IOOF Holdings
Annual Report 2017

Plain-text annual report

annualreport2017 I O O F H o d n g s l i | A n n u a l R e p o r t 2 0 1 7 0 8 5 6 - A R C Turn your life goals into a reality ioof.com.au Contents About IOOF Our major brands Chairman and Managing Director’s commentary Our financial performance Directors Environmental, Social & Governance report IOOF Foundation Financial report 1 2 3 7 10 13 21 23 Share registry Boardroom Pty Limited Level 12, 225 George Street Sydney NSW 2000 Auditor KPMG Tower Two, Collins Square, 727 Collins Street Docklands VIC 3008 Solicitors King & Wood Mallesons Level 50, Bourke Place 600 Bourke Street Melbourne VIC 3000 Bankers Commonwealth Bank Limited Tower 1, 201 Sussex Street, Sydney NSW 2000 Securities exchange listing IOOF Holdings Ltd shares are listed on the Australian Securities Exchange (ASX: IFL) Website address www.ioof.com.au Corporate directory (as at 28 September 2017) Directors Mr George Venardos B.Com, FCA, FGIA, FAICD, FTIA Chairman Mr Christopher Kelaher B.Ec, LL.B, F Fin Managing Director Ms Elizabeth Flynn LL.B, Grad Dip AppCorpGov, FAICD, FGIA, FCIS, F Fin Ms Jane Harvey B.Com, MBA, FCA, FAICD Mr Allan Griffiths B.Bus, DipLi Mr John Selak Dip Acc, FCA, FAICD Company Secretary Mr A Paul M Vine LL.B, FGIA, GAICD Notice of Annual General Meeting The Annual General Meeting of IOOF Holdings Ltd will be held at: Verandah Room Grand Hyatt 123 Collins Street Melbourne, Victoria 3000 Time 9.30am Date 23 November 2017 A formal notice of meeting is available on our website and has been sent to shareholders Principal registered office in Australia Level 6, 161 Collins Street Melbourne, VIC 3000 (03) 8614 4400 CRA-6580 IOOF Annual Report 2017 - COVER SPREADS_V4.indd 2-4 6/10/17 11:39 am IOOF annual report 2017 About IOOF At IOOF, we have been helping Australians secure their financial independence for over 170 years, and have grown to become a leading provider of quality financial advice, products and services. Today, IOOF is one of the largest financial services group in Australia. We are an ASX top 100 company with $147.2 billion in funds under management, administration, advice and supervision, and we currently provide services to more than 500,000 customers around Australia.* Our broad range of products and services means that our ability to provide tailored solutions to help our clients achieve their financial goals is unparalleled. What does IOOF do? IOOF provides a range of wealth management solutions for Australians, including: Financial Advice and Distribution Services We believe in the value of financial advice. Whether provided through the organisations we partner with or our own extensive network of financial advisers and stockbrokers, our goal is to help clients build, maintain and protect their wealth. Platform Management and Administration We offer financial advisers, their clients and hundreds of employers around Australia leading superannuation and investment administration platforms. Our unique open architecture model means we not only offer our IOOF platforms but selective leading external platforms to ensure advisers and their clients can choose the product and service solutions that best suit their individual needs. Investment Management Through our investment management expertise, we offer a range of highly rated multi-manager solutions that add value on several fronts; those being our active management of underlying investment managers, our dynamic asset allocation and our robust risk management approach. We also offer a tax effective alternative to Super through our leading investment bond. Trustee Services Our trustee business includes compensation trusts, estate planning and administration, personal trustee services, philanthropy, self-managed super fund (SMSF) solutions and corporate trust services. * As at 30 June 2017 1 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 1 10/10/17 11:35 am IOOF annual report 2017 Our major brands Financial advice Platform management and administration Investment management Trustee IOOF Employer Super IOOF MultiMix IOOF PlatformConnect IOOF MultiSeries Corporate Trust Private Client Services Superannuation IOOF Alliances IOOF Pursuit IOOF WealthBuilder As at 28 September 2017 2 2 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 2 10/10/17 11:35 am IOOF annual report 2017 Chairman and Managing Director’s Commentary George Venardos Christopher Kelaher Meeting our commitments to clients, advisers and shareholders 2017 has delivered another year of consistent, strong financial performance. IOOF’s unique value proposition 2017 was hallmarked by solid financial results and positive momentum in each of our businesses. During the year, we achieved outstanding funds growth, exceptional cost control and our underlying business performance metrics are on an upward trajectory. Our strong balance sheet remains and will allow us to capitalise on future growth opportunities when they arise. Our advice-led wealth management strategy, multi-brand model and unique open architecture means that IOOF is an extremely attractive alternative for advisers looking to partner with a non- bank aligned dealer group. In addition, we have delivered on implementation of strategic initiatives – including ClientFirst and the IOOF Advice Academy – ensuring we are providing the level of service that often exceeds advisers’ and their clients’ expectations. 3 3 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 3 10/10/17 11:35 am IOOF annual report 2017 Meeting commitments delivers shareholder value Strong organic growth continues Underlying profit for the year was $169.4m. For our shareholders, this strong financial performance translated into a total dividend for the full year of 53cps, fully franked. This result is a testament to the continued hard work and dedication of all of our people, the Leadership Group and our fellow Board members. Thank you all for your ongoing commitment to delivering efficiencies and generating long-term, sustainable shareholder value. value. 2017 saw IOOF recording an 18th consecutive quarter of positive platform net inflows, with $1.2 billion of net inflows. This is an increase of 130% vs 2016 and demonstrates that our commitment to service excellence is resulting in significantly increased flows. Our adviser numbers continue to grow, which appears to be counter to industry trend. Advice net inflows of $3.0 billion, up 131% vs 2016, included $976 million from 33 new advisers joining IOOF from another licensee. Our advice-led strategy is leading to record levels of interest in our advice businesses. Our open architecture approach continues to set us apart from our peers. The choice that this affords is a major reason why advisers choose to partner with an IOOF advice group, as it is a tangible demonstration of offering solutions which best service the needs of our advisers and their clients. The value of financial advice At IOOF, we believe in the value of financial advice. With our Advice Academy, we are committed to improving the quality of financial advice for all Australians, in addition to improving the efficiency of its delivery. Recently, 14 of the top 50 advisers in Barron’s inaugural survey of Australian financial advisers were IOOF employed or aligned. This was the highest number achieved by any institution and showcases that our advisers are delivering high quality financial advice and superior outcomes for their clients. Focus on core capabilities During the year, we continued to undertake activities to simplify and streamline our business. In 2017, we divested a number of small non-core businesses which allows us to focus on our core wealth management capabilities. In addition, with the major platform consolidation finalised in June 2016, early completion of the MySuper transition, continual product enhancements and dedication to our ClientFirst approach, we are demonstrating our ongoing commitment to reducing complexity and duplication to best serve the interests of our advisers and their clients. 44 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 4 10/10/17 11:35 am IOOF annual report 2017 Outlook IOOF’s unique positioning in the industry sees us well placed to deliver positive long-term outcomes for our advisers, their clients and our shareholders. As the industry continues to consolidate, there is ample opportunity for acquisitive growth to augment our significant organic growth momentum. We have an exceptional track record of delivering value-accretive acquisitions and have the scale, experience and, importantly, financial strength, to take advantage of these opportunities. To our shareholders, the Board and management of IOOF thank you again for your support over this past year. We are excited by the prospects that our unique position in the wealth management industry present and look forward to continuing our track record of success. George Venardos Chairman Christopher Kelaher Managing Director Acquisition to bolster Trustee business strength Board and Management changes In June 2017, we announced the acquisition of National Australia Trustees Limited. Upon completion of the acquisition, IOOF will become the largest provider of compensation trusts in Australia. This acquisition demonstrates our commitment to building our Trustee business, enhancing our national presence and providing our clients with a range of financial solutions to meet their individual needs. Environmental, Social and Governance matters We are committed to ensuring Environmental, Social and Governance (ESG) practices are deeply embedded in our culture and we consider ESG as our responsibility to clients, shareholders and the communities in which we operate. Our IOOF Foundation has continued its work in assisting some of our most disadvantaged communities. The Foundation has now surpassed the $12.5m mark in total donations since its formal establishment in 2001. In 2017, we continued our journey to ensure we are appropriately monitoring and reporting our material ESG matters. Our ESG Report provides further details on our approach to material ESG matters, how these are linked to strategic initiatives and our assessment of their impact. We remain committed to the sector with our significant shareholding in Australian Ethical, Australia’s largest dedicated ESG investment manager. We encourage you to read the further detail on our ESG matters and the IOOF Foundation in our ESG report on page 13. This year we welcomed three new non-executive Directors; John Selak, who joined the IOOF Holdings Limited Board, and Dawn Oldham and Martin Walsh, who joined our APRA Regulated Entity Boards. John, Dawn and Martin bring valuable experiences, skills and perspectives which bolster the existing strength of our Boards of Directors. We recognise the importance that individual skills and experiences can bring to ensuring diversity of thinking at Board level and at all staff levels around the Group. The skills of our Directors are outlined in our Board Skills Matrix which can be found at www.ioof.com.au/about- us/about-ioof/corporate-governance At Management level, 2017 saw us welcome Sharam Hekmat to the role of Chief Information Officer. Sharam is also a member of the IOOF Leadership Group. Sharam joined IOOF at a time of significant growth in IOOF’s technology capabilities following recent simplification and enhancements to its platform offerings and client experience. In addition, Dan Farmer was appointed to the role of Chief Investment Officer. Dan’s appointment followed the retirement of longstanding CIO, Steve Merlicek. Steve built a strong and capable investment team, testament to which is the elevation of Dan to the Chief Investment Officer role. Dan has been with IOOF for seven years and during this time has played an integral part in the award winning team’s delivery of quality multi-manager investment solutions and strong performance. Steve will be remaining on IOOF’s Investment Management Committee. CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 5 10/10/17 11:35 am 5 IOOF annual report 2017 We are excited by the prospects that our unique position in the wealth management industry present and look forward to continuing our track record of success. 6 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 6 10/10/17 11:35 am IOOF annual report 2017 Our financial performance divisional updates Funds by segment ■ Funds Under Supervision ■ Investment Management ■ Platform Management and Administration ■ Financial Advice and Distribution $134.3b $131.1b $29.6b $27.0b $20.0b $19.6b $34.9b $34.5b $147.2b $32.2b $20.6b $37.2b $49.9b $50.0b $57.2b $103.1b $26.0b $12.6b $31.9b $32.6b June 2014 June 2015 June 2016 June 2017 Financial Advice & Distribution % contribution to Group UNPAT Key activities $’m Revenue UNPAT Closing FUA ($’b) About the division 45% 2016/2017 2015/2016 • Advice-led strategy delivers growth in adviser numbers – 50 advisers committed to join IOOF licenses, counter to industry trend. • IOOF achieved the top ranking for the number of advisers in Barron’s inaugural survey of Australian financial advisers. Among the list of ‘Australia’s Top 50 Financial Advisers’, 14 out of 50 advisers and 4 out of the top 15, were IOOF aligned advisers. • Business simplification activities undertaken to divest non-core businesses. This allows us to focus on our core Wealth Management capabilities. 354.9 76.4 57.2 354.5 78.4 50.0 • Continued focus on quality of advice via our IOOF Advice Academy - a training and coaching resource for the financial planning industry helping advisers build high quality businesses that in turn helps clients to achieve their financial and lifestyle goals. Our IOOF Advice division supports over 1,000 financial advisers and stockbrokers that provide financial advice services to over 500,000 clients across both retail and institutional sectors. Advice covers wealth accumulation, retirement planning and investment strategies and is provided by our well-known brands Shadforth Financial Group, Bridges Financial Services, Consultum Financial Advisers, Lonsdale Financial Group and Ord Minnett. • Ongoing commitment to open architecture through PlatformConnect, providing IOOF with an attractive differentiator by offering real choice. Two key initiatives implemented during the year included: – launch of the Symetry Active platform, including a managed account service to the Bridges Financial Services group; and – launch of a superannuation version of Asset Administrator platform. 7 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 7 10/10/17 11:35 am IOOF annual report 2017 Platform Management & Administration Investment Management % contribution to Group UNPAT % contribution to Group UNPAT 46% 19% $’m Revenue UNPAT Closing FuAd ($’b) 2016/2017 2015/2016 $’m 2016/2017 2015/2016 393.8 77.3 37.2 399.9 Revenue 79.0 34.5 UNPAT Closing FuM ($’b) 84.1 32.7 20.6 101.2 31.4 19.6 About the division About the division Our platforms allow clients, employers and advisers to manage a wide range of superannuation and investment options, including managed and listed investments. Our flagship platforms are IOOF Pursuit and IOOF Employer Super. Key activities • Launch of a brand new adviser website for IOOF Employer Super featuring a powerful search facility, enhanced reporting and transaction capabilities as well as the ability for advisers to grant access to their support staff. The launch of this website consolidated five adviser portals into one convenient location. • Upgrade of the member website for IOOF Employer Super including simplified trading for both managed and listed investments, functionality for members to update their investment strategy, personalised performance information, and the visual representation of their account balance over time. • A new reweight portal was released for IOOF Pursuit which allows advisers to rebalance their client’s portfolio in percentages and automatic reweights gave advisers the ability to nominate an investment strategy which is reviewed and rebalanced at the chosen frequency. • Other IOOF Pursuit enhancements included the addition of an online pension application form and reporting for regulatory change such as capital gains/losses for pensions, rate of return for closed accounts, client deposit reporting, and fee reporting. • Consolidation of the Kingston Superannuation Trust into IOOF Pursuit Select completed in March 2017. This is another tangible example of our commitment to reducing complexity and duplication to deliver better outcomes for our clients. • Successful transfer of Accrued Default Amounts (ADA) from an external non-MySuper authorised superannuation fund to IOOF MySuper within IOOF Employer Super. 8 Our investment management business offers multi-manager products that are easy to understand with well-rounded investment options across a range of asset classes. In addition, the Wealthbuilder investment bond products and the equity accounted contribution from our 42% stake in Perennial Value Management are reported in this segment. Key activities • Dan Farmer appointed Chief Investment Officer following the retirement of Stephen Merlicek – (effective 3 July 2017). Stephen Merlicek to remain on IOOF Investment Committee. • Stanley Yeo appointed Deputy Chief Investment Officer (May 2017). • Successful launch of the low-cost multi-manager range of funds, IOOF MultiSeries in October 2016 to complement the award winning fully active IOOF MultiMix range of funds. • Following the upgrade of IOOF MultiMix International Shares Trust and IOOF MultiMix Australian Equities Trust to ‘Recommended’, the full suite of IOOF multi-manager funds are now rated as ‘Recommended’ by Lonsec. The IOOF MultiSeries range on its debut was given this ‘Recommended’ rating – a fantastic achievement for a new range of funds. • Launch of an online client engagement tool for advisers called Investment Central, allowing more transparency and enhancing the conversation on the multi-manager investment solution. • IOOF WealthBuilder celebrated 35 years of the bond in 2016 and continues to grow in popularity for when super is not an option. CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 8 10/10/17 11:35 am IOOF annual report 2017 We believe that success comes from caring about people and providing quality financial advice, product and service solutions. Trustee Services % contribution to Group UNPAT 4% $’m Revenue UNPAT Closing FuS ($’b) About the division 2016/2017 2015/2016 30.8 6.7 32.2 29.6 6.0 27.0 Our Trustee Services business includes estate planning, estate administration, compensation trust services, fiduciary services, philanthropic services and corporate trust services, operating under the brand Australian Executor Trustees (AET). AET is also a specialist provider of self-managed super fund (SMSF) solutions including the AET Small APRA Fund. Acquisition of National Australia Trustees In June 2017, IOOF announced the acquisition of National Australia Trustees (NATL). • On completion of the purchase, IOOF will: – become Australia’s largest provider of compensation trust services for personal injury clients. – increase its distribution network on the East Coast of Australia. – expand its Wills bank. – deepen its capability towards becoming Australia’s preferred Trustee. Key activities • Significant growth from the compensation trust and Native Title Trust businesses – particularly in the Western Australian market. • Successful partnerships with industry bodies including the Australian Lawyers Alliance (ALA) and the SMSF Association. • Stronger alignment between the AET and IOOF Distribution and Operations teams to provide specialist estate and trustee solutions to advisers and their clients. • Importantly, AET continues to be a highly complementary business to IOOF. AET’s advice partners direct funds under supervision for compensation trusts, Native Title trusts, philanthropic trusts to IOOF platforms. • Development of a national estate planning offering. CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 9 10/10/17 11:35 am 9 IOOF annual report 2017 Directors Mr George Venardos B.Com, FCA, FGIA, FAICD, FCIS Chairman – Independent Non-Executive Director Independent Non-Executive Director since 2009 Mr Venardos is an experienced director with broad listed company experience across a range of different industries including financial services, affordable leisure, oil and gas services and technology development. Mr Venardos has over 30 years’ experience in executive roles in financial services, insurance and funds management. For a period of 10 years, Mr Venardos was the Chief Financial Officer of Insurance Australia Group and Chairman of the Insurance Council of Australia’s Finance and Accounting Committee. Mr Venardos was a director of Miclyn Express Offshore Ltd from 2010 to 2013, Bluglass Ltd from 2008 to 2016 and Ardent Leisure Group from 2009 to 2017. Significant non-listed directorships • Chairman of Guild Group • Cuscal Ltd • Lawcover Pty Ltd Special responsibilities • Chairman of IOOF since November 2016 • Chairman of the Nominations Committee • Member of the Group Audit Committee • Member of the Remuneration Committee 10 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 10 10/10/17 11:35 am IOOF annual report 2017 Mr Christopher Kelaher B.Ec, LL.B, F Fin. Managing Director Managing Director since 2009 Mr Kelaher is the Managing Director of IOOF Holdings Ltd. He was appointed in 2009, after IOOF’s merger with Australian Wealth Management Limited (AWM), a company he had led since 2006. Prior to AWM, Mr Kelaher was the CEO of Select Managed Funds Limited for nine years, a private company which was brought to market in 2005 and in turn ultimately merged with AWM in 2006. In the following periods, he has been instrumental in executing multiple mergers and acquisitions that have added materially to the IOOF Group and its antecedent businesses. Mr Kelaher has extensive capital markets experience from his time during the late 1980s with Citicorp where he oversaw the establishment of Citicorp Investment Management and Global Asset Management businesses in Australia and New Zealand. He holds a Bachelor of Economics and a Bachelor of Laws from Monash University and is a Fellow of the Financial Services Institute of Australia. Ms Elizabeth Flynn LL.B, Grad Dip AppCorpGov, FAICD, FFin, FGIA, FCIS. Independent Non-Executive Director Independent Non-Executive Director since 2015 Ms Flynn has more than 30 years’ experience in the financial services industry, including roles within law and corporate governance as well as executive responsibilities. From 1998 to 2010, Ms Flynn was the Chief Legal Counsel, Group Compliance Manager and Group Company Secretary of financial services group Aviva Australia, and a director of NULIS Nominees, Aviva Australian’s superannuation trustee company. Prior to her time at Aviva, Ms Flynn spent 18 years as a commercial lawyer with Minter Ellison, including eight years as a partner, specialising in managed funds, banking and securitisation and superannuation. Ms Flynn was a director of Bennelong Funds Management from 2010 to 2015. Significant non-listed directorships • AIA Australia Limited • Victorian Government’s Emergency Services Superannuation Board Special responsibilities Special responsibilities • Managing Director of the IOOF Group since 2009 • Chair of the Risk and Compliance Committee • Member of the Nominations Committee • Member of the APRA Regulated Entities Audit Committee • Member of the Remuneration Committee 11 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 11 10/10/17 11:35 am IOOF annual report 2017 Directors Ms Jane Harvey B.Com, MBA, FCA, FAICD Mr Allan Griffiths B.Bus, DipLi Mr John Selak Dip Acc, FCA, FAICD Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director since 2005 Independent Non-Executive Director since 2014 Independent Non-Executive Director since 2016 Ms Harvey has more than 30 years’ experience in the financial and advisory services industry. Prior positions include as a Partner at PricewaterhouseCoopers, a Director of David Jones Limited from 2012 to 2014, a Director of UGL Limited from 2015 to 2017, and as a Director of DUET Finance Limited, a stapled entity within the ASX Listed DUET Group from 2013 to 2017. More than 30 years’ experience with a deep understanding of the financial services industry. Mr Griffiths has held a number of executive positions within the industry most notably as Chief Executive Officer Aviva Australia and later Managing Director South Asia, Aviva Asia Pte Ltd based in Singapore. Prior to joining Aviva he held executive positions with Colonial Ltd and Commonwealth Bank of Australia. Significant non-listed directorships Significant non-listed directorships • Bupa Health Services Pty Ltd • Chairman of the Westpac/ Mr Selak has over 40 years’ experience in the financial and advisory services industry. From 2000 to 2016 he was a partner in the Corporate Finance Practice of Ernst & Young, providing valuation services to a broad range of local and international clients and also serving on their Global Corporate Finance Executive. Significant non-listed directorships • Chairman of Corsair Capital • National Tiles • Advisory board member of Turi Foods BT Insurance Boards • Chairman of Metrics Credit Partners Special responsibilities • CARE Australia Special responsibilities • Chairman of the APRA Regulated Entities Audit Committee • Member of the Risk and Compliance • Chairman of the Remuneration Committee Committee • Member of the Group Audit • Member of the Group Audit Committee Committee • Opera Victoria Ltd • Colonial Foundation Ltd Special responsibilities • Chair of the Group Audit Committee • Member of the APRA Regulated Entities Audit Committee • Member of the Nominations Committee 12 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 12 10/10/17 11:35 am IOOF annual report 2017 Environmental Social and Governance report Our ethics, values and culture are key factors to our continued success. Environmental, Social & Governance (ESG) practices are about managing risks and opportunities in a way that balances the long term needs of stakeholders, including customers, employees, shareholders, suppliers, the community and the environment. Material exposure to Environmental and Social Sustainability Risks There are a number of material ESG matters that impact the IOOF Group, the achievement of our strategic aims and the communities in which we operate. In determining our material ESG matters, the Board considers our business model, the industry in which we operate, current areas of focus of our regulators, media and public commentary and the interests of our stakeholders, including industry bodies, investors and analysts. Material ESG matters and their link to our strategic initiatives are outlined below. Governance Stakeholder Material ESG matter Strategic initiative • Corporate Governance • Establishing trusted relationships with advisers • Responsible investment • Tax transparency • Climate change and the environment • ClientFirst • Open Architecture • Advice Academy • Business simplification Our business e r u t l u C Our clients & community • Acting in the best interests of our clients • Advocating for quality financial advice for all Australians • ClientFirst • Advice Academy • Diversity and inclusion • Corporate culture and attracting and retaining talent • Engagement Our people The IOOF corporate brand and our reputation as a leading provider of quality financial services could be damaged by failing to identify, monitor and report our material ESG matters. 13 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 13 10/10/17 11:35 am IOOF annual report 2017 Our business At IOOF, we believe in the value of financial advice. In today’s complex and ever-changing financial world, it has never been more important for people to seek qualified and experienced guidance to secure their financial future. One of our major goals is to make it easier for all Australians to access and benefit from receiving the right advice for their individual needs and objectives. ESG practices are deeply embedded in our day to day operations and to the creation of long-term financial outcomes for our advisers, clients and shareholders. Corporate Governance Robust corporate governance policies, practices and procedures are a fundamental part of our culture and lay the foundations that underpin everything we do. IOOF has adopted Listing Rule 4.10.3 which allows companies to publish their corporate governance statement on their website rather than in their annual report. The Directors of IOOF have reviewed and approved the statement, which is available at: www.ioof.com.au/about-us/about-ioof/ corporate-governance Establishing trusted relationships with advisers At IOOF, we recognise the true value of advice and, because of this, we have trusted relationships with over 1,000 financial advisers. The true value of advice IOOF undertook a survey of 521 advised and non-advised clients and discovered that those who receive ongoing financial planning advice experience1: • 13% greater levels of overall personal happiness. • 21% overall increase in peace of mind. • 19% less likelihood to have arguments with loved ones. Meanwhile those who don’t receive financial advice were: • 22% more likely to have their sleep disrupted due to money concerns. • 15% more likely to feel stress and anxiety. • 11% more likely to feel concerned about their finances. 14 In addition, 83% of clients surveyed endorsed the value of financial advice by saying it’s also important for their loved ones to have good financial advice. A financial adviser provides the peace of mind of a well thought out plan which ensures better preparation for the future. Also, advice extends beyond measurable financial gains, to improved physical health, stronger relationships and personal happiness. Due to our advice-led wealth management strategy, we are seeing record levels of interest in our advice businesses. In 2017, this has resulted in 33 new advisers joining IOOF since 31 December 2016 from another large financial institution, with further growth in adviser numbers targeted. New advisers can join one of IOOF’s Advice Groups subject to meeting minimum adviser education standards and undergoing rigorous compliance and onboarding processes, to ensure that the quality of financial advice IOOF is offering our clients is uncompromised. In addition to our advice-led strategy, IOOF offers open architecture. This means that our advisers have the choice to use our platform, or those of competitors. Choice of products and services presents a fundamental difference from our peers in the industry. This is a major reason for advisers to choose to partner with an IOOF advice group and a tangible demonstration of offering solutions which best service our advisers and their clients’ individual needs. Our IOOF Advice Academy ensures we are at the forefront of advocacy for improving the quality of financial advice. Further information on our Advice Academy can be found in the ‘Our clients & community’ section of this report. Responsible investment Our multi-manager investment management offering ensures ESG factors are considered by underlying investment managers in their investment decision-making processes in order to protect and manage investments for the long term.  In 2017 an ESG clause was added to all of our Investment Management Agreements with external fund managers. These managers must now identify and manage risks associated with ESG as part of their investment process. In addition, IOOF has a 20% shareholding in Australian Ethical (ASX: AEF). This represents a long-standing commitment to responsible investing with our initial investment dating back to 2005. Tax Transparency The IOOF Group is committed to tax transparency and integrity. IOOF is a signatory to the Board of Taxation’s Voluntary Tax Transparency Code (the Code), which was released on 3 May 2016. The Code is a set of principles and ‘minimum standards’ to guide disclosure of tax information by businesses, encourage those businesses to avoid aggressive tax planning, and to help educate the public about their compliance with Australia’s tax laws. Tax strategy and governance Tax governance is part of the IOOF Group’s overall risk management framework, as well as being part of an overall tax strategy. The overall tax strategy drives the IOOF Group’s approach to tax risk management and is aimed at good corporate tax compliance and reporting, the ability to meet and be prepared for regulatory changes, and in ensuring shareholder value. The IOOF Group regards its relationship with the ATO as effective and open, thereby maintaining transparency and collaboration. 1 IOOF: The true value of advice (2015) CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 14 10/10/17 11:35 am IOOF annual report 2017 We will seek to measure, report and incrementally improve our emissions year on year, once the move to our new premises has completed in our major locations. Other environmental activities We also continue to seek better ways to minimise our environmental impact, including: • Working with contractors, landlords and service providers to increase waste recycling. Outside of our major office movements, we continue to work with our landlords in all locations to ensure we are limiting our waste emissions and will look to report on total overall improvements as part of our annual ESG reporting process. • Reducing non-essential air travel. During 2017, we upgraded our internal communications system to better facilitate video conferencing in all of our office locations. In July 2017, we changed our corporate air travel arrangements to a single provider for all domestic and international travel. • Encouraging employee work practices that reduce environmental impacts. To encourage a move to a paperless environment, during 2017 we implemented ‘Follow Me’ printing to reduce unnecessary printing of documents and paper wastage. Tax contribution analysis The IOOF Group contributed a total of $131.5m in taxes to Australian, New Zealand and Hong Kong governments (state and federal) in the 2017 tax year. $131.0m or 99.6% of this amount was attributable to the Australian Government. The below tables provide an analysis of the types of taxes the IOOF Group is liable for and those payable in Australia versus those in foreign jurisdictions. Further detail on tax paid by the IOOF Group can be found in note 2-6 to the financial statements within this Annual Report. 2017 tax contribution by type (total $131.5m) Income Tax GST Payroll Tax Fringe Benefits Tax Other $70.4m $45m $12.2m $1.3m $2.6m 2017 tax contribution by country (total $131.5m) Australia New Zealand Hong Kong $131m $0.495m $0.005m Climate change and the environment Climate change presents significant challenges for society and generates both risks and opportunities for IOOF’s business and stakeholders. As a diversified financial services company, we seek to minimise our impact on the environment through a range of waste, energy and emission- reduction activities. Environmental impact During 2017 we commenced a significant project to consolidate our property footprint, which will better enable us to monitor and manage our environmental impact. In Melbourne, our current corporate headquarters is undergoing significant refurbishment. We expanded our existing floorplan to enable all Melbourne based staff to work in one energy efficient office building from the end of September 2017. Once stage 1 building works are complete, a 4 Star NABERS Energy Rating is targeted, with the intention to target a 4.5 Star NABERS rating once all stage 2 building works are complete. A designated waste area with a co-mingled recycling capability is also planned for the completed building to ensure we are managing our waste outputs in an environmentally sustainable way. In Sydney, we are moving all of our people to 30 The Bond by the end of December 2017; a 5.5 Star NABERS rated building. Environmental sustainability and enablement of our people were significant factors in choosing this building. Combining heritage preservation and modern day environmentally sustainable design, the building offers some of the largest floor plates in Sydney which provides for optimum workspace efficiency, integration and staff interaction. It has a 3.5 Star NABERS water rating and a 5 Green Star rating, meaning it is currently one of the most environmentally sustainable buildings in Sydney. CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 15 10/10/17 11:35 am 15 IOOF annual report 2017 Our clients and community Over 170 years ago, IOOF was established with a commitment to helping people and positively contributing to the communities we serve. This commitment remains unchanged. Advocating for quality financial advice for all Australians Our unique advice-led wealth management strategy is differentiating us from our peers and is focused on delivering quality financial advice to all Australians. As one of Australia’s leading financial services businesses, we are pleased to be investing in the continued improvement in the quality of advice for the benefit of all Australians. In July 2016, we launched the IOOF Advice Academy, which aims to be the pre-eminent training and coaching resource for the financial planning industry. Our vision for the IOOF Advice Academy is to create an environment where ongoing financial planning relationships deliver continued mutual value and enable our clients to live their ideal lives and be free of financial concern. The 2017 target for participation in the IOOF Advice Academy was 10% of our adviser base. For the 2017/18 year, the IOOF Advice Academy is fully subscribed, with 100 advisers scheduled to commence various modules of the Academy. Objectives and outcomes based advice framework Integrated advice philosophies Developing industry talent our Advice Academy Enabling advice businesses and their clients to achieve their ultimate measure of success Coaching focused on client progression Practice support and team member training Tools, templates and education In addition to our investment in the quality of financial advice via the IOOF Advice Academy, 14 of the top 50 advisers in Barron’s inaugural survey of Australian financial advisers were IOOF employed or aligned. This was the highest number achieved by any institution. This result showcases that our advisers are delivering high quality financial advice and superior outcomes for their clients. 16 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 16 10/10/17 11:35 am IOOF annual report 2017 Acting in the best interests of our clients Supported by robust corporate governance foundations, IOOF is committed to our ClientFirst strategy. In an environment where product has become a commodity, and technology can be easily replicated, client experience is fast becoming a sustainable competitive advantage. ClientFirst is much more than changing a process or a technology system. It’s about completely changing the way we work. It requires us to systematically understand client demand types, variation and the roles all people through the organisation play in delivering demand. ClientFirst is about revealing unmet client needs, reframing client problems, and helping us to rethink the entire client experience. Deep alignment on culture and new operating model around our clients Trusted by clients and partners as a leader in advice and financial services. T U I O N ADVICE Vision and Leadership Our people Are embracing our ClientFirst strategy. It is driving empowerment and enablement. New methods and measures emerging. Leadership development Investing in our leaders to help them better support our people. Our leaders meet quarterly to discuss progress. T & DIS T R I B Celebrate success C U D O R P System capability G O Operating rhythm M E A S U P U RPOSE Cl ients V E Knowledge and documentation We have documented processes from a client perspective. This is revealing significant opportunity to innovate and redesign the way our clients interact with us. N R A N C E R ES Visual Management M E T S E R Knowledge and documentation VICES F I N A N C Improvement E T EC Coaching and capability O P E R A T I O N S Data driven decision making S D O H Planning Y G O L O N H Date driven decision making Capturing new data that reveals ‘what really matters’ to clients. Building new capability to utilise the data to deliver more value for clients. Improvement Empowering our people and leaders to solve client problems in ‘the moment’. New support tools and techniques to identify and address the root cause of client issues. Giving back to our communities IOOF Foundation Reconciliation Action Plan Since its formal establishment in 2001, the IOOF Foundation has donated more than $12.5 million to community groups across Australia. Our IOOF Foundation develops strong partnerships with non-profit organisations that are bringing opportunities to those less fortunate and are helping communities to grow and thrive. We have continued our financial support for programs that support the aged, disadvantaged families, children and young people. In 2017, we also maintained our focus on programs that improve financial literacy to support young people in making confident and informed choices about their money. Further information on the programs that have been supported by the IOOF Foundation, can be found on page 21 of this report. We believe that all Australians can contribute to the reconciliation of the nation. With this in mind, two of our businesses, AET and Shadforth Financial Group (SFG) are coming together to develop a joint Reconciliation Action Plan (RAP). The purpose of the RAP is to promote and facilitate reconciliation by building relationships, respect and trust between the wider Australian community and Aboriginal and Torres Strait Islander peoples. The AET / SFG Reconciliation Action Plan will articulate clearly how AET and SFG will play their part in achieving this goal. AET and SFG have committed to completing their Reconciliation Action Plan by the end of 2017. 17 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 17 10/10/17 11:35 am IOOF annual report 2017 Our people Our people are our most important asset. Our success depends on them. Corporate culture & attracting and retaining talent We are committed to attracting and retaining the best talent. We recognise the value of diversity and embrace an inclusive culture where people from diverse backgrounds, with different skills, knowledge and experiences can develop their unique talents. Our culture is underpinned by four core values; • Commitment – We do what we say we will do. We persevere in the face of challenges. • Excellence – We search for ways to improve. We strive to exceed expectations. • Empathy – We listen, we feel and we care. We treat each Employee engagement and alignment In August 2016, we undertook a comprehensive survey of our people in order to identify opportunities to further improve employee engagement and alignment. Employee engagement and alignment is a critical requirement for achieving sustainable high performance. The survey was completed by 73% of our people across the entire IOOF Group. Using the results of this survey, we implemented initiatives to develop and foster improved employee engagement which will lead to increased job satisfaction for our people. During 2017, some of the group-wide initiatives have introduced are: other with respect. • Our renewed Purpose Statement. • Trust – We act honestly, openly and reliably. We nurture • Leadership Group Webinars showcasing strategic areas positive working relationships. Development of our people of focus. • Inspire (Staff Newsletter). Equipping our people with the right tools, knowledge and development opportunities is an investment we make for our future success. IOOF has a number of initiatives to support all of our people, including career development and planning, extensive tailored learning and development opportunities and commitment to financial study support. These programs not only provide scope to extend individual skills, but remain critical to succeed in a complex and competitive industry landscape. All employees are encouraged to set personal development plans with their managers and to undertake training which is appropriate for their role and future career aspirations. We have been holding innovation events to harness the creativity and abilities of our people. These innovation days invite our people to form multi-disciplinary teams and generate innovative ideas for new services and products. The best ideas have moved into an incubation stage with funding for further development. • Refreshed IOOF values and behaviours. • New platform for IOOF Performance Management. • Leadership programs. To ensure we were on the right track in key areas, in early 2017, we undertook a ‘pulse survey’ with a focus on five key areas; Alignment, Engagement, Long Term Direction, Team Leadership and Investment in People. The 2017 Pulse Survey results show that we have made improvements in all of these key areas. We look forward to continually improving to ensure we are building a workplace which attracts and retains the best talent. Commitment to balance and encouraging community participation We offer a range of programs and services to employees to help achieve an appropriate balance between work and family. As well as offering flexible work arrangements, we provide our employees with a range of additional benefits 18 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 18 10/10/17 11:35 am IOOF annual report 2017 Salary packaging Volunteering and giving For the last decade, we have supported employees who are interested in volunteering through the use of paid volunteer leave. This equates to more than 16,000 hours of volunteer time available for our people. Activities ranged from cooking at homeless shelters, supporting Christmas giving programs, looking after neglected/ maltreated animals, to supporting local school programs and providing gardening support. Organisations assisted include Hobart City Mission, RSCPA, Wesley Mission, Salvation Army and Easy Gardens. Our people actively support a number of key community initiatives in our offices throughout the year. In 2017, some of the initiatives we supported include the Cancer Council’s Biggest Morning Tea, Fight Cancer Foundations ‘Footy Colours Day’, RSPCA ‘Cupcake Day’, Legacy Appeal, R U OK day and Earth Hour. Our Workplace Giving program encourages all of our people to make a tax-effective donation that IOOF matches dollar for dollar. This is a simple and effective way for our people to make small regular donations. We have committed to invest further in this program, moving to a new online platform and expanding the number of organisations we will support. We have listened to our employees and understand that it is important to give them a choice in where they give their time and money, which encourages greater participation. IOOF offers employees a range of salary sacrifice options: • Additional superannuation contributions. • Motor vehicle novated leasing. • Car parking, where available. • Workplace charitable giving program. Work flexibility To enable our people to make arrangements about their working conditions to suit their personal circumstances, IOOF provides a range of flexible working arrangements: • Opportunity to purchase additional annual leave. • Eight weeks paid parental leave. • Job share. • Community Day. Leisure and Lifestyle Benefits We believe in promoting a healthy work/life balance and, to assist with this, IOOF offers: • Confidential Employee Assistance program (EAP). • Wellbeing program including Nutrition checks, Health Heart check and Flu vaccinations. • IOOF’s iBenefits program – exclusive access to discounted gift cards, e-gift cards and discounts at large retailers and leisure outlets. • Gymnasium discounts. • Service awards. • Recruitment referral bonuses. • Study leave and CPD support. • One Professional membership paid annually. • Preferred health insurance rates with select insurers. • Discounted public transport tickets (Victoria). • IOOF Pursuit Select staff rates. CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 19 10/10/17 11:35 am 19 IOOF annual report 2017 Diversity and inclusion People with different skills and experience and from different backgrounds bring fresh ideas and perspectives. IOOF acknowledges diversity as critical to enabling innovation and broader thinking and, ultimately, to the group’s greater success. IOOF has a Diversity and Inclusion Plan 2017/2018 that sets out the diversity initiatives for the IOOF Group. In this context, diversity and inclusion covers gender, age, ethnicity, race, sexual orientation, physical abilities, religious beliefs and other beliefs. It also extends to differences surrounding socio economic or educational background, marital status, mental health, family responsibilities and addressing matters of domestic violence. We recognise that building a diverse, inclusive workforce increases the possibility to recruit, retain and develop the best talent whilst forging a stronger understanding and connection with our clients and broader communities. As part of our employee engagement survey completed in August 2016, 31% of our people identified as being from a culturally or linguistically diverse background. In order to create a focus on encouraging a gender balanced workplace, IOOF has supported a number of initial research programs to address any gaps that may be evident. A pay equity audit has been conducted annually since 2011 amongst all levels of IOOF staff to determine whether a gender pay gap existed within the IOOF Group in order to identify any trends. Our People and Culture Committee will continue to address matters of equal pay and continue to support the programs to further increase the number of women in senior management positions. In 2017, 49% of appointments to Manager roles were women. Other initiatives include: • leadership fundamentals education series and mentoring programs; • awareness/education on work life balance and flexibility; • a section dedicated to wellbeing on employee intranet portal; • networking functions; and IOOF targets being a diversity leader in the financial sector by; • opportunities for small groups to attend industry networking and skills specific conferences and workshops to enhance their education and potential to encourage networking with industry and business peers. The Board approved Diversity and Inclusion Plan for 2017-2018 is available on our website. • providing a diverse, inclusive workplace in which everyone has the opportunity to participate and be valued for their distinctive skills, experiences and perspectives; • incorporating diversity into business practices through its corporate social responsibility initiatives that aim to improve quality of life for our workforce, their families, communities and society at large; and • ensuring diversity extends and is embraced across all aspects of the Group, including recruitment and appointment to roles, talent development, Board appointments, retention, mentoring and coaching programs, flexible work arrangements, succession planning, training and development and across all of the relevant Group policies and procedures. The table below sets out the number of women at board, senior management and all staff levels: Group September 2016 September 2017 Women on the IOOF Holdings Limited Board Women in senior management Women at all staff levels 33% 31% 50% 33% 29% 49% 20 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 20 10/10/17 11:35 am IOOF annual report 2017 During 2017, the IOOF Foundation passed the $12.5 million mark in grants it has awarded since its formation in 2001. This year, the Foundation has continued to support charitable organisations working to benefit the community on a range of initiatives. The IOOF Foundation is provided with ongoing support from the IOOF group, covering the expenses and resourcing of our Foundation. With the support of IOOF our Foundation aspires to create opportunities for the aged, disadvantaged families, youth and children by investing in initiatives that reduce the obstacles to improved quality of life and help others achieve their potential and meaningfully participate in the community. The grants that are approved are innovative, yet sustainable, and are those that will provide value to the community. This helps ensure that grants provided make a real impact on the community and achieve a meaningful result. Youth Focus WA Youth Focus WA Youth Focus do an incredible job with young people in Western Australia, providing counselling and other support services to prevent depression and youth suicide. We were pleased to provide $45,000 to support their counselling service and support their annual fundraising event – the Hawaiian Ride for Youth. Some 11,000km from Honolulu, this charity rides actually travels 700km through the wheat belt of Western Australia over five days in March. The 2017 Hawaiian Ride for Youth was a record breaking success with more the $2.5 million raised. Juvenile Diabetes Research Foundation The effects of Type 1 Diabetes are life changing. For many people who face this diagnosis it can be a frightening and overwhelming time. The IOOF Foundation was pleased to provide a $30,000 grant to the JDRF peer support program. This program allows sufferers to reach out to the diabetes community for practical advice and support. 2017 Community Partners • Spinal Research Institute • Red Dust • The Smith Family • Maggie Beer Foundation • Righteous Pups • Kids Under Cover • Ardoch Youth Foundation • Parkinsons Australia • Youth Focus WA • Juvenile Diabetes Research Foundation • Ronald McDonald House Westmead CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 21 10/10/17 11:35 am 21 IOOF annual report 2017 Alzheimer’s Australia Ardoch Youth Foundation Maggie Beer Foundation We are proud to support the good work of Edie (pronounced Eddie). You won’t ever meet him, however. Edie’s just an app, after all. Edie is the ‘Educational Dementia Immersive Experience’ – an innovative way to increase empathy and awareness of the devastating effects of dementia by letting anybody view the world through the eyes of a person suffering from this condition. The 360-degree virtual reality experience was developed with the help of $160,000 funding from the IOOF Foundation. This initiative lets Alzheimer’s Australia use technology to improve care for dementia patients, in Australia and around the world. With financial support from the IOOF Foundation, the Shadforth team in Melbourne worked with the Ardoch Youth Foundation to support schools in disadvantaged communities. The Shadforth volunteers have been instrumental in helping build students’ literacy and social skills through the Literacy Buddies® program. Both the teachers and students alike have been very inspired by the Big Buddies’ creative letter writing skills. The program will expand to Queensland, Western Australia and New South Wales in late 2017 with the help of the IOOF Foundation. ‘Stop using the F word’ is the catch-cry Australian chef Maggie Beer uses to grab attention for her Foundation’s new workshop ‘Creating an Appetite for Life’. The ‘F’, in this case, refers to facilities for aged care. Ms Beer believes that aged care homes should feel like home and a significant part of that comes down to cooking healthy, flavoursome meals that don’t have to break the bank. ‘If we can give aged care residents the smells of home cooked food, that feeling they are a person and still living, not just existing, that’s the thing we most want to do,’ Maggie said. As an official community partner of the Maggie Beer Foundation, the IOOF Foundation offers scholarships for not-for- profits to attend her Creating an Appetite for Life workshops. We have committed to expand our partnership to further support these worthwhile educational programs throughout 2018. Find out more about the IOOF Foundation at www.iooffoundation.org.au 22 CRA-6580 IOOF Annual Report 2017 - EDITORIAL V6.indd 22 10/10/17 11:35 am IOOF annual report 2017 Financial report for the year ended 30 June 2017 Contents Directors’ Report Remuneration Report Directors’ Declaration Lead Auditor’s Independence Declaration Independent Auditor’s Report to the Members 24 38 55 56 57 Consolidated Statement of Comprehensive Income 61 Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the financial statements 62 63 65 66 23 232323 IOOF annual report 2017 Directors’ report The Directors present their report together with the financial report of IOOF Holdings Ltd (the “Company” or “Parent”) and of the IOOF Group, being the Company and its subsidiaries and the consolidated Group’s interest in associates for the financial year ended 30 June 2017 and the auditor’s report thereon. Directors The Directors of the Company during or since the end of the financial year were: Name, qualifications and independence status Mr George Venardos BComm, FCA, FGIA, FAICD. Independent Non-Executive Director Director since 2009 Chairman since November 2016 Dr Roger Sexton AM B.Ec. (Hons), M.Ec. Ph.D (Econ), FAICD, FAIM. SFFin, C. P Mgr, C.Univ Chairman and Independent Non-Executive Director Retired 24 November 2016 Mr Christopher Kelaher B.Ec, LL.B, F Fin. Managing Director Director since 2009 Mr Allan Griffiths B.Bus, DipLI. Independent Non-Executive Director Director since 2014 Ms Jane Harvey B.Com, MBA, FCA, FAICD. Independent Non-Executive Director Director since 2005 Ms Elizabeth Flynn LLB, Grad Dip App Corp Gov, FAICD, FFin, FGIA, FCIS. Director since 2015 Experience, special responsibilities and other directorships An experienced Director with broad listed company experience across a range of different industries, including financial services, affordable leisure, oil and gas services and technology development. Over 30 years’ experience in executive roles in financial services, insurance and funds management including 10 years as CFO of Insurance Australia Group and Chairman of the Insurance Council of Australia Finance and Accounting Committee. Other ASX listed directorships include Ardent Leisure Group since 2009, appointed Chairman in November 2016. Former Director of Miclyn Express Offshore Ltd from 2010 to 2013 and Bluglass Ltd from 2008 to 2016. Member of the Risk and Compliance Committee until 24 November 2016 and Chairman of the Remuneration and Nominations Committee until 24 November 2016. Member of the Group Audit and Remuneration Committees from 24 November 2016. Chairman of the Nominations Committee from 24 November 2016. More than 30 years experience in senior management in finance and the investment banking industry. A specialist in the areas of corporate reconstruction, mergers and acquisitions, and asset management. Chairman of Beston Global Food Company Ltd. A Former Member of the Australian Accounting Standards Board. Chairman of the Remuneration and Nominations Committee and Chairman of Perennial Investment Partners Ltd. Member of the Group Audit and Remuneration and Nominations Committees. Director from 2012 to November 2016. In 2009, Mr Kelaher became the Managing Director of the IOOF Group after its merger with Australian Wealth Management Limited (AWM), a company he had led since 2006. Prior to AWM, Mr Kelaher was the CEO of Select Managed Funds Limited for nine years, a private company which was brought to market in 2005 and in turn ultimately merged with AWM in 2006. In the following periods, he has been instrumental in executing multiple mergers and acquisitions that have added materially to the IOOF Group and its antecedent businesses. Mr Kelaher has extensive capital markets experience from his time during the late 1980s with Citicorp where he oversaw the establishment of Citicorp Investment Management and Global Asset Management businesses in Australia and New Zealand. Member of the Nominations Committee from 24 November 2016. More than 30 years’ experience with a deep understanding of the financial services industry. Mr Griffiths has held a number of executive positions within the industry most notably as Chief Executive Officer Aviva Australia and later, Managing Director South Asia, Aviva Asia Pte Ltd based in Singapore. Prior to joining Aviva Mr Griffiths held executive positions with Colonial Ltd and Norwich Union. Chairman of the Risk and Compliance Committee until 24 November 2016. Member of the Group Audit and Risk and Compliance Committees. Chairman of the Remuneration Committee from 24 November 2016. Ms Harvey has more than 30 years’ experience in the financial and advisory services industry. Prior positions include as a Partner at PricewaterhouseCoopers, a Director of David Jones Limited from 2012 to 2014, a Director of UGL Limited from 2015 to 2017, and as a Director of DUET Finance Limited, a stapled entity within the ASX Listed DUET Group from 2013 to 2017. Ms Harvey is currently a Director of BUPA ANZ. Ms Harvey is the Chairperson of the IOOF Group Audit Committee and member of the Risk and Compliance Committee. Member of Remuneration and Nominations Committee until 24 November 2016. Member of Nominations and APRA Regulated Entity Audit Committees from 24 November 2016. Ms Flynn has more than 30 years’ experience in the financial services industry, including roles within law and corporate governance as well as executive responsibilities. From 1998 to 2010, Ms Flynn was the Chief Legal Counsel, Group Compliance Manager and Group Company Secretary of financial services group Aviva Australia, and a director of NULIS Nominees, Aviva Australia’s superannuation trustee company. Prior to her time at Aviva, Ms Flynn spent 18 years as a commercial lawyer with Minter Ellison, including eight years as a Partner, specialising in managed funds, banking and securitisation and superannuation. Ms Flynn was a director of Bennelong Funds Management from 2010 to 2015. Member of the Group Audit Committee until 24 November 2016. Member of the Risk and Compliance Committee and appointed as Chairperson from 24 November 2016. Member of Remuneration and APRA Regulated Entity Audit Committees from 24 November 2016. 24 24 IOOF annual report 2017 Name, qualifications and independence status Mr John Selak Dip Acc, FCA, FAICD Appointed 14 October 2016 Experience, special responsibilities and other directorships Mr Selak has over 40 years’ experience in the financial and advisory services industry. From 2000 to 2016 Mr Selak was a Partner in the Corporate Finance Practice of Ernst & Young serving on their Global Corporate Finance Executive. From 2014 to 2017 Mr Selak was an advisory board member of Quest Apartment Hotels. Mr Selak is currently Chairman of Corsair Capital, a non-executive director of National Tiles and an advisory board member of Turi Foods. Chairman of APRA Regulated Entity Audit Committee from 24 November 2016 and member of Group Audit Committee from 24 November 2016. All Directors held office during and since the end of the financial year, unless otherwise noted. The Remuneration and Nominations Committees review the balance of skills, experience, independence, knowledge and diversity of Directors. This involves the creation of a board skills matrix setting out the mix of skills and diversity that the Board currently has or is looking to achieve in its membership. During the year each Board member completed a skills matrix. The Board was satisfied that the skills matrix results demonstrate that the Board has the appropriate skills and experience necessary to oversee the operations and governance of the IOOF Group. The Board Skills Matrix is available as part of our Corporate Governance Statement which is available on the IOOF website. Principal activities The principal continuing activities of the IOOF Group during the financial year consisted of: • financial advice and distribution; • platform management & superannuation administration; • • investment management; and trustee services including estate planning and corporate trust. Operating and financial review In accordance with current Australian Accounting Standards, the audited financial results of the benefit funds of IOOF Ltd are included in the consolidated results of the IOOF Group. The inclusion of the benefit funds has no impact on the profit after tax for the year (2016: $nil), but results in offsetting pre-tax profit and income tax amounts not available to shareholders. The following table, which has not been audited, provides a reconciliation between the reported results of the IOOF Group and underlying net profit after tax pre-amortisation (UNPAT), with the results of the benefit funds excluded. In calculating its UNPAT, the IOOF Group reverses the impact on profit of certain, predominantly non cash, items to enable a better understanding of its operational result. It is the UNPAT result which will be analysed in detail in this section of the Directors’ Report. It should be noted, however, that the items reversed, and the rationale for that reversal, is also addressed in detail. Shareholders can review the more detailed results presentation by visiting the Company website at www.ioof.com.au 25 25 IOOF annual report 2017 Directors’ report (cont’d) Operating and financial review (cont’d) Note 2-4 2-4 2-2,2-3 2-3 2-4 2-4 2-4 2017 $’000 119,851 (3,861) 115,990 - 2016 $’000 140,542 (2,620) 137,922 58,924 115,990 196,846 38,611 4,125 (6,261) (11,930) 2,013 (5,707) 38,592 39,681 6,005 (71,988) (8,125) 5,061 - - (10,056) (10,056) - - - 3,980 169,357 - 169,357 1,516 951 (825) 14,301 173,367 (2,097) 171,270 Self-Managed - the fund member acts as Trustee for his or her pool of funds, which may include funds from a limited number of other family members and associates. These funds are predominantly utilised where the Trustee perceives they have the requisite time and expertise to manage their own investment strategy and a sufficient scale of funds to make the fixed administration costs economically justifiable. Corporate - funds established for the benefit of employees of a particular entity or a group of related entities, with joint member and employer control. Public Sector - funds which provide benefits largely for government employees or employees of statutory authorities, or are schemes established by a Commonwealth, State or Territory law. Self Managed Funds are regulated by the Australian Taxation Office (ATO) whereas all others above are regulated by the Australian Prudential Regulation Authority (APRA). Profit for the year from continuing operations Less non-controlling interest Profit attributable to Owners of the Company from continuing operations Profit for the year from discontinued operation Profit attributable to Owners of the Company - total Underlying net profit after tax pre-amortisation (UNPAT) adjustments: Reverse the impact of: Amortisation of intangible assets Termination and retention incentive payments Gain on divestment of subsidiaries Profit on divestment of assets Non-recurring professional fees Acquisition tax provision release Impairment of goodwill Unwind of deferred tax liability recorded on intangible assets Acquisition and divestment transaction costs Onerous contracts Reinstatement of Perennial non-controlling interests Income tax attributable UNPAT Discontinued operation UNPAT from continuing operations The IOOF Group services the needs of financial advisers and their clients through appropriately licensed and regulated entities. The pool of investable funds emanates predominantly from superannuation which has been supported by Australia’s mandatory contributions regime since the early 1990s. Competition for service offerings to superannuants and investors (fund members) in the Australian market place is currently drawn from five main fund types with the following differentiating features: Retail - privately operated trusts and other schemes. The majority of funds are channelled to administration services and investment management products through financial advisers. However, technological development is enabling an increasing range of offerings direct to fund members. Industry Funds - superannuation entities which historically have provided for employees working in the same union, industry or group of related industries. Many industry funds now offer membership to members of the public. Industry funds generally administer these funds, but may outsource the management of investments. 26 26 The IOOF Group administers and manages Retail funds. Australian Superannuation assets totalled $2.3 trillion as at 30 June 2017. Over the 12 months to June 2017 there was an 10.0% increase in total superannuation assets and retail providers had a market share of approximately 25%. The IOOF Group’s market share of that sub-set, as represented by our platform administration segment’s flows to Funds Under Administration, was approximately 9%. There is a high degree of competition between the five fund types and fragmentation and competition among the participants within each fund type. As at the end of June 2017, for funds with greater than four members, 49.8% of investments were invested in equities; with 22.8% in Australian listed equities, 22.9% in international listed equities and 4.0% in unlisted equities. Fixed income and cash investments accounted for 33.3% of investments; 20.9% in fixed income and 12.4% in cash. Property and infrastructure accounted for 13.3% of investments and 3.7% were invested in other assets, including hedge funds and commodities. The IOOF Group operates in the Wealth Management sector. The sector has a substantial and growing pool of funds underpinned by government compulsion. The attraction of the sector is further enhanced by high regulatory and technological barriers to entry from new competitors. As an incumbent participant, we seek to grow our Funds Under Management, Administration, Advice and Supervision (FUMAS) faster than our competitors. In doing so, the portion of our revenue net of direct costs (gross margin) which is levied on asset balances may reasonably be expected to rise proportionately with FUMAS. This proportionate rise may be affected by the impact of differentiated product pricing and competitive pressure on management fee rates. In conjunction, we seek to leverage a cost base which is largely fixed relative to the scale of our FUMAS. The IOOF Group’s future FUMAS growth will be underpinned by organic and acquisition initiatives. Organic growth will be advanced through: • increasing brand and product awareness to increase revenue; • enhancing the adviser and fund client experience through continued technology development and experienced knowledgeable support staff; • operating an open architecture environment which allows our advisers and clients to utilise the administration service which best meets their objectives irrespective of whether it is an IOOF Group proprietary service or a competitor’s service. All options, however, generate a favourable economic return for the IOOF Group; IOOF annual report 2017 • enhanced training initiatives and leading minimum qualification standards to give our staff and advisers every opportunity to optimise the experience of our clients; • establishing skilled teams and robust analytical processes to enhance the prospect of achieving above benchmark performance in investment management; and • continuous improvement in process efficiency to minimise operating costs. The IOOF Group also has a long-term strategy of pursuing growth through acquisitions and has completed several acquisitions in previous years. The IOOF Group will continue to pursue acquisitions within the Wealth Management sector on an opportunistic basis. However acquisitions will only be considered where they present a logical strategic fit with existing operations and are priced reasonably for the expected value accretion to shareholders. The funding of acquisitions will be considered on a case by case basis taking into account the relative cost of available funding sources and the impact on balance sheet structure overall. On 14 June 2017, the IOOF Group announced its agreement with National Australia Bank Limited to acquire National Australia Trustees Limited (NATL). NATL is a significant provider of trustee services with a recognised history in Western Australia, New South Wales, Queensland and Victoria. NATL’s offering is considered a strong strategic fit with the IOOF Group’s existing trustee business, Australian Executor Trustees Limited (AET), as combined customers will benefit from greater scale and more specialist product offerings. Completion of the sale is subject to regulatory approval and is expected to be finalised in the next half-yearly reporting period. As such, there has been no impact on the IOOF Group’s results for the current year. The IOOF Group’s UNPAT of $169.4m for the year ended 30 June 2017 was materially in line with $171.3m UNPAT from continuing operations in the prior year. In the prior year Perennial Fixed Interest and Perennial Growth Management were divested to the Henderson Group plc (Henderson) for an upfront consideration of $71.6m and a deferred component dependent on future business performance, payable after two and four years. $0.7m has been recognised in statutory profit only as deferred consideration for the year ended 30 June 2017. The results of these businesses have been disclosed as a discontinued operation in the financial statements. These divestments allow the IOOF Group to concentrate on its core advice, superannuation, multimanager and trustee business. The proceeds from the divestment will fund congruent acquisitions. 27 27 IOOF annual report 2017 Directors’ report (cont’d) Operating and financial review (cont’d) Analysis of financial results - IOOF Group Operating expenditure decreased by $9.0m The decrease in operating expenditure excludes the impact of expenditure items identified as reversed in calculating UNPAT. As a financial services provider, labour represents the IOOF Group’s most material cost. Labour costs have reduced by $2.1m despite higher rates of pay due to lower staff numbers following realisation of efficiencies through platform rationalisation. This rationalisation, in addition to a strategic imperative to build enhanced functionality in the prior year, has also seen computer expenditure reduce by approximately $8.8m relative to prior year. Professional fees have increased largely because specialist advisers have been engaged to assess significant acquisition opportunities. In addition, the IOOF Group has outsourced a significant component of its research capability which has the effect of increasing professional fees, but lowering staff numbers. Net financing costs stable Net financing costs have not varied materially as there has been a reasonably stable interest rate environment over the two years to 30 June 2017 in addition to similar patterns of sources and applications of funds over that period. Other profit impacts decreased by $1.7m Non-controlling interests excluded Perennial entities due to classification as discontinued operations and was $1.2m higher in line with Ord Minnett’s increased profitability. Share of associates profits declined $1.4m relative to prior year as a result of mandate outflows and higher costs within the Perennial Value Management (PVM) Group. Share-based payments expense was $0.7m lower due to the roll off of non-employee stakeholder plans. Income tax increased by $2.4m Income tax expense relative to prior year reflected a $4.1m lower spend on treasury shares to fulfil employee share plans ($1.2m tax impact). This was due principally to a wind down in scale and breadth of plans overall. Assessable income, as opposed to accounting profit before tax, was higher than the prior year and R&D claims lower on the back of lower software development expenditure. Analysis of the IOOF Group’s result excludes the divested Perennial businesses from the review and the impact on particular items of revenue or expense highlighted in discontinued operations disclosures. Variances compare the year to 30 June 2017 with the year to 30 June 2016. Gross margin decreased $9.6m During the current year, average Funds Under Management, Administration and Advice (FUMA) were $109.5b, an increase of 5.5% on the prior year average. The increases were derived largely from equity market performance in the current year augmented by organic growth in advice based funds. Platform and advice flows of $4.2b were up 131% on prior year. Organic growth benefited from higher levels of flows across the sector and better penetration of the IOOF Group’s exisiting client base. As far as the latter is concerned, the transfer of clients from the Bridges aligned TPS platform to the IOOF Group’s contemporary, more marketable, Pursuit offering was the prime cause of this positive outcome. The improvement on prior year was also impacted by the loss of a single low margin corporate account which had an outsize impact in that prior year. The revenue impact from higher average funds was offset by negative impacts from product mix on earning rates or margins. It should be noted, however, that margins improved significantly across the two halves of the current year. Within platform administration, the lower rates for the current year principally reflected the ability of clients transferred via platform rationalisation to access lower fee scales. In addition, there is a continuing trend for a higher proportion of funds to be directed towards more contemporary platforms with lower fees, but commensurately lower attributable overheads. Notwithstanding, higher platform margins were achieved in the second half of the current year due to service fee repricing. Investment management margins were stable, with an improved second half of the current year driven by consolidation of underlying fund managers and resultant lower costs. In financial advice, Shadforth margins declined due to divestment and service mix impacts whilst new business from incoming advisers was dilutive on segment margin overall. Other revenue increased $2.7m The IOOF Group’s broking businesses’, (Ord Minnett and Bridges) contributions were up in comparison to prior year due to improved equity market conditions for new issues and traded volumes more broadly. In comparison to prior year, service charges to associated entities were reduced in line with the significant number of divested holdings enacted in 2015 and 2016. 28 28 IOOF annual report 2017 Analysis of financial results - Segments (excluding discontinued operations) Financial advice and distribution Net operating revenue Other revenue (incl equity accounted profits) Operating expenditure Net financing Net non-cash items Income tax expense and non-controlling Interest Underlying Profit after Tax 2017 $’000 261,808 3,856 (148,755) 560 (3,221) (37,894) 76,354 2016 $’000 261,667 4,700 (147,715) 731 (3,967) (36,981) 78,435 Movement $’000 141 (844) (1,040) (171) 746 (913) (2,081) % 0.1% (18.0%) (0.7%) (23.4%) 18.8% (2.5%) (2.7%) • Average funds growth has been offset by Shadforth fee mix impacts and divestments of owned advice business into owner operated dealer groups. The addition of advisers has brought new revenue streams into the IOOF group, albeit at a dilutive margin in percentage of average funds terms. • Operating expenditure has been impacted by redistribution of corporate charges in the wake of significant divestments in the prior year. In particular, there has been significant re-weighting toward front line support for advisers under the IOOF Group’s Client First initiatives. Platform management and administration Net operating revenue Other revenue (incl equity accounted profits) Operating expenditure Net financing Net non-cash items Income tax expense and non-controlling Interest Underlying Profit after Tax 2017 $’000 212,450 - (95,865) 1 (5,380) (33,939) 77,267 2016 $’000 218,161 375 (99,409) 2 (5,288) (34,820) 79,021 Movement $’000 (5,711) (375) 3,544 (1) (92) 881 (1,754) % (2.6%) (100.0%) 3.6% (50.0%) (1.7%) 2.5% (2.2%) • Average funds benefited from significantly improved organic growth. Improvements in fund flows in the sector more generally, the transfer of Bridges’ clients to Pursuit and the administration of increased native title and compensation funds from the trustee segment were the key drivers of this outcome. This growth was complemented by positive investment returns. • Net operating revenue decrease was driven primarily by lower pricing tiers for Bridges’ clients following the rationalisation of two flagship retail platforms to one and a full year of MySuper pricing on higher balance accounts. • Significantly reduced operating expenditure resulted primarily from reduced staff numbers and technology support and license costs following platform rationalisation. In addition, there was higher IT investment in the prior year in order to facilitate higher levels of on-line transacting in future periods. 29 29 IOOF annual report 2017 Directors’ report (cont’d) Operating and financial review (cont’d) Investment management Net operating revenue Other revenue (incl equity accounted profits) Operating expenditure Net financing Net non-cash items Income tax expense and non-controlling Interest Underlying Profit after Tax 2017 $’000 57,508 2,737 (14,284) 436 (723) (12,967) 32,707 2016 $’000 57,719 5,572 (19,769) 1,236 (1,383) (11,996) 31,379 Movement $’000 (211) (2,835) 5,485 (800) 660 (971) 1,328 % (0.4%) (50.9%) 27.7% (64.7%) 47.7% (8.1%) 4.2% • Net operating revenue was stable with broadly equivalent average funds and margins across both years. Other revenue was affected by PVM performance. • Decreased operating expenditure resulted from lower allocation of IOOF Group service costs following the divestment of Perennial. Trustee services Net operating revenue Other revenue (incl equity accounted profits) Operating expenditure Net financing Net non-cash items Income tax expense and non-controlling Interest Underlying Profit after Tax 2017 $’000 28,490 - 2016 $’000 27,422 - (18,341) (18,601) - (578) (2,876) 6,695 - (246) (2,578) 5,997 Movement $’000 1,068 - 260 - (332) (298) 698 % 3.9% n/a 1.4% n/a LARGE (11.6%) 11.6% • Net operating revenue has increased in line with higher client numbers; in particular, an improved contribution from the compensation trust and native title trust businesses resulted from an investment in capability and service delivery. • Reduced operating expenditure resulted from efficiencies following stronger alignment with the broader IOOF Group operating model. Financial Position The IOOF Group held cash and cash equivalents of $208.2m at 30 June 2017 (30 June 2016: $187.0m). Cash is held to satisfy regulatory net asset requirements and also to ensure adequate liquidity given management fee receipts are less frequent than payroll and service fee cash outflows. The overall debt to equity ratio stood at 13% at 30 June 2017 (30 June 2016: 13%). Net debt, borrowings less cash, stood at 0.0 times underlying earnings before interest, tax, depreciation and amortisation. This compares favourably to a covenant ratio upper limit of 2.5 times. Cash flow forecasting is conducted monthly which indicates that the IOOF Group’s debt levels are able to be serviced from current business operations. We also conduct stress testing of lending covenants when assessing acquisition opportunities and monitor adherence to licence conditions monthly. Risks The IOOF Group manages a number of risks in conducting its operations and implementing its strategy. An in depth discussion of risks and sensitivities is outlined in Section 1 of the financial statements. Material risks faced by the IOOF Group include, but may not be limited to, the following: 30 30 IOOF annual report 2017 (i) Changes in investment markets (iv) Cyber security The IOOF Group derives a significant proportion of its earnings from fees and charges based on the level of FUMAS. The level of FUMAS will reflect (in addition to other factors such as the funds flowing into and out of FUMAS) the investment performance of those funds. Therefore, changes in domestic and/or global investment market conditions could lead to a decline in FUMAS, adversely impacting the amount we earn in fees and charges. Deterioration in investment market conditions could also lead to reduced consumer interest in the IOOF Group’s financial products and services. The principal response to this risk has been to establish comprehensive investment governance committees, policies and procedures which are subject to continuous monitoring and oversight. (ii) Competition There is substantial competition for the provision of financial services in the markets in which the IOOF Group operates. A variety of market participants in specialised investment fund management, wealth advice and corporate trustee services compete vigorously for customer investments and the provision of wealth management services. These competitive market conditions may adversely impact earnings and assets. The IOOF Group manages this risk by continuously investing in product design, stakeholder relationships and continuous improvement initiatives. (iii) Information technology The IOOF Group relies heavily on information technology. Therefore, any significant or sustained failure in the IOOF Group’s core technology systems could have a materially adverse effect on operations in the short term, which in turn could undermine longer term confidence and impact the future profitability and financial position of the IOOF Group. The IOOF Group has implemented a next-generation firewall, pursues continuous improvements to protect user devices and imposes segregation of duties between technology environments. More broadly, the IOOF Group uses policies and procedures which are subject to continuous monitoring and oversight, maintains a significant complement of experienced staff and employs specialist advisers. Information technology controls are highly complementary to those employed to minimise cyber security risks. There is a risk of significant failure in the IOOF Group’s operations and/or material financial loss as a result of cyber attacks. To manage this risk, the IOOF Group has followed the recommendation of ASIC and adopted the United States government’s National Institute of Standards and Technology cybersecurity framework. In doing so, the IOOF Group has implemented measures and controls that cover identification, detection, monitoring and response in relation to cyber threats. More broadly, we have developed and tested our disaster recovery capability and procedures, implemented high availability infrastructure and architectures, conducted mandatory staff training which is focused on cyber risk and continually monitor our systems for signs of poor performance, intrusion or interruption. Cyber security controls are highly complementary to those employed to minimise information technology risks. (v) Brands and reputation The IOOF Group’s capacity to attract and retain financial advisers, employees, clients and FUMAS depends to a certain extent upon the brands and reputation of its businesses. A significant and prolonged decline in key brand value or group reputation could contribute to lower new business sales, reduced inflows of investment funds and assets, damage to client strategies and may impact adversely upon our future profitability and financial position. The IOOF Group actively monitors media and other public domain commentary on its affairs as well as proactively promoting the value of its services, products and community initiatives and building a customer centric culture. (vi) Provision of investment advice The IOOF Group’s financial advisers and authorised representatives provide advice to clients and may be exposed to litigation if this advice is judged to be incorrect or if the authorised representative otherwise becomes liable for client losses. This risk is managed by having high educational, compliance and training standards for the IOOF Group’s advisers whilst its potential financial impact is generally mitigated by taking out appropriate insurance cover. 31 31 IOOF annual report 2017 Directors’ report (cont’d) Operating and financial review (cont’d) (vii) Operational risks (x) Cash flow and interest rate risk Operational risk is the risk arising from the daily functioning of the IOOF Group’s businesses. The IOOF Group has specific operational exposures relevant to the industry in which we operate including exposures in connection with product disclosure statements, investment management, tax and financial advice, legal and regulatory compliance, product commitments, process error, fraud, system failure, failure of security and physical protection systems and unit pricing errors. This risk is minimised via policies and procedures which are subject to continuous monitoring and oversight. The IOOF Group maintains a significant complement of experienced staff, builds a positive culture and utilises specialist advisers to carry out such monitoring. (viii) Conduct risk Conduct risk is the risk of failure of the IOOF Group’s frameworks, product design or practices to prevent inappropriate, unethical or unlawful conduct (either by negligence or deliberate actions) on the part of the IOOF Group’s management, employees, contractors or representatives. The IOOF Group’s culture of honest and ethical behaviour is supported by the IOOF Code of Conduct and its Compliance Manual for Authorised Representatives, which set out the tenets of professional and personal conduct with which directors, employees, contractors, Authorised Representatives, agents and consultants are required to comply. These include promoting a healthy and safe environment, protecting private and confidential information, acting at all times within the law and acting in the best interests of the IOOF Group, its shareholders, clients and investors. As an additional safeguard, the IOOF Group’s Whistleblower Policy protects employees from detrimental action where employees disclose, in good faith and with reasonable grounds, any unethical, illegal, fraudulent or undesirable conduct. (ix) Credit risk Credit risk refers to the risk that a counterparty will fail to meet its contractual obligations resulting in financial loss that arises from receivables, loans and other receivables. The IOOF Group’s counterparties generally do not have an independent credit rating. The IOOF Group assesses the credit quality of the debtor taking into account its financial position, past experience with the debtor, and other available credit risk information. 32 32 Interest rate risk is the risk to the IOOF Group’s earnings and capital arising from changes in market interest rates. The financial instruments held that will be impacted by interest rate risk consist of cash and cash equivalents, loans, and borrowings. Short and long-term investment mixes and loans to related entities are influenced by liquidity policy requirements. Interest rates (both charged and received) are based on market rates, and are closely monitored by management. They are primarily at variable rates of interest, and will expose the IOOF Group to cash flow interest rate risk. (xi) Liquidity risk Liquidity risk relates to the IOOF Group having insufficient liquid assets to cover current liabilities and unforeseen expenses. The IOOF Group manages liquidity risk exposure by maintaining sufficient liquid assets and an ability to access a committed line of credit. The liquidity requirements for licensed entities in the IOOF Group is also regularly reviewed and carefully monitored in accordance with those licence requirements. (xii) Reliance on Australian Financial Services Licence, Registrable Superannuation Entity and other licences In order to provide the majority of its services in Australia, a number of the IOOF Group’s controlled entities are required to hold a number of licences, most notably AFS or RSE licences. If any of those entities fails to comply with the general obligations and conditions of its licence, this could result in the suspension or cancellation of the licence. While it is not expected to occur, a breach or loss of licences could have a material adverse effect on business and financial performance. AFS and RSE licences also require the licence holder to maintain certain levels of capital. These capital requirements may change from time to time. Earnings dilution may occur where a higher capital base is required to be held. (xiii) Insurance The IOOF Group holds insurance policies, including errors and omissions (professional indemnity) and directors’ and officers’ insurance, which are commensurate with industry standards, and adequate having regard to our business activities. These policies provide a degree of protection for the IOOF Group’s assets, liabilities, officers and employees. However, no assurance can be given that any insurance that the IOOF Group currently maintains will: IOOF annual report 2017 • be available in the future on a commercially (xvii) Acquisitions reasonable basis; or • provide adequate cover against claims made against or by the IOOF Group, noting that there are some risks that are uninsurable (e.g. nuclear, chemical or biological incidents) or risks where the insurance coverage is reduced (e.g. cyclone, earthquake, flood, fire). The IOOF Group also faces risks associated with the financial strength of its insurers to meet indemnity obligations when called upon which could have an adverse effect on earnings. If the IOOF Group incurs uninsured losses or liabilities, its assets, profits and prospects may be adversely affected. (xiv) Unit pricing errors Systems failures or errors in unit pricing of investments are issues affecting the broader funds management industry that may result in significant financial losses and brand damage to a number of financial services organisations. A unit pricing error made by the IOOF Group or its service providers could cause financial or reputation loss. This risk is minimised via policies, procedures and contractual enforcement which are subject to continuous monitoring and oversight. The IOOF Group maintains a significant complement of experienced staff and utilises specialist service providers to maintain robust systems and accurate inputs. (xv) Dependence on key personnel The IOOF Group’s performance is dependent on the talents and efforts of key personnel. The IOOF Group’s continued ability to compete effectively depends on our capacity to retain and motivate existing employees as well as attract new employees. The loss of key executives or advisers could cause material disruption to operations in the short to medium term. While equity incentives of key personnel align their interests with the IOOF Group’s future performance, they do not provide a guarantee of their continued employment. The IOOF Group utilises succession planning to manage this risk. (xvi) Dependence on financial advisers The success of the IOOF Group’s advice and platform business is highly dependent on the quality of the relationships with its financial advisers and the quality of their relationships with their clients. The IOOF Group’s ability to retain productive advisers is managed by monitoring and, where necessary, improving service levels, technological capability, suitability of product offerings and the quality and relevance of professional training. Acquisition transactions involve inherent risks, including: • accurately assessing the value, strengths, weaknesses, contingent and other liabilities and potential profitability of acquired businesses; • integration risks including the risk that integration could take longer or cost more than expected or that the anticipated benefits and synergies of the integration may be less than estimated; • diversion of management attention from existing business; • potential loss of key personnel and key clients; • unanticipated changes in the industry or general economic conditions that affect the assumptions underlying the acquisition; and • decline in the value of, and unanticipated costs, problems or liabilities associated with, the acquired business. Any of these risks could result in a failure to realise the benefits anticipated to result from any acquisition of new business and could have a material adverse impact on our financial position. The IOOF Group maintains a significant complement of experienced staff and holds relationships with specialist advisers to assess acquisition opportunities. This is designed to ensure the Board is fully informed of the risks and opportunities associated with any potential individual acquisition. (xviii) Dilution The IOOF Group’s need to raise additional capital in the future in order to meet its operating or financing requirements, including by way of additional borrowings or increases in the equity of any of the consolidated entity’s companies, may change over time. Future capital raisings or equity funded acquisitions may dilute the holdings of particular shareholders to the extent that such shareholders do not subscribe to additional equity, or are otherwise not invited to subscribe in additional equity. This risk will be managed by examination of relevant factors and circumstances prevailing at that time. (xix) Regulatory and legislative risk and reform The financial services sectors in which the IOOF Group operates are subject to extensive legislation, regulation and supervision by a number of regulatory bodies in multiple jurisdictions. The regulatory regimes governing the IOOF Group’s business activities are complex and subject to change. The impact of future regulatory and legislative change upon the IOOF Group cannot be predicted. In addition, if the amount and complexity of new regulation increases, so too may the cost of compliance and the risk of non-compliance. The IOOF Group maintains a significant complement of experienced staff and holds relationships with specialist advisers to minimise this risk. 33 33 IOOF annual report 2017 Directors’ report (cont’d) Operating and financial review (cont’d) Shareholder returns The IOOF Group dividend is calibrated to provide shareholders with a benefit which reflects performance and offers an attractive yield when assessed against a range of other external economic factors and investment options. The Board also understands that dividend payments should not hinder future organisational plans. The Board has therefore determined that a pay-out ratio range of 60% - 90% of UNPAT is generally appropriate, but not binding. Based on historical precedent, the occasions on which this range is not met or exceeded are expected to be infrequent. Total Shareholder Return (TSR) measures the change in share value over a specified period together with the return by way of dividends received. The IOOF Group’s TSR for the twelve months to 30 June 2017 was 31.9% with 99% of UNPAT paid as dividends augmented by strong share price growth of 25.2%. The market valuation of the IOOF Group remained reflective of movements in global equity markets generally. TSR in the 5 year period from 1 July 2012 was 103% in total and 15.3% on a compounding annualised basis. The IOOF Group is in a strong financial position with low gearing and significant free cash. Profit attributable to owners of the Company ($'000s)1 Profit for the year from continuing operations ($'000s) Basic EPS (cents per share) Diluted EPS (cents per share) Basic EPS (continuing operations) (cents per share) UNPAT ($'000s) UNPAT EPS (cents per share) UNPAT EPS (continuing operations) (cents per share) Dividends declared ($'000s) Dividends per share (cents per share) Opening share price Closing share price at 30 June Return on equity (non-statutory measure)2 2017 115,990 119,851 38.7 38.6 38.7 2016 196,846 140,542 65.7 65.4 46.0 2015 138,371 140,527 47.7 47.4 45.8 2014 101,285 103,378 43.7 43.1 43.7 2013 79,769 80,432 34.4 34.1 34.4 169,357 173,367 173,758 123,047 108,756 56.5 56.5 57.8 57.1 59.9 58.6 53.1 53.1 159,071 163,573 159,070 127,260 53.0 $7.83 $9.80 12.1% 54.5 $8.99 $7.83 12.3% 53.0 $8.40 $8.99 13.4% 47.5 $7.36 $8.40 15.0% 46.9 46.9 97,485 42.0 $6.05 $7.36 13.2% 1 Profit attributable to owners of the Company has been calculated in accordance with Australian Accounting Standards. 2 Return on equity is calculated by dividing UNPAT by average equity during the year. Returns to shareholders increase/decrease through both dividends and capital growth/decline. Dividends for 2017 and prior years were fully franked. Items excluded from underlying net profit after tax pre-amortisation (UNPAT) Amortisation of intangible assets: Non-cash entry reflective of declining intangible asset values over their useful lives. Intangible assets are continuously generated within the IOOF Group, but are only able to be recognised when acquired. The absence of a corresponding entry for intangible asset creation results in a conservative one sided decrement to profit only. It is reversed to ensure the operational result is not impacted. The reversal of amortisation of intangibles is routinely employed when performing company valuations. However, the amortisation of software development costs is not reversed in this manner. Termination and retention incentive payments: Facilitation of restructuring to ensure long term efficiency gains which are not reflective of conventional recurring operations. Gain on divestment of subsidiaries: During the year, the IOOF Group divested its interests in Perennial Investment Management Limited to Perennial Value Management Ltd. The IOOF Group also partially divested a subsidiary (2016: Perennial Fixed Interest and Perennial Growth Management). Profit on divestment of assets: Divestments of non-core businesses, client lists and associates. Non-recurring professional fees: Costs relating to specialist service and advice providers enlisted to assist the IOOF Group in better informing key stakeholders. These services were required following negative media allegations. In particular, but not limited to, process review, senate inquiry support, government relations, litigation defence and communications advice. It is not anticipated that this type and level of support will be required on a recurrent basis. Costs were predominantly in the prior year. 34 34 Acquisition tax provision release: The acquisition of DKN in the 2012 financial year necessitated recognition of a provision related to an uncertain tax position. This was recognised at estimated fair value, however the provision was released during the current year as it was adjudged that a present obligation no longer existed. This was a one-off, non-cash, non-operational increment to the IOOF Group’s statutory profitability. Impairment of goodwill: A non-cash impairment of $38.6m has been recognised in relation to goodwill allocated to PVM and its subsidiaries. Reduced profitability from both lower revenue and higher costs has led to calculated value-in- use declining to below the carrying value of the aggregate goodwill and investment balances. Revenue decline has arisen due to institutional outflows. These outflows reflect changing market dynamics where larger institutions now weight a greater proportion of funds to indexed products. This has combined with below benchmark performance in 2012 which adversely affected 3 and 5 year fund performance numbers. Higher costs resulted from an absence of operations scale and subsidisation following the divestment of other Perennial entities as PVM moved to virtually complete autonomy during the current year. Unwind of deferred tax liability recorded on intangible assets: Acquired intangible asset valuations for AASB 3 Business Combinations accounting are higher than the required cost base as set under tax consolidation rules implemented during 2012. A deferred tax liability (DTL) is required to be recognised as there is an embedded capital gain should the assets be divested at their accounting values. This DTL reduces in future years at 30% of the amortisation applicable to those assets which have different accounting values and tax cost bases. The recognition of DTL and subsequent reductions are not reflective of conventional recurring operations and are regarded as highly unlikely to be realised due to the IOOF Group’s intention to hold these assets long term. Acquisition and divestment transaction costs: In 2016, one off payments to external advisers in pursuit of corporate transactions, such as the divestment of certain Perennial subsidiaries, which were not reflective of conventional recurring operations. Onerous contracts: In 2016, non-cash entry to record the estimated present value of expected costs of meeting the obligations under terminated information technology contracts associated with platform rationalisation. For these contracts, the costs exceed the economic benefits expected to be received. IOOF annual report 2017 Reinstatement of Perennial non-controlling interests: In 2016, embedded derivatives existed given the IOOF Group’s obligation to buy-back shareholdings in certain Perennial subsidiaries if put under the terms of their shareholders’ agreements. International Financial Reporting Standards deems the interests of these non-controlling holders to have been acquired. Those interests must therefore be held on balance sheet as a liability to be revalued to a reserve each reporting year. In calculating UNPAT, the non-controlling interest holders share of the profit of these subsidiaries is subtracted from the IOOF Group result as though there were no embedded derivatives to better reflect the current economic interests of Company shareholders in the activities of these subsidiaries. Income tax attributable: This represents the income tax applicable to certain adjustment items outlined above. Dividends In respect of the financial year ended 30 June 2017, the Directors declared the payment of a final dividend of 27.0 cents per share franked to 100% at 30% corporate income tax rate to the holders of fully paid ordinary shares to be paid on 1 September 2017. This dividend will be paid to all shareholders recorded on the Register of Members on 18 August 2017. The Directors declared the payment of an interim dividend of 26.0 cents per share franked to 100% at 30% corporate income tax rate to the holders of fully paid ordinary shares paid on 30 March 2017. In respect of the financial year ended 30 June 2016, a final dividend of 26.0 cents per share franked to 100% at 30% corporate income tax rate was paid to the holders of fully paid ordinary shares on 13 October 2016. Environmental regulation The IOOF Group is not subject to significant environmental regulation. Events occurring after balance date The Directors have declared the payment of a final dividend of 27.0 cents per ordinary share franked to 100% based on tax paid at 30%, to be paid on 1 September 2017. The Directors are not aware of any other matter or circumstance not otherwise dealt with in this report, or the accompanying financial statements and notes thereto, that has arisen since 30 June 2017 that has significantly affected, or may significantly affect: • • • the IOOF Group’s operations in future financial years; or the results of those operations in future financial years; or the IOOF Group’s state of affairs in future financial years. 35 35 IOOF annual report 2017 Directors’ report (cont’d) Lead auditor’s independence declaration The lead auditor’s independence declaration is included on page 56 of the annual financial report and forms part of the Directors’ Report for the year ended 30 June 2017. Company secretary The Company Secretary is Mr A Paul M Vine LLB FGIA FCIS GAICD. Mr Vine was appointed to the position in December 2015 and is also the General Manager Legal, Risk and Compliance, with over 25 years’ experience in legal and governance roles in public companies and leading law firms. Directors’ meetings The number of Directors’ meetings (including meetings of committees of Directors) and number of meetings attended by each of the Directors of the Company during the financial year are: Director Directors Meetings Remuneration Committee Committee Meetings Nominations Committee Remuneration & Nominations Committee1 Meetings attended Meetings held Meetings attended Meetings held Meetings attended Meetings held Meetings attended Meetings held C Kelaher G Venardos R Sexton J Harvey A Griffiths E Flynn J Selak Director C Kelaher G Venardos R Sexton J Harvey A Griffiths E Flynn J Selak 13 13 8 12 13 13 7 13 13 8 13 13 13 7 n/a 2 n/a n/a 2 2 n/a n/a 2 n/a n/a 2 2 n/a 2 2 n/a 2 n/a n/a n/a Committee Meetings 2 2 n/a 2 n/a n/a n/a n/a n/a 2 2 2 n/a n/a n/a 2 2 2 n/a n/a n/a Group Audit Committee APRA Regulated Entity Audit Committee2 Risk and Compliance Committee2 Meetings attended Meetings held Meetings attended Meetings held Meetings attended Meetings held n/a n/a 2 6 8 8 6 2 2 6 8 8 6 2 n/a n/a n/a 3 n/a 3 3 n/a n/a n/a 3 n/a 3 3 n/a 6 n/a 7 7 7 n/a 7 n/a 7 7 7 n/a n/a 1 The Remuneration and Nominations Committee was reorganised into two separate Committees effective 24 November 2016. 2 These Committees include additional members that are not Directors of IOOF Holdings Ltd. Meetings held represents the number of meetings held during the time the Director held office. The Directors meetings are those held for IOOF Holdings Ltd. This does not include the meetings held and attended by Directors for the various subsidiary companies. Major subsidiaries averaged a further 7 meetings each during the year. In addition to the meetings attended during the year, a number of matters were considered and addressed separately via circular resolution. 36 36 Shares issued on exercise of options During the financial year, the IOOF Group did not issue any ordinary shares of the Company as a result of the exercise of options. All plans were satisfied from the purchase of shares. Unexercised options over shares, performance rights and deferred shares At the date of this report unexercised options over shares of the Company under deferral arrangements and performance rights are: Performance rights Vesting date 30 Jun 18 30 Jun 19 31 Dec 19 Deferred shares Vesting date 31 Jul 18 Number of rights 135,000 329,567 30,000 494,567 Number of shares 35,420 35,420 Shares allocated on vesting will rank equally with all other ordinary shares on issue. These performance rights do not entitle the holder to participate in any share issue or receive dividends of the Company. Indemnification and insurance Rule 84 of the IOOF Holdings Ltd Constitution requires the Company to indemnify to the extent permitted by law, each Director and Secretary against liability incurred in, or arising out of the conduct of the business of the Company or the discharge of the duties of the Director or Secretary. The Directors and Secretary named in this Directors’ Report have the benefit of this requirement, as do individuals who formerly held one of those positions. In accordance with this requirement the Company has entered into Deeds of Access, Indemnity and Insurance (Deeds of Indemnity) with each Director and Secretary. During the financial year, the IOOF Group paid insurance premiums to insure against amounts that the IOOF Group may be liable to pay the Directors and Secretary pursuant to Rule 84. The insurance policy also insures the Directors and Secretary of the Company and its controlled entities, and the general officers of each of the companies in the IOOF Group. Details of the amount of the premium paid in respect of the insurance contract have not been disclosed as such disclosure is prohibited under the terms of the contract. IOOF annual report 2017 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 entities in the IOOF 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 to themselves or someone else or to cause detriment to the Company. Rounding off of amounts The Company is a company of the kind referred to in ASIC Corporations Instrument 2016/191, dated 24 March 2016, and in accordance with that Instrument amounts in the financial report are rounded off to the nearest thousand dollars, narrative disclosures are expressed in whole dollars or as otherwise indicated. Non-audit services The Directors are satisfied that the provision of non-audit services during the year of $499,958, by the auditor is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. Non-audit services are managed as follows: • fees earned from non-audit work undertaken by KPMG are capped at 1.0 times the total audit fee; • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in the Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the IOOF Group, acting as advocate for the IOOF Group or jointly sharing economic risks and rewards. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. 37 37 IOOF annual report 2017 Remuneration report Executive Summary 1. Overview 1.1 Key Management Personnel 1.2 Summary - Key Management Personnel remuneration 1.3 Summary - Non-Executive Directors remuneration 2. Remuneration Framework 2.1 Objectives 2.2 Remuneration governance 2.3 Committee members 2.4 How remuneration is determined 2.5 Services from consultants 2.6 Consequences of performance on shareholder wealth 3. Managing Director Remuneration 3.1 Summary of Managing Director remuneration outcomes for 2017 3.2 Managing Director remuneration 3.2.1 Short term incentive: targets and outcomes 3.2.2 Long term incentive: targets and outcomes 3.3 Change of control and cessation of employment 3.4 Remuneration for the year ended 30 June 2018 4. Key Management Personnel remuneration 4.1 Key Management Personnel remuneration 4.1.1 Short term incentive: targets and outcomes 4.1.2 Long term incentive: targets and outcomes 5. Remuneration tables 5.1 Deferred shares and performance rights over equity instruments granted as compensation during 2017 5.2 Summary of Key Management Personnel deferred shares and performance rights holdings 5.3 Performance rights granted since the end of the financial year 6. Summary of Key Management Personnel Contracts 7. Shareholdings of Key Management Personnel 8. Non-Executive Directors’ Remuneration 8.1 Overview 8.2 Terms of appointment 8.3 Shareholdings of Non-Executive Directors 9. Payments to persons before taking office 39 39 39 40 42 43 43 43 43 43 45 45 46 46 46 47 47 48 49 49 49 49 49 50 50 51 52 52 52 53 53 53 54 54 The information in this report is in accordance with AASB 124 Related Party Disclosures and section 300A of the Corporations Act 2001, and has been audited as required by Section 308(3C) of the Corporations Act 2001 unless otherwise stated. 38 IOOF annual report 2017 2017 profitability was broadly equivalent to 2016’s record result from continuing operations, with sustained returns to shareholders over the last three years. These strong results have been reflected in the short and long term incentive outcomes received by the KMP. The IOOF Group’s Total Shareholder Return (TSR) performance over the three years to 30 June 2017 was 36.9%, placing it at the 58th percentile relative to the ASX 200. Return on Equity (RoE) for the year to 30 June 2017 was 12.1%. The impact of these outcomes on the Managing Director and other executive KMP Long Term Incentives is detailed at sections 3.2.2 and 4.1.2 below. Following an independent remuneration consultant review completed during the year, Non-Executive Directors received an increase in fees to align with comparable peers in the financial services sector. The remuneration for all Non-Executive Directors remains within the shareholder approved limits. Executive Summary This report details the remuneration framework and outcomes for Key Management Personnel (KMP) of the IOOF Group for the year ended 30 June 2017. The Board of Directors is committed to a remuneration strategy that aligns remuneration practices with the creation of shareholder value. A number of amendments have been made to the policies over the past few years to ensure that the policies have remained aligned with shifts in the IOOF Group’s business strategy and focus. The key principles of the IOOF Group’s remuneration policy remain unchanged from last year. This report aims to communicate our remuneration practices, and their link to the creation of shareholder value, in a clear, concise and transparent way and demonstrate how these practices: • align to our strategic objectives; • are sufficient to attract, motivate and retain an ambitious and highly talented executive team; and • support an appropriate governance culture to minimise risks to our clients and shareholders. 1. Overview 1.1 Key Management Personnel This report covers the IOOF Group’s KMP. KMP are the people who have the authority and responsibility for planning, directing and controlling the activities of the IOOF Group: Name Position Managing Director Mr C Kelaher Managing Director Other Executive KMP Mr D Coulter Mr S Merlicek1 Mr R Mota Mr G Riordan Chief Financial Officer Chief Investment Officer Group General Manager – Wealth Management Full year Group General Counsel & General Manager Trustee Services Full year Term as KMP Full year Full year Full year, retired 3 July 2017 1 Mr D Farmer has taken on this role from 4 July 2017. The Non-Executive Directors of the IOOF Group are also required to be disclosed as part of this report and are listed below: Non-Executive Directors Mr G Venardos Independent Non-Executive Director & Chairman Full year, appointed as Chairman 24 November 2016 Dr R Sexton AM Independent Non-Executive Director & Chairman Retired 24 November 2016 Ms J Harvey Mr A Griffiths Ms E Flynn Mr J Selak Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Full year Full year Full year Appointed 14 October 2016 39 IOOF annual report 2017 Remuneration report (cont’d) 1.2 Summary - Key Management Personnel remuneration The IOOF Group uses a total remuneration package approach in determining remuneration that comprises both “fixed” and “at risk” components. These components reflect an employee’s contribution to the IOOF Group, their skills and qualifications, market benchmarks and the remuneration environment. The remuneration arrangements for KMP comprise three key components: • a base package which is a fixed amount and is reviewed on an annual basis with consideration given to cost of living increases (CPI), market movements or changes in the scope of the individual’s role and responsibilities; • a Short Term Incentive (STI) amount which is tied to the successful achievement of a set of performance scorecard objectives (including financial, strategic, customer, people and governance objectives) for the annual performance period. STI awards are considered “at risk” components of an individual’s remuneration and can be awarded as either cash or share-based arrangements; and • a Long Term Incentive (LTI) which is intended to provide incentives to KMP to remain with the IOOF Group to enhance the sustainable performance of the IOOF Group over the long term. LTI awards are considered “at risk” components of an individual’s remuneration and are all share-based arrangements. 40 IOOF annual report 2017 The following table sets out the remuneration received by the Managing Director and other executive KMP for the financial year ended 30 June 2017 and the prior year to 30 June 2016. The share-based payments shown below are not amounts actually received by KMP during the year, as they include accounting values for unvested share awards. Actual share-based payment amounts received are shown as cash remuneration. Further details are disclosed in sections 2 to 7 below. Element of Remuneration Component of Remuneration Managing Director Post employ- ment Share- based payments3 Salary Bonus1 Non- monetary2 Super- annu- ation Perform- ance Rights Total Cash remun- eration4 Fixed $ At risk $ Fixed $ Fixed $ At risk $ $ $ Remuneration components as a % of total remuneration Fixed % At risk5 % C Kelaher 2017 1,211,363 697,765 2016 1,187,756 651,891 Other Executive KMP D Coulter S Merlicek6 R Mota G Riordan 2017 2016 2017 2016 2017 2016 2017 2016 420,384 300,000 383,066 200,000 406,948 63,645 411,744 225,000 480,384 350,000 453,016 200,000 447,048 140,000 438,287 140,000 Executive KMP – Former 5,898 8,877 4,904 4,918 4,904 4,918 9,218 4,918 1,961 801 19,616 1,102,138 3,036,780 2,886,590 19,308 1,051,796 2,919,628 5,005,194 19,616 20,052 17,352 20,052 19,616 20,052 19,616 19,308 130,138 875,042 810,747 130,884 738,920 786,618 18,495 511,344 649,300 80,167 741,881 869,796 130,138 989,356 870,747 130,884 808,870 876,567 130,138 738,763 777,411 130,884 729,280 801,095 M Farrell7 Total 2016 224,764 70,000 830 11,510 29,599 336,703 559,524 2017 2,966,127 1,551,410 26,885 95,816 1,511,047 6,151,285 5,994,795 2016 3,098,633 1,486,891 25,262 110,282 1,554,214 6,275,282 8,898,794 41 42 51 55 84 59 51 59 63 63 70 59 58 49 45 16 41 49 41 37 37 30 1 The bonus reflects amounts provided under the STI program in relation to the financial year. One third of the bonus awarded to Mr Kelaher has been deferred into shares which will vest in July 2018 subject to a “look back.” This component of the STI is included as a share-based payment expense. The expected payment value of the bonuses is the amount shown and includes any amounts that may be sacrificed into superannuation. 2 Non-monetary benefits include company funded benefits and fringe benefits tax payable on those benefits, typically car parking. 3 4 Share-based payments include accruals in relation to the Executive Performance Share Plan and accruals in relation to other grants of performance rights over shares in the Company. The value of the number of shares and options expected to vest has been apportioned over the term from grant date to vesting date. This non-statutory disclosure provides shareholders with a view of the cash and other benefits received by KMP. Cash remuneration includes all remuneration paid during the financial year, including superannuation and STIs which were awarded for performance in previous financial years. In addition, any shares received by the KMP during the year are included at the value the shares were or could have been converted to cash on the date they were received. This value has been determined as the cash received by the employee where known, or the closing share price on the date the shares were allocated to the KMP less any consideration paid. 5 As payment of the at-risk component is at the discretion of the Board, the minimum value is nil and the maximum is the total amount paid. 6 7 S Merliceck ceased employment with the IOOF Group on 3 July 2017 and received a termination payment of $160,077. Performance rights due to vest in 2018 and future financial years have lapsed. M Farrell ceased employment with the IOOF Group on 22 January 2016. On 26 November 2015, the Board resolved to approve early vesting of 50% of the 2015 rights on the date of Mr Farrell’s cessation of employment. All other rights awarded to Mr Farrell have lapsed. Mr Farrell received a termination payment of $29,407. 41 IOOF annual report 2017 Remuneration report (cont’d) 1.3 Summary - Non-Executive Directors remuneration The total fees paid to the Chairman and the Non-Executive Directors (including fees paid for their involvement on Board committees) have been determined within the total amount for Non-Executive Directors as approved by shareholders. Following an independent remuneration consultant review completed during the year, Non-Executive Directors received an increase in Directors’ fees to align with comparable peers in the financial services sector. Short-term benefits Post-em ployment benefits Shareholder approved remuner- ation Post-em ployment benefits Total Directors fees1 $ Non- monetary $ Superan- nuation $ Retirement2 $ $ G Venardos J Harvey A Griffiths E Flynn J Selak3 2017 2016 2017 2016 2017 2016 2017 2016 2017 Former Non-Executive Directors R Sexton I Griffiths4 Total 2017 2016 2016 2017 2016 221,800 148,832 155,297 148,832 155,924 149,826 155,297 115,255 111,064 105,379 251,531 38,584 904,761 852,860 - - - - - - - - - 2,980 - 2,871 2,980 2,871 17,692 14,139 14,753 14,139 14,126 13,145 14,753 10,949 10,551 8,722 20,052 3,666 80,597 76,090 239,492 162,971 170,050 162,971 170,050 162,971 170,050 126,204 121,615 117,081 271,583 45,121 988,338 931,821 - - - - - - - - - - - - - - $ 239,492 162,971 170,050 162,971 170,050 162,971 170,050 126,204 121,615 117,081 271,583 45,121 988,338 931,821 1 Directors’ fees includes any fees sacrificed into superannuation funds. 2 Non-Executive Directors appointed after 13 April 2003 are not entitled to retirement benefits. Non-Executive Directors appointed prior to this date accrued retirement benefits. Where entitled, the provision was based on the average emoluments of Non-Executive Directors over the previous three years’ of service. The benefit accrued after three years of service and varied according to the number of years of service, reaching twice the average annual emoluments after ten years of service. R Sexton was paid $475,000 on his retirement on 24 November 2016. This amount was accrued at 30 June 2016 and relates to Director appointment pre 13 April 2003. Refer to ‘post employment benefits’ in section 8.2 for further details. 3 Mr J Selak was appointed as Non-Executive Director effective 14 October 2016. 4 Mr I Griffiths resigned as Non-Executive Director effective 2 October 2015. 42 IOOF annual report 2017 2. Remuneration Framework 2.3 Committee Members 2.1 Objectives The Board of Directors is committed to a remuneration strategy that aligns remuneration practices with the creation of shareholder value. To realise this objective, the Board is committed to remuneration practices which align to the IOOF Group’s strategic objectives, are sufficient to attract, motivate and retain an ambitious and highly motivated executive team and promote an appropriate governance culture in line with the IOOF Group’s risk appetite. 2.2 Remuneration governance The Board of Directors oversees the IOOF Group’s remuneration policies on recommendation from the Remuneration Committee. The Board and the Remuneration Committee review the remuneration policies of the IOOF Group annually to ensure that they support the IOOF Group’s objectives. The IOOF Group’s Remuneration Framework, established by the Remuneration Committee, considers the adequacy of remuneration policies and practices within the IOOF Group on an annual basis, including: • determination of Managing Director and other executive remuneration arrangements; • ensuring that succession planning and development plans are in place for KMP and their potential successors; • on-going review and monitoring of short-term and long- term incentive schemes; • setting key performance indicators and assessment of the Managing Director’s and the IOOF Group’s performance against those key performance indicators; • overall compensation arrangements of the IOOF Group; • ensuring remuneration policies are appropriate to Non- Executive Directors; • ongoing review of the composition, skill base and performance of Non-Executive Directors; and • compliance with regulatory requirements including the ASX Listing Rules and the associated ASX Corporate Governance Principles and meeting both ASIC and APRA requirements. The Remuneration Committee reviews and makes recommendations to the Board on the remuneration structure and policies applicable to the KMP and Non-Executive Directors of the IOOF Group. The Remuneration Committee’s charter is available on the Corporate Governance page of the Company’s website at www.ioof.com.au The Remuneration and Nominations Committee was in existence until 24 November 2016. Separate committees were formed for these functions post this date. The members of the Remuneration and Nominations Committee were Mr George Venardos (Chairman), Ms Jane Harvey and Dr Roger Sexton. The Remuneration Committee was established on 24 November 2016. The Committee is comprised solely of Non-Executive Directors, all of whom are independent. The members of the Remuneration Committee during 2017 were Mr Allan Griffiths (Chairman), Mr George Venardos and Ms Elizabeth Flynn. The Board considers that the members of the Remuneration Committee provide an appropriate mix of skills to undertake its terms of reference, having regard to qualifications, knowledge of the financial services industry and experience in business management. In order to ensure that it is fully informed when making remuneration decisions, the Remuneration Committee receives regular reports and updates from the Company Secretary and the Group General Manager, People and Culture and other members of management invited by the Remuneration Committee to attend meetings when appropriate. The Remuneration Committee can also draw on services from a range of external sources, including access to benchmarking material and remuneration consultants. This enables the IOOF Group to remain competitive with relevant competitors in the financial services sector and the broader spectrum of public companies of similar size, revenue and profitability. 2.4 How remuneration is determined Executive remuneration comprises a number of components including total fixed remuneration (TFR), STIs, partially (cash) deferred STI (for the Managing Director only) and LTIs in the form of deferred shares (Managing Director only) and performance rights over ordinary shares. LTIs are subject to appropriate, pre-determined performance hurdles. Each of these forms of remuneration are described in detail below. Total Fixed Remuneration (TFR) TFR includes a combination of base salary, employer superannuation contributions and other fringe benefits that an individual employee could choose to salary sacrifice (e.g. superannuation, motor vehicle). TFR is based on what is appropriate to the position taking into consideration expertise, responsibility, knowledge, experience and market competitiveness. 43 IOOF annual report 2017 Remuneration report (cont’d) Early vesting may occur in certain circumstances, subject to the performance hurdle being achieved and Board approval received: • on a person/entity acquiring more than 20% of the voting shares in the Company pursuant to a takeover bid that has become unconditional; • on the termination of employee due to death or permanent disability; or • in other exceptional circumstances where the Board determines appropriate. The performance hurdle for current LTI plans has been linked to IOOF Group TSR compared to S&P ASX200 companies at the date of grant. TSR represents the change in the value of a share plus the value of dividends paid. TSR was chosen as the most appropriate comparative measure as it focuses on the delivery of shareholder value and is a well understood and tested metric of performance. The Remuneration Committee engaged the services of an independent external organisation (Value Adviser Associates) to calculate the IOOF Group’s performance against the TSR performance hurdles. Deferral arrangements The Board has implemented deferral arrangements and “look back” provisions on a portion of the STI (cash payment) for the Managing Director. The deferral element of the Managing Director’s remuneration is described in detail in Section 3.2 of this report. Hedging of unvested securities The IOOF Group Policy - Personal Trading in IOOF Holdings Limited Securities contains a restriction on KMP and other employees entering into a hedging transaction to remove the “at risk” aspect of securities that have been granted to them as part of their remuneration package and which have not vested subject to performance conditions and/or which are still subject to forfeiture conditions. Employees are provided with a copy of this policy and are required to provide annual certification that they have complied with the policy. Failure to comply with the policy may result in disciplinary action, including forfeiture of the securities, suspension or termination of employment. Short Term Incentive (STI) The STI opportunity is a cash-based incentive forming part of each KMP’s total remuneration package, the value of which is tied to the successful achievement of a set of performance objectives, as outlined below. STI opportunities vary for each individual. For the Managing Director, the maximum STI is up to 100% of TFR. The Chief Investment Officer had up to 100% of TFR if additional KPIs on the performance of the investment management business were satisfied (ie. top quartile performance). Other executive KMP’s maximum STI opportunity for 2017 is up to 50% of TFR, however variations to STIs may be awarded at the discretion of the Managing Director, subject to Board approval. Objectives are drawn from the following categories: • Financial Performance measures include Underlying Profit After Tax (UNPAT), TSR and RoE. • Business excellence Performance measures for the year ended 30 June 2017 included operational targets such as long-term structural reductions to the cost base of the IOOF Group, balance sheet and liquidity initiatives and improvements to the performance of business units. • Strategy Measurable progress towards achieving longer term strategic goals. This includes, but is not limited to, implementation of major platform consolidation, regulatory adherence, growth through acquisition, divestment of non-core assets and product rationalisation initiatives. • Governance adherence KMP are provided with a number of targets at the beginning of the performance period that are set and agreed with the Managing Director. KMP have included in their targets an objective relating to risk management, regulatory and IOOF Group compliance and ensuring that outcomes from internal and external audit are actioned. In addition, KMP have specific targets relating to their businesses to ensure they are working towards the IOOF Group’s overall objectives. Long Term Incentive (LTI) The Board considers a long-term performance-related incentive component to be an important element of the executive reward framework. The IOOF Group utilises equity based incentives in the form of deferred shares (Managing Director only) and performance rights. These LTIs are subject to the achievement of a gateway qualifying condition (Managing Director only), minimum service periods and appropriate performance hurdles. The LTI element of the Managing Director’s remuneration is described in detail in section 3 of this report. 44 IOOF annual report 2017 Remuneration mix The table below shows the TFR and target and actual performance base remuneration as a proportion of the total of all forms of remuneration for the 2017 financial year: Position Managing Director Chief Investment Officer Other Executives Target Actual1 Target Actual Target Actual TFR % 35 41 49 84 56 55 STI % 34 23 49 12 28 29 LTI % 31 36 2 4 16 15 1 Actual STI for the Managing Director includes one third of the STI awarded for the 2017 year settled in deferred shares. 2.5 Services from consultants The Remuneration Committee seeks and considers advice from independent, external remuneration consultants where appropriate. Remuneration consultants are engaged directly by and report to the Remuneration Committee. Egan Associates Pty Ltd were engaged in July 2016 to provide advice on Non-Executive Director remuneration and benchmarking data on Managing Director remuneration at a cost of $7,881. Following these reviews, the Remuneration Committee resolved to recommend to the Board an increase of 2% for the Managing Director and 8% for the Non-Executive Directors respectively to align fees with comparable peers in the financial services sector. The Board is satisfied that this review was made free from undue influence as the recommendation relied on peer data. 2.6 Consequences of performance on shareholder wealth In considering the IOOF Group’s performance and benefits for shareholder wealth, the Remuneration Committee has regard to the following indices in respect of the current financial year and the previous four financial years. Profit attributable to owners of the Company ($'000s) UNPAT ($'000s)1 UNPAT EPS (cents per share) Basic EPS (cents per share) Basic EPS (continuing operations) (cents per share) Share price at start of year Share price at end of year Change in share price Dividends per share (cents per share) Return on equity (non-statutory measure)2 Total STIs paid to key management personnel ($'000s) 2017 2016 2015 2014 115,990 196,846 138,371 101,285 2013 79,769 169,357 173,367 173,758 123,047 108,756 56.5 38.7 38.7 7.83 9.80 1.97 53.0 12.1% 1,900 57.8 65.7 46.0 8.99 7.83 (1.16) 54.5 12.3% 1,813 59.9 47.7 45.8 8.40 8.99 0.59 53.0 13.4% 1,573 53.1 43.7 43.7 7.36 8.40 1.04 47.5 15.0% 1,681 1 UNPAT is reconciled to profit attributable to owners of the Company in the Operating and Financial Review at page 26 of the Directors’ Report. 2 RoE is calculated by dividing UNPAT by average capital on issue during the year. 46.9 34.4 34.4 6.05 7.36 1.31 42.0 13.2% 1,156 45 IOOF annual report 2017 Remuneration report (cont’d) Underlying Profit & STI Payments 3.2 Managing Director remuneration During the financial year ended 30 June 2017, Mr Kelaher received a remuneration package comprising TFR of $1,231,350. Mr Kelaher was entitled to a total STI opportunity of up to a maximum of $1,231,350 (100% of TFR) based on achievement of superior performance against set targets determined by the Board on recommendation from the Remuneration Committee, as outlined in section 3.2.1. In August 2017 the Remuneration Committee assessed Mr Kelaher’s performance against those targets and recommended an STI amount of $1,046,648, being 85% of the eligible amount, which was approved by the Board. The STI opportunity was settled two thirds by cash and one third in the form of deferred shares. The number of deferred shares granted to Mr Kelaher was determined on the basis of the STI deferral amount divided by the five day Volume Weighted Average Price up to and including 30 June 2017, which was $9.85. The number of deferred shares to be issued accordingly was 35,420 (capped at 75,000 annually) and there is no consideration payable for the grant of the deferred shares. The Board has determined that the portion of STI awarded as deferred shares will be subject to Board “look back” arrangements. This means the Board will conduct a review of Mr Kelaher and the IOOF Group’s performance in July 2018 and assess whether any significant unexpected or unintended consequences have occurred that were not foreseen by the Remuneration Committee when it made its recommendation in August 2017, and whether it is still appropriate to award the deferred shares During August 2017, the Remuneration Committee performed a “look back” review in regards to the 41,895 deferred shares issued in July 2016. The Remuneration Committee recommended that all of the deferred shares should vest in accordance with the terms of the arrangement and this was approved by the Board. The 41,895 shares have since been transferred to Mr Kelaher. $m 200 180 160 140 120 100 80 60 40 20 0 T A P N U 2013 2014 2015 2016 2017 UNPAT Aggregate KMP Bonuses $’000s 2000 1800 1600 1400 1200 1000 800 600 400 200 0 t n u o m A I T S STI payments awarded to KMP are commensurate to the IOOF Group’s levels of profitability and scale of operations. As is consistent with the IOOF Group’s adherence to effective cost management, STI levels from 2013 to 2017 recognise KPIs specific to individuals rather than being solely determined by profitability. 3. Managing Director Remuneration 3.1 Summary of Managing Director remuneration outcomes for 2017 Performance outcomes for the Managing Director for 2017 were as follows: the maximum opportunity for STI in 2017 was 100% of base salary. Assessment against Key Performance Indicators (KPIs) resulted in awarding 85% of the Managing Director’s base salary. Two thirds of this payment was paid in cash ($697,765) and one third in 35,420 deferred shares; the Remuneration Committee performed a look-back for the 41,895 deferred shares awarded in July 2016 and determined it was still appropriate to award the deferred shares. The Remuneration Committee recommended this to the Board. These were released to Mr Kelaher in August 2017; and the performance rights awarded in 2015 were subject to performance testing during 2017. The IOOF Group’s TSR of 36.9% over the three year performance period placed it at the 58th percentile relative to the ASX 200 as a comparator group. This percentile ranking means that 66%, or 49,500 of the 75,000 performance rights awarded to Mr Kelaher, have vested. • • • 46 IOOF annual report 2017 3.2.1 Short term incentive: targets and outcomes The key areas of focus for the Managing Director’s STI targets/objectives for the 2017 performance period are shown below. The targets/objectives which were set for the 2016/2017 year included both objective and subjective measures. The Board through its Remuneration Committee assessed each of the Managing Director’s targets and awarded an STI amount of $1,046,648. The STI awarded represents 85% of the total opportunity for the 2017 performance period. KPI Customer Operations Measure Outcome Improve key processes and implement new operating model from ClientFirst strategy Achieved - significant progress on ClientFirst and improvement in Wealth Insights ranking Continue to simplify the business and drive productivity improvements Achieved - implementation of Project Unite, product rationalisations and business restructures Growth/Strategy Drive organic growth initiatives, net flows and consider appropriate acquisitions Achieved - net flows improvement. Consideration of various potential acquisitions, with National Australia Trustees transaction successful Leadership and people Employee alignment and engagement, governance KPIs, leadership of the executive team Achieved - launch of IOOF purpose and strategy on a page and action planning on employee engagement initiatives Compliance and risk Testing of implementation of review recommendations Achieved - all recommendations successfully implemented The Managing Director received a higher overall STI than in the prior financial year in large part for the significant progress on customer initiatives, financial performance during a period of significant change, organic growth, cost reduction and a continued disciplined approach to potential acquisition opportunities. 3.2.2 Long term incentive: targets and outcomes The Managing Director is eligible for an LTI payment, with the amount to be determined each year by the Board. The LTI amount is paid via performance rights, subject to a gateway qualifying condition and TSR hurdle. Performance rights - gateway condition Notwithstanding the gateway qualifying condition and TSR hurdle, the awarding of performance rights or similar remuneration bonuses remains at the discretion of the Board. For consideration to be given to the awarding of any performance rights to the Managing Director, the IOOF Group must achieve a minimum RoE of 1.5 times the Long Term Bond Rate (10 year bond yield) (LTBR). Only when this gateway condition is met, is consideration given to the TSR hurdle and the potential vesting of performance rights. That is, if less than 1.5 times the LTBR is achieved, no performance rights are eligible to vest. If 1.5 and up to 2.0 times the LTBR is achieved, 50% of the performance rights are eligible to vest. If 2.0 to up to 2.5 times is met, then 75% of the performance rights will be eligible to vest and 100% will be eligible to vest if 2.5 times (or above) the LTBR is achieved. The RoE gateway condition has been developed by the Board to ensure that an LTI is not paid in a period of low or negative performance. RoE is calculated by dividing UNPAT pre-amortisation by average equity on issue during the year. Summary of RoE performance against the LTBR over the past 5 years is outlined below: IOOF RoE v LTBR Performance rights eligible to be tested against hurdles Performance rights - 2017 series performance hurdle 2017 4.5 x 100% 2016 3.8 x 100% 2015 3.9 x 100% 2014 4.0 x 100% 2013 3.3 x 100% As noted above, only once the gateway qualifying condition is satisfied, will the performance hurdle be assessed. The performance hurdle relates to the IOOF Group’s TSR over a three year period from 1 July 2016 to 30 June 2019 measured against the TSR of a group of companies comprising the S&P ASX 200 as at 1 July 2016. The performance rights are subject to a TSR hurdle whereby the IOOF Group’s TSR must be greater than the median TSR of S&P/ASX200. The TSR hurdle has progressive vesting on a straight line basis, such that 2% of LTI awards vest for each 1% ranking increase from 50th percentile. All vest if 75th percentile is achieved. 47 IOOF annual report 2017 Remuneration report (cont’d) As approved at the Annual General Meeting on 24 November 2016, Mr Kelaher is entitled to participate in an LTI program offering a maximum reward opportunity of 120,000 performance rights in respect of the 1 July 2016 to 30 June 2019 performance period. The number of rights submitted to the AGM for approval was determined on 28 July 2016 by the Remuneration and Nominations Committee based on the face value of the shares, up to a maximum of 90% of the Managing Directors base salary. On that date, the face value of IOOF shares was $9.00, hence 120,000 performance rights were granted for a total maximum value of $1,080,000 (89% of total base salary). A summary of the current performance rights on issue to Mr Kelaher is as follows: Year Performance Hurdle 2017 2016 2015 TSR greater than median TSR of the S&P/ASX200 (progressive vesting) TSR greater than median TSR of the S&P/ASX200 (progressive vesting) TSR greater than median TSR of the S&P/ASX200 (progressive vesting) (66% satisfied) Grant date Performance period 24 Nov 16 2017-2019 Rights eligible to vest 120,000 Vesting date 30 Jun 19 26 Nov 15 2016-2018 75,000 30 Jun 18 25 Nov 14 2015-2017 49,500 30 Jun 17 2015-2017 performance results (2015 series performance rights) The below figure compares IOOF’s TSR performance against the median TSR of the ASX 200 over the 2015 to 2017 performance period. Figure 1 IOOF TSR Versus ASX200 Median and Upper Quartile IOOF Total Shareholder Return Performance vs Members of ASX200 Final data points (as at 30 June 2017) are based on 20-day VW APs rather than closing prices. ) 4 1 - n u J - 0 3 @ 0 0 1 = e s a b ( x e d n I n r u t e R l a t o T 200 150 100 50 0 Jun 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 IOOF Holdings Ltd ASX200 Upper Quartile ASX200 Median The IOOF Group’s TSR performance over the period was 36.9% placing it at the 58th percentile relative to the ASX 200. This resulted in 66% or 49,500 of 75,000 performance rights vesting in July 2017. 2018 Series Approval to be sought at the November 2017 Annual General Meeting - Managing Director Approval will be sought at the 24 November 2017 Annual General Meeting for the issue of 122,500 performance rights. The gateway qualifying condition and performance hurdles will remain the same as those selected for the 2015, 2016 and 48 2017 grants. The performance period will be from 1 July 2017 to 30 June 2020, with vesting to occur on 1 July 2020. The number of rights was determined on 1 August 2017 by the Remuneration Committee and Board based on the face value of the shares, up to a maximum of 100% of the Managing Director’s base salary. On that date, the face value of IOOF shares was $10.04, hence 122,500 performance rights were granted for a total maximum value of $1,231,350 (100% of total base salary). 3.3 Change of control and cessation of employment The Board has determined that, if there is a change of control, any unvested LTIs may vest subject to the approval of the Board. If the Board so determines, any unvested performance rights may become exercisable. On cessation of employment, unvested LTIs will be dealt with as follows: Reason for termination Treatment of unvested LTIs Termination of employment by IOOF by notice The Board has discretion to waive the performance hurdles or determine that the proportion (if any) of unvested LTIs that will vest Termination of employment by IOOF for cause Resignation by Mr Kelaher Dismissal for serious misconduct (eg fraud) Unvested performance rights and share options are forfeited The Board has discretion to waive the performance hurdles or determine that the proportion (if any) of unvested LTIs that will vest Unvested performance rights and share options are forfeited IOOF annual report 2017 3.4 Remuneration for the year ended 30 June 2018 The Board, on the recommendation of the Remuneration Committee, has increased the Managing Director’s total fixed annual remuneration to $1,257,208 for the financial year commencing 1 July 2017. STI terms will be the same as for the year ended 30 June 2017, with an opportunity of up to 100% of total fixed remuneration, with specific performance hurdles relating to: the continuing growth of the business, product development, achievement of management efficiencies, succession planning, profitability, compliance, risk management and corporate governance. The STI deferral arrangements remain unchanged with two thirds of the STI award to be paid in cash shortly after the performance assessment has been completed at year end, and one third will be used to purchase Company shares which will vest in July 2019 after a “look back” review. 4. Key Management Personnel Remuneration 4.1 Key Management Personnel remuneration The remuneration of other executive KMP is determined by the Managing Director, recommended by the Remuneration Committee and approved by the Board. Details of the total value of fixed, STI and LTI for each other executive KMP is provided in section 1 of this report. 4.1.1 Short term incentive: targets and outcomes At the end of the year, their targets were assessed by the Managing Director and considered and approved by both the Remuneration Committee and the Board. The outcome of each assessment is set out below: Other Executive KMP D Coulter1 S Merlicek R Mota1 G Riordan TFR $ 440,000 424,300 500,000 466,800 STI opportunity STI awarded % awarded in year % forfeited in year $ $ 220,000 424,300 250,000 233,400 300,000 63,645 350,000 140,000 136% 15% 140% 60% 0% 85% 0% 40% 1 Total STI awarded exceeded the maximum STI opportunity at the discretion of the Managing Director, as approved by the Board. 4.1.2 Long term incentive: targets and outcomes A summary of the current performance rights on issue to key management personnel is as shown below. Vesting of performance rights is subject to serving a three year employment period commencing on the date of grant. 50% of the grant is then subject to a TSR progressive vesting scale. This scale is the same as applies to the Managing Director as outlined in section 3.2.2 of this report. In July 2017, the other executive KMP each had 8,250 of 12,500 performance rights vest under this TSR measure and a further 12,500 each vested on the basis of fulfilling a three year service period obligation. The aggregated vested performance rights for other executive KMP was 83,000. Year 2018 2017 2016 2015 Performance period Grant date IOOF TSR for the period % Ranking relative to ASX200 Vesting status at 30 Jun 2017 2018-2020 2017-2019 2016-2018 2015-2017 21 Aug 17 Performance period not complete 10 Jul 16 02 Jul 15 18 Jul 14 Performance period not complete Performance period not complete 36.9% 58th 66% vested Vesting date 30 Jun 20 30 Jun 19 30 Jun 18 30 Jun 17 49 IOOF annual report 2017 Remuneration report (cont’d) 5. Remuneration tables 5.1 Deferred shares and performance rights over equity instruments granted as compensation during 2017 Details of deferred shares and performance rights over ordinary shares in the Company that were granted as compensation to each Executive during the reporting year are as follows: Name Type of instrument Number granted Grant date Vesting date Instrument fair value Vested during 2017 Managing Director C Kelaher LTI performance rights 120,000 24-Nov-16 30-Jun-19 STI deferred shares 35,420 30-Jun-17 01-Jul-18 Other Executive KMP D Coulter S Merlicek1 R Mota G Riordan 1 Rights lapsed on 30 June 2017. LTI performance rights LTI performance rights LTI performance rights LTI performance rights 30,000 30,000 30,000 30,000 09-Sep-16 09-Sep-16 09-Sep-16 09-Sep-16 30-Jun-19 30-Jun-19 30-Jun-19 30-Jun-19 $4.50 $9.85 $6.10 $6.10 $6.10 $6.10 - - - - - - In addition to a continuing employment service condition, the ability to exercise the performance rights is conditional on the IOOF Group achieving certain performance hurdles. Details of the performance criteria are included in the performance rights hurdles at sections 3 and 4 of the Remuneration Report. The following series performance hurdles were tested during the financial year: Name Type of instrument Managing Director C Kelaher Other Executive KMP D Coulter S Merlicek R Mota G Riordan 2015 deferred shares2 2015 rights3 2015 rights3 2015 rights3 2015 rights3 2015 rights3 % vested in year % forfeited in year1 100.0% 66.0% 66.0% 66.0% 66.0% 66.0% 0.0% 34.0% 34.0% 34.0% 34.0% 34.0% 1 The percentage forfeited in the year represents the reduction from the maximum number of options or performance rights available to vest due to performance criteria not being achieved. 2 The Remuneration and Nominations Committee performed a “look back” for these deferred shares and determined it was still appropriate to award them. 3 These performance rights are subject to a TSR hurdle. Refer section 2.4 for further details. 50 IOOF annual report 2017 5.2 Summary of Key Management Personnel deferred shares and performance rights holdings There have been no alterations to the terms of share-based payment transactions during the current or the prior reporting years. Details on deferred ordinary shares and performance rights in the Company that were granted as compensation to each key management person during the reporting year and details on the vesting profiles of each are as follows: Name Type of instrument Grant date Number granted1 Balance as at 1 Jul 16 Granted as compen- sation Exercised Forfeited/ Lapsed Balance as at 30 Jun 17 - - - - - (25,500) 120,000 75,000 49,500 Deferred shares vested during the year Financial years in which grant vests/ vested 2019 2018 2017 2016 2015-2017 - - - - - 35,420 - 2019 - 41,895 41,895 2018 19-Aug-15 26,984 26,984 - (26,984) - - 2017 Managing Director C Kelaher 2017 rights 24-Nov-16 120,000 - 120,000 2016 rights 26-Nov-15 2015 rights 25-Nov-14 75,000 75,000 75,000 75,000 2014 rights 26-Nov-13 100,000 54,000 2012 rights 1-Jul-11 150,000 32,175 - - - - 30-Jun-17 35,420 - 35,420 30-Jun-16 41,895 41,895 - 2017 deferred shares2 2016 deferred shares 2015 deferred shares Other Executive KMP D Coulter 2017 rights 9-Sep-16 2016 rights 2-Jul-15 2015 rights 18-Jul-14 2014 rights 22-Aug-13 S Merlicek 2017 rights 9-Sep-16 2016 rights 2-Jul-15 2015 rights 18-Jul-14 R Mota 2017 rights 9-Sep-16 2016 rights 2-Jul-15 2015 rights 18-Jul-14 2014 rights 22-Aug-13 G Riordan 2017 rights 9-Sep-16 2016 rights 2-Jul-15 2015 rights 18-Jul-14 2014 rights 22-Aug-13 1 Exercise price at grant date is $nil. 30,000 15,000 25,000 25,000 30,000 15,000 25,000 30,000 15,000 25,000 25,000 30,000 15,000 25,000 25,000 - 30,000 15,000 25,000 19,250 - - - - 30,000 15,000 25,000 - - - 30,000 15,000 25,000 19,250 - - - - 30,000 15,000 25,000 19,250 - - - (54,000) (32,175) - - - - - (19,250) - - - - - - (19,250) - - - - - - (4,250) - (30,000) (15,000) (4,250) - - (4,250) - - - (4,250) 30,000 15,000 20,750 - - - 20,750 30,000 15,000 20,750 - 30,000 15,000 20,750 (19,250) - - 2 In August 2017, Mr Kelaher was awarded an STI amount of $1,046,648 for the 2017 financial year of which one-third was settled in the form of deferred shares. The number of deferred shares issued was 35,420 which will vest in July 2018 subject to Board look-back provisions. 2019 2018 2017 2016 2019 2018 2017 2019 2018 2017 2016 2019 2018 2017 2016 51 IOOF annual report 2017 Remuneration report (cont’d) 5.3 Performance rights granted since the end of the financial year The Board resolved on 1 August 2017 to offer the following performance rights to Other Executive KMP: Name Type of instrument D Coulter R Mota G Riordan LTI performance rights LTI performance rights LTI performance rights Number granted Vesting date 30,000 30,000 20,000 30-Jun-20 30-Jun-20 30-Jun-20 Exercise price $ $nil $nil $nil In addition to continued service to the IOOF Group, the performance hurdle remains unchanged from previous TSR hurdle over three years as outlined in section 3.2.2. 6. Summary of Key Management Personnel Contracts Details of the employment contracts, as applied during the financial year, are as follows: Executive Term Managing Director Termination notice period – IOOF1,2 Termination notice period – Executive C Kelaher Ongoing 12 months Other Executive KMP D Coulter S Merlicek R Mota G Riordan Ongoing Ongoing Ongoing Ongoing 6 months 6 months 7 months 6 months 3 months 3 months 3 months 5 weeks 6 months 1 Termination provisions - the IOOF Group may elect to make a payment in lieu of part or all of the notice periods, incorporating unpaid leave entitlements and pro- rated entitlement to STI (if applicable). 2 The Board has discretion regarding treatment of unvested short and long-term incentives. 7. Shareholdings of Key Management Personnel The relevant interest of KMP in the shares issued by the Company, is as follows: Ordinary shares Managing Director C Kelaher Other Executive KMP D Coulter S Merlicek R Mota G Riordan 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 Balance at 1 July No. 3,305,290 4,856,291 252,043 242,043 170,000 141,805 93,009 68,009 25,000 - Received on vesting of performance No. 113,159 352,817 19,250 25,000 - 25,000 19,250 25,000 19,250 25,000 Net other change No. Balance at 30 June1 No. 25,000 3,443,449 (1,903,818) 3,305,290 - (15,000) (70,000) 3,195 (9,250) - - - 271,293 252,043 100,000 170,000 103,009 93,009 44,250 25,000 1 The equity holdings for the above individuals is inclusive of both direct and indirect shareholdings. 52 IOOF annual report 2017 8. Non-Executive Directors’ Remuneration 8.1 Overview Non-Executive Directors are remunerated for their skilled input, time responsibilities and commitment to the IOOF Group through the payment of a fixed fee inclusive of superannuation. Non-Executive Directors do not receive additional fees for service on individual Board Committees or subsidiary companies. To ensure that independence and impartiality is maintained, fees to Non-Executive Directors are not linked to the performance of the Company and Non-Executive Directors are not eligible to participate in any of the IOOF Group’s incentive arrangements. 8.2 Terms of appointment All Non-Executive Directors have letters of appointment detailing the terms under which they are engaged. The term of appointment for each is open-ended, subject to the provisions of the Corporations Act and the Company’s Constitution. Under the Constitution, one-third of Directors must retire from office each year and may seek re-election by shareholders at the Annual General Meeting of the Company. The Company’s Constitution requires that the aggregate remuneration paid or provided to all Non-Executive Directors in any financial year by the Company, its subsidiaries and associated entities may not exceed an amount approved by shareholders. This ceiling amount includes all remuneration provided to Non-Executive Directors, including superannuation but not including retirement benefits. The current limit of $1,250,000 per annum was approved by shareholders at the 2013 Annual General Meeting and the remuneration for all Non-Executive Directors remains within the shareholder approved limits. Elements Details Current Board fees 2016/2017 Fees per annum were: IOOF Holdings Board Chairperson fee IOOF Holdings Board Non-Executive Director fee $285,000 $170,000 Post-employment benefits Superannuation contributions are made at a rate of 9.5% (up to the Government’s prescribed maximum contributions limit) which satisfies the IOOF Group’s statutory superannuation contributions and are included in the base fee. The Board withdrew the retirement benefit from the potential remuneration for new Non-Executive Directors. The program continued for Directors appointed prior to 13 April 2003 to fulfil the terms of an historical agreement. However the maximum payment available was capped at $475,000. This benefit provided for a cash based payment to Non-Executive Directors at the time of their retirement and, subject to the cap noted above, was calculated as follows: Period of service as a Non-Executive Director Benefit Value1 0 to < 3 years 3 to 5 years > 5 years to 10 years > 10 years Nil AAE times 1.0 AAE times 1.5 AAE times 2.0 The retirement benefits plan sole participant was R Sexton and a payment of $475,000 was paid upon his retirement on 24 November 2016. This plan is no longer in operation. 1 “AAE” = Annual Average Emoluments over the last 3 years of service to date of retirement. 53 IOOF annual report 2017 Remuneration report (cont’d) 8.3 Shareholdings of Non-Executive Directors The relevant interest of each Non-Executive Director in the shares issued by the Company, as notified by the Directors to the ASX in accordance with s.205G(1) of the Corporations Act 2001 is as follows: Name G Venardos J Harvey A Griffiths E Flynn J Selak Balance as at 1 Jul 2016 Shares from changes during the year Balance as at 30 Jun 2017 1 Balance as at report sign-off date 41,816 23,578 30,000 20,000 - 10,000 - - - 25,000 51,816 23,578 30,000 20,000 25,000 51,816 23,578 30,000 20,000 25,000 1 The following shares (included in the holdings above) were held on behalf of the Non-Executive Directors (ie. indirect beneficially held shares) as at 30 June 2017: G Venardos - 51,816; J Harvey - 23,578; A Griffiths - 30,000; E Flynn - 20,000; and J Selak - 25,000. 9. Payments to persons before taking office No Director or member of senior management appointed during the year received a payment as part of his or her consideration for agreeing to hold the position. This Directors’ report is signed in accordance with a resolution of the Directors made pursuant to s.298(2) of the Corporations Act 2001. This report is made by a resolution of the Directors: Mr George Venardos Chairman 29 August 2017 54 Directors’ declaration For the year ended 30 June 2017 IOOF annual report 2017 1. In the opinion of the Directors of the Company: (a) the consolidated financial statements and notes set out on pages 61 to 117, and the Remuneration Report, set out on pages 38 to 54 in the Directors’ Report, are in accordance with the Corporations Act 2001 including: (i) giving a true and fair view of the IOOF Group’s financial position as at 30 June 2017 and its performance for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Managing Director and Chief Financial Officer for the financial year ended 30 June 2017. 3. The Directors draw attention to section 7-2 to the consolidated financial statements, which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the Directors: Mr George Venardos Chairman Melbourne 29 August 2017 55 IOOF annual report 2017 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To the Directors of IOOF Holdings Ltd I declare that, to the best of my knowledge and belief, in relation to the audit of IOOF Holdings Ltd for the To the Directors of IOOF Holdings Ltd financial year ended 30 June 2017 there have been: i. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and I declare that, to the best of my knowledge and belief, in relation to the audit of IOOF Holdings Ltd for the financial year ended 30 June 2017 there have been: no contraventions of any applicable code of professional conduct in relation to the audit. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. i. ii. KPMG KPMG DM Waters Partner Melbourne DM Waters 29 August 2017 Partner Melbourne 29 August 2017 KPMG KPMG Rachel Milum Partner Melbourne Rachel Milum 29 August 2017 Partner Melbourne 29 August 2017 30 56 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. 30 Liability limited by a scheme approved under Professional Standards Legislation. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Professional Standards Legislation. Independent Auditor’s Report Independent Auditor’s Report To the members of IOOF Holdings Ltd To the members of IOOF Holdings Ltd Opinion Opinion We have audited the Financial Report of We have audited the Financial Report of The Financial Report comprises: The Financial Report comprises: IOOF Holdings Ltd (the Company). IOOF Holdings Ltd (the Company). In our opinion, the accompanying Financial In our opinion, the accompanying Financial Report of the Company is in accordance Report of the Company is in accordance with the Corporations Act 2001, including: with the Corporations Act 2001, including: • • • • giving a true and fair view of the giving a true and fair view of the Group’s financial position as at 30 Group’s financial position as at 30 June 2017 and of its financial June 2017 and of its financial performance for the year ended on performance for the year ended on that date; and that date; and complying with Australian Accounting complying with Australian Accounting Standards and the Corporations Standards and the Corporations Regulations 2001. Regulations 2001. • Consolidated statement of financial position as at 30 • Consolidated statement of financial position as at 30 June 2017; June 2017; • Consolidated statement of comprehensive income, • Consolidated statement of comprehensive income, Consolidated statement of changes in equity, and Consolidated statement of changes in equity, and Consolidated statement of cash flows for the year Consolidated statement of cash flows for the year • Notes including a summary of significant accounting • Notes including a summary of significant accounting then ended; then ended; policies; and policies; and • Directors’ Declaration. • Directors’ Declaration. The Group consists of the Company and the entities it The Group consists of the Company and the entities it controlled at the year-end or from time to time during controlled at the year-end or from time to time during the financial year. the financial year. Basis for opinion Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditor’s responsibilities for Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. The Key Audit Matter we identified is: The Key Audit Matter we identified is: Key Audit Matters are those matters that, in our Key Audit Matters are those matters that, in our Key Audit Matters Key Audit Matters • Valuation of Goodwill and Intangible • Valuation of Goodwill and Intangible Assets Assets professional judgment, were of most significance in our professional judgment, were of most significance in our audit of the Financial Report of the current period. audit of the Financial Report of the current period. These matters were addressed in the context of our These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate our opinion thereon, and we do not provide a separate opinion on these matters. opinion on these matters. KPMG, an Australian partnership and a member firm of the KPMG KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Liability limited by a scheme approved under Professional Standards Legislation. Professional Standards Legislation. 31 31 IOOF annual report 2017 Independent Auditor’s Report Independent Auditor’s Report Independent Auditor’s Report To the members of IOOF Holdings Ltd To the members of IOOF Holdings Ltd To the members of IOOF Holdings Ltd Opinion Opinion We have audited the Financial Report of We have audited the Financial Report of Opinion IOOF Holdings Ltd (the Company). IOOF Holdings Ltd (the Company). We have audited the Financial Report of In our opinion, the accompanying Financial In our opinion, the accompanying Financial IOOF Holdings Ltd (the Company). Report of the Company is in accordance Report of the Company is in accordance with the Corporations Act 2001, including: with the Corporations Act 2001, including: In our opinion, the accompanying Financial Report of the Company is in accordance • giving a true and fair view of the • giving a true and fair view of the with the Corporations Act 2001, including: Group’s financial position as at 30 Group’s financial position as at 30 June 2017 and of its financial June 2017 and of its financial giving a true and fair view of the performance for the year ended on performance for the year ended on Group’s financial position as at 30 that date; and that date; and June 2017 and of its financial performance for the year ended on complying with Australian Accounting complying with Australian Accounting that date; and Standards and the Corporations Standards and the Corporations Regulations 2001. Regulations 2001. complying with Australian Accounting Standards and the Corporations Regulations 2001. • • • • The Financial Report comprises: The Financial Report comprises: • Consolidated statement of financial position as at 30 • Consolidated statement of financial position as at 30 The Financial Report comprises: June 2017; June 2017; • Consolidated statement of financial position as at 30 • Consolidated statement of comprehensive income, • Consolidated statement of comprehensive income, June 2017; Consolidated statement of changes in equity, and Consolidated statement of changes in equity, and Consolidated statement of cash flows for the year Consolidated statement of cash flows for the year • Consolidated statement of comprehensive income, then ended; then ended; Consolidated statement of changes in equity, and Consolidated statement of cash flows for the year • Notes including a summary of significant accounting • Notes including a summary of significant accounting then ended; policies; and policies; and • Notes including a summary of significant accounting • Directors’ Declaration. • Directors’ Declaration. policies; and The Group consists of the Company and the entities it The Group consists of the Company and the entities it • Directors’ Declaration. controlled at the year-end or from time to time during controlled at the year-end or from time to time during the financial year. the financial year. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. Basis for opinion Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit Basis for opinion evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit Our responsibilities under those standards are further described in the Auditor’s responsibilities for Our responsibilities under those standards are further described in the Auditor’s responsibilities for evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. the audit of the Financial Report section of our report. the audit of the Financial Report section of our report. Our responsibilities under those standards are further described in the Auditor’s responsibilities for We are independent of the Group in accordance with the Corporations Act 2001 and the ethical We are independent of the Group in accordance with the Corporations Act 2001 and the ethical the audit of the Financial Report section of our report. requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in We are independent of the Group in accordance with the Corporations Act 2001 and the ethical Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. Key Audit Matters Key Audit Matters The Key Audit Matter we identified is: The Key Audit Matter we identified is: Key Audit Matters • Valuation of Goodwill and Intangible • Valuation of Goodwill and Intangible The Key Audit Matter we identified is: Assets Assets • Valuation of Goodwill and Intangible Assets Key Audit Matters are those matters that, in our Key Audit Matters are those matters that, in our professional judgment, were of most significance in our professional judgment, were of most significance in our audit of the Financial Report of the current period. audit of the Financial Report of the current period. Key Audit Matters are those matters that, in our professional judgment, were of most significance in our These matters were addressed in the context of our These matters were addressed in the context of our audit of the Financial Report of the current period. audit of the Financial Report as a whole, and in forming audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate our opinion thereon, and we do not provide a separate These matters were addressed in the context of our opinion on these matters. opinion on these matters. audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. 31 31 KPMG, an Australian partnership and a member firm of the KPMG KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. International Cooperative (“KPMG International”), a Swiss entity. 31 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Liability limited by a scheme approved under Professional Standards Legislation. Professional Standards Legislation. Liability limited by a scheme approved under Professional Standards Legislation. 57 IOOF annual report 2017 Valuation of Goodwill and Intangible Assets - $954.8m and $441.1m Other Information Refer to Note 4-3 Goodwill and 4-2 Intangible Assets to the Financial Report The key audit matter How the matter was addressed in our audit responsible for the Other Information. A key audit matter was whether the Group’s value in use models for goodwill and intangible assets impairment included assumptions that were supportable and appropriate under accounting standards. Specific intangible assets we focussed on related to customer relationships and brand names. The size of the goodwill and intangible assets relative to the total assets of the Group (being 34.7% and 16.0% respectively) and the level of judgement required by the Group, contributed to this being a key audit matter. The models and forecast assumptions incorporated significant judgement in respect of key factors such as discount rates, revenue growth, and forecasted funds under management, as well as economic assumptions such as inflation rates. Changes in the underlying assumptions can significantly impact the recoverable amount of the relevant intangible assets and can therefore give rise to impairment. The Group recorded an impairment charge of $38.6m against goodwill. This related to the Perennial Cash Generating Unit (“CGU”) as a result of reduced profitability from both lower revenue due to institutional outflows, and higher costs due to the absence of operational scale and subsidisation following the divestment of other Perennial entities. This increased the sensitivity of the model to small changes and further increased our audit effort in this key audit area. We involved valuation specialists to supplement our senior audit team members in assessing this key audit matter. Working with our valuation specialists, our procedures included: • Testing of key controls, such as the review and approval of internal forecasts, to evaluate the Group’s goodwill and intangible asset valuation process; • • We considered the appropriateness of the value in use method applied by the Group to perform the annual test of goodwill and intangibles for impairment against the requirements of the accounting standards. For goodwill, customer relationships and brand names we challenged the Group’s key assumptions, in particular those relating to discount rates, revenue growth and forecasted funds under management by analysing historical data and taking into consideration expected future events, and corroborating the key market related assumptions to external data, through the following procedures: - We compared relevant data in the models to the latest Board approved forecasts. - We assessed the accuracy of previous Group forecasts to inform our evaluation of forecasts incorporated in the models. - We independently developed a discount rate range considered comparable using publicly available market data for comparable entities, adjusted by risk factors specific to the Group’s CGUs and the industry they operate in. - We assessed the integrity of the value in use models used, including the accuracy of the underlying calculation formulas. - We considered the sensitivity of the models by varying key assumptions such as revenue growth and discount rates, within a reasonably possible range, to identify those CGUs at higher risk of impairment and to focus our further procedures. - We assessed the key assumptions for consistent application across the Group. • We recalculated the impairment charge from the Perennial CGU model against the recorded amount and reconciled it to the amount disclosed; and • We assessed the disclosures in the financial report using our understanding of the issue obtained from our testing and against the requirements of the accounting standards. Other Information is financial and non-financial information in IOOF Holdings Ltd’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are The Other Information we obtained prior to the date of this Auditor’s Report was the Directors’ report and Remuneration report. The remaining other information is expected to include: About IOOF, Our Major Brands, Chairman’s Letter, Managing Director’s Commentary, Our financial Performance, Divisional Updates and Shareholder Information and is expected to be made available to us after the date of the Auditor's Report. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: • • • • • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error assessing the Group’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our Auditor’s Report. 58 32 33 IOOF annual report 2017 Other Information Other Information is financial and non-financial information in IOOF Holdings Ltd’s annual reporting which is provided in addition to the Financial Report and the Auditor’s Report. The Directors are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditor’s Report was the Directors’ report and Remuneration report. The remaining other information is expected to include: About IOOF, Our Major Brands, Chairman’s Letter, Managing Director’s Commentary, Our financial Performance, Divisional Updates and Shareholder Information and is expected to be made available to us after the date of the Auditor's Report. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: • preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 • • implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error assessing the Group’s ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the Financial Report Our objective is: • • to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditor’s Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our Auditor’s Report. 33 59 IOOF annual report 2017 Report on the Remuneration Report Opinion Directors’ responsibilities In our opinion, the Remuneration Report of IOOF Holdings Ltd for the year ended 30 June 2017, complies with Section 300A of the Corporations Act 2001. The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in pages 14 to 28 of the financial report for the year ended 30 June 2017. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. KPM_INI_01 KPMG DM Waters Partner Melbourne 29 August 2017 29 August KPMG Rachel Milum Partner Melbourne 29 August 2017 60 34 Consolidated statement of comprehensive income For the year ended 30 June 2017 IOOF annual report 2017 Continuing operations Revenue Expenses Share of profits of associates accounted for using the equity method Finance costs Profit before tax Income tax expense Statutory fund Statutory fund revenue* Statutory fund expenses* Income tax (expense)/benefit - statutory* Statutory fund contribution to profit, net of tax Profit for the year from continuing operations Non-controlling interest Profit attributable to Owners of the Company from continuing operations Discontinued operation Profit for the year from discontinued operation Profit for the year attributable to owners of the Company Other comprehensive income Items that may be reclassified subsequently to profit or loss: Net change in fair value of available-for-sale financial assets Exchange differences on translating foreign operations Income tax on other comprehensive income Other comprehensive income/(expense) for the year, net of income tax** Non-controlling interest Total comprehensive income for the year Profit attributable to: Owners of the Company Non-controlling interest Profit for the year Total comprehensive income attributable to: Owners of the Company Non-controlling interest Total comprehensive income for the year Earnings per share: Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Earnings per share - continuing operations: Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Note 2-3 2-4 2-6 5-4 5-4 5-4 2017 $’000 907,519 (724,745) 3,478 (6,828) 179,424 (59,573) 65,016 (52,124) (12,892) - 119,851 (3,861) 115,990 2016 $’000 907,882 (713,217) 4,831 (7,353) 192,143 (51,601) 62,937 (58,200) (4,737) - 140,542 (2,620) 137,922 2-2 - 58,924 115,990 196,846 3,770 15 (1,134) 2,651 3,861 3,648 118 (1,109) 2,657 2,620 122,502 202,123 115,990 3,861 119,851 118,641 3,861 122,502 38.7 38.6 38.7 38.6 196,846 2,620 199,466 199,503 2,620 202,123 65.7 65.4 46.0 45.8 Notes to the consolidated financial statements are included on pages 66 to 117. * A subsidiary of the Company, IOOF Ltd, is a friendly society in accordance with the Life Insurance Act 1995. The funds operated by IOOF Ltd, and any trusts controlled by those funds, are treated as statutory funds in accordance with the Life Insurance Act 1995. These statutory funds are required to be consolidated in accordance with accounting standards and are shown separately from shareholder funds in the financial statements. ** Total items that may be reclassified subsequently to profit or loss. 61 IOOF annual report 2017 Consolidated statement of financial position For the year ended 30 June 2017 Assets Cash Receivables Other financial assets Prepayments Deferred acquisition costs Associates Property and equipment Intangible assets Goodwill Assets relating to statutory funds* Total assets Liabilities Payables Borrowings Current tax liabilities Contingent consideration Provisions Deferred tax liabilities Deferred revenue liability Lease incentives Liabilities relating to statutory funds* Total liabilities Net assets Equity Share capital Reserves Accumulated losses Total equity attributable to equity holders of the Company Non-controlling interest Total equity Note 1-1(d) 1-1(d) 1-1(d) 4-1 4-2 4-3 5-1 1-1(d) 3-2 1-1(d) 4-4 2-6 2017 $’000 208,218 108,401 45,430 14,403 1,913 21,081 21,480 441,079 954,867 934,119 2016 $’000 186,992 102,378 43,378 11,828 2,482 22,667 21,863 480,169 991,712 879,349 2,750,991 2,742,818 60,007 206,948 25,813 1,839 64,639 92,949 1,800 2,429 68,781 206,975 17,930 1,491 62,394 101,163 2,499 2,536 5-2 934,119 879,349 1,390,543 1,343,118 1,360,448 1,399,700 3-3 3-5 1,434,459 1,436,460 13,349 (97,048) 11,266 (57,501) 1,350,760 1,390,225 9,688 9,475 1,360,448 1,399,700 Notes to the consolidated financial statements are included on pages 66 to 117. * A subsidiary of the Company, IOOF Ltd, is a friendly society in accordance with the Life Insurance Act 1995. The funds operated by IOOF Ltd, and any trusts controlled by those funds, are treated as statutory funds in accordance with the Life Insurance Act 1995. These statutory funds are required to be consolidated in accordance with accounting standards and are shown separately from shareholder funds in the financial statements. 62 Consolidated statement of changes in equity For the year ended 30 June 2017 For the year ended 30 June 2017 Ordinary shares Treasury shares Reserves Accu- mulated losses Total Non- controlling interest Total equity IOOF annual report 2017 $’000 1,439,276 $’000 (2,816) $’000 11,266 $’000 $’000 $’000 $’000 (57,501) 1,390,225 9,475 1,399,700 Balance at 1 July 2016 Total comprehensive income for the year Profit for the year attributable to owners of the Company Other comprehensive income for the year, net of income tax Total comprehensive income for the year Contributions by and (distributions to) owners Dividends to equity holders Share-based payment expense Operating Risk Financial Reserve Transfer from employee equity- settled benefits reserve on exercise of options Treasury shares transferred to recipients during the year Transfer of lapsed share options to retained earnings Purchase of treasury shares - 115,990 115,990 3,861 119,851 2,651 - 2,651 - 2,651 2,651 115,990 118,641 3,861 122,502 - (155,934) (155,934) (3,648) (159,582) 1,295 (144) (1,322) - - - - 1,295 (144) - - - (1,997) 1,997 - - (397) 397 - - - - - - 1,295 (144) - - - (3,323) - - - - - - 1,322 - - - - - - - - - (3,323) (1,326) (4,142) Total transactions with owners (675) Balance at 30 June 2017 1,438,601 Notes to the consolidated financial statements are included on pages 66 to 117. - - (3,323) (568) (155,537) (158,106) (3,648) (161,754) 13,349 (97,048) 1,350,760 9,688 1,360,448 63 IOOF annual report 2017 Consolidated statement of changes in equity For the year ended 30 June 2017 For the year ended 30 June 2016 Ordinary shares Treasury shares Reserves Accu- mulated losses Total Non- controlling interest Total equity $’000 1,444,903 $’000 (7,146) $’000 (8,918) $’000 $’000 $’000 $’000 (66,224) 1,362,615 9,643 1,372,258 Balance at 1 July 2015 Total comprehensive income for the year Profit for the year attributable to owners of the Company Other comprehensive income for the year, net of income tax Total comprehensive income for the year Transactions with owners, recorded directly in equity Contributions by and (distributions to) owners Dividends to equity holders Share-based payment expense Operating Risk Financial Reserve Proceeds from exercise of options under executive and employee share option plan Transfer from employee equity- settled benefits reserve on exercise of options Treasury shares transferred to recipients during the year Divestment of discontinued operation Transfer of lapsed share options to retained earnings Purchase of treasury shares - - - - - - 210 5,931 - - - - - - - - - - - - - (7,438) 4,330 (2,816) 1,966 2,799 - (5,931) (35) - 17,527 11,266 - 196,846 196,846 2,620 199,466 2,657 - 2,657 - 2,657 2,657 196,846 199,503 2,620 202,123 - (169,430) (169,430) (2,788) (172,218) - - - - - 35 - 1,966 2,799 210 - - - - (7,438) - - - - - - - - 1,966 2,799 210 - - - - (7,438) (11,768) 11,768 - 18,728 (18,728) Total transactions with owners (5,627) Balance at 30 June 2016 1,439,276 (188,123) (171,893) (2,788) (174,681) (57,501) 1,390,225 9,475 1,399,700 Notes to the consolidated financial statements are included on pages 66–117. 64 Consolidated statement of cash flows For the year ended 30 June 2017 IOOF annual report 2017 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Dividends from associates Net stockbroking purchases Non-recurring professional fees Termination and retention incentive payments Income taxes paid Net cash provided by operating activities Cash flows from investing activities Dividends and distributions received Interest received Net proceeds on divestment of discontinued operation, net of tax Acquisition and divestment transaction costs Interest and other costs of finance paid Gain on divestment of subsidiaries Purchase of shares in subsidiaries Proceeds on divestment of other assets Receipt/(payment) of deferred purchase consideration Purchase of non-controlling interests in subsidiaries Net proceeds from sales/(purchases) of financial assets Payments for property and equipment Amounts borrowed from other entities Payments for intangible assets Net cash provided by investing activities Cash flows from financing activities Net borrowings repaid Purchase of treasury shares Proceeds from exercise of IFL share options Dividends paid: - members of the Company - non-controlling members of subsidiary entities - shareholders entitled to contractual share buy-back Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of year Cash and cash equivalents divested Effects of cash reclassified as assets held for sale at 30 June 2015 Operating Risk Financial Reserve cash requirement 3-5 Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of year Notes to the consolidated financial statements are included on pages 66 to 117. Note 2017 $’000 2016 $’000 967,166 1,004,844 (725,564) (757,836) 2-5 3,966 (55) (2,013) (3,933) (60,288) 179,279 823 4,313 - - (6,608) 6,261 (1,045) 14,814 325 - 1,015 (7,440) 18 (4,934) 7,542 (212) (3,323) - (155,934) (3,648) - (163,117) 23,704 186,992 (2,350) - (144) 16 2,757 (596) (5,061) (5,799) (69,458) 168,851 839 5,002 54,586 (1,516) (7,022) - - 5,868 (4,188) (2,112) (944) (8,390) 352 (842) 41,633 (1,087) (7,438) 210 (169,430) (2,788) (1,698) (182,231) 28,253 150,533 - 5,314 2,799 93 208,218 186,992 65 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Section 1 – Financial instruments and risk management The IOOF Group’s activities expose it to a variety of financial and non-financial risks. Financial risks include: market risks (including price risk, currency risk and interest rate risk), credit risk, statutory fund and liquidity risk. The nature of the financial risk exposures arising from financial instruments, the objectives, policies and processes for managing these risks, and the methods used to measure them are detailed below. Key non-financial exposures, such as operational risk and a failure to meet regulatory compliance obligations, are discussed in detail in the Operating and Financial Review. Similarly the objectives, policies and processes for managing the risks of the IOOF Group are separate and distinct from those for the benefit funds and trusts. The funds and trusts are managed under extensive regulatory requirements, and in accordance with specific investment guidelines, risk management strategies, risk management plans, and product disclosure statements. The IOOF Group is managed under a set of separate corporate policies and review processes that are directed toward the interests of the shareholders of the IOOF Group. Information in relation to financial risks associated with the benefit funds and controlled trusts is available in their Product Disclosure Statements and the individual annual financial reports of those trusts. Further information in relation to the Australian Accounting Standards requirement to consolidate the benefit funds and controlled trusts in the consolidated financial statements of the IOOF Group is available in Note 7-3(b) Basis of consolidation. (a) Market risk (i) Price risk Price risk is the risk that the fair value or future earnings of a financial instrument will fluctuate because of changes in market prices (other than from interest rate risk or currency risk, as described later). The financial instruments managed by the IOOF Group that are impacted by price risk consist of investment units held in trusts and available for sale financial assets. The price risk associated with the units held in trusts is that the fair value of those units will fluctuate with movements in the redemption value of those units, which in turn is based on the fair value of the underlying assets held by the trusts. Available for sale financial assets are exposed to price risk as the share price fluctuates. 1-1 Risk management IOOF risk management framework Risk is defined as the chance of an event occurring that will have an impact on the strategic or business objectives of the IOOF Group, including a failure to exploit opportunities. The IOOF Group’s risk management process involves the identification of material risks, assessment of consequence and likelihood, implementation of controls to manage risks, and continuous monitoring and improvement of the procedures in place. The IOOF Group’s objective is to satisfactorily manage its risks in line with the IOOF Group’s Risk Management Policy set by the Board, and this aligns to International Standard ISO 31000. The IOOF Group’s Risk Management Framework manages the risks faced by the IOOF Group, with approaches varying depending on the nature of the risk. The IOOF Group maintains a framework to ensure regulatory compliance obligations are managed in accordance with Australian Standard 3806 Compliance Programs. The IOOF Group’s exposure to all material risks is monitored by the Risk Team and this exposure, and emerging risks, are regularly reported to the Risk and Compliance Committee, and the Board. The IOOF Group’s income and operating cash flows are indirectly impacted by changing market conditions. Its exposure is through the impact of market changes on the level of funds under management and administration, and consequently management fee and service fee revenue. Information has been provided below only on the direct impact of changing market conditions to the IOOF Group’s income and operating cash flows. Financial risk The financial risk management objectives, policies and processes and the quantitative data about the exposure to risk at the reporting date, as set out in the remainder of this note, excludes the benefit funds and the controlled unit trusts. This is because the risks associated with financial instruments held by the benefit funds and controlled trusts are borne by the policyholders and members of those funds and trusts, and not the shareholders of the IOOF Group. There is no direct impact on the net profit or the equity of the IOOF Group as a consequence of changes in markets as they apply to financial instruments held by those funds and trusts at the reporting date. 66 IOOF annual report 2017 IOOF Group sensitivity (b) Credit risk At 30 June 2017 had the price of the units / shares held by the IOOF Group in unlisted unit trusts / shares in other entities increased / decreased by 1% (2016: 1%) with all other variables held constant, post-tax profit for the year would increase / decrease by $5,000 (2016: $15,000) as a result of gains / losses recorded through profit or loss, and available-for-sale reserves would increase / decrease by $178,000 (2016: $147,000). (ii) Currency risk The IOOF Group is exposed to insignificant foreign exchange risk in relation to the financial instruments of its foreign activities in New Zealand and Hong Kong. (iii) Cash flow and interest rate risk Interest rate risk is the risk to the IOOF Group’s earnings and capital arising from changes in market interest rates. The financial instruments held that are impacted by interest rate risk consist of cash, loans, and borrowings. Short and long-term investment mixes and loans to related entities are influenced by liquidity policy requirements. Interest rates (both charged and received) are based on market rates, and are closely monitored by management. They are primarily at variable rates of interest, and expose the IOOF Group to cash flow interest rate risk. Management regularly assesses the appropriateness of the investment of surplus funds with the objective of maximising returns. There is limited exposure to fair value interest rate risk because of the relatively short time frame of any fixed rate investments and borrowings. IOOF Group sensitivity At 30 June 2017, if interest rates had changed by +/- 100 basis points (2016: +/- 100 basis points) from the year-end rates with all other variables held constant, post tax profit for the year would have increased/decreased by $1,448,000 (2016: $1,451,000). Equity would have been higher/lower by the same amount. Credit risk refers to the risk that a counterparty will fail to meet its contractual obligations resulting in financial loss to the IOOF Group. Credit risk arises for the IOOF Group from cash, receivables and loans. The IOOF Group mitigates its credit risk by ensuring cash deposits are held with high credit quality financial institutions and other highly liquid investments are held with trusts operated by the IOOF Group. Where investments are held in units in a trust operated by the IOOF Group, that trust is subject to the rules of the trust deed and the investment in underlying assets is subject to asset allocation guidelines. Receivables consist of management fees receivable, service fees receivable and other amounts receivable from related parties. These counterparties generally do not have an independent credit rating, and the IOOF Group assesses the credit quality of the debtor taking into account its financial position, past experience with the debtor, and other available credit risk information. In relation to management fees receivable, the IOOF Group is contractually entitled to deduct such fees from investors’ account balances, in accordance with the Product Disclosure Statements, and pass the fees to the Responsible Entity or Trustee. Due to this pass-through process the embedded credit risk is considered minimal. Other receivables are regularly monitored by line management. The maximum exposure to credit risk at the reporting date is the carrying value of the financial assets as summarised in the table included in this note below. The IOOF Group does not hold any significant collateral as security over its receivables and loans, apart from its recourse to certain shares in subsidiaries in relation to loans to executives of subsidiaries. There are no significant concentrations of credit risk within the IOOF Group. The IOOF Group does not hold any financial assets whose terms have been renegotiated, but which would otherwise be past due or impaired. The credit quality of the financial assets that are neither past due nor impaired as at balance date was consistent with that described above, and management assesses the credit risk associated with these reported balances as being minimal. Information in relation to impaired receivables and past due but not impaired receivables is included below. 67 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Impaired receivables (c) Statutory Fund Risk Financial risks are monitored and controlled by selecting appropriate assets to back policy liabilities. The assets are regularly monitored by the Investment Management Committee to ensure there are no material exposures and that liability mismatching issues and other risks such as liquidity risk and credit risk are maintained within acceptable limits. The Investment Management Committee is chaired by an independent expert and its membership is drawn from appropriately skilled senior management. There are no Non- Executive Directors on this Committee. The IOOF Group’s friendly society operations are subject to regulatory capital requirements which prescribe the amount of capital to be held depending on the type, quality and concentration of investments held. Procedures are in place to monitor compliance with these requirements. Refer to Section 5 - Statutory funds for further details. (d) Liquidity risk Liquidity risk relates to the IOOF Group having insufficient liquid assets to cover current liabilities and unforeseen expenses. The IOOF Group maintains a prudent approach to managing liquidity risk exposure by maintaining sufficient liquid assets and an ability to access a committed line of credit. It is managed by continuously monitoring actual and forecast cash flows and by matching the maturity profiles of financial assets and liabilities. Temporary surplus funds are invested in highly liquid, low risk financial assets. The IOOF Group had access to undrawn bank borrowing facilities at the balance date, on the terms described and disclosed in section 3-2 Borrowings. The liquidity requirements for licensed entities in the IOOF Group are regularly reviewed and carefully monitored in accordance with those licence requirements. As at 30 June 2017, $3,447,000 trade receivables of the IOOF Group were past due or impaired (2016: $3,495,000). The amount of the impairment provision was $585,000 (2016: $598,000). Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the IOOF Group may not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulty of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 120 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The amount of the impairment loss is recognised in profit or loss within other expenses. When a trade receivable for which an impairment allowance has been recognised becomes uncollectible in a subsequent year, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in profit or loss. Movements in the provisions for impairment of trade receivables are as follows: Carrying value at 1 July Provision for impairment provided/(written back) during the year Receivables written back during the year as collectible Carrying value at 30 June Ageing of trade receivables that were not impaired at 30 June Neither past due nor impaired Past due 31-60 days Past due 61-90 days Past due 91-120 days Trade receivables past due but not impaired 68 2017 2016 $’000 598 (13) - 585 2017 $’000 54,594 1,568 563 731 57,456 3,447 $’000 605 32 (39) 598 2016 $’000 47,561 1,042 504 1,351 50,458 3,495 IOOF annual report 2017 Maturities of financial liabilities The tables below analyse the IOOF Group’s financial liabilities into relevant maturity groupings based on the remaining years at the balance date to the contractual maturity date. The amounts disclosed therein are the contractual undiscounted cash flows. Statutory funds are excluded on the basis that monies held in the benefit funds and controlled trusts are held for the benefit of the members of those funds, and are not available to shareholders or creditors. 2017 Carrying Amount Current Non-Current Total Contractual cash flows 1-5 years 5+ years 1 year or less Total contractual cash flows $’000 $’000 $’000 $’000 $’000 $’000 $’000 Financial liabilities Payables Total payables Borrowing facilities Finance lease liabilities Total borrowings Contingent consideration 60,004 60,004 90,000 40 90,040 1,447 3 3 60,007 60,007 116,908 206,908 - 40 116,908 206,948 392 1,839 60,004 60,004 90,000 40 90,040 1,447 3 3 116,908 - 116,908 392 151,491 117,303 268,794 151,491 117,303 Financial assets available to meet the above financial liabilities 208,218 57,456 44,838 - 102,294 - - 718 5,389 6,107 208,218 57,456 45,556 5,389 208,218 57,456 44,838 - 108,401 102,294 18 - - - 18 679 25,445 679 25,445 18 - - - 8,404 8,404 - 3,731 - 3,731 3,731 - 7,153 7,153 - - - 718 - 718 - 679 - - - - Cash Trade receivables Other receivables Security bonds Total receivables Fair value through profit or loss Shares in listed companies Unlisted unit trusts Available-for-sale investments Loans and other receivables Loans to directors and executives of associated entities Receivables from statutory benefit funds Seed capital receivable Total other financial assets Net financial assets/ (liabilities) 3,749 41,681 45,430 3,749 679 41,002 45,430 314,261 162,770 47,788 (69,515) 362,049 93,255 314,261 162,770 1,397 (115,906) 46,391 46,391 362,049 93,255 69 - - - - - - - - - - 5,389 5,389 - - 25,445 60,007 60,007 206,908 40 206,948 1,839 268,794 208,218 57,456 45,556 5,389 108,401 18 679 25,445 8,404 8,404 - 3,731 7,153 7,153 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 2016 Carrying Amount Current Non-Current Total Contractual cash flows 1-5 years 5+ years 1 year or less Total contractual cash flows $’000 $’000 $’000 $’000 $’000 $’000 $’000 Financial liabilities Payables Total payables Borrowing facilities Finance lease liabilities Total borrowings Contingent consideration 68,778 68,778 – 192 192 721 3 3 68,781 68,781 68,778 68,778 206,730 206,730 53 245 206,783 770 206,975 1,491 – 192 192 721 3 3 206,730 53 206,783 770 69,691 207,556 277,247 69,691 207,556 Financial assets available to meet the above financial liabilities 186,992 186,992 – – – – – – – – – – 5,374 5,374 – – – 20,999 68,781 68,781 206,730 245 206,975 1,491 277,247 186,992 50,458 46,546 5,374 102,378 132 181 1,963 20,999 8,409 8,409 – 4,541 7,153 7,153 186,992 50,458 44,761 – 95,219 132 181 – – – – 1,785 5,374 7,159 – – 1,963 20,999 50,458 46,546 5,374 102,378 132 181 1,963 20,999 – 8,409 8,409 4,541 – 4,541 4,541 – 7,153 7,153 – 50,458 44,761 – 95,219 132 181 – – – – – 1,785 – 1,785 – – 1,963 – – – – 4,854 38,524 43,378 4,854 1,963 36,561 43,378 287,065 217,374 45,683 (161,873) 332,748 55,501 287,065 217,374 3,748 (203,808) 41,935 41,935 332,748 55,501 Cash Trade receivables Other receivables Security bonds Total receivables Fair value through profit or loss Certificates of deposit Shares in listed companies Unlisted unit trusts Available-for-sale investments Loans and other receivables Loans to directors and executives of associated entities Receivables from statutory benefit funds Seed capital receivable Total other financial assets Net financial assets/ (liabilities) 70 IOOF annual report 2017 (e) Accounting policies and fair value estimation Financial assets at fair value through profit or loss The fair values of financial assets and liabilities are equal to the carrying amounts shown in the statement of financial position with the exception of finance lease liabilities which are disclosed in note 3-2 Borrowings. Offsetting assets and liabilities Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the IOOF Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Non-derivative financial assets The IOOF Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the date at which the IOOF Group becomes a party to the contractual provisions of the instrument. The IOOF Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the IOOF Group is recognised as a separate asset or liability. The IOOF Group has the following non-derivative financial assets: • cash; • financial assets at fair value through profit or loss; • loans and receivables; and • available-for-sale financial assets. Cash Cash includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash. A financial asset is classified as at fair value through profit or loss if the IOOF Group manages such investments and makes purchase and sale decisions in accordance with the IOOF Group’s documented risk management or investment strategy. Upon initial recognition attributable transaction costs are recognised in profit or loss when incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. Units in unlisted trusts are carried at the current unit price for redemption of those units with the trust. The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. The quoted market price used for financial assets is the closing price. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted on an active market. They arise when the IOOF Group provides money, assets, or services directly to a debtor with no intention of selling the receivable. Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method and closely approximate their estimated fair value due to their short-term nature. Available-for-sale financial assets Available-for-sale financial assets are non-derivative assets comprising principally marketable equity securities that are either designated in this category or are not classified in any of the other categories of financial instruments. Available-for-sale financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, are recognised in other comprehensive income and presented within equity in the available-for-sale investment revaluation reserve. When an investment is derecognised, the cumulative gain or loss in equity is transferred to profit or loss. 71 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Non-derivative financial liabilities Payables The IOOF Group initially recognises financial liabilities on the date at which the IOOF Group becomes a party to the contractual provisions of the instrument. The IOOF Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. The IOOF Group has the following non-derivative financial liabilities: • payables; • borrowings (including finance leases); and • other financial liabilities (including contingent consideration). Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition these financial liabilities are measured at amortised cost using the effective interest method. 1-2 Financial Instruments Fair value hierarchy The carrying value of payables are assumed to approximate their fair values due to their short-term nature. Borrowings and finance leases Borrowings and finance leases are further explained in section 3-2 Borrowings. Contingent consideration The contingent consideration amounts payable can rise and fall depending on performance hurdles achieved during the deferral period specific to each agreement which may include revenue targets, gross margin targets and/or FUMAS retention requirements. Where contingent consideration is due for payment after 12 months, the estimated amounts payable are discounted. Assumptions used include pre-tax discount rates in the range of 3-4% which were based on market interest rates upon acquisition of related intangibles. The fair values of financial assets and liabilities are equal to the carrying amounts shown in the statement of financial position with the exception of finance lease liabilities which are disclosed in note 3-2 Borrowings. The table below analyses financial instruments carried at fair value, by valuation method. 30 June 2017 Financial assets measured at fair value Available-for-sale investments Shares in listed companies Unlisted unit trusts Financial liabilities measured at fair value Contingent consideration 30 June 2016 Financial assets measured at fair value Available-for-sale investments Certificates of deposit Shares in listed companies Unlisted unit trusts Financial liabilities measured at fair value Contingent consideration 72 Level 1 $’000 Level 2 $’000 Level 3 $’000 25,445 18 - 25,463 - - 20,999 - 181 - 21,180 - - - - 679 679 - - - 132 - 1,963 2,095 - - - - 1,839 1,839 - - - - - - - 1,491 1,491 Total 25,445 18 679 26,142 1,839 1,839 20,999 132 181 1,963 23,275 1,491 1,491 IOOF annual report 2017 The definitions of each level and the valuation techniques used are as follows: • Level 1: quoted closing prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included with Level 1 that are observable for the asset or liability, either directly (ie. as prices) or indirectly (ie. derived from prices). Level 2 fair values for the over-the-counter foreign exchange and index swap are provided by the counterparty and verified by the IOOF Group. Fair values are derived from published market indices and include adjustments to take account of the credit risk of the IOOF Group entity and counterparty. • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The IOOF Group recognises transfers between levels of the fair value hierarchy as of the end of the reporting year during which the transfer has occurred. There were no transfers between Level 1 to Level 2 of the fair value hierarchy during the year ended 30 June 2017. Reconciliation of movements in level 3 financial liabilities Contingent consideration Opening balance as at 1 July 2016 Acquisition of intangibles Fair value gain from derecognition of contingent consideration payable Unwinding of discount Settlement of contingent consideration Closing balance as at 30 June 2017 $’000 1,491 1,069 (209) 36 (548) 1,839 73 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Section 2 - Results for the year This section focuses on the results and performance of the IOOF Group. On the following pages you will find disclosures explaining the IOOF Group’s results for the year, segmental information, taxation and earnings per share. Where an accounting policy is specific to a single note, the policy is described in the note to which it relates. 2-1 Operating segments Corporate and other Corporate and other costs include those of a strategic, shareholder or governance nature incurred in carrying on business as a listed entity managing multiple business units. Information regarding the results of each reportable segment is included below. Performance is measured based on segment underlying profit before income tax as management believes that such information is the most relevant in evaluating the results of certain segments relative to other entities that operate within these industries. The IOOF Group has the following five strategic divisions, which are its reportable segments. All segments’ operating results are regularly reviewed by the IOOF Group’s Managing Director to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Financial advice and distribution The provision of financial planning advice and stockbroking services supported by services such as investment research, training, compliance support and access to financial products. Platform management and administration The provision of administration and management services through master trust platforms, which offer a single access point to a range of investment products. Investment management The management and investment of monies on behalf of corporate, superannuation, institutional clients and private individual investor clients. Trustee services The provision of estate planning, trustee, custodial, agency and estate administration services to clients. 74 IOOF annual report 2017 Financial advice and distribution Platform management and administration Investment management Trustee services Corporate and Total other 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 263,494 260,285 387,608 394,082 81,942 99,318 26,695 24,995 - - 759,739 778,680 16,167 22,656 6,239 5,829 2,146 1,847 3,833 4,213 489 562 28,874 35,107 (126,443) (119,933) (109,026) (113,866) (26,339) (43,187) (2,321) (2,171) 398 419 (263,731) (278,738) (372) (603) (157) (517) - - - - - - (529) (1,120) External management and service fee revenue External other fee revenue Service fees and other direct costs Deferred acquisition costs Gross Margin 152,846 162,405 284,664 285,528 57,749 57,978 28,207 27,037 887 981 524,353 533,929 Stockbroking revenue 85,478 73,841 Stockbroking service fees expense Stockbroking net contribution (48,549) (41,683) 36,929 32,158 Inter-segment revenuei 75,467 71,879 - - - - - - - - - - - - - - - - - - - - - - - - - 85,478 73,841 - (48,549) (41,683) - 36,929 32,158 - 283 385 139 137 75,889 72,401 Inter-segment expensesi Net Operating Revenue (3,434) (4,775) (72,214) (67,367) (241) (259) - - - - (75,889) (72,401) 261,808 261,667 212,450 218,161 57,508 57,719 28,490 27,422 1,026 1,118 561,282 566,087 Other external revenue 3,028 3,537 603 12 816 800 17 1,146 - 1 - - 375 2 - - 75 436 1,887 1,236 - - 2,662 3,685 - - - - - - - - 1,197 4,190 - - 549 4,300 6,348 3,743 5,230 5,781 - - 12 17 3,478 4,831 (148,755) (147,715) (95,853) (99,392) (14,284) (19,769) (18,341) (18,601) (40,682) (41,477) (317,915) (326,954) (102) (409) (189) (503) (211) (296) (15) (20) (778) (726) (1,295) (1,954) (43) - (69) - - (12) - (17) - - - - - - - - (3,119) (3,558) (3,454) (3,048) (512) (1,087) (563) (226) - - (1,737) (1,737) - - - - (6,785) (7,284) (6,828) (7,353) - - - - - - (12) (17) (7,648) (7,919) (1,737) (1,737) (3,861) (2,620) - - - - - - - - (3,861) (2,620) Finance income Inter-segment revenuei Share of net profits of associates Operating and other expenditure Share-based payments expense Finance costs Inter-segment expenses(i) Depreciation Amortisation of intangible assets - IT Development Non-controlling interests Income tax expense (34,033) (34,361) (33,939) (34,820) (12,967) (11,996) (2,876) (2,578) 18,166 20,515 (65,649) (63,240) UNPAT from continuing operations Discontinued Operations UNPAT 76,354 78,435 77,267 79,021 32,707 31,379 6,695 5,997 (23,666) (23,562) 169,357 171,270 - 2,097 169,357 173,367 i Segment revenues, expenses and results include transfers between segments. Such transfers are priced on a commercial basis and are eliminated on consolidation. Segment disclosures have been prepared on an underlying (UNPAT) basis as discussed in the Operating and Financial Review section of the Directors’ Report. Comparatives have been restated to be on a comparable basis. 75 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Reconciliation of reportable segment revenues and expenses Profit for the year from continuing operations Less non-controlling interest Profit attributable to Owners of the Company from continuing operations Profit for the year from discontinued operation Profit attributable to Owners of the Company - total Underlying net profit after tax pre-amortisation (UNPAT) adjustments: Amortisation of intangible assets Termination and retention incentive payments Gain on divestment of subsidiaries Profit on divestment of assets Non-recurring professional fees Acquisition tax provision release Impairment of goodwill Unwind of deferred tax liability recorded on intangible assets Acquisition and divestment transaction costs Onerous contracts Reinstatement of Perennial non-controlling interests Income tax attributable UNPAT Discontinued operation UNPAT from continuing operations Note 2-4 2-4 2-2,2-3 2-3 2-4 2-4 2-4 2017 $’000 119,851 (3,861) 115,990 - 2016 $’000 140,542 (2,620) 137,922 58,924 115,990 196,846 38,611 4,125 (6,261) (11,930) 2,013 (5,707) 38,592 (10,056) - - - 3,980 169,357 - 169,357 39,681 6,005 (71,988) (8,125) 5,061 - - (10,056) 1,516 951 (825) 14,301 173,367 (2,097) 171,270 The significant accounting policies which apply to the major revenue and expense items below follow each of the notes. More general information on how these are recognised/measured can be found in note 7-2 Basis of preparation. 2-2 Discontinued operation In the prior year Perennial Fixed Interest and Perennial Growth Management were divested to Henderson for an upfront consideration of $71.6m and a deferred component dependent on future business performance, payable after two and four years. The divestment to Henderson was completed on 1 November 2015. $735k has been recognised as deferred consideration at 30 June 2017. These components of the Perennial Group were previously classified as held-for-sale. 76 IOOF annual report 2017 Results of the discontinued operation 4 months ended 1 Nov 15 Revenue Expenses Results from operating activities Income tax Results from operating activities, net of tax Gain on divestment of discontinued operation Income tax on gain on sale of discontinued operation Gain on divestment of discontinued operation, net of tax Profit for the year Basic earnings per share Diluted earnings per share Cash flows from the discontinued operation Net cash provided by operating activities Net cash provided by investing activities Net cash flow for the year Accounting policies $’000 9,486 (5,435) 4,051 (1,221) 2,830 71,988 (15,894) 56,094 58,924 19.7 19.6 2,830 54,586 57,416 A discontinued operation is a component of the IOOF Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the IOOF Group and which: • • represents a separate major line of business or geographic area of operations; and is part of a single co-ordinated plan to divest a separate major line of business or geographical area of operations. Classification as a discontinued operation occurs at the earlier of divestment or when the operation meets the criteria to be classified as held for sale. When an operation is classified as a discontinued operation, the comparative statement of comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year. 77 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 2-3 Revenue Management and service fees revenue Stockbroking revenue External other fee revenue Finance income Interest income on loans to Directors of controlled and associated entities Interest income from non-related entities Dividends and distributions received Net fair value gains/(losses) on other financial assets at fair value through profit or loss Other revenue Service revenue charged to related parties Profit on divestment of assets Gain on divestment of subsidiaries Other Policy note (i) (ii) (ii) (iii) 2017 2016 $’000 759,739 85,478 28,874 254 4,098 824 54 5,230 - 11,930 6,261 10,007 28,198 $’000 778,680 73,841 35,107 295 4,661 839 (14) 5,781 1,887 8,125 - 4,461 14,473 Total revenue from continuing operations 907,519 907,882 Accounting policies Revenue is measured at the fair value of the consideration received or receivable. (i) Management and service fees revenue The IOOF Group provide management services to unit trusts and funds operated by the IOOF Group at normal commercial rates. Management and service fees earned from the unit trusts and funds are calculated based on an agreed percentage of the respective funds under management or administration as disclosed in the respective product disclosure statements, and are recognised on an accruals basis. Management and service fees revenue from the provision of financial advisory services together with revenue from the rendering of services are recognised at the time the service is provided. (ii) Stockbroking revenue and external other fee revenue Other fee revenue and stockbroking revenue from the rendering of services are recognised at the time the service is provided. (iii) Finance income Finance income comprises interest income on funds invested (including available-for-sale financial assets), dividend income, gains on the divestment of available-for-sale financial assets and changes in the fair value of financial assets at fair value through profit or loss. Interest income is recognised as it accrues in profit or loss, using the effective interest method. Dividend income is recognised in profit or loss on the date that the IOOF Group’s right to receive payment is established, which in the case of quoted securities is the ex-dividend date. 78 2-4 Expenses Service Fees and other direct costs Service and marketing fees expense Stockbroking service fees expense Other direct costs Operating expenditure Salaries and related employee expenses Employee defined contribution plan expense Information technology costs Professional fees Marketing Office support and administration Occupancy related expenses Travel and entertainment Other Other expenses Share-based payments expense Acquisition and divestment transaction costs Termination and retention incentive payments Depreciation of property and equipment Amortisation of intangible assets Amortisation of intangible assets - IT development Loss on divestment of non-current assets Impairment of goodwill Deferred acquisition costs Non-recurring professional fees Onerous contracts Total expenses from continuing operations Policy note (i) (ii) (iii) (iv) (v) (vi) (vi) (vi) (vii) IOOF annual report 2017 2017 2016 $’000 $’000 241,153 48,549 22,578 312,280 254,591 41,683 24,147 320,421 197,898 199,990 14,089 41,532 10,959 8,446 17,120 21,989 5,877 5 14,812 50,296 7,492 9,250 18,539 20,335 6,066 - 317,915 326,780 1,295 - 4,125 7,648 38,611 1,737 - 38,592 529 2,013 - 1,954 1,414 6,005 7,919 39,681 1,737 174 - 1,120 5,061 951 94,550 724,745 66,016 713,217 79 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Accounting policies Annual and long service leave benefits Expenses are recognised at the fair value of the consideration paid or payable for services received, further specific expense policies are listed below. (i) Service Fees and other direct costs Service fees and other direct costs include amounts paid to advisers, dealer groups and other suppliers in the course of operating and marketing products and services of the IOOF Group. Examples of direct costs include custodian fees, audit services and the printing and mailing of client statements and other communications. The values are recognised at the fair value of the consideration paid or payable for the goods or services received. (ii) Salaries and related employee expenses These entitlements including salaries, wages, bonuses, overtime, allowances, annual and long service leave, but exclude share-based payments. The accounting policies for the three major expense categories under this definition are as follows. Short-term employee benefits Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the IOOF Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Short-term incentive plans A provision for employee benefits in the form of an incentive plan is recognised when there is no realistic alternative but to settle the liability, and at least one of the following conditions is met: • • there are formal terms in the plan for determining the amount of the benefit; the amounts to be paid are determined before the time of completion of the financial report; or • past practice gives clear evidence of the amount of the obligation. The IOOF Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior years plus related on-costs. Liabilities for long-term benefits that are expected to be settled beyond 12 months are discounted using rates attaching to high quality corporate bonds which most closely match the terms of maturity of the related liabilities at balance date. In determining the liability for employee entitlements, consideration is given to future increases in wage and salary rates, experience with employee departures and years of service. (iii) Employee defined contribution plan expense A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are recognised in profit or loss in the years during which services are rendered by employees. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. (iv) Share-based payments expense The grant date fair value of share-based payment awards granted to employees is recognised as a share-based payment expense, with a corresponding increase in the share- based payments reserve, over the year that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. The fair value at grant date is independently determined where considered appropriate. 80 IOOF annual report 2017 (vii) Deferred acquisition costs Deferred acquisition costs relate to service fees paid, and are deferred as an asset in recognition that they relate to a future economic benefit. Deferred acquisition costs are initially measured at historical cost and are written down immediately to their recoverable amount if the carrying amount is greater than its estimated recoverable amount. Deferred acquisition costs are progressively amortised in profit or loss by a systematic allocation over the years the future economic benefits are expected to be received. The amortisation period is between 5 and 7 years. Shares held by the IOOF Equity Plan Trust will contribute to the employee allocation of shares on satisfaction of vesting performance hurdles. The IOOF Group has no right to recall placed shares. However, a subsidiary company acts as the Trustee of the Trust, and can direct the voting rights of shares held and strategic direction. Non-Executive Directors have the opportunity to participate in the IOOF Deferred Share Purchase Plan. The plan provides a facility for Non-Executive Directors to sacrifice base salary or future incentive entitlements in order to acquire shares. As the purchase is funded by Directors’ salary sacrifice, no additional expense is recorded by the IOOF Group. (v) Termination and retention incentive payments Termination benefits or redundancy costs are recognised as an expense when the IOOF Group is committed demonstrably, without realistic opportunity of withdrawal, to a formal detailed plan without possibility of withdrawal, or providing termination benefits as a result of an offer made to encourage voluntary redundancy. (vi) Amortisation and impairment The value of intangible assets, with the exception of goodwill and brand names with indefinite useful lives, reduces over the number of years the IOOF Group expects to use the asset, the useful economic life, via an annual amortisation charge to profit and loss. The values and useful lives ascribed are reflective of arms-length transactions and independent expert advice thereon. Where there has been a technological change or decline in business performance the Directors review the value of assets to ensure they have not fallen below their amortised value. Should an asset’s value fall below its amortised value an additional one-off impairment charge is made against profit. 81 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 2-5 Net cash provided by operating activities Cash includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash. This note reconciles the operating profit to the cash provided by operating activities per the cash flow statement. 2017 $’000 119,851 7,648 40,348 38,592 (18,228) 6,828 (4,352) (823) 3,966 (3,478) 1,295 - 1,144 (7,575) (833) 1,674 569 (8,275) (699) 1,919 7,871 1,089 103 (9,355) 2016 $’000 199,466 7,919 41,418 - (80,533) 7,353 (4,990) (839) 2,757 (4,831) 1,966 1,516 (49) 8,444 52 3,031 1,157 (3,515) (1,238) (6,078) (11,219) (9) (114) 7,187 179,279 168,851 Profit for the year Depreciation on property and equipment Amortisation of intangible assets Impairment of goodwill (Profit)/loss on divestment of assets Interest and other costs of finance Interest received and receivable Dividends and distributions received and receivable Dividends received from associates Share of profits of associates accounted for using the equity method Share-based payments expense Acquisition and divestment transaction costs Other Changes in net operating assets and liabilities: (Increase)/decrease in receivables (Increase)/decrease in other assets (Increase)/decrease in other financial assets (Increase)/decrease in deferred acquisition costs Increase/(decrease) in payables Increase/(decrease) in deferred revenue liabilities Increase/(decrease) in provisions Increase/(decrease) in income tax payable Increase/(decrease) in contingent consideration Increase/(decrease) in other liabilities Increase/(decrease) in deferred taxes Net cash provided by operating activities 82 2-6 Income taxes Income taxes Current tax expense Current year Adjustment for prior years Deferred tax expense Origination and reversal of temporary differences Adjustments recognised in the current year in relation to the deferred tax of prior years Total income tax expense from continuing operations Income tax recognised in other comprehensive income 2017 $’000 IOOF annual report 2017 2016 $’000 61,494 (958) 60,536 (8,606) (329) (8,935) 51,601 2017 $’000 70,408 (1,478) 68,930 (9,460) 103 (9,357) 59,573 2016 $’000 Available-for-sale financial assets Exchange differences on translating foreign operations Before tax Tax expense Net of tax Before tax Tax expense Net of tax 3,770 15 (1,131) (3) 2,639 12 3,648 118 (1,105) (4) 2,543 114 3,785 (1,134) 2,651 3,766 (1,109) 2,657 Reconciliation of effective tax rate Profit before tax from continuing operations Tax using the IOOF Group's domestic tax rate Tax effect of: Share of tax credits with statutory funds (Non assessable income)/Non-deductible expenses Impairment of goodwill Share of net profits of associates Assessable associate dividends Imputation credits Other Under/(over) provided in prior years 2017 2016 % $’000 % $’000 30.0% 0.5% (1.8%) 6.5% (0.6%) 2.1% (2.2%) (0.5%) (0.8%) 179,424 53,827 978 (3,264) 11,578 (1,044) 3,771 (4,012) (886) (1,375) 30.0% 0.7% (1.5%) - (0.8%) 2.2% (2.3%) (0.8%) (0.7%) 192,143 57,643 1,304 (2,874) - (1,449) 4,264 (4,509) (1,491) (1,287) 33.2% 59,573 26.9% 51,601 The IOOF Holdings Ltd tax consolidated group (the IOOF tax group) paid $66.6m in income tax relating to the financial year ended 30 June 2016. In December 2016 the ATO published the tax information in respect of large public taxpayers in its tax transparency report. For the IOOF tax group the ATO published payment of $78.9m in income tax relating to the financial year ended 30 June 2015. For statutory reporting purposes, the Group had an effective tax rate of 33.2% on its continuing operations for the year ended 30 June 2017 (2016: 26.9%) compared to a statutory corporate tax rate of 30%. The rate difference in the year ended 30 June 2017 is primarily due to research and development tax offsets, tax offsets for fully franked dividend income and impairment of goodwill. For the year ended 30 June 2016, the rate difference is primarily due to research and development tax offsets and tax offsets for fully franked dividend income. Excluding these items IOOF’s effective tax rate would be 30% across both years. The effective tax rate for New Zealand and Hong Kong operations was 29.7%, and 18.0% respectively. 83 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Deferred tax assets and liabilities Deferred tax asset balance comprises temporary differences attributable to: Salaries and related employee expenses Provisions, accruals and creditors Carry forward capital and revenue losses Other Deferred tax asset balance as at 30 June Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax asset balance as at 30 June Deferred tax liability balance comprises temporary differences attributable to: Customer relationships Unrealised gains Fixed assets and computer software Other Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax liability balance as at 30 June Reconciliation of movements Net carrying amounts at the beginning of the year Acquisitions and divestments Credited/(charged) to profit or loss Discontinued operation Temporary differences directly attributable to equity Carrying amount at the end of the year Unrecognised deferred tax assets Tax losses Potential tax benefit at the Australian tax rate of 30% 2017 $’000 2016 $’000 18,721 3,349 99 1,934 24,103 (24,103) - 17,525 4,642 102 2,413 24,682 (24,682) - 107,534 117,869 5,087 1,230 3,201 117,052 (24,103) 92,949 3,947 1,987 2,042 125,845 (24,682) 101,163 (101,163) (92,527) (9) 9,357 - (1,134) - 8,935 (16,459) (1,112) (92,949) (101,163) - - - - The deductible temporary differences and tax losses do not expire under current tax legislation. Deferred tax assets have not been recognised in respect of these items because it is not probable that future taxable profit will be available against which the IOOF Group can utilise the benefits there from. Accounting policies Income tax Income tax comprises current and deferred tax. Current and deferred tax are recognised in profit or loss except to the extent that it relates to a business combination, or items recognised directly in equity or in other comprehensive income. Current tax Current tax is the expected tax payable or receivable on the taxable income for the year, using tax rates enacted or substantively enacted at the reporting date, and any 84 adjustment to tax payable in respect of previous years. Current tax also includes any tax arising from dividends. Current tax assets and liabilities are offset only if certain criteria are met. Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax is not recognised for: IOOF annual report 2017 The Code is a set of principles and ‘minimum standards’ to guide disclosure of tax information by businesses, encourage those businesses to avoid aggressive tax planning, and to help educate the public about their compliance with Australia’s tax laws. The IOOF Group provides a reconciliation of accounting profit to tax expense, and to income tax paid/payable including identification of material temporary and non-temporary differences and accounting effective company tax rates for the IOOF Groups Australian and global operations. Information about international related party dealings The IOOF Group conducts foreign activities in New Zealand, via IOOF New Zealand, and in Hong Kong, via share broking business, Ord Minnett. Each of those entities is subject to the local tax regime and effective tax rates are disclosed with the IOOF Group’s effective tax rate. Related party dealings between the IOOF Group’s Australian and foreign jurisdictions are supported by transfer pricing documentation. Approach to tax strategy and governance Tax governance is part of the IOOF Group’s overall risk management framework, as well as being part of an overall tax strategy. The overall tax strategy drives the IOOF Group’s approach to tax risk management and is aimed at good corporate tax compliance and reporting, ability to meet and be prepared for regulatory changes, and in ensuring shareholder value. Tax governance is continuously monitored and in line with the IOOF Group’s strategy. The IOOF Group regards its relationship with the ATO as effective and open thereby maintaining transparency and collaboration. • • temporary differences on the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit or loss; temporary differences related to investments in subsidiaries and associates to the extent that the IOOF Group is able to control the timing of the reversal of the temporary differences and it is probable that they will not reverse in the foreseeable future; and • taxable temporary differences arising on the initial recognition of goodwill. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when deferred tax balances relate to the same taxation authority. Tax consolidation IOOF Holdings Ltd and its wholly owned Australian resident entities (including IOOF Ltd benefit funds) are part of a tax-consolidated group under Australian taxation law. As a consequence, all members of the tax-consoldiated group are taxed as a single entity. Tax transparency The IOOF Group is committed to tax transparency and integrity. It is a signatory to the Board of Taxation’s Voluntary Tax Transparency Code (the Code), which was released on 3 May 2016. Tax contribution analysis The IOOF Group contributed a total of $131.5m in taxes to Australian, New Zealand and Hong Kong governments (state and federal) in the 2017 tax year. $131.0m or 99.6% of this amount was attributable to the Australian Government. The below tables provide an analysis of the types of taxes the IOOF Group is liable for and those payable in Australia versus those in foreign jurisdictions. 2017 tax contribution by type (total $131.5m) 2017 tax contribution by country (total $131.5m)  Income Tax $70.4m  GST $45m  Payroll Tax $12.2m  Fringe Benefits Tax $1.3m  Other $2.6m  Australia $131m  New Zealand $0.495m  Hong Kong $0.005m Further taxes paid by the IOOF Group on behalf of others, including employees and members, are not directly borne by the Group. These include income tax, GST, pay-as-you-earn withholding taxes, and local duties, which total a further $76.0m. 85 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 2-7 Dividends After 30 June 2017 the following dividends were declared by the directors. The dividends have not been provided for and there are no income tax consequences. Final 2017 dividend Cents per share 27.0 Total amount $’000 81,036 Date of payment Franked/ unfranked 1 September 2017 Franked Dividend franking account 30 per cent franking credits available to shareholders of IOOF Holdings Ltd for subsequent financial years 2017 $’000 2016 $’000 84,469 83,923 The above available amounts are based on the balance of the dividend franking account at year-end adjusted for: (a) franking credits that will arise from the payment of the current tax liabilities; and (b) franking credits that the IOOF Group may be prevented from distributing in subsequent years. The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends. The impact on the dividend franking account of dividends declared after the balance date but not recognised as a liability is to reduce it by $34,730,000 (2016: $33,443,000). The following dividends were declared and paid by the IOOF Group during the current and preceding financial year: 2017 Interim 2017 dividend Final 2016 dividend 2016 Interim 2016 dividend Final 2015 dividend Cents per share 26.0 26.0 52.0 28.5 28.0 56.5 Total amount $’000 78,035 78,035 156,070 85,538 84,037 169,575 Date of payment Franked/ unfranked 30 March 2017 13 October 2016 Franked Franked 07 April 2016 15 October 2015 Franked Franked Franked dividends declared or paid during the year were franked at the tax rate of 30 per cent. Dividend amounts shown are inclusive of any dividends paid on treasury shares. 86 2-8 Earnings per share Basic earnings per share Diluted earnings per share Continuing operations Basic earnings per share Diluted earnings per share Basic earnings per share IOOF annual report 2017 2017 2016 Cents per share Cents per share 38.7 38.6 38.7 38.6 65.7 65.4 46.0 45.8 The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows: Profit for the year attributable to owners of the Company Earnings used in the calculation of basic EPS Weighted average number of ordinary shares Weighted average number of ordinary shares (basic) Effect of unvested performance rights Effect of share options on issue Weighted average number of ordinary shares (diluted) Accounting policies 2017 $’000 115,990 115,990 2016 $’000 196,846 196,846 2017 2016 No. ’000 No. ’000 299,820 299,838 673 - 1,011 4 300,493 300,853 The IOOF Group presents basic and diluted earnings per share data for its ordinary shares. Basic earnings per share is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the year, adjusted for treasury shares held. Diluted earnings per share is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding, adjusted for treasury shares held, for the effects of all dilutive potential ordinary shares, which comprise performance rights and share options granted to employees. At 30 June 2017, there were no options outstanding. The average market value of the Company’s shares for purposes of calculating the dilutive effect of share options was based on quoted market prices for the year. 87 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Section 3 - Capital management and financing This section outlines how the IOOF Group manages its capital structure and related financing costs, including its balance sheet liquidity and access to capital markets. The IOOF Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns to shareholders and benefits to other stakeholders, and to maintain an optimal structure to reduce the cost of capital. 3-1 Capital management In order to maintain or adjust the capital structure, the IOOF Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, buy back its shares on market, issue new shares, sell assets, or otherwise adjust debt levels. The IOOF Group monitors capital on the basis of investment capital, working capital and regulatory capital. Investment capital is the IOOF Group’s capital that is not required for regulatory and working capital requirements of the business. The investment capital is invested in: • bank bills and deposits; • subsidiaries; • available-for-sale assets; • unit trusts, as investments; and • IOOF Group operated unit trusts, as seed capital. The investment capital is available to support the organic development of new businesses and products and to respond to investment and growth opportunities such as acquisitions, as they arise. Seed capital is primarily available to support the business in establishing new products and is also used to support capital adequacy requirements of the benefit funds. Working capital is the capital that is required to meet the day to day operations of the business. Regulatory capital is the capital which the IOOF Group is required to hold as determined by legislative and regulatory requirements in respect of its friendly society and financial services licensed operations. During the year, the IOOF Group has complied with all externally imposed capital requirements to which it is subject. The Board of each operational subsidiary manages its own capital required to support planned business growth and meet regulatory requirements. Australian Prudential Regulation Authority (APRA) regulated subsidiaries have their own capital management plan which specifically addresses the regulatory requirements of that entity and sets a target surplus over minimum regulatory requirements. Regular monitoring of regulatory requirements ensures sufficient capital is available and appropriate planning is made to retain target surpluses. IOOF Holdings Ltd is primarily the provider of equity capital to its subsidiaries. Such investment is funded by IOOF Holding Ltd’s own investment capital, through capital issues, profit retention and, in some instances, by debt. Subsidiary capital generated in excess of planned requirements is returned to IOOF Holdings Ltd, usually by way of dividends. A standby facility is in place as a safeguard against a temporary need for funds and to provide a short term funding facility that allows the business to take advantage of acquisition opportunities as they arise. The weighted average cost of capital is regularly monitored. Funding decisions take into consideration the cost of debt versus the cost of equity with emphasis on the outcome that is best for shareholder interests. The IOOF Group’s capital risk management strategy was not changed during the year. Further information in relation to capital adequacy requirements imposed by the Life Insurance Act is provided in section 5-7 Capital adequacy position. 88 IOOF annual report 2017 3-2 Borrowings This note provides information about the contractual terms of the IOOF Group’s interest-bearing borrowings, which are measured at amortised cost. For more information about the IOOF Group’s exposure to interest rate and liquidity risk, see section 1-1 Risk management. Syndicated facility agreement Finance lease liabilities – refer (c) 2017 $’000 2016 $’000 206,908 206,730 40 245 206,948 206,975 (a) Cash Advance & Working Capital Facility The unsecured cash advance facilities and working capital facility is provided under an Australian dollar line of credit facility, to which unrestricted access was available at balance date as follows: Total facilities Used at 30 June Unused at 30 June 2017 $’000 225,000 206,908 18,092 2016 $’000 225,000 206,730 18,270 The financial liability under the facility has a fair value equal to its carrying amount. Accounting policies Finance costs comprise interest expense on borrowings, unwinding of the discount on provisions, changes in the fair value of financial assets at fair value through profit or loss and impairment losses recognised on financial assets. Borrowing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset are recognised in profit or loss using the effective interest method. (b) Other bank facilities In addition to the cash advance and working capital facilities, the IOOF Group has a number of facilities under the Syndicated Facility Agreement. These include equipment finance and contingent liability facilities. The aggregate of these facilities is $40 million of which $34.3m was used at 30 June 2017 (2016: $31.8m). The IOOF Group has other facilities outside the Syndicated Facility Agreement of $8m of which $5.05m was used at 30 June 2017 (2016: $0.2m). (c) Finance lease liabilities Finance leases relate to computer hardware. IOOF Group Finance lease liabilities are payable as follows: Less than one year Between one and five years Less future finance charges 2017 2016 Future minimum lease payments Present value of minimum lease payments Future minimum lease payments Present value of minimum lease payments $’000 $’000 $’000 $’000 40 - 40 - 40 40 - 40 213 40 253 (8) 245 205 40 245 89 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 3-3 Share capital The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are fully paid. The holders of ordinary shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at meetings of the Company. All shares rank equally with regard to the Company’s residual assets. 300,133,752 fully paid ordinary shares (2016: 300,133,752) 476,411 treasury shares (2016: 320,731) Ordinary shares On issue at 1 July Issue of shares on exercise of options under executive and employee share option plan Transfer from employee equity-settled benefits reserve on exercise of options Treasury shares transferred to recipients during the year On issue at 30 June Treasury shares On issue at 1 July Purchase of treasury shares Treasury shares transferred to recipients during the year On issue at 30 June Accounting policies Ordinary shares 2017 $’000 2016 $’000 1,438,601 1,439,276 (4,142) (2,816) 1,434,459 1,436,460 2017 2016 No. ’000 $’000 No. ’000 $’000 300,134 1,439,276 300,134 1,444,903 - - - - 1,322 (1,997) - - - 210 5,931 (11,768) 300,134 1,438,601 300,134 1,439,276 (321) (380) 225 (476) (2,816) (3,323) 1,997 (4,142) (732) (830) 1,241 (321) (7,146) (7,438) 11,768 (2,816) 299,658 1,434,459 299,813 1,436,460 Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares and share options are shown in equity as a deduction, net of any tax effects. Treasury shares Shares in the Company which are purchased on-market by the IOOF Equity Plan Trust are classified as treasury shares and are deducted from share capital. Treasury shares are excluded from the weighted average number of ordinary shares used in the earnings per share calculations. The IOOF Equity Plan Trust is controlled by the IOOF Group and is therefore consolidated. Dividends received on treasury shares are eliminated on consolidation. 90 IOOF annual report 2017 3-4 Capital commitments and contingencies The only capital commitments entered into by the IOOF Group are operating lease commitments disclosed below. Operating lease commitments Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows: 2017 Premises Office equipment 2016 Premises Office equipment Guarantees and underwriting commitments Rental bond guarantees ASX settlement bond guarantee ASIC bond guarantees Other guarantees Contingent liabilities Less than one year 1 to 5 years Later than five years $’000 18,045 3 $’000 50,600 - $’000 30,322 - Total $’000 98,967 3 18,048 50,600 30,322 98,970 Less than one year 1 to 5 years $’000 17,307 117 17,424 $’000 31,676 3 31,679 Later than five years $’000 4,619 - 4,619 2017 $’000 Total $’000 53,602 120 53,722 2016 $’000 16,281 11,447 500 140 3,000 19,921 500 120 3,000 15,067 Contingent liabilities exist in relation to claims and/or possible claims which, at the date of signing these accounts, have not been resolved. An assessment of the likely loss to the Company and its controlled entities has been made in respect of the identified claims, on a claim by claim basis, and specific provision has been made where appropriate. The IOOF Group does not consider that the outcome of any other current proceedings, either individually or in aggregate, is likely to materially affect its operations or financial position. 91 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 3-5 Reserves Available-for-sale investment revaluation reserve Business combinations reserve Foreign currency translation reserve Operating Risk Financial reserve* Share-based payments reserve 2017 $’000 13,074 (326) 121 2,655 (2,175) 2016 $’000 10,436 (326) 109 2,799 (1,752) 13,349 11,266 *This reserve is held for certain AET Superannuation products. Other similar reserves exist within the IOOF Group, however these are generally held by the relevant funds. 92 IOOF annual report 2017 Section 4 - Operating assets and liabilities This section shows the assets used to generate the IOOF Group’s trading performance and the liabilities incurred as a result. Liabilities relating to the Group’s financing activities are addressed in Section 3. 4-1 Associates Associates are those entities over which the IOOF Group has significant influence, but not control, over the financial and operating policies. The IOOF Group has interests in a number of associates. For one of these associates, Perennial Value Management Limited, the IOOF Group owns 52.4% (2016: 52.4%) of the equity interests but has 42.4% of the voting rights and dividend entitlements. The IOOF Group has determined that it does not have control but has significant influence because it has representation on the board of the investee. The table below discloses material associates individually: Associate Country of incorporation Ownership interest 2017 2016 Carrying value Perennial Value Management Ltd Australia Other associates % 52.4 % 52.4 $’000 9,733 11,348 21,081 IOOF Group’s share of profit/ (loss) $’000 2,662 816 3,478 Other associates had a carrying value of $12,634,000 and share of profit of $1,147,000 in 2016. The following table summarises the financial information of the IOOF Group’s material associate, Perennial Value Management Limited, as included in its own financial statements. All fair values and accounting policies are consistent with those of the IOOF Group. Beneficial ownership interest Current assets Non-current assets Current liabilities Non-current liabilities Net assets (100%) IOOF Group's share of net assets (42.4%) IOOF Group's share of movements in equity and other reserves (42.4%) Goodwill Carrying value of interest in associate Revenue (100%) Profit and total comprehensive income (100%) Profit and total comprehensive income (42.4%) Dividends received by the IOOF Group 2017 $’000 42.4% 14,655 7,516 (5,376) (619) 16,176 6,851 (1,569) 4,451 9,733 27,196 6,285 2,662 2,961 None of the IOOF Group’s equity-accounted investees are publicly listed entities and consequently do not have published price quotations. Dividends received from associates During the year, the IOOF Group has received dividends of $3,966,000 (2016: $2,757,000) from its associates. 2016 $’000 42.4% 18,854 1,226 (3,350) (500) 16,230 6,873 (1,291) 4,451 10,033 25,497 8,700 3,684 2,115 93 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Accounting policies Interests in associates are accounted for using the equity method. They are initially recognised at cost, which includes any transaction costs. Subsequent to initial recognition, the consolidated financial statements include the IOOF Group’s share of the profit or loss and Other Comprehensive Income of the associates, until the date on which significant influence ceases. 4-2 Intangible assets (other than goodwill) 2017 $’000 670,159 (229,080) 441,079 IT Develop- ment Computer software Customer relationships Brand names Other Intangibles $’000 2,378 - - (1,737) 641 $’000 6,090 178 - (1,022) 5,246 $’000 394,232 5,663 (3,417) (34,920) 361,558 $’000 68,547 - - (801) 67,746 $’000 8,922 340 (1,506) (1,868) 5,888 2016 $’000 669,101 (188,932) 480,169 Total $’000 480,169 6,181 (4,923) (40,348) 441,079 Cost Accumulated amortisation Carrying value at 1 July 2016 Additions Divestments Amortisation expense Carrying value at 30 June 2017 Accounting policies Intangible assets are non-physical assets used by the IOOF Group to generate revenues and profits. These assets include brand names, software, customer and adviser relationships and contractual arrangements. The cost of these assets is the amount that the IOOF Group has paid or, where there has been a business combination, the fair value of the specific intangible assets that could be sold separately or which arise from legal rights. The value of intangible assets, with the exception of goodwill and brand names with indefinite useful lives, reduces over the number of years the IOOF Group expects to use the asset, the useful economic life, via an annual amortisation charge to profit and loss. The values and useful lives ascribed are reflective of arms-length transactions and independent expert advice thereon. Where there has been a technological change or decline in business performance the Directors review the value of assets to ensure they have not fallen below their amortised value. Should an asset’s value fall below its amortised value an additional one-off impairment charge is made against profit. Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on brands, is recognised in profit or loss as incurred. Amortisation Amortisation is charged to the income statement over the estimated useful lives of intangible assets unless such lives are judged to be indefinite. Indefinite life assets are not amortised but are tested for impairment at each reporting date. The estimated useful lives for the current and comparative years are as follows: • adviser relationships 5–10 years • software 2.5–10 years • customer relationships 10–20 years • brand names 20 years • contract agreements 9–10 years • IT development 4 years Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. 94 IOOF annual report 2017 Impairment testing for cash-generating units containing indefinite life intangible assets For the purposes of impairment testing, indefinite life intangibles are allocated to the IOOF Group’s operating divisions, or CGUs, which represent the lowest level within the IOOF Group at which intangible assets are monitored for internal management purposes. Each CGU is not higher than the IOOF Group’s operating segments as reported in Note 2-1 operating segments. Indefinite life intangible assets The indefinite life intangible assets relate to brand names. The below table excludes $9.5m of intangibles which have a finite life. The aggregate carrying amounts of indefinite-life intangible assets allocated to each CGU are as follows: Shadforth Ord Minnett group Lonsdale 2017 $’000 51,000 6,773 500 2016 $’000 51,000 6,773 500 58,273 58,273 In designating brand names as indefinite life, consideration was given to the length of time the brand names have been in existence and it was determined that there is no foreseeable limit to the years over which the brand names are expected to generate net cash inflows for the IOOF Group. The recoverable amount for the brand names have been determined based on a royalty savings method of calculating value in use. The calculation incorporates estimated costs of brand maintenance. The discount rate of 12.5% (2016: 10.7%) used reflects the IOOF Group’s pre-tax nominal weighted average cost of capital (WACC). Management’s assessment of indefinite life intangible value-in-use exceeds the value of the intangible asset allocated to the CGU, therefore any reasonably possible changes to assumptions used in management’s assessment is not expected to result in impairment. 4-3 Goodwill Cost Accumulated impairment Net carrying value of goodwill Carrying value at 1 July Acquisition of subsidiaries Impairment of goodwill Divestment of discontinued operation Carrying value at 30 June 2017 $’000 2016 $’000 1,010,468 1,008,721 (55,601) 954,867 991,712 1,747 (38,592) - 954,867 (17,009) 991,712 1,013,105 - - (21,393) 991,712 A non-cash impairment of $38.6m has been recognised in relation to goodwill allocated to Perennial Value Management (PVM) and its subsidiaries. Reduced profitability from both lower revenue and higher costs has led to calculated value-in-use declining to below the carrying value of the aggregate goodwill and investment balances. Revenue decline has arisen due to institutional outflows. These outflows reflect changing market dynamics where larger institutions now weight a greater proportion of funds to indexed products. This has combined with below benchmark performance in 2012 which adversely affected 3 and 5 year fund performance numbers. Higher costs resulted from an absence of operations scale and subsidisation following the divestment of other Perennial entities as PVM moved to virtually complete autonomy during the current year. 95 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Accounting policies Goodwill represents the future economic benefits that arise from assets that are not capable of being individually identified and separately recognised. Its cost is the amount the IOOF Group has paid in acquiring a business over and above the fair value of the individual assets and liabilities acquired. The value of goodwill is an ‘intangible’ value that comes from, for example, a uniquely strong market position and the outstanding productivity of its employees. The goodwill recognised by the IOOF Group has all arisen as a result of business combinations. For the measurement of goodwill at initial recognition, see section 7-3(b)(i) Business combinations. Subsequent measurement Goodwill is measured at cost less accumulated impairment losses. In respect of equity-accounted investees, the carrying amount of goodwill is included in the carrying amount of the investment, and any impairment loss is allocated to the carrying amount of the equity accounted investee as a whole. Impairment testing for cash-generating units containing goodwill For the purposes of impairment testing, goodwill is allocated to the IOOF Group’s cash-generating units (CGUs). These represent the lowest level within the IOOF Group at which the goodwill is monitored for internal management purposes. Assets that cannot be tested individually are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from continuing use of other assets or groups of assets (the CGU). These CGUs are not higher than the IOOF Group’s operating segments as reported in 2-1 Operating segments. The aggregate carrying amounts of goodwill allocated to each CGU are as follows: 2017 2016 Cash inflows yrs 2-5 Cash out flows yrs 2-5 Cash flows – perpetuity Value in Use element Shadforth1 Platform management and administration Perennial DKN Multi manager IOOF Ltd Consultum1 Bridges2 $’000 431,191 347,509 37,829 80,339 39,735 11,970 4,344 1,950 $’000 434,812 347,509 76,421 80,339 39,735 11,970 723 203 954,867 991,712 B B C B B D A B E E - E E D E E 2.5% growth from yr 5 2.5% growth from yr 5 2.5% growth from yr 5 2.5% growth from yr 5 2.5% growth from yr 5 2.5% growth from yr 5 2.5% growth from yr 5 2.5% growth from yr 5 A Reserve Bank of Australia forecast GDP growth rate3 B Observed Australian managed funds annual compounding growth for March 2012 to March 20174 C Forecast for Perennial Value Management Limited D Observed Australian friendly societies annual compounding growth for March 2012 to March 20174 E Blended rate of the underlying Australian forecast inflation levels and the applicable Reserve Bank of Australia GDP growth rate3 1 Reflects adviser transfer during the year 2 Bridges includes CUA FP and SA Carrington 3 source - RBA Statement of Monetary Policy 4 source - ABS 5655.0 Managed Funds Australia 96 IOOF annual report 2017 The recoverable amounts for goodwill allocated to all CGUs have been determined based on value-in-use calculations using 2017 actual balances to forecast 2018 and beyond cash flows. The manner in which the IOOF Group conducts each impairment assessment for years 2 to 5 and into perpetuity is discussed below for each relevant CGU. The growth rates applied do not exceed the long-term average growth rate for businesses in which each CGU operates. The pre- tax discount rate of 12.5% (2016: 10.7%) used reflects the IOOF Group’s pre-tax nominal weighted average cost of capital (WACC). Management’s assessment of goodwill’s value-in-use exceeds the value of goodwill allocated to these CGUs, except for the Perennial CGU where a $38.6m non-cash impairment has been recognised in 2017. Any reasonably possible changes to assumptions used in management’s assessment is not expected to result in impairment. Management has applied post tax WACC increments of 2.5% for Perennial and 3.5% for Consultum to reflect specific company risk premiums. These incremental amounts are judgement based and are consistent with accepted valuation industry practice. 4-4 Provisions Directors' retirement obligations Onerous contracts Employee entitlements Other provisions Balance at 1 July 2016 Provisions made during the year Provisions utilised during the year Balance at 30 June 2017 Accounting policies 2017 $’000 - 350 62,456 1,833 64,639 2016 $’000 475 2,063 57,999 1,857 62,394 Other Total $’000 1,857 1,724 (1,748) 1,833 $’000 62,394 34,818 (32,573) 64,639 Directors' retirement Onerous contracts $’000 475 - (475) - $’000 2,063 - (1,713) 350 Employee entitle- ments $’000 57,999 33,094 (28,637) 62,456 A provision is recognised if, as a result of a past event, the IOOF Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money. Directors’ retirement obligations Retirement benefits were paid to Non-Executive Directors appointed prior to 13 April 2003 to fulfil the terms of historical agreements. The benefit provided for a cash based payment to Non-Executive Directors at the time of their retirement. The retirement benefit obligation was measured on an undiscounted basis, was capped at $475,000 and was expensed as the related service was provided. The sole participant of this plan Dr Roger Sexton was paid $475,000 on his retirement on 24 November 2016. The plan is no longer in operation. Onerous contracts A provision for onerous contracts is recognised when the expected benefits to be derived by the IOOF Group from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is valued as the estimated present value of future lease payments net of anticipated recoveries from third parties, that the IOOF Group is presently obligated to make under non-cancellable operating lease contracts. The estimate may vary as a result of changes in the utilisation of the leased premises and sub-lease arrangements where applicable. Provisions relate to onerous lease contracts. The unexpired term of these leases is less than 1 year. 97 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Employee entitlements The provision for employee benefits includes provisions for remuneration in the form of incentive plans and expected leave benefits that employees have earned in return for their service in the current and prior years plus related on-costs. A provision for employee benefits in the form of an incentive plan is recognised when there is no realistic alternative but to settle the liability, and at least one of the following conditions is met: • • there are formal terms in the plan for determining the amount of the benefit; the amounts to be paid are determined before the time of completion of the financial report; or • past practice gives clear evidence of the amount of the obligation. A provision for restructuring is recognised when the IOOF Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating losses are not provided for. Liabilities for incentives are expected to be settled within 12 months and are measured at the amounts expected to be paid when they are settled. Other provisions Other provisions have been made for the present value of the Directors’ best estimates of legal settlements. The information usually required by AASB 137 Provisions, Contingent Liabilities and Contingent Assets, is not disclosed on the grounds that it can be expected to prejudice the outcome of litigation. 98 IOOF annual report 2017 Section 5 - Statutory funds A subsidiary of the Company, IOOF Ltd, is a friendly society in accordance with the Life Insurance Act 1995. Balances below are disclosed inclusive of amounts collected/receivable from or paid/payable to IOOF Group entities. These funds are not available to shareholders. 5-1 Assets relating to statutory funds Cash at bank Receivables Unlisted unit trusts Loans to policyholders Investments backing policyholder liabilities designated at fair value through profit or loss Statutory 2017 $’000 3,717 32,794 875,079 22,529 934,119 2016 $’000 5,263 26,716 832,061 15,309 879,349 Assets held in the Statutory Funds (including the Benefit Funds) are subject to the distribution and transfer restrictions and other requirements of the Life Insurance Act 1995. Monies held in the benefit funds and controlled trusts are held for the benefit of the members of those funds, and are subject to the constitution and rules of those funds. Accordingly, with the exception of permitted profit distributions, the investments held in the statutory funds are not available for use by other parties of the IOOF Group. The IOOF Group has determined that all financial assets held within its reported statutory funds (including the benefit funds which are treated as statutory funds) represent the assets backing policy liabilities and are measured at fair value through profit or loss. Other than loans and receivables held by the IOOF Group and its controlled entities, assets backing policy liabilities have been designated at fair value through profit or loss as the assets are managed on a fair value basis. 5-2 Liabilities relating to statutory funds Payables Seed capital Deferred tax liabilities Investment contract liabilities with DPF Investment contract liabilities Statutory 2017 $’000 6,360 7,153 2,307 267,220 651,079 934,119 2016 $’000 6,421 7,153 1,718 300,259 563,798 879,349 Policy liabilities have been determined in accordance with applicable accounting standards. Policy liabilities for life insurance contracts are valued in accordance with AASB 1038, whereas life investment contracts are valued in accordance with AASB 139 and AASB 118. There are differences between the valuation requirements of the accounting standards and those of the Life Insurance Act 1995. 99 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Accounting policies Contract classification The accounting treatment of certain transactions varies depending on the nature of the contract underlying the transaction. The major contract classifications are insurance contracts and investment contracts. (i) Insurance contracts Insurance contracts are those containing significant insurance risk at the inception of the contract, or those where at the inception of the contract there is a scenario with commercial substance where the level of insurance risk may be significant. The significance of insurance risk is dependent on both the probability of an insured event and the magnitude of its potential effect. Life insurance contract liabilities are calculated in accordance with actuarial standards. Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during the year. (ii) Investment contracts Contracts not considered insurance contracts are classified as investment contracts. The accounting treatment of investment contracts depends on whether the investment has a discretionary participation feature (‘DPF’). A DPF represents a contractual right to receive, as a supplement to guaranteed benefits, additional benefits that are: • likely to be a significant portion of the total benefits; • distributed at the discretion of the insurer; and • are based on the performance of a specified pool of assets. Deposits collected and benefits paid under investment contracts with DPF are accounted for through profit or loss. The gross change in the liability to these policyholders for the year, which includes any participating benefits vested in policyholders and any undistributed surplus attributed to policyholders, is also recognised in profit or loss. Deposits collected and withdrawals processed for investment contracts without DPF are accounted for directly through the statement of financial position as a movement in the investment contract liability. Distributions on these contracts are charged to profit or loss as an expense. Where contracts contain both an investment component and an insurance component and the deposit component can be separately measured, the underlying amounts are unbundled. Premiums relating to the insurance component are accounted for through profit or loss and the investment component is accounted for as a deposit through the statement of financial position as described above. 100 5-3 Reconciliation of movements in contract liabilities IOOF annual report 2017 Statutory 2017 $’000 2016 $’000 Investment contract liabilities with DPF Investment contract liabilities with DPF at beginning of the year 300,259 338,709 Net increase in investment contract liabilities with DPF Investment contract liabilities with DPF contributions Investment contract liabilities with DPF withdrawals Investment contract liabilities with DPF at end of the year Other investment contract liabilities Investment contract liabilities at beginning of the year Net increase in investment contract policy liabilities Investment contract contributions Investment contract withdrawals Investment contract liabilities at end of the year 5-4 Statutory fund contribution to profit or loss, net of tax Statutory fund revenue Interest income Dividends and distributions received Net fair value gains/(losses) on other financial assets designated as fair value through profit or loss Investment contracts with DPF: Contributions received - investment contracts with DPF DPF policyholder liability decrease Non - DPF policyholder liability (increase) Other fee revenue Statutory fund expenses Service and marketing fees expense Direct operating expenses Investment contracts with DPF: Benefits and withdrawals paid Termination bonuses Interest Income tax Statutory fund contribution to profit, net of tax 2,371 6,249 (41,659) 267,220 563,798 36,490 129,571 (78,780) 651,079 Statutory 2017 $’000 563 54,595 4,999 6,249 33,038 (36,490) 2,062 65,016 10,354 5 2,027 6,105 (46,582) 300,259 533,281 12,256 113,266 (95,005) 563,798 2016 $’000 552 44,841 (17,827) 6,105 38,450 (12,256) 3,072 62,937 11,523 5 41,636 46,516 23 106 52,124 12,892 - 66 90 58,200 4,737 - 101 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Accounting policies Processes used to select assumptions Investment contracts with DPF Mortality and Morbidity All mortality and morbidity risk is fully reinsured and the gross risk to the IOOF Group is low. The mortality and morbidity assumptions have been taken to be equal to the reinsurer’s mortality and morbidity assumptions. Other Assumptions In adopting the accumulation method to assess the policy liabilities, one material assumption is required. It is assumed that the future overall experience as to expense levels, surrender/lapse rates and discount rates will likely remain within a satisfactory range so that the policies produce future profits for the business. In which case, there is no need to set aside provisions, in addition to the accumulation amounts, for future losses (i.e. there is no loss recognition concerns for the business). This assumption has been adopted on the basis that, based on the current actual experience of the business, the policies are producing satisfactory profits for the business and there is no circumstances known that would indicate that the current position (i.e. general experience levels and ongoing profitability) will not continue into the future. Sensitivity analysis The policy liabilities are not sensitive to changes in variables within a moderate range. Increases in mortality and morbidity assumptions will result in an increase in gross policy liabilities for IOOF Ltd, however as the mortality and morbidity risk is fully reinsured any change in these assumptions would be consistent with the reinsurer’s assumptions and the net change in policy liabilities would be nil. The value of these liabilities changes in relation to the change in unit prices for unit linked contracts, and are decreased by management fee charges. In accordance with the rules of the funds, any remaining surplus is attributed to the policyholders. Adjustments to the liabilities at each reporting date are recorded in profit or loss. Other investment contracts The value of these liabilities changes in relation to the change in unit prices for unit linked contracts, and are decreased by management fee charges. In accordance with the rules of the funds, any remaining surplus is attributed to the members of the fund. Amounts distributable to members are recorded in profit or loss as an expense. There is no claims expense in respect of life investment contracts. Surrenders and withdrawals which relate to life investment contracts are treated as a movement in life investment contract liabilities. Surrenders are recognised when the policyholder formally notifies of their intention to end the policy previously contracted. Insurance contract liabilities and claims expense A claim expense is recognised when the liability to the policyholder under the policy contract has been established, or upon notification of the insured event. Withdrawal components of life insurance contracts are not expenses and are treated as movements in life insurance contract liabilities. 5-5 Actuarial assumptions and methods The effective date of the actuarial report on the policy liabilities and capital adequacy reserves is 30 June 2017. The actuarial report for IOOF Ltd was prepared by Mr Andrew Mead, FIAA, and was dated 18 August 2017. The actuarial report indicates that Mr Mead is satisfied as to the accuracy of the data upon which the policy liabilities have been determined. Actuarial Methods Policy liabilities have been calculated in accordance with relevant actuarial guidance issued by the Australian Prudential Regulation Authority under the Life Insurance Act 1995. Policy liabilities are based on a systematic release of planned margins as services are provided to policyholders and premiums are received. 102 IOOF annual report 2017 5-6 Disclosures on asset restrictions, managed (ii) Managed Funds and other fiduciary duties assets and trustee activities (i) Restrictions on assets Investments held in life statutory funds can only be used in accordance with the relevant regulatory restrictions imposed under the Life Act and associated rules and regulations. The main restrictions are that the assets in a life statutory fund can only be used to meet the liabilities and expenses of that life statutory fund, to acquire investments to further the business of the life statutory fund or as distributions when capital adequacy and other regulatory requirements are met. 5-7 Capital adequacy position Entities in the IOOF Group, including the IOOF Ltd Benefit Funds, hold controlling investments in managed funds. A subsidiary of the Company is the Responsible Entity for these managed funds and has a fiduciary responsibility for managing these trusts. Arrangements are in place to ensure that such activities are managed separately from the other activities of the IOOF Group. Capital adequacy reserves are required to meet the prudential standards determined in accordance with Prudential Standard LPS 110 Capital Adequacy issued by the Australian Prudential Regulation Authority under paragraph 230A(1)(a) of the Life Insurance Act 1995. Capital adequacy reserves provide additional protection to policy holders against the impact of fluctuations and unexpected adverse circumstances on the Company. The figures in the table below represent the number of times coverage of the aggregate of all benefit funds and statutory funds in the Life Group over the prescribed capital amount. (a)   Capital Base (b)   Prescribed capital amount Capital in excess of prescribed capital amount    = (a) - (b) Capital adequacy multiple (%) (a) / (b) Capital Base comprises: Net Assets Regulatory adjustment applied in calculation of Tier 1 capital (A) Common Equity Tier 1 Capital Additional Tier 1 Capital Regulatory adjustment applied in calculation of Additional Tier 1 capital (B) Total Additional Tier 1 Capital Tier 2 Capital Regulatory adjustment applied in calculation of Tier 2 capital (C) Total Tier 2 Capital Total capital base Statutory 2017 $’000 35,139 14,883 20,256 236% 2016 $’000 28,292 6,623 21,669 427% 35,139 28,292 - - 35,139 28,292 - - - - - - - - - - - - 35,139 28,292 For detailed capital adequacy information on a statutory fund basis, users of this annual financial report should refer to the financial statements prepared by the friendly society. 103 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Section 6 - Other disclosures 6-1 Parent entity financials As at and throughout the financial year ended 30 June 2017, the parent entity of the IOOF Group was IOOF Holdings Ltd. Result of the parent entity Profit for the year Total comprehensive income for the year Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Share-based payments reserve Retained earnings Total equity Parent entity contingent liabilities 2017 $’000 2016 $’000 159,871 159,871 138,091 138,091 75,845 62,842 1,677,687 1,667,452 114,215 231,124 17,257 223,988 1,438,601 1,439,276 2,062 5,900 2,485 1,702 1,446,563 1,443,464 There are currently no complaints or claims made against the parent entity. The parent entity does not provide any guarantees to subsidiaries or related parties. 6-2 Share-based payments The IOOF Group operates a number of employee share and option schemes operated by the IOOF Equity Plan Trust (the “Trust”). The employee share option plans were approved by the Board of Directors. IOOF Executive and Employee Share Option Plan The IOOF Group has an ownership-based compensation scheme for executives and senior employees. Selected employees may be granted options which entitle them to purchase ordinary fully paid shares in the Company at a price fixed at the time the options are granted. Voting and dividend rights will be attached to the unissued ordinary shares when the options have been exercised. Options may be exercised at any time from the date of vesting to the date of their expiry. The Remuneration Committee regards the grant of options to employees as an appropriate long-term incentive and retention component of total remuneration for executives and senior employees. It is expected that future annual grants of options will be made, the vesting of which will be subject to attainment of appropriate performance hurdles and on the basis of continuing employment with the IOOF Group. Options granted under the plan carry no dividend or voting rights. All plans are equity-settled. There were no options granted in 2017. 104 IOOF annual report 2017 IOOF Executive Performance Rights Plan The IOOF Executive Performance Rights Plan is the vehicle used to deliver equity based incentives to executives and senior employees of the IOOF Group. Each employee receives ordinary shares of the Company on vesting of the performance rights. No amounts are paid or payable by the recipient on receipt of the performance rights or on vesting. The performance rights carry neither rights to dividends nor voting rights prior to vesting. The Remuneration Committee regards the grant of performance rights to employees as an appropriate long-term incentive and retention component of total remuneration for executives and senior employees. It is expected that future annual grants of performance rights will be made, subject to the Board’s determination of the overall performance of the Company and market conditions. The vesting of any performance rights awarded will be subject to attainment of appropriate performance hurdles and on the basis of continuing employment with the IOOF Group. Performance rights granted under the plan carry no dividend or voting rights. All plans are equity-settled. Deferred Share Plan A Short Term Incentive (STI) mandatory deferral program exists with equity deferral relating to a third of the Managing Directors’ STI for each year. The following share-based payment arrangements were in existence during the current and comparative reporting years: Options Series – Recipient 2012-02 Managing Director 2010-03 Executives 2009-16 Managing Director Exercise price Earliest vesting date Exercise year $ $6.81 $7.01 $5.20 Commence 1-Jul-14 1-Jul-14 Expires 1-Jul-17 4-May-13 4-May-13 4-May-16 27-Nov-12 27-Nov-12 27-Nov-15 EPS & RoE Performance related vesting conditions EPS & RoE Nil On vesting of performance rights, ordinary shares are transferred to the employee’s name or sold. The employee receives all dividends on the ordinary shares while held in trust. The vesting of all issuances is subject to continuing employment. Opening balance at 1 July 2016 Forfeited or lapsed during the year Exercised during the year Granted during the year Outstanding at 30 June 2017 Exercisable at 30 June 2017 Performance Rights Number of rights Deferred Shares Number of shares Total Number of rights & shares No. 587,425 (176,750) (182,425) 419,567 647,817 - No. 68,879 - (26,984) 35,420 77,315 - No. 656,304 (176,750) (209,409) 454,987 725,132 - 105 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Disclosure of share-based payment plans Series – Recipient Performance rights 2012-01 Managing Director 2014-01 Executives 2014-02 Managing Director 2015-01 Executives 2015-02 Managing Director 2016-01 Executives 2016-02 Managing Director 2017-01 Executives 2017-02 Managing Director 2017-03 Executives 2017-04 Other Key Stakeholders Deferred shares 2015-03 Managing Director 2016-03 Managing Director 2017-03 Managing Director Exercise price Opening balance as at 1 July 2016 Granted Forfeited or Lapsed Exercised Closing balance as at 30 June 2017 $nil $nil $nil $nil $nil $nil $nil $nil $nil $nil $nil $nil $nil $nil 32,175 96,250 54,000 150,000 75,000 105,000 75,000 - - - - 587,425 26,984 41,895 - 68,879 - - - - - - - 240,000 120,000 30,000 29,567 419,567 - - 35,420 35,420 - - - (46,250) (25,500) (45,000) - (60,000) - - - (32,175) (96,250) (54,000) - - - - - - - - (176,750) (182,425) - - - - (26,984) - - (26,984) - - - 103,750 49,500 60,000 75,000 180,000 120,000 30,000 29,567 647,817 - 41,895 35,420 77,315 656,304 454,987 (176,750) (209,409) 725,132 There are no options outstanding at 30 June 2017. Inputs for measurement of grant date fair values granted during the financial year The grant date fair value of share-based payment plans granted during the year were measured based on a binomial options pricing model for non-market performance conditions and a monte carlo simulation model for market performance conditions. Expected volatility is estimated by considering historic average share price volatility. The inputs used in the measurement of the fair values at grant date of the share-based payment plans are the following: Series Fair value Grant date share price Expected volatility Expected life (years) Dividend yield Risk-free interest rate 2017-01 Executives 2017-02 Managing Director 2017-03 Executives 2017-04 Other Key Stakeholders $6.10 $4.50 $5.60 $7.11 $8.80 $8.40 $8.68 $8.74 25% 25% 25% n/a 3 3 3 3 6.2% 6.3% 6.1% 6.0% 1.5% 1.9% 2.0% 2.0% 106 IOOF annual report 2017 The following share-based payment arrangements were in existence during the current and comparative reporting years: Performance Rights Series – Recipient Exercise price Earliest vesting date Last tranche vesting date 2017-04 Other Key Stakeholders 2017-03 Executives 2017-02 Managing Director 2017-01 Executives 2016-02 Managing Director 2016-01 Executives 2015-02 Managing Director 2015-01 Executives 2014-02 Managing Director 2014-01 Executives 2013-04 Other Key Stakeholders 2013-03 Other Key Stakeholders 2012-01 Managing Director 2010-06 Managing Director nil nil nil nil nil nil nil nil nil nil nil nil nil nil 30-Jun-19 31-Dec-19 30-Jun-19 30-Jun-19 30-Jun-18 30-Jun-18 30-Jun-17 30-Jun-17 30-Jun-16 30-Jun-16 30-Nov-15 30-Nov-15 01-Jul-14 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 01-Jul-16 23-Nov-13 23-Nov-15 Performance related vesting conditions n/a TSR TSR & RoE TSR TSR & RoE TSR TSR & RoE TSR TSR & RoE TSR Compliance1 Compliance1 TSR & RoE TSR & RoE 1 The compliance condition requires maintenance of authorised representative status, attendance at professional development days, compliance with CPD requirements and the achievement of a minimum compliance audit score. The breakdown of share-based payments expense for the year by recipient is as follows. This represents the expense recorded to date and does not reflect the opportunity to transfer to retained profits the value of those legacy series that will lapse. Recipient Managing Director Senior Management Other Key Stakeholders Accounting policies 2017 $’000 753 513 29 2016 $’000 726 806 434 1,295 1,966 The grant date fair value of share-based payment awards granted to employees is recognised as a share-based payment expense, with a corresponding increase in the share-based payments reserve, over the years that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that meet the related service and non-market performance conditions at vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. The fair value at grant date is independently determined where considered appropriate. The option pricing model used takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option. Shares held by the Trust will contribute to the employee allocation of shares on satisfaction of vesting performance hurdles. The IOOF Group has no right to recall placed shares. However, a subsidiary company acts as the Trustee of the Trust, and can direct the voting rights of shares held. Shares in the Company held by the Trust are classified and disclosed as treasury shares, and deducted from share capital. Dividends received by the Trust are recorded as dividend income in the financial statements of the Trust and are eliminated on consolidation. 107 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 Set out below is a list of material subsidiaries of the IOOF Group. Parent entity IOOF Holdings Ltd Material subsidiaries AET Structured Finance Services Pty Limited Australian Executor Trustees Limited Bridges Financial Services Pty Limited Consultum Financial Advisers Pty Ltd Executive Wealth Management Financial Services Pty Limited I.O.O.F. Investment Management Limited IOOF Ltd IOOF Equity Plan Trust IOOF NZ Ltd IOOF Service Co Pty Ltd Lonsdale Financial Group Limited Questor Financial Services Pty Ltd SFG Australia Limited Financial Acuity Limited Shadforth Financial Group Limited Perennial Investment Management Limited Actuate Alliance Services Pty Ltd Ord Minnett Limited Ord Minnett Financial Planning Pty Limited Ord Minnett Management Limited Unconsolidated structured entities Country of incorporation Australia Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ownership interest 2017 % 2016 % 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 - 100.0 70.0 70.0 70.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 70.0 70.0 70.0 The IOOF Group has interests in various structured entities that are not consolidated. An ‘interest’ in an unconsolidated structured entity is any form of contractual or non-contractual involvement which exposes the IOOF Group to variability of returns from the performance of that entity. Such interests include holdings of equity securities, seed capital and fees from funds management activities. The seed capital is primarily available to support the business in establishing new products and is also used to support capital adequacy requirements of the benefit funds. The IOOF Group has investments in managed investment funds through its asset management subsidiaries. Control of these managed investment funds may exist since the IOOF Group has power over the activities of the fund. However, these funds have not been consolidated because the IOOF Group is not exposed to significant variability in returns from the funds. The IOOF Group earns management fees from the management of these investment funds which are commensurate with the services provided and are reported in external management and service fee revenue in note 2-3. Management fees are generally based on the value of the assets under management. Therefore, the fees earned are impacted by the composition of the assets under management and fluctuations in financial markets. Investment funds are investment vehicles that consist of a pool of funds collected from several investors for the purpose of investing in securities such as money market instruments, debt securities, equity securities and other similar assets. For all investment funds, the IOOF Group’s maximum exposure to loss is equivalent to the carrying amount of the investment in the fund. 108 IOOF annual report 2017 6-4 Remuneration of auditors Auditors’ remuneration paid or payable by members of the IOOF Group to the auditors of the corporate entities in relation to audit services of the corporate entities and products operated by the IOOF Group during the year and for the prior year: Audit services Auditors of the Company KPMG Australia Audit and review of financial reports Other regulatory audit services Other services Auditors of the Company KPMG Australia Taxation services Due diligence services Other services All amounts payable to the Auditors of the Company were paid by an IOOF Group subsidiary. 6-5 Key management personnel The key management personnel compensation comprised: Short-term employee benefits Post-employment benefits Share-based payments Key management personnel compensation reconciles to disclosures in the remuneration report as follows: Executive key management personnel Non-executive Directors 2017 $ 2016 $ 2,903,518 2,856,236 1,052,624 3,956,142 1,187,388 4,043,624 131,452 185,744 182,762 499,958 267,585 82,398 180,305 530,287 4,456,100 4,573,911 2017 $ 2016 $ 5,452,163 5,466,517 176,413 186,372 1,511,047 1,554,214 7,139,623 7,207,103 6,151,285 6,275,282 988,338 931,821 7,139,623 7,207,103 Individual Directors and executives compensation disclosures Information regarding individual Directors and executives compensation and some equity instruments disclosures as required by Corporations Regulation 2M.3.03 is provided in the remuneration report section of the Directors’ Report. No Director has entered into a material contract with the IOOF Group since the end of the prior financial year and there were no material contracts involving directors’ interests existing at year-end. 109 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 6-6 Related party transactions (a) Ultimate parent entity IOOF Holdings Ltd is the ultimate parent entity in the IOOF Group. (b) Loans to Directors and executives of associates and subsidiaries Financial year Opening balance 1 July Closing balance June Interest paid and payable during the year Interest free loans Perennial Value Management Limited Interest bearing loans Perennial Value Management Limited 2017 2016 2017 2016 Highest balance during the year $ 2,286,717 2,286,717 $ $ 2,286,717 2,286,717 2,286,717 2,286,717 $ - - 6,263,882 6,267,091 234,588 6,336,367 6,183,013 6,263,882 250,543 6,393,615 The amounts above were advanced by Perennial Investment Partners Pty Ltd and I.O.O.F. Investment Management Limited for the specific purpose of assisting executives to acquire an equity interest in subsidiaries and associates of the Company. Secured interest bearing loans totalling $6,267,091 were made on commercial terms and conditions and loans totalling $2,286,717 are unsecured interest free loans. (c) Transactions with key management personnel i. Key management personnel compensation Details of key management personnel compensation are disclosed in section 6-5 to the financial statements and in the Remuneration Report. ii. Loans to key management personnel There are no loans between the IOOF Group and key management personnel. iii. Other transactions with key management personnel of the IOOF Group There were no other transactions with key management personnel of the IOOF Group during the 2017 and 2016 financial years. (d) Transactions with other related parties Other related parties of the IOOF Group include associates listed in section 4-1 Associates. Receipt of service charge revenue from associates Payment of management fees to associates 2017 $ - - 2016 $ 1,886,860 8,096,435 110 IOOF annual report 2017 Section 7 - Basis of preparation This section sets out the IOOF Group’s accounting policies that relate to the financial statements as a whole. Where an accounting policy is specific to a single note, the policy is described in the note to which it relates. This section also shows new accounting standards, amendments and interpretations, and whether they are effective in 2017 or later years. We explain how these changes are expected to impact the financial position and performance of the IOOF Group. 7-1 Reporting entity (c) Functional and presentation currency The Company is a public company listed on the Australian Stock Exchange (trading under the symbol ‘IFL’), domiciled in Australia. The consolidated financial statements of the Company as at and for the year ended 30 June 2017 comprise the Company and its controlled entities and the IOOF Group’s interests in associates. The IOOF Group is a for-profit entity and is primarily involved in the provision of wealth management services. The Company’s registered office and its principal place of business are Level 6, 161 Collins Street, Melbourne. 7-2 Basis of preparation (a) Statement of compliance These general purpose financial statements have been prepared in accordance with Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB). The annual financial report was approved by the Board of Directors on 29 August 2017. (b) Basis of measurement The consolidated financial statements have been prepared on the historical cost basis except for the following material items in the statement of financial position: • financial instruments at fair value through profit or loss are measured at fair value; and • available-for-sale financial assets are measured at fair value. The statement of financial position is presented in order of liquidity. These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. All amounts have been rounded to the nearest thousand unless otherwise stated. (d) Rounding of amounts The Company is a company of the kind referred to in ASIC Corporations Instrument 2016/191, dated 24 March 2016, and in accordance with that Instrument amounts in the financial report are rounded off to the nearest thousand dollars, narrative disclosures are expressed in whole dollars or as otherwise indicated. (e) Use of estimates and judgements To conform with AASBs management is required to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the year in which the estimates are revised and in any future years affected. Information about critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included in the following notes: • section 2-4 - (vii) Deferred acquisition costs; • • • section 4-2 - Intangible assets (other than goodwill); section 4-3 - Goodwill; and section 6-2 - Share-based payments. Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year are included in the following notes: • note 4-2 & 4-3 - key assumptions used in discounted cash flow projections; and • note 3-4 & 4-4 - contingencies and provisions. 111 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 When share-based payment awards (replacement awards) are required to be exchanged for awards held by the acquiree’s employees (acquiree’s awards) and relate to past services, then all or a portion of the amount of the acquiree’s replacement awards is included in measuring the consideration transferred in the business combination. This determination is based on the market-based value of the replacement awards compared with the market-based value of the acquiree’s awards and the extent to which the replacement awards relate to past and/or future service. (ii) Non-controlling interests (NCI) NCI are measured at their proportionate share of the acquiree’s identifiable net assets at the acquisition date. Changes in the IOOF Group’s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. (iii) Subsidiaries Subsidiaries are entities controlled by the IOOF Group. The IOOF Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. (iv) Loss of control When the IOOF Group loses control over a subsidiary, it derecognises the assets and liabilities of the subsidiary, and any related NCI and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. (v) IOOF Equity Plan Trust (the “Trust”) The IOOF Group has formed a trust to administer the IOOF Group’s employee share schemes. The Trust is consolidated, as the substance of the relationship is that the Trust is controlled by the IOOF Group. Shares held by the Trust are disclosed as treasury shares and are deducted from share capital. 7-3 Other significant accounting policies Significant accounting policies have been included in the relevant notes to which the policies relate. Other significant accounting policies are listed below. Certain comparative amounts have been reclassified to conform with the current year’s presentation. (a) Changes in accounting policies The IOOF Group has consistently applied the accounting policies to all years presented in these consolidated financial statements. (b) Basis of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of the Company as at 30 June 2017 and the results of all controlled subsidiaries for the year then ended. This includes the benefit funds of its subsidiary, IOOF Ltd, and any controlled trusts. The benefit funds, and any trusts controlled by those funds, are treated as statutory funds in accordance with the Life Insurance Act 1995. These statutory funds, in addition to the statutory funds of the life insurance business conducted by the IOOF Group, are shown separately from shareholder funds in the notes to the financial statements. Refer to Note 5-2 Liabilities relating to statutory funds for information in relation to the different accounting treatment of investment contracts with discretionary participating features. (i) Business combinations The IOOF Group accounts for business combinations using the acquisition method when control is transferred. The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the contingent consideration are recognised in profit or loss. 112 (vi) Transactions eliminated on consolidation Intra-IOOF Group balances and transactions, and any unrealised income and expenses arising from intra-IOOF Group transactions, are eliminated in preparing the consolidated financial statements. Unrealised gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the IOOF Group’s interest in the investee. Unrealised losses are eliminated in the same way as unrealised gains, but only to the extent that there is no evidence of impairment. Dividends paid to the Trust are also eliminated. (c) Foreign currency Foreign currency transactions Transactions in foreign currencies are translated at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in profit or loss. Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on consolidation, are translated to Australian dollars at foreign exchange rates ruling at the balance sheet date. The revenue and expenses of foreign operations are translated to Australian dollars at rates approximating the foreign exchange rates ruling at the dates of the transactions. Foreign currency differences are recognised directly in equity in the foreign currency translation reserve (FCTR). (d) Property and equipment (i) Recognition and measurement Property and equipment are measured at cost less any accumulated depreciation and any accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. IOOF annual report 2017 The gain or loss on divestment of an item of property and equipment is determined by comparing the proceeds from divestment with the carrying amount of the property and equipment and is recognised net within other income/other expenses in profit or loss. When revalued assets are sold, any related amount included in the revaluation reserve is transferred to retained earnings. (ii) Subsequent costs Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the IOOF Group. Repairs and maintenance costs are charged to profit or loss as they are incurred. (iii) Depreciation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of property and equipment. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the IOOF Group will obtain ownership by the end of the lease term. Items of property and equipment are depreciated from the date that they are installed and are ready for use, or in respect of internally constructed assets, from the date that the asset is completed and ready for use. The estimated useful lives for the current and comparative year are as follows: • office equipment 3-10 years • leasehold improvements 3-10 years • equipment under finance lease 3-10 years Depreciation methods, useful lives and residual values are reviewed at each reporting date, and adjusted if appropriate. 113 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 (e) Impairment (i) Non-derivative financial assets A financial asset not carried at fair value through profit or loss is assessed at each reporting date to determine whether there is objective evidence that it is impaired. A financial asset is impaired if objective evidence indicates that a loss event has occurred after the initial recognition of the asset, and that the loss event had a negative effect on the estimated future cash flows of that asset that can be estimated reliably. Objective evidence that financial assets (including equity securities) are impaired can include default or delinquency by a debtor, restructuring of an amount due to the IOOF Group on terms that the IOOF Group would not consider otherwise, indications that a debtor or issuer will enter bankruptcy, adverse changes in the payment status of borrowers or issuers in the IOOF Group, economic conditions that correlate with defaults or the disappearance of an active market of a security. In addition, for an investment in an equity security, a significant or prolonged decline in its fair value below its cost is considered objective evidence of impairment. Financial assets measured at amortised cost An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. Losses are recognised in profit or loss and reflected as an allowance account against loans and receivables. Interest on the impaired asset continues to be recognised. When a subsequent event (eg. a repayment by a debtor) causes the amount of impairment loss to decrease, the decrease in impairment loss is reversed through profit or loss. Available-for-sale financial assets Impairment losses on available-for-sale financial assets are recognised by reclassifying the losses accumulated in the investment revaluation reserve, to profit or loss. The cumulative loss that is reclassified from equity to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. 114 Changes in impairment provisions attributable to application of the effective interest method are reflected as a component of interest income. If, in a subsequent year, the fair value of an impaired available-for-sale debt security increases and the increase can be related objectively to an event occurring after the impairment loss was recognised in profit or loss, then the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. Associates An impairment loss in respect of an associate is measured by comparing the recoverable amount of the investment with its carrying amount. An impairment loss is recognised in profit or loss, and is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. (ii) Non-financial assets The carrying amounts of the IOOF Group’s non-financial assets, other than deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill, and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at the same time. An impairment loss is recognised if the carrying amount of an asset or its related cash-generating unit (CGU) exceeds its estimated recoverable amount. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Subject to an operating segment ceiling test, for the purposes of goodwill impairment testing, CGUs to which goodwill has been allocated are aggregated so that the level at which impairment is tested reflects the lowest level at which goodwill is monitored for internal reporting purposes. Goodwill acquired in a business combination is allocated to groups of CGUs that are expected to benefit from the synergies of the combination. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of CGUs are allocated first to reduce the carrying amount of any goodwill allocated to the units, and then to reduce the carrying amounts of the other assets in the unit (group of units) on a pro rata basis. IOOF annual report 2017 An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Goodwill that forms part of the carrying amount of an investment in an associate is not recognised separately, and therefore is not tested for impairment separately. Instead, the entire amount of the investment in an associate is tested for impairment as a single asset when there is objective evidence that the investment in an associate may be impaired. (f) Goods and service tax (GST) Revenues, expenses and assets (excluding receivables) are recorded net of GST. GST input tax credits are initially recorded as an asset and GST collected as a liability. These balances are offset as at the reporting date and recognised as either an amount receivable or payable to the Australian Taxation Office. The GST portion relating to financial supplies and non- deductible expenditure, for which an input tax credit cannot be claimed, is expensed or is recognised as part of the cost of acquisition of an asset. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the Australian Taxation Office is included with other receivables or payables in the statement of financial position. Cash flows are presented in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the Australian Taxation Office are presented as operating cash flows. (g) Leases Leases in terms of which the IOOF Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Upon initial recognition the leased asset is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to that asset. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each year during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. Other leases are operating leases and are not recognised on the IOOF Group’s statement of financial position. 7-4 New standards and interpretations not yet adopted A number of new standards and amendments to standards are effective for annual years beginning after 1 January 2016 and earlier application is permitted; however the IOOF Group has not early adopted the following new or amended standards in preparing these consolidated financial statements. IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual years beginning on or after 1 January 2018, with early adoption permitted. The IOOF Group has completed an initial assessment of the potential impact of the adoption of IFRS 15 on its consolidated financial statements and does not expect that there will be a significant impact. 115 IOOF annual report 2017 Notes to the financial statements For the year ended 30 June 2017 (i) Management and service fees revenue IFRS 16 Leases The IOOF Group provide management services to unit trusts and funds operated by the IOOF Group at normal commercial rates. Management and service fees earned from the unit trusts and funds are calculated based on an agreed percentage of the respective funds under management or administration as disclosed in the respective product disclosure statements, and are recognised on an accruals basis. The IOOF Group currently recognises management and service fees revenue at the time the service is provided. No significant changes are expected to this treatment under IFRS 15. Stockbroking revenue and external other fee revenue are also recognised at the time the service is provided. No significant changes are expected to this treatment under IFRS 15. The IOOF Group plans to adopt IFRS 15 in its consolidated financial statements for the year ending 30 June 2019. IFRS 9 Financial Instruments IFRS 9 is effective for annual years beginning on or after 1 January 2018, with early adoption permitted. The IOOF Group plans to adopt IFRS 9 in its consolidated financial statements for the year ending 30 June 2019. At 30 June 2017, the IOOF Group had equity investments classified as available-for-sale with a fair value of $25.4m that are held for long-term strategic purposes. Upon application of IFRS 9 the IOOF Group will classify these as Fair Value Other Comprehensive Income with all fair value gains and losses reported in other comprehensive income in line with current treatment. IFRS 9 replaces the “incurred loss” model in IAS 39 with a forward looking ‘expected credit loss’ (ECL) model when determining provision for impairment of receivables. This will require considerable judgement as to how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. Given the IOOF Group’s receivables are short term, loss allowances are not expected to change significantly when IFRS 9 is adopted. IFRS 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are optional exemptions for short-term leases and leases of low value items. IFRS 16 replaces existing leases guidance including IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions involving the Legal Form of a Lease. The standard is effective for annual years beginning on or after 1 January 2019. Early adoption is permitted for entities that apply IFRS 15 Revenue from Contracts with Customers at or before the date of initial application of IFRS 16. The IOOF Group has started an initial assessment of the potential impact of its consolidated financial statements. So far, the most significant impact identified is that the IOOF Group will recognise new assets and liabilities for its property operating leases ($85m). The nature of expenses related to those leases will now change as IFRS 16 replaces the straight- line operating lease expense with a depreciation charge for right-of-use assets and interest expense on lease liabilities. No significant impact is expected for the IOOF Group’s finance leases. The IOOF Group will apply the standard using a retrospective approach and plans to adopt IFRS 16 in the consolidated financial statements for the year ended 30 June 2020. Disclosure Initiative (Amendments to IAS 7) The amendments require disclosures that enable users of financial statements to evaluate changes in liabilities arising from financing activities, including both changes arising from cash flow and non-cash changes. The amendments are effective for annual years beginning on or after 1 January 2017, with early adoption permitted. To satisfy the new disclosure requirements, the Group intends to present a reconciliation between the 2017 opening and 2018 closing balances for liabilities with changes arising from financing activities. 116 Other amendments The following new or amended standards are not expected to have a significant impact on the IOOF Group’s consolidated financial statements. • Classification and Measurement of Share-based payment Transactions (amendments to IFRS 2) • Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (amendments to IFRS 10 and IAS 28) • Recognition of Deferred Tax Assets for Unrealised Losses (amendments to IAS 12) 7-5 Subsequent events The Directors have declared the payment of a final dividend of 27.0 cents per ordinary share franked to 100% based on tax paid at 30%, to be paid on 1 September 2017. The Directors are not aware of any other event or circumstance since the end of the financial year not otherwise dealt with in this report or the consolidated financial report that has or may significantly affect the operations of the consolidated entity, the results of those operations or the state of affairs of the consolidated entity in subsequent financial years. IOOF annual report 2017 117 IOOF annual report 2017 Shareholder information Share Capital IOOF has on issue 300,133,752 fully paid ordinary shares held by 59,932 holders as at 28 September 2017. Balance at 28-Sep-17 41,302,623 25,412,867 23,788,928 23,322,538 8,982,179 4,770,787 4,571,120 2,760,419 2,265,506 1,946,474 1,928,518 1,716,464 1,214,453 1,174,094 1,133,098 1,124,199 1,095,032 1,000,000 797,756 777,520 151,084,575 300,133,752 % of issued capital 13.76 8.47 7.93 7.77 2.99 1.59 1.52 0.92 0.75 0.65 0.64 0.57 0.40 0.39 0.38 0.37 0.36 0.33 0.27 0.26 50.34 Voting Rights IOOF’s fully paid ordinary shares carry voting rights of one vote per share. Twenty largest shareholders as at 28 September 2017 The following table sets out the top 20 registered holders of shares. Rank Holder Name HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED THE TRUST COMPANY (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED BNP PARIBAS NOMINEES PTY LTD BNP PARIBAS NOMS PTY LTD MR IAN GREGORY GRIFFITHS SAM GANNON PTY LTD CITICORP NOMINEES PTY LIMITED MRS SALLY KELAHER MILTON CORPORATION LIMITED HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED - A/C 2 BKI INVESTMENT COMPANY LIMITED WPQ HOLDINGS PTY LTD CUSTODIAL SERVICES LIMITED AMP LIFE LIMITED THANECORP AUSTRALIA PTY LTD THANECORP AUSTRALIA PTY LTD MRS SUSAN JANE GRIFFITHS Total Securities of Top 20 Holdings Total of Securities 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 118 IOOF annual report 2017 Distribution of members and their holdings The following table summarises the distribution of our listed shares as at 28 September 2017. Range 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001+ Totals No of Holders No of Units % Issued Capital 34,498 20,181 3,414 1,715 124 59,932 13,425,631 46,635,460 24,391,533 36,315,053 179,366,075 300,133,752 4.47 15.54 8.13 12.10 59.76 100.00 There were 787 shareholders holding less than a marketable parcel of shares based on a market price of $11.12 at the close of trading on 28 September 2017 and there were 20 per cent of shareholders with registered addresses outside Australia. Substantial Shareholdings Substantial shareholders as at 28 September 2017 are shown below, with the date of their last notice lodged in accordance with section 671B of the Corporations Act: Name Bruce W Neill Legg Mason Asset Management Australia Limited Share register and other enquiries Date of last notice 21-Aug-2014 20-Jun-2017 No of Ord Shares 27,812,867 21,394,719 % of Issued Share Capital as at date of last notice 9.29% 7.12% If you have any questions in relation to your shareholding, share transfers or dividends, please contact our share registry: Boardroom Pty Limited Level 12, 225 George Street Sydney NSW 2000 1300 737 760 (Australia only) Phone: Phone: + 612 9290 9600 Email: IOOF@boardroomlimited.com.au Website: www.boardroomlimited.com.au Please include your shareholder reference number (SRN) or holder identification number (HIN) in all correspondence to the share registry. CRA-6580 IOOF Annual Report 2017 - FINANCIALS v6.indd 119 6/10/17 10:19 am 119 This page has been left blank intentionally. Contents About IOOF Our major brands Chairman and Managing Director’s commentary Our financial performance Directors Environmental, Social & Governance report IOOF Foundation Financial report 1 2 3 7 10 13 21 23 Share registry Boardroom Pty Limited Level 12, 225 George Street Sydney NSW 2000 Auditor KPMG Tower Two, Collins Square, 727 Collins Street Docklands VIC 3008 Solicitors King & Wood Mallesons Level 50, Bourke Place 600 Bourke Street Melbourne VIC 3000 Bankers Commonwealth Bank Limited Tower 1, 201 Sussex Street, Sydney NSW 2000 Securities exchange listing IOOF Holdings Ltd shares are listed on the Australian Securities Exchange (ASX: IFL) Website address www.ioof.com.au Corporate directory (as at 28 September 2017) Directors Mr George Venardos B.Com, FCA, FGIA, FAICD, FCIS Chairman Mr Christopher Kelaher B.Ec, LL.B, F Fin. Managing Director Ms Elizabeth Flynn LL.B, Grad Dip AppCorpGov, FAICD, FFin, FGIA, FCIS. Ms Jane Harvey B.Com, MBA, FCA, FAICD Mr Allan Griffiths B.Bus, DipLi Mr John Selak Dip Acc, FCA, FAICD Company Secretary Mr A Paul M Vine LL.B, FGIA, FCIS, GAICD Notice of Annual General Meeting The Annual General Meeting of IOOF Holdings Ltd will be held at: Verandah Room Grand Hyatt 123 Collins Street Melbourne, Victoria 3000 Time 9.30am Date 23 November 2017 A formal notice of meeting is available on our website and has been sent to shareholders Principal registered office in Australia Level 6, 161 Collins Street Melbourne, VIC 3000 (03) 8614 4400 CRA-6580 IOOF Annual Report 2017 - COVER SPREADS_V5.indd 2-4 6/10/17 2:54 pm annualreport2017 I O O F H o d n g s l i | A n n u a l R e p o r t 2 0 1 7 0 8 5 6 - A R C Turn your life goals into a reality ioof.com.au 

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