15,020) 12,214 11,659 At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Plant and equipment is carried at cost, net of accumulated depreciation and any accumulated impairment losses. The carrying values of plant and equipment are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognised and the asset is written down to its recoverable amount. The recoverable amount of plant and equipment is the greater of fair value less costs to sell and value in use. In assessing value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined by reference to the cash-generating unit to which the asset belongs. Annual Report 2019 | Notes to the Consolidated Financial Statements PAGE 63 13. Property, plant and equipment (cont.) Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows: Asset Useful Life Plant and equipment 2 – 7 years Leasehold improvements Lease term Motor vehicles 5 years Derecognition: An item of plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the Statement of Profit or Loss and Other Comprehensive Income when the asset is derecognised. Residual values, useful lives and methods of depreciation of plant and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate. Leasehold Improvements $’000 Plant & Equipment $’000 Total $’000 Cost At 1 July 2017 Additions Disposals At 30 June 2018 Reclassification Additions Disposals At 30 June 2019 Depreciation and impairment At 1 July 2017 Depreciation charge for the year Disposals At 30 June 2018 Depreciation charge for the year Disposals At 30 June 2019 Net carrying value At 30 June 2019 At 30 June 2018 1,986 - - 1,986 - - - 1,986 1,522 155 - 1,677 99 - 1,776 210 309 2,786 322 (9) 3,099 (135) 11 (110) 2,865 2,274 186 (3) 2,457 157 (70) 2,544 321 642 4,772 322 (9) 5,085 (135) 11 (110) 4,851 3,796 341 (3) 4,134 256 (70) 4,320 531 951 Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 64 14. Intangible assets Accounting policies Goodwill Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised at the date of the acquisition. Goodwill is subsequently measured at cost less any accumulated impairment losses. Impairment of assets For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the business combination. A cash-generating unit or groups of cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss on goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Key judgements The cash-generating units determined by management are: • Licensee Services • Ventura Investment Management Limited (Ventura) • xseedwealth Pty Ltd (xseedwealth) • Centrepoint Alliance Lending Services Pty Ltd (Centrepoint Lending Services) • Investment Diversity Pty Ltd (Investment Diversity) Key estimates Impairment testing of goodwill was carried out by comparing the net present value of cash flows from the cash- generating unit to the carrying value of the cash-generating unit. The cash flows were based on projections of future earnings before taxation, depreciation and amortisation, minus forecast capital expenditure. The cash flows have been projected over a period of five years. The terminal value of the Group beyond year five has been determined using a constant growth perpetuity. The key assumptions used in carrying out the impairment testing were as follows: • Budgeted operating cashflows for the financial years ending 30 June 2020 – 2024 represents the Group’s estimate of future cashflows based on the forecast approved by the Board of Directors. The business has moved to a fee-based model which primarily impacts the Licensee Services CGU and given some uncertainty around this, change sensitivities have been disclosed below. • Terminal growth rate 1.0% (2018: 1.0%) represents the terminal growth rate (beyond five years). • Discount rate 12.35% (2018: 12.35%) is the discount rate used in impairment testing for all CGUs at 30 June 2019. The business believes the discount rate applied is appropriate based upon the risks inherent in the business. The goodwill disclosed in the Statement of Financial Position at 30 June 2019 was supported by the impairment testing and no impairment adjustment was required. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 65 14. Intangible assets (cont.) The CGUs where a ‘reasonably possible’ change in estimates could lead to the carrying amount exceeding the value in use are Centrepoint Lending Services and Licensee Services. The reasonably possible trigger points at which the carrying value of the cash-generating unit would exceed its recoverable amount, while holding all other variables constant, are as follows: • Licensee services – the primary sensitivity for Licensee Services relates to fee income earned under the new revenue model and forecast fees would need to decrease by 27% and remain flat for five years before carrying amount would exceed recoverable amount. The Group believes the likelihood of this scenario occurring is remote; and • Centrepoint Lending Services – the primary sensitivity for Centrepoint Lending Services is the discount rate used in the calculation of value in use. The discount rate would need to increase to 25% before carrying amount would exceed recoverable amount. The Group believes the risks associated with the cashflows in this CGU are lower than average in the Group and the discount rate used is appropriate. Intangible asset Cash Generating Units Goodwill Description of the Group’s intangible assets Goodwill was created during 2012 on the acquisitions of the externally owned interests in Ventura Investment Management Ltd of $93,000 and in Centrepoint Alliance Lending Pty Ltd (previously Centrepoint Lending Solutions Pty Ltd) of $863,000. Other CGUs include Licensee Services, Investment Diversity Pty Ltd and xseedwealth pty ltd. Goodwill is tested on an annual basis and when there is an indication of potential impairment. The current carrying value of Goodwill is $956,000 Key Accounting Policies Goodwill is tested annually for impairment by calculation of value in use at the CGU level. Management is of the view that core assumptions such as cost of equity and terminal growth rate are the same across all CGUs. Value in use is calculated using discounted cash flow projections for five years and terminal values prepared from current forecasts using the following assumptions: Terminal growth rate 1.00% (2018: 1.00%) Cost of equity: 12.35% (2018: 12.35%) The testing resulted in no impairment being required. No indicators of impairment are noted for the remaining CGUs. Impairment Test Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, Goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired. As at acquisition date, any Goodwill acquired is allocated to each of the CGUs which are expected to benefit from the acquisition. Impairment is determined by assessing the recoverable amount of the CGU to which the Goodwill relates. Where the recoverable amount of the CGU is less than the carrying amount, an impairment loss is recognised. Where Goodwill forms part of a CGU and part of the operation within that unit is disposed of, the Goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the CGU retained. Impairment losses recognised are not subsequently reversed. Annual Report 2019 | Notes to the Consolidated Financial Statements 14. Intangible assets (cont.) Intangible asset Networks and client lists Description of the Group’s intangible assets Intangible assets in the form of adviser network businesses and adviser client lists acquired to expand the adviser network. These had a total book value at 30 June 2019 of $348,000 (2018: 620,000). Software The Group has developed or acquired software, which are being amortised over their expected useful lives. PAGE 66 Key Accounting Policies Impairment Test Adviser network businesses and client lists are regularly tested for impairment by calculation of value in use when indicators of potential impairment arises. Value in use is calculated using discounted cash flow projections associated with the applicable asset using the following assumptions: The number of revenue generating advisers and clients declines to nil over the remaining useful life of 4 years and 1 year respectively. Cash flows associated with remaining advisers and clients are inflated only at CPI with no growth assumed. Cost of equity: 12.35% (2018: 12.35%). The testing resulted in no impairment losses. The value in use calculations are most sensitive to the remaining useful life assumption. Sensitivity analysis indicates a decrease in the assumed useful life of 1 year would have resulted in an impairment expense of $127,342 (2018: $187,858). The value of the developed or acquired software of the Group is amortised on a straight-line basis over a 5 year period, which the Directors assess as the intangible asset’s useful life. No software is considered to be impaired. Intangible assets acquired separately are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful life and tested for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at the end of each financial year. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in an accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in the Statement of Profit or Loss and Other Comprehensive Income. Intangible assets with indefinite useful lives are not amortised, but are tested for impairment at least annually either individually or at the cash-generating unit level. The assessment of indefinite life of an intangible asset is reviewed each year- end to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis. Under the standard software cost can be capitalised as an asset or expensed in the year in which they are incurred. Value of software assets recorded by the entity in their financial statement continues to reflect the expected benefits to be obtained from their use. The Group needs to determine the useful life of software assets and amortise the cost over useful life of the assets. At each reporting date, the entity will assess whether there is any indication that an asset is recorded at greater than its recoverable amount. If applicable, recognise an impairment loss. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 67 14. Intangible assets (cont.) The estimated useful lives in the current and comparative periods are as follows: Software Network and Client Lists 5 years 5 – 15 years Impairment of non-financial assets other than Goodwill At each reporting date, the Group assesses whether there is any indication that an asset may be impaired. Non-financial assets are carried at cost, net of accumulated depreciation and any accumulated impairment losses. The carrying values of non-financial assets are reviewed for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Where an indicator of impairment exists, the Group makes a formal estimate of recoverable amount. Where the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognised and the asset is written down to its recoverable amount. The recoverable amount of a non-financial asset is the greater of fair value less costs to sell and value in use. In assessing value in use, estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. 14.1.1. Reconciliation of carrying amounts at the beginning and end of the financial year Financial year ending 30 June 2019 At 1 July 2018 net of accumulated amortisation and impairment Reclassification Additions Amortisation At 30 June 2019 net of accumulated amortisation and impairment At 30 June 2019 Cost Accumulated amortisation and impairment Net carrying value Financial year ending 30 June 2018 At 1 July 2017 net of accumulated amortisation and impairment Disposals Additions Amortisation At 30 June 2018 net of accumulated amortisation and impairment At 30 June 2018 Cost Accumulated amortisation and impairment Net carrying value 956 - - - 956 1,209 (253) 956 956 - - - 956 1,209 (253) 956 Goodwill $’000 Software $’000 Network & Client Lists $’000 75 135 1,202 (41) 1,371 620 - 134 (406) 348 5,110 (3,739) 1,371 10,520 (10,172) 348 16,839 (14,164) 2,675 Goodwill $’000 Software $’000 Network & Client Lists $’000 123 (13) - (35) 75 1,152 - 15 (547) 620 3,773 (3,698) 75 10,387 (9,767) 620 15,369 (13,718) 1,651 Total $’000 1,651 135 1,336 (447) 2,675 Total $’000 2,231 (13) 15 (582) 1,651 Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 68 15. Provisions Provision for claims The provision for adviser client claims is the estimated cost of resolving claims from clients arising from financial advice provided prior to 1 July 2010 (Legacy Claims) by authorised representatives of the Group. The Group makes a specific provision for claims arising from advice provided prior to 1 July 2010. The provision for general claims is the estimated cost of resolving claims from external parties that may arise as the Group becomes aware of them. Legacy Claims are expected to be reported and resolved by approximately 2021. Resolution is dependent on the circumstances of each claim and the level of complexity involved. Any costs are offset against the provision as incurred. Provision for onerous lease contract In 2018, the Gold Coast office was consolidated from two floors to one and an onerous contract was created for the unused space. There is no onerous lease provision for 2019 (2018: $86k). A tenant sub-leased the unused space in the Gold Coast office for the remaining duration of the lease which expired in October 2018. Key accounting policies Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event. It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the reporting date. If the effect of the time value of money is material, 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, where appropriate, the risks specific to the liability. The Group recognises a liability to make cash or non-cash distributions to equity holders of the Parent Entity when the distribution is authorised and the distribution is no longer at the discretion of the Group. A corresponding amount is recognised directly in equity. A provision for claims is recognised when client claims received by advisers are notified to the Group or the Group expects to incur liabilities in the future as a result of past advice given. It is measured at the present value of the future costs that the Group expects to incur to settle the claims. Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave and long service leave. Liabilities for wages and salaries, including non-monetary benefits, annual leave, and other benefits, expected to be settled wholly within 12 months of the reporting date are measured at the amounts due to be paid when the liability is settled. The liability for long service leave is recognised and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to the expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows. A provision for make good costs for leased property is recognised when a make good obligation exists in the lease contracts. The provision is the best estimate of the present value of the expenditure required to settle the make good obligation at the reporting date. Future make good costs are reviewed annually and any changes are reflected in the present value of the make good provision at the end of the financial year. The unwinding of the discounting is recognised as a finance cost. Present obligations arising under onerous contracts are recognised and measured as provisions. An onerous contract is considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received from the contract. Employee benefits Make good costs for leased property Onerous contracts Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 69 15. Provisions (cont.) Current Provision for claims Provision for employee entitlements Property make good Onerous lease Restructuring Total Non-current Provision for claims Provision for employee entitlements Property make good Total a) Movement in provision for claims Opening balance Movement in the provision is as follows: Claims provisioning expense for the year Claims settlements & fees paid (net of recoveries) Closing balance b) Movement in provision for employee benefits Opening balance Movement in the provision is as follows: Provision for year Leave and other employee benefits paid Closing balance c) Movement in provision for property make good Opening balance Movement in the provision is as follows: Provision for year Closing balance 2019 $’000 2018 $’000 1,232 2,963 26 - - 4,221 29 208 265 502 5,393 2,669 83 86 550 8,781 25 198 232 455 2019 $’000 2018 $’000 5,418 4,589 363 (4,520) 1,261 5,992 (5,163) 5,418 2019 $’000 2018 $’000 2,867 3,275 3,332 (3,028) 3,171 2,681 (3,089) 2,867 2019 $’000 2018 $’000 315 (24) 291 315 - 315 Annual Report 2019 | Notes to the Consolidated Financial Statements15. Provisions (cont.) d) Movement in provision for onerous lease Opening balance Movement in the provision is as follows: Onerous lease unwind Sub-lease reduction Closing balance e) Movement in provision for restructuring costs Opening balance Movement in the provision is as follows: Provision for year Restructuring costs paid Closing balance 16. Contingent liabilities Client Claims PAGE 70 2019 $’000 2018 $’000 86 343 (86) - - (222) (35) 86 2019 $’000 2018 $’000 550 - - (550) - 550 - 550 The nature of the financial advice business is such that from time to time advice given by the Group or its authorised representatives results in claims by clients for compensation. On 18 June 2019 the Australian Securities and Investments Commission (ASIC) announced that it has approved a change to Australian Financial Complaints Authority (AFCA) Rules to allow it to investigate certain complaints dating back to 1 January 2008. The Group is unable to reliably estimate the quantum of any such claims and accordingly no specific provision has been made for possible claims. There have been 4 claims re-opened from 1 July 2019 where we have been able to quantify with reasonable certainty, and hence an amount has been put aside as a provision for these at 30 June 2019. Adviser Service Fees Under the service arrangements between clients and their advisers, clients generally pay an adviser service fee to receive an annual review, together with other services. The Group is assessing whether clients who have paid for these services have been provided with the agreed services. An assessment of financial advisers employed by the Group (xseedwealth salaried advisers) has been completed and where client compensation is probable and can be reliably estimated a provision has been taken at 30 June 2018. The assessment process has commenced identifying clients associated with authorised representatives licensed by the Group’s wholly owned subsidiaries, Professional Investment Services and Alliance Wealth. The assessment is still in progress. Given the early stage of the assessment process and time period and availability of records, it is not practicable to provide an estimate of final remediation costs. The program is ongoing, however refund amounts identified up to 22 August 2019 are not material and accordingly, no provision has been recognised in relation to this matter at 30 June 2019. The costs of the program are being expensed as incurred. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 71 16. Contingent liabilities (cont.) Royal Commission The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) handed down its report on 1 February 2019. The Group has reviewed the report and the Government’s response to the report released on 4 February 2019. The proposed ban on grandfathered commissions and other forms of conflicted renumeration is expected to impact the way the Group receives income for some of its products and services. The Strategic Refresh program announced in August 2018, which includes the design of new arrangements with advisers and product providers, is consistent with the recent recommendations from the Royal Commission. At the date of this report the Directors are not aware of any other material contingent claims. There were no other contingent liabilities at the reporting date. 17. Remuneration of auditors The primary auditor of the Group was Deloitte Touche Tohmatsu. Amounts received or due and receivable by Deloitte Touche Tohmatsu Fees payable to the Group’s auditor for the audit of the financial report for the Company and other controlled entities Fees payable to the Group’s auditor for the audit related assurance services to the Company and other controlled entities Fees payable to the Group’s auditor for the non-audit services to the Company and other controlled entities - Taxation services - Other non-audit services 18. Information relating to Centrepoint Alliance Limited The Consolidated Financial Statements of the Group are: Current assets Non-current assets Current liabilities Net Assets Issued capital Dividend reserve Accumulated profit Total Shareholder Equity Net loss after tax of the parent entity Total comprehensive loss of the parent entity At reporting date the Group has given nil guarantees to external parties (2018: nil). Contractual operating lease expenditure commitments of the Group are as follows: 2019 $ 2018 $ 259,656 224,780 63,000 64,600 3,000 72,900 2,450 14,000 398,556 305,830 2019 $’000 2018 $’000 23,965 5,596 (21) 29,540 33,497 10,504 (14,461) 29,540 (6,409) (6,409) 32,323 8,968 35 41,326 37,933 10,504 (7,111) 41,326 (7,191) (7,191) Annual Report 2019 | Notes to the Consolidated Financial Statements18. Information relating to Centrepoint Alliance Limited (cont.) Not later than one year Later than one year but not later than five years Total PAGE 72 2019 $’000 2018 $’000 146 - 146 370 370 740 The Group has various corporate services agreements for IT and telecommunications hardware and support. The agreements have terms between 1 and 3 years with options to renew at expiry of the initial term on a month to month basis. 19. Related party disclosures a) Information relating to subsidiaries Name Country of Incorporation Ownership Interest Principal Activity 2019 2018 Licensee and Advice Services Centrepoint Alliance Lending Pty Ltd Alliance Wealth Pty Ltd Australia Australia Professional Investment Services Pty Ltd Australia Associated Advisory Practices Pty Ltd Australia xseedwealth pty ltd Australia Funds Management and Administration Investment Diversity Pty Ltd Australia Ventura Investment Management Ltd Australia Corporate Centrepoint Alliance Services Pty Ltd Australia Centrepoint Services Pty Ltd Centrepoint Wealth Pty Ltd De Run Securities Pty Ltd Presidium Research and Investment Management Pty Ltd (formerly Imagine Your Lifestyle Pty Ltd) Professional Accountants Pty Ltd Professional Investment Services (NZ) Limited** Ginger Group Financial Services Limited ** Currently under Solvent Voluntary Liquidation b) Ultimate parent 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 56% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 56% 100% 100% 43% Mortgage broker/ aggregator Financial advice Financial advice Support services AFSL licensee Salaried advice Packages investment platforms Packages managed funds Trustee – Employee share plan Service company Holding company Financial services Dormant Loans to advisers Dormant Australia Australia Australia Australia Australia 100% New Zealand 43% New Zealand 50% 50% Financial advice The ultimate holding company is Centrepoint Alliance Limited, a company incorporated and domiciled in Australia. c) Terms and conditions of transactions with related parties other than KMP Sales to and purchases from related parties are made on terms equivalent to those that prevail in arm’s length transactions. Outstanding balances at financial year end are unsecured and interest free and settlement occurs in cash. There have been no guarantees provided or received for any related party receivables or payables. For the year ended 30 June 2019, the Group has not recorded any impairment of receivables relating to amounts owed by related parties (2018: Nil). An impairment assessment is undertaken each financial year through examination of the financial position of related parties and the market in which a related party operates. Annual Report 2019 | Notes to the Consolidated Financial Statements  PAGE 73 19. Related party disclosures (cont.) d) Transactions with Key Management Personnel The aggregate compensation made to Directors and other members of KMP of the Company and the Group is set out below: Short term employee benefits Post employment benefits Long-term benefits Share based payments Termination/resignation benefits Total compensation 2019 $’000 2018 $’000 1,485 76 - 289 233 2,083 2,109 87 - - 441 2,637 In addition to the above compensation provided to Directors and other KMP, out of pocket costs for Peter Loosmore (Interim Chief Financial Officer) of $2,262 has been incurred in the financial year. 20. Share-based payment plans a) Types of share-based payment plans i) Performance Rights (CESP) Performance rights are rights that can be converted to fully paid ordinary shares in the Company for no monetary consideration subject to specific performance criteria, as determined by the Board for each issue of rights, being achieved. ii) Centrepoint Alliance Employee Share Plan (CAESP) The purpose of the CAESP is to provide employees with an opportunity to acquire a financial interest in the Company, which will align their interests more closely with shareholders and provide a greater incentive to focus on the Company’s longer-term goals. b) Recognised share-based payment expenses Expense arising from performance rights Total Key accounting policies i) Equity settled transactions: 2019 $’000 2018 $’000 436 436 354 354 The Group provides benefits to its employees, including KMP, in the form of share-based payments, whereby employees render services in exchange for rights over shares (equity-settled transactions). In valuing equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the price of the shares of Centrepoint Alliance Limited (market conditions) if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions become fully entitled to the award (vesting date). At each subsequent reporting date until vesting, the cumulative charge to the Statement of Profit or Loss and Other Comprehensive Income is the product of: • • the grant date fair value of the award; the current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of non-market performance conditions being met; and • the expired portion of the vesting period. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 74 20. Share-based payment plans (cont.) The charge to the Statement of Profit or Loss and Other Comprehensive Income for the financial year is the cumulative amount as calculated above less the amounts already charged in previous years. There is a corresponding entry to equity. Until an award has vested, any amounts recorded are contingent and will be adjusted if more or fewer awards vest than were originally anticipated to do so. Any award subject to a market condition is considered to vest irrespective of whether or not that market condition is fulfilled, provided that all other conditions are satisfied. If the terms of an equity-settled award are modified, the minimum expense recognised is the expense had the terms not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of the modification. If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share. Shares in the Company reacquired on market and held by the Employee Share Plan Trust are classified and disclosed as reserved shares and deducted from equity. ii) Reserved shares: The Company’s own equity instruments, which are reacquired for later use in employee share-based payment arrangements (reserved shares), are deducted from equity. No gain or loss is recognised in the Statement of Profit or Loss and Other Comprehensive Income on the purchase, sale, issue or cancellation of the Company’s own equity instruments. Movements during the year All current option awards are fully vested at reporting date. The 8,050,000 shares that were held within the CAESP which were held as reserved shares were cancelled during the financial year, following approval by shareholders at the 2018 Annual General Meeting. 2019 2018 No WAEP* No WAEP* (i) Shares under the CAESP Outstanding at beginning of the financial year Forfeited during the financial year Outstanding at end of period 8,050,000 (8,050,000) - (ii) Performance rights under the CESP Outstanding at beginning of period Granted during the financial year Vested during the financial year Expired during the financial year 2,450,000 9,550,000 - - Outstanding at end of financial year 12,000,000 *WAEP is weighted average exercise price 0.18 (0.18) - - - - - - 8,050,000 - 8,050,000 3,750,000 700,000 - (2,000,000) 2,450,000 0.18 - 0.18 - - - - - Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 75 20. Share-based payment plans (cont.) Performance rights pricing model The fair value of the performance rights issued are calculated as at the date of grant using the Monte Carlo Model. This Model takes into account the terms and conditions upon which they were granted and market based inputs as at the grant date. 21. Restatement to prior year comparative AASB 108 “Accounting Policies, Changes in Accounting Estimates and Errors” requires corrections to comparative information be disclosed in the financial statements. During the year, the Company completed the cancellation of 8,050,000 shares which represented the final step in the closure of the Centrepoint Alliance Employee Share Plan. Upon full review by the Group, it was identified that a receivable under the Plan in the 31 December 2017 and the 30 June 2018 financial reports was incorrectly recognised. As a result, the receivable and related income and tax impacts have been adjusted in the comparative figures disclosed in these financial statements. The relevant financial statement line items impacted are as follows: Condensed consolidated statement of profit or loss and other comprehensive income Interest income Total revenue Total expenses Net loss before tax Income tax expense Net loss after tax Earnings per share Net profit/(loss) attributable to ordinary equity holders of the Company Basic earnings/(loss) per share Diluted earnings/(loss) per share Condensed consolidated statement of financial position Trade and other receivables Deferred tax assets Total assets Total liabilities Net assets Equity Accumulated losses Equity attributable to shareholders Non-controlling interests Total equity 30 June 2018 previously reported $’000 Adjustment $’000 30 June 2018 restated $’000 1,298 33,062 (35,666) (2,604) (3,729) (6,333) (787) (787) 511 32,275 - (35,666) (787) 236 (551) (3,391) (3,493) (6,884) (6,333) (551) (6,884) (4.25) (4.25) (0.37) (0.37) (4.62) (4.62) 30 June 2018 previously reported $’000 Adjustment $’000 30 June 2018 restated $’000 10,541 4,632 38,607 19,052 19,555 (27,410) 19,437 118 19,555 (787) 236 (551) - (551) (551) (551) - 9,754 4,868 38,056 19,052 19,004 (27,961) 18,886 118 (551) 19,004 22. Events after the financial year There are no matters or events which have arisen since the end of the financial year which have significantly affected or may significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in subsequent financial years. Annual Report 2019 | Notes to the Consolidated Financial StatementsPAGE 76 Directors’ Declaration In accordance with a resolution of the Directors of Centrepoint Alliance Limited, I state that: 1. In the opinion of the Directors: (a) The consolidated financial statements and notes of Centrepoint Alliance Limited for the financial year ended 30 June 2019 are in accordance with the Corporations Act 2001, including: i) ii) giving a true and fair view of its financial position as at 30 June 2019 and of its performance for the year ended on that date; and complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (b) (c) The financial statements and notes also comply with International Financial Reporting Standards as disclosed in Note 2; and 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. This declaration has been made after receiving the declarations required to be made to the Directors by the Chief Executive Officer and Chief Financial Officer in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2019. On behalf of the Directors: A. D. Fisher Chairman 22 August 2019 Annual Report 2019 | Directors’ Declaration PAGE 77 Independent Auditor’s report to the Directors of Centrepoint Alliance Annual Report 2019 | Independent Auditor’s ReportIndependent Auditor’s report to the Directors of Centrepoint Alliance PAGE 78 Annual Report 2019 | Independent Auditor’s ReportPAGE 79 Independent Auditor’s report to the Directors of Centrepoint Alliance Annual Report 2019 | Independent Auditor’s ReportIndependent Auditor’s report to the Directors of Centrepoint Alliance PAGE 80 Annual Report 2019 | Independent Auditor’s ReportPAGE 81 Independent Auditor’s report to the Directors of Centrepoint Alliance Annual Report 2019 | Independent Auditor’s ReportIndependent Auditor’s report to the Directors of Centrepoint Alliance PAGE 82 Annual Report 2019 | Independent Auditor’s ReportPAGE 83 Independent Auditor’s report to the Directors of Centrepoint Alliance Annual Report 2019 | Independent Auditor’s ReportPAGE 84 ASX Additional Information Additional information required by the Australian Securities Exchange Limited and not shown elsewhere in this report is as follows. The information is current as at 11 September 2019. 1) Class of securities and voting rights a) Ordinary shares Ordinary shares of the Company are listed (quoted) on the ASX. There are 1,793 holders of ordinary shares, holding 148,882,969 fully paid ordinary shares. Holders of ordinary shares are entitled to one vote per share when a poll is called, otherwise each member present at a meeting or by proxy has one vote on a show of hands. b) Performance rights A performance right is a right that can be converted to an ordinary fully paid share in the Company for no monetary consideration subject to specific performance criteria being achieved. Details of performance rights are not quoted on the ASX and do not have any voting rights. 2) Distribution of shareholders and performance rights Size of holding No. of ordinary shareholders No. of performance right holders 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,000 and over 293 467 241 649 143 18 The number of shareholdings held in less than marketable parcels is 700. 3) Substantial shareholders The names of substantial holders in the Company who have notified the Company in accordance with section 671B of the Corporations Act 2001 are set out below: Ordinary Shareholders TIGA Trading Pty Ltd AD & MP Beard ATF Fully paid No. of Shares 48,591,871 11,003,890 Annual Report 2019 | ASX Additional InformationPAGE 85 4) Twenty largest holders of quoted equity securities Ordinary Shareholders Fully paid No. of Shares % Held UBS NOMINEES PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED MR ALEXANDER BEARD + MRS PASCALE MARIE BEARD 35,705,098 14,998,216 10,268,889 ONE MANAGED INVT FUNDS LTD 4,541,382 NATIONAL NOMINEES LIMITED SUPERTCO PTY LTD RICHARD JOHN NELSON + KAYE MARIE NELSON GRIFFIN FUND MANAGEMENT PTY LTD BNP PARIBAS NOMINEES PTY LTD WAYLEX PTY LTD FETTERPARK PTY LTD AGRB PTY LTD AVANTEOS INVESTMENTS LIMITED <2024279 LUBBO A/C> CATHAYS PTY LTD KORO KIDS PTY LTD MR DANIEL BARON DROGA + MRS LYNDELL DROGA MR JASON MAXWELL YU MILA INVESTMENT CO PTY LTD MRS CHRISTINE ANN MOSSMAN 3,440,630 3,000,000 2,729,660 1,891,231 1,655,153 1,418,051 1,217,603 1,198,434 1,092,000 1,089,500 1,069,946 1,000,000 950,000 900,000 829,600 816,857 20 MR PETER HOWELLS 89,812,250 60.32 23.98 10.07 6.90 3.05 2.31 2.02 1.83 1.27 1.11 0.95 0.82 0.80 0.73 0.73 0.72 0.67 0.64 0.60 0.56 0.55 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 Annual Report 2019 | ASX Additional InformationPAGE 86 Registered Address Centrepoint Alliance Limited Registered Address and Head Office: Level 9, 10 Bridge Street Sydney New South Wales 2000 Australia Telephone: (within Australia) 1300 557 598 (outside Australia) +61 2 8987 3000 Facsimile: +61 2 8987 3075 Website: www.centrepointalliance.com.au Annual General Meeting 11:00am (AEDT) Friday, 15 November 2019 Deloitte Touche Tohmatsu Grosvenor Place Level 9, 225 George Street Sydney, New South Wales 2000 Australia Corporate Directory Securities Exchange Listing Centrepoint Alliance Limited’s shares are listed on the Australian Securities Exchange (ASX) and are traded under the ASX code CAF Share Registry Computershare Investor Services Pty Limited Level 11, 172 St George’s Terrace Perth Western Australia 6000 Australia GPO Box 2975 Melbourne Victoria 3001 Australia Telephone: (within Australia) 1300 763 925 (outside Australia) +61 3 9415 4870 Facsimile: +61 3 9473 2500 Email: web.queries@computershare.com.au Website: www.computershare.com.au Auditor Deloitte Touche Tohmatsu Riverside Centre Level 23, 123 Eagle Street Brisbane Queensland 4000 Australia Annual Report 2019 | Corporate DirectoryPAGE 87 This page is left intentionally blank. Annual Report 2019 | Centrepoint AllianceCentrepoint Alliance Limited and its Controlled Entities ABN 72 052 507 507 1300 557 598 centrepointalliance.com.au