Iress Ltd Annual Report 2017

Plain-text annual report

delivering outcomes today, developing for tomorrow, designing for the future. 01101001 01110011 01100101 01100101 01100111 01110100 01100101 01101111 00101100 01110110 01110000 00100000 00100000 01101111 01110111 01100101 01101110 00100000 00100000 00100000 01110101 01110010 00101110 01101100 01110010 00100000 01100011 01110011 01100100 00100000 01100101 01101001 01100110 01110100 01110010 00101100 01110011 01101001 01100110 01110100 01100110 01110010 01100101 00100000 01101001 01101001 01101111 01101111 00100000 01100001 01100100 01101100 01101110 01101111 01101111 01110010 00100000 01101001 01101110 01101111 01101000 01110101 01100101 01110011 01100100 01110110 01101110 01110101 01101101 01110100 01111001 01100101 01101111 01100111 01110010 01101101 01101111 01100100 01100111 01100111 01110010 01100101 01110100 00101110 Annual Report 2017 In this Report About Us 2017 A Snapshot Leading Our People Our People Leading Financial Highlights Chairman & CEO’s Letter Principal Activities Operating & Financial Review Board of Directors Directors’ Report Auditor’s Independence Declaration Financial Statements Directors’ Declaration Independent Auditor’s Report Shareholder Information Corporate Directory 01 02 04 05 06 08 10 12 16 18 45 46 73 74 78 80 AGM details Thursday 3rd May 2018 11:30am AEST RACV Club 501 Bourke Street Melbourne, Victoria, Australia delivering outcomes today, developing for tomorrow, designing for the future. 01101001 01110011 01100101 01100101 01100111 01110100 01100101 01101111 00101100 01110110 01110000 00100000 00100000 01101111 01110111 01100101 01101110 00100000 00100000 00100000 01110101 01110010 00101110 01101100 01110010 00100000 01100011 01110011 01100100 00100000 01100101 01101001 01100110 01110100 01110010 00101100 01110011 01101001 01100110 01110100 01100110 01110010 01100101 00100000 01101001 01101001 01101111 01101111 00100000 01100001 01100100 01101100 01101110 01101111 01101111 01110010 00100000 01101001 01101110 01101111 01101000 01110101 01100101 01110011 01100100 01110110 01101110 01110101 01101101 01110100 01111001 01100101 01101111 01100111 01110010 01101101 01101111 01100100 01100111 01100111 01110010 01100101 01110100 00101110 On our cover Binary code is the simplest form of computer code – the basis of every software engineering language and what makes technology work. As technology is the very core of our business, it’s only fitting to explain what we are all about – delivering outcomes today, developing for tomorrow and designing for the future – in binary code. IRESS LIMITED ABN 47 060 313 359 About Us 01000001 01100010 01101111 01110101 01110100 00100000 01010101 01110011 We design, develop and deliver technology solutions for the financial services industry in Australia, New Zealand, the United Kingdom, South Africa, Canada, and Asia. Whether our clients trade on global financial markets, manage investments, provide mortgages or help people plan their financial future and protect their family, they rely on our software and our team to help deliver the right outcomes for their business and their clients. With a solid financial track record, we continue to grow and adapt to meet the complex and changing needs of our clients. As we enter our 25th year, we haven’t forgotten our roots: keeping the entrepreneurial spirit and creative thinking that has driven us to success, and an unwavering focus on what’s most important – delivering outcomes today, developing for tomorrow and designing for the future. 1,881 People 17 Offices 6 Countries 1 Ambition To be the most innovative, reliable and respected technology partner, regarded by our clients as essential and desirable. Adelaide 01000001 01100100 01100101 01101100 01100001 01101001 01100100 01100101 Auckland 01000001 01110101 01100011 01101011 01101100 01100001 01101110 01100100 Brisbane 01000010 01110010 01101001 01110011 01100010 01100001 01101110 01100101 Cape Town 01000011 01100001 01110000 01100101 00100000 01010100 01101111 01110111 01101110 Cheltenham 01000011 01101000 01100101 01101100 01110100 01100101 01101110 01101000 01100001 01101101 Durban 01000100 01110101 01110010 01100010 01100001 01101110 Johannesburg 01001010 01101111 01101000 01100001 01101110 01101110 01100101 01110011 01100010 01110101 01110010 01100111 Leatherhead 01001100 01100101 01100001 01110100 01101000 01100101 01110010 01101000 01100101 01100001 01100100 London 01001100 01101111 01101110 01100100 01101111 01101110 Melbourne 01001101 01100101 01101100 01100010 01101111 01110101 01110010 01101110 01100101 Perth 01010000 01100101 01110010 01110100 01101000 Singapore 01010011 01101001 01101110 01100111 01100001 01110000 01101111 01110010 01100101 Sydney 01010011 01111001 01100100 01101110 01100101 01111001 Toronto 01010100 01101111 01110010 01101111 01101110 01110100 01101111 Warwick 01010111 01100001 01110010 01110111 01101001 01100011 01101011 Wellington 01010111 01100101 01101100 01101100 01101001 01101110 01100111 01110100 01101111 01101110 Wollongong 01010111 01101111 01101100 01101100 01101111 01101110 01100111 01101111 01101110 01100111 01 2017 A Snapshot A focus on clients and users World-leading solutions 21 All-digital UK bank Atom processes a mortgage, from application to offer, in just 21 seconds using our Mortgage Sales and Origination (MSO) software. 55% Continued investment in our product and technology capability where now 55% of our people are directly responsible for creating and deploying our world-leading solutions. 3 1 Three key Australian wealth management clients took delivery of XPLAN Prime, changing the way advice professionals deliver scaled, objective-based advice. 10 XPLAN named the best financial planning software for the tenth consecutive year in Investment Trends’ (Australian) Planning Software Benchmark Report. Major milestones reached in the delivery of a single integrated private wealth technology platform and new digital client portal for prominent UK wealth manager Close Brothers Asset Management. $108m Over $108 million was invested in product and technology, the heart of IRESS’ success and market position, supporting client retention and future recurring revenue growth. 140K Statewide Super replaces multiple legacy systems with our Acurity platform enabling them to focus on the needs of its more than 140,000 members. 347 Our third Global Hackathon, held across 6 countries over 24 hours, saw more than 600 people in 161 teams develop, code and build 347 new ideas – many of which are now in production. 02 IRESS LIMITED ANNUAL REPORT 2017 00110010 00110000 00110001 00110111 00001010 01000001 00100000 01010011 01101110 01100001 01110000 01110011 01101000 01101111 01110100 IRESS LIMITED ANNUAL REPORT 2017Planned and targeted growth The best people working together 153 Our market data coverage continues to expand, with our clients able to access information from 153 global exchanges and macroeconomic data from 196 countries. 2020 2020 ambition and strategy shared with all IRESS people at events during March and April – the key theme being the relentless pursuit of becoming essential and desirable to our clients and users. 94 Continued penetration of the UK wealth management and advice sector, with 94 of the top 100 advisory firms now using our technology. 40% South African operating revenue grew 40% in 2017, reflecting strong demand across our product suite and contribution from recently- acquired market data firm INET BFA. 4b Growth in the Canadian wealth management market with delivery of a complete solution to leading independent firm Echelon Wealth Partners, which has more than CAD 4 billion assets under management. 212 Our Sydney team of 212 people moved to new offices in Barangaroo, purpose built as a contemporary, cross-functional team workspace that fosters collaboration and creativity. 26 Industry leading parental leave entitlements introduced as part of our diversity and inclusion commitment – 26 weeks’ paid leave for primary carers and four for secondary carers. 8 Eight of our people recognised externally for their achievements. Andrew Walsh Finalist, EY Australian Entrepreneur of the Year Clare Wilkes Finalist, HR Professional of the Year award Ellen Sumbler Winner, Goodacre Client Consultancy award Jo Hopkins Winner, IT Rising Star (SME) award Kirsty Gross Finalist, FinTech Leader of the Year award Marnie Shervey Finalist, IT Innovator of the Year award Melanie Meadwell Winner, Goodacre Product Specialist award. Sally Padmore Finalist, IT Hero of the Year (SME) award 0303 Leading Our People 01001100 01100101 01100001 01100100 01101001 01101110 01100111 00100000 00001010 01001111 01110101 01110010 00100000 01010000 01100101 01101111 01110000 01101100 01100101 Our greatest asset at IRESS is our people – more than 1,800 – who make it happen for our business, our clients and our users. Supporting them to deliver outcomes today, develop for tomorrow and design for the future are a leadership team who are committed to IRESS’ goals, clients and people. Back row (left to right) John Harris Chief Financial Officer, Glenn Wilson Executive General Manager Wealth & Trading, Julia McNeill Group Executive – Human Resources, Andrew Todd Chief Technology Officer, Simon New Group Executive – Strategy, Simon Badley Managing Director – United Kingdom, Andrew Walsh Chief Executive Officer, Peter Ferguson Group General Counsel, Coran Lill Group Executive – Communications and Marketing. Front row (left to right) Tizzy Vigilante Managing Director – Australia & New Zealand (Wealth Management), Aaron Knowles Group Executive – Product, Kirsty Gross Managing Director – Australia & New Zealand (Financial Markets), Jason Hoang Managing Director – Asia, Ray Pretorius Managing Director – South Africa. 04 IRESS LIMITED ANNUAL REPORT 2017Our People Leading 01001111 01110101 01110010 00100000 01010000 01100101 01101111 01110000 01101100 01100101 00001010 01001100 01100101 01100001 01100100 01101001 01101110 01100111 IRESS Foundation Our people are more than skilled software engineers, client relationship professionals and business managers - they are also passionate about making a difference in the communities in which we operate. We have a long history of people-led community engagement. In 2017 we established the IRESS Foundation to provide more support, structure and funding to these endeavours across our regions in two key areas - IRESS Opportunity Initiatives and IRESS Matching Initiatives. IRESS Opportunity Initiatives In each region, we have established IRESS Opportunity Initiatives in the form of long-term partnerships with community organisations to make a recognisable and significant contribution to the partner organisation. In the United Kingdom we continued our relationships with the Myton Hospice and the James Hopkins Trust and started working with Cobalt, a charity that invests in medical equipment, research and education. In South Africa, we continued our long-term relationship with Seeds of Africa, focused on early childhood development in previously disadvantaged communities, and the Klipheuwel Creche in Cape Town, which now has space for 40 children to learn, play and grow while receiving access to food, medicine and specialist support. In Canada, we continued our support of the Holland Bloorview Rehabilitation Hospital. In Sydney we have partnered with TABLE – connecting people from all walks of life with those from disadvantaged backgrounds through the sharing of a meal. In Melbourne, we partnered with Whitelion – an organisation that assists at-risk young people to reach their full potential. IRESS Matching Initiatives We recognise that our people have personal interests in other social or health issues, so IRESS Matching Initiatives focus on harnessing enthusiasm for community engagement by matching funds raised by a team of IRESS people. Some highlights included: – – – – In Canada, raising $25,000 in the Ride to Conquer Cancer. In the United Kingdom, taking on the Three Peaks Challenge, climbing the three highest mountains in Scotland, England & Wales within 24 hours. In Australia, completing the JDRF charity cycle in Adelaide, raising $23,000 for research into Type 1 diabetes. In South Africa, raising funds to purchase 60 food hampers for families at the Healing Word crèche. – In Australia, raising $13,000 for the Cure Brain Cancer charity. In 2017, the IRESS Foundation supported Opportunity Initiatives and Matching Initiatives to a total value of over $100,000. 05 Financial Highlights 01000110 01101001 01101110 01100001 01101110 01100011 01101001 01100001 01101100 00001010 01001000 01101001 01100111 01101000 01101100 01101001 01100111 01101000 01110100 01110011 Solid revenue growth driven by the acquisitions of Financial Synergy and INET and underpinned by organic delivery to clients globally. Operating Revenue $430m 10% on 2016 13% on 2016 on a constant currency basis APAC Resilient financial markets revenue. Strong underlying growth in wealth management reflects ongoing XPLAN demand. Full year contribution from Financial Synergy acquired in 2016. Asia steady. 56% United Kingdom Revenue growth reflects successful client deliveries and increasing uptake. Key milestones achieved on several key client projects to deliver integrated solutions. Lending momentum increasing. 30% South Africa Strong underlying growth reflects client deliveries and ongoing demand across product suite. Full year contribution from INET acquired in 2016. 10% Canada Revenue growth reflects successful client deliveries and strong client retention. Successful wealth deployments increasing wealth footprint. 4% 06 IRESS LIMITED ANNUAL REPORT 2017Strong financial track record Operating Revenue Operating Cash Flow 0 . 0 3 4 7 . 3 8 AUD (m) 08 09 10 11 12 13 14 15 16 17 08 09 10 11 12 13 14 15 16 17 AUD (m) Operating Cashflow $m Cashflow Per Share Cents Segment Profit (1) Earnings Per Share 4 . 5 2 1 4 . 5 3 AUD (m) NPAT 08 09 10 11 12 13 14 15 16 17 08 09 10 11 12 13 14 15 16 17 AUD (cents) Dividends Per Share 8 . 9 5 0 . 4 4 AUD (m) AUD (cents) 08 09 10 11 12 13 14 15 16 17 08 09 10 11 12 13 14 15 16 17 Unless otherwise stated all comparisons are with the prior corresponding period on a reported currency basis. Financial information in this report is extracted or calculated from the half year & annual financial statements which have been subject to review or audit. (1) Segment Profit represents earnings before interest, tax, depreciation, amortisation, share based payments, non-operating items and unrealised FX gains/losses – see page 14 for a full reconciliation. 07 Chairman & Chairman & CEO’s Letter CEO’s Letter 01000011 01101000 01100001 01101001 01110010 01101101 01100001 01101110 00100000 00100110 00001010 01000011 01000101 01001111 00100111 01110011 00100000 01001100 01100101 01110100 01110100 01100101 01110010 We are delivering on our strategy of providing integrated, market-leading products, with critical milestones achieved to existing and new clients. 2017 was a year of solid performance by IRESS. As Australia’s leading financial technology company, with a diversified international presence, IRESS continued to deliver growth and innovation - supported by targeted investments for the longer term. In the United Kingdom, we delivered our integrated trading and wealth solution to leading financial services businesses. In Australia, we launched XPLAN Prime, our new scaled advice solution. In the second half we delivered Prime to three ASX-listed financial services businesses who are to use Prime to change the way they deliver advice to their clients. The theme of delivery was repeated in Singapore, South Africa and Canada where key client deployments were a feature in 2017. We continued to invest in our people, our products and our technology while focusing on costs and operational efficiency and continued to maintain a conservative balance sheet and steady dividend. Financial results For the full year to 31 December 2017, group revenue was up 10% on 2016 to $430 million. On a constant currency basis, group revenue was up 13%. This included positive contribution to earnings from the Financial Synergy and INET BFA acquisitions in Australia and South Africa. Statutory net profit was $59.8 million, up 1% on 2016, after investment made during 2017 in client delivery capability for the longer term. Group Segment Profit was $125.4 million, up 2% on 2016 (up 3% on a constant currency basis). Our financial results for 2017 are at the higher end of the range of the revised guidance provided to the market in November 2017. We experienced increased business and revenue momentum in the second half, realising the benefit of investments made in prior periods. In particular, second half revenue increased 3% over the first half, with second half segment profit up 11% over the first half on a constant currency basis. We are delivering on our strategy of providing integrated, market-leading products, with critical milestones achieved to existing and new clients. Revenue growth in Australia, New Zealand and Asia was strong and included the impact of 2016 acquisitions. Our financial markets business shows continued resilience as clients continue to experience cost pressures. Our wealth management business also experienced solid underlying growth, underpinned by continuing demand for our solutions. 08 IRESS LIMITED ANNUAL REPORT 2017 IRESS LIMITED ANNUAL REPORT 2017Tony D’Aloisio Chairman Andrew Walsh Managing Director & Chief Executive Officer Business activity During the year IRESS achieved a number of business highlights, including: – XPLAN Prime: During the second half of 2017, our new scaled advice solution, XPLAN Prime, was delivered to three ASX-listed financial services businesses. Market demand for this new solution is strong. – Integrated solutions: Critical project milestones were achieved for Tilney Group and Close Brothers Asset Management in the United Kingdom, and Echelon Wealth Partners in Canada. – Superannuation: Delivery of a managed technology service and adoption of Acurity by industry super fund, Statewide Super, significantly automating superannuation administration. – Portfolio management: Increased demand for IRESS’ portfolio management solution to new and existing retail and institutional buy-side clients. – Lending: Major retail bank TSB went live in the second half with MSO V2 and we reached agreement with our first Australian client to deliver our mortgage solution during the first half of 2018. Lending recurring revenue increased from 10% to 15% of total revenue, reflecting client deliveries. – Client and user experience: Investments in improving core products and technology for our clients and users to improve experience and ensuring greater leverage, simplicity, and scale. People In response to feedback from people and market research, during 2017 we reviewed and extensively tested a new non-executive remuneration framework. In 2018 we are implementing this model. This will see a greater focus on collective performance to drive increased collaboration as well as simplicity and transparency in how we reward and recognise our people. Under the new model, individual cash bonuses will not continue and will be replaced with a profit share arrangement for our people, with those who consistently excel being offered equity as a fixed percentage of their base salary. Our focus in 2018 2018 will see IRESS continue to focus on growth in all of our markets. Our unique product and solution set, our strong track record and our real on-the-ground presence in each market we serve are strong competitive advantages. External drivers including a demand for integration, market consolidation, regulatory change and a desire for business efficiency are strong drivers of our growth strategy. We will continue to focus on scale and efficiency through operational leverage. We are well advanced with technology initiatives to improve delivery to our clients as well as support greater efficiency. Thank you We take this opportunity to thank you – IRESS’ shareholders – as well as our clients, users and people, for your continued support. In the United Kingdom, we continue to experience strong demand from existing and new clients for integrated solutions across IRESS’ trading and advice product suite. 2017 saw moderate revenue growth and one-off costs associated with the delivery of a large and strategically important client project impacting direct contribution. In the UK, recurring revenue represents approximately 93% of total revenue, while XPLAN sales contributed around 20% of total revenue highlighting its progress in the market. Lending revenue in the UK was steady as this business continues to make good progress transitioning to a subscription revenue model. In 2017 recurring license fees contributed approximately 15% of total revenue, up from 10% in 2016, reflecting key client deliveries. South Africa achieved solid underlying revenue and Segment Profit growth, which was accelerated by the positive impact of the first full year contribution from INET. Our business in Canada improved, reflecting successful client project deliveries, strong client retention and a strong focus on cost control. Dividend and capital management In respect of second half earnings, the Directors determined to pay a final dividend of 28.0 cents per share franked to 60% at a 30% corporate tax rate. This represents a total dividend for the year ended 31 December 2017 of 44.0 cents per share, which is in line with 2016. IRESS’ net debt balance at 31 December 2017 increased marginally to $165.8 million (2016: $155.9 million), equal to 1.3 times annualised Segment Profit, and continues to reflect a conservative balance sheet position. 09 Principal Activities 01010000 01110010 01101001 01101110 01100011 01101001 01110000 01100001 01101100 00001010 01000001 01100011 01110100 01101001 01110110 01101001 01110100 01101001 01100101 01110011 IRESS is a leading provider of technology to the financial services industry. It was founded in Australia in 1993 and operates in Australia, New Zealand, the United Kingdom, South Africa, Canada and Asia. IRESS’ revenue is primarily recurring and subscription based. Our unified technology capability We partner with and support clients from small retail to large institutional firms across multiple segments of the financial services industry. Our solutions sit at the centre of our clients’ businesses, supporting their core operations, providing end-to-end functionality and connectivity through back, middle and front office operations and to our clients' customers. Financial Markets Solutions Global market data and trading software including order and execution management services, smart order routing, FIX services, portfolio management, securities lending, analytical tools and connectivity Clients Private Wealth Management Wealth Management Lending Integrated software solution offering market data, order management, portfolio management, CRM and wealth management platform. Integrated wealth management platform offering client management, business automation, portfolio data, research, financial planning tools, digital client solutions and scaled advice. Superannuation administration platform. Multi-channel mortgage sales and origination platform including automated workflow and processing. Mortgage intermediary advice and mortgage comparison solution. Sell-side and buy- side institutions, retail advisory, online brokers and platforms Discretionary retail fund managers, private client advisers, wealth managers. Institutional and independent advisory, wealth managers, mortgage intermediaries. Lenders, mortgage intermediaries. 10 IRESS LIMITED ANNUAL REPORT 2017Material business risks The material business risks that have the potential to impact the Group are outlined below, together with mitigating actions undertaken to minimise these risks. Risk Nature of risk Mitigation Information security breach and failure of critical systems Due to the nature of IRESS’ business, the Group could be impacted significantly by the failure of critical systems, whether caused by error or malicious attack. Dedicated information security functions across jurisdictions. Board oversight through the Audit & Risk Committee and executive oversight via Information Security Governance Committee and Chief Information Security Officer. Economic climate Foreign Exchange Regulation Economic conditions, domestically and internationally, can impact client revenue and accordingly, client demand for IRESS’ systems. IRESS is exposed to foreign exchange movements which may affect the value of profits repatriated to Australia. Regulation can impact IRESS and its clients because regulation increases the cost of doing business, or because regulation results in structural changes, including consolidation or fragmentation, both of which can negatively impact IRESS client engagements. Market or technology risk The risk that a pronounced shift in technology or a pronounced change in the way market-segments organise themselves and make use of IRESS’ products or solutions. IRESS’ controls, audit and governance provides a framework for actively identifying gaps, new exposures and the development of appropriate treatment plans. Network and malware scanning and mandatory information security awareness training across the business. Comprehensive disaster recovery procedure in place. Focus on redundancy for internal and critical systems. This risk is mitigated by IRESS’ diverse geographic presence and diverse product portfolio. IRESS’ presence in several jurisdictions and the increase in relative revenue contributions from those jurisdictions tends to ameliorate some of this exposure. IRESS reports foreign exchange movements transparently in its periodic financial statements in order to enable investors to better understand the performance of the underlying business. IRESS’ risk management strategy includes the close monitoring of regulatory developments globally. IRESS is pro-actively engaged in the development of new and existing relationships with relevant regulatory stakeholders, policy makers, and media groups to monitor the regulatory landscape. This strategy is focused on limiting potential impacts of regulatory development so that IRESS may continue to service its global markets and efficiently respond to compliance requests. IRESS endeavours to manage this risk by maintaining a highly skilled and educated technology organisation and by exploring the potential utilisation or impact of emerging technologies. In the same way, IRESS endeavours to manage market change by maintaining a high degree of engagement with its customers. In that regard IRESS is fortunate that its customer base, being distributed geographically and being comprised of highly sophisticated industry representatives, is likely to be at the forefront of industry change and evolution. 11 Operating & Financial Review 01001111 01110000 01100101 01110010 01100001 01110100 01101001 01101110 01100111 00100000 00100110 00100000 01000110 01101001 01101110 01100001 01101110 01100011 01101001 01100001 01101100 00100000 01010010 01100101 01110110 01101001 01100101 01110111 IRESS’ financial performance is underpinned by a focus on client service and support, ongoing investment in products and technology, increasing product and geographical diversification and a recurring subscription revenue model. REPORTED (AUDm) Operating Revenue - reported - constant currency basis Segment Profit - reported - constant currency basis Segment Profit after Share Based Payments EBITDA Reported NPAT Basic EPS (cents per share) Dividend (cents per share) Operating Revenue On a reported basis, revenue from ordinary activities grew 10% to $430.0m in 2017 (2016: $389.7m) which primarily reflects a full year contribution from businesses acquired in 2016 and underlying growth in all geographies, most notably Australia, South Africa and the UK. On a constant currency basis, total revenue growth in 2017 was 13% and 4% excluding 2016 acquisitions. In Australia, revenue growth was driven by: – Continuing strong underlying demand for IRESS’ wealth management platform, XPLAN. The financial services sector globally continues to look to technology to increase efficiency, manage risk in an increasingly complex regulatory environment and deliver improved client experience; – Deployment of XPLAN Prime to three ASX listed clients, two of whom have gone live and are actively using this product to change the way they deliver scaled wealth advice to their customers; – Increased demand for IRESS’ portfolio management solution to new and existing buy-side financial markets clients, reflecting increased focus on transparency and efficiency; and – Full year revenue contribution from Financial Synergy, which was acquired in October 2016. In the United Kingdom, full year revenue growth of 3% (in local currency) reflected increased revenue in the second half following successful client deliveries and increased uptake from existing customers. The UK is underpinned by similar global wealth management themes, with the evolving regulatory environment and industry landscape continuing to heighten demand for broader IRESS solutions that support integrated wealth and trading capabilities and unify diverse internal technology needs. In South Africa, revenue growth was driven by a full year revenue contribution from INET BFA, which was acquired in November 2016, and continuing strong underlying demand for IRESS’ suite of trading, market data and advice solutions. 2016 389.7 389.7 123.5 123.5 112.7 103.5 59.5 37.0 44.0 2017 430.0 439.8 125.4 126.6 116.1 107.3 59.8 35.4 44.0 Movement from 2016 10% 13% 2% 3% 3% 4% 1% (4%) - Segment Profit IRESS uses Segment Profit as a measure of underlying earnings to aid inter-period comparability of results. In 2017, reported Segment Profit increased 2%, reflecting revenue growth, particularly from business acquired in 2016 and from Australia and the UK in the second half, and targeted investment in the delivery of strategically important client deployments, global product development, migration of clients to latest product releases with enhanced functionality and increased delivery capability to support future growth. On a constant currency basis, Segment Profit increased 3% in 2017 reflecting 11% growth in the second half from increased revenue with only marginal cost growth. Excluding the impact of 2016 acquisitions constant currency Segment Profit was down 3% in 2017 reflecting the targeted cost investment that exceeded underlying revenue growth. APAC Financial Markets Financial Markets revenue grew 1% in 2017 ($1.6m) which reflects growth in demand for portfolio management solutions amidst continuing challenging market pressures, particularly on the institutional sell side. 12 IRESS LIMITED ANNUAL REPORT 2017REPORTED (AUDm) APAC Financial Markets ANZ Wealth Management UK Lending South Africa Canada Total Group Product and Technology Operations Corporate Segment Profit OPERATING REVENUE 2016 113.5 93.8 110.8 26.0 28.7 16.9 2017 115.1 125.1 105.5 23.8 42.8 17.7 389.7 430.0 Movement from 2016 1% 33% (5%) (9%) 49% 5% 10% DIRECT CONTRIBUTION 2016 84.1 75.7 73.2 21.1 22.4 7.8 284.4 (98.4) (34.2) (28.2) 123.5 2017 83.8 93.9 67.3 18.6 32.8 9.0 305.4 (108.3) (38.7) (33.0) 125.4 Movement from 2016 (0%) 24% (8%) (12%) 47% 15% 7% 10% 13% 17% 2% Revenue from Asia remained in line with the prior year but is expected to grow in 2018 as Maybank Kim Eng continues to roll out IRESS’ online trading solution to its retail clients. The small decline in Direct Contribution reflects wage inflation. Increases in other costs, including external market data, are largely passed onto clients. ANZ Wealth Management Momentum in Wealth Management remained strong in 2017 with revenue growth of 33% from 2016 reflecting the full year contribution from Financial Synergy, and 7% underlying growth from the increase in the uptake of services by IRESS’ existing clients in response to business challenges and opportunities and regulatory complexity. During 2017, three key Australian Wealth Management clients took delivery of IRESS’ scaled advice solution, XPLAN Prime, changing the way advice professionals deliver scaled advice. Interest in XPLAN Prime remains strong and provides strong efficiency opportunities for each of large wealth advice businesses, superannuation funds, and independent financial advice businesses. During the year, the Superannuation business successfully rolled out its Acurity managed superannuation platform to Statewide Super, replacing multiple legacy systems and enabling the fund to focus (1) Previously called UK Lending on the needs of their more than 140,000 members. IRESS also completed development of a digital superannuation solution that provides increased functionality and engagement for members. This solution is attracting strong interest from industry superannuation funds in Australia. In 2017, XPLAN was voted the number one financial planning software in Australia for the tenth consecutive year. UK In local currency, revenue increased 3% from 2016 to 2017 which reflects delivery of a number of client projects and client retention. Revenue was slightly down in the first half of 2017, when compared to the second half of 2016 reflecting the focus on key project delivery. Revenue grew 3% in the second half reflecting client deliveries and increased uptake from existing clients across services, including revenue growth for services provided by IRESS’ The Exchange. Recurring revenue represents approximately 93% of total revenue, while XPLAN contributed approximately 20% of total revenue reflecting progress in the market. In local currency, direct contribution was flat on the prior year which reflects investment in delivery capacity and one-off costs associated with the delivery of a large and strategically important client project in an accelerated time-frame. During 2017, IRESS successfully delivered a major milestone with prominent wealth manager Close Brothers Asset Management (CBAM) to deliver an integrated private wealth technology platform and new digital client portal that replaces a number of existing systems and processes with a unified technology solution. IRESS continues to experience strong demand from existing and new clients for integrated solutions across IRESS’ trading and advice product suite, reflecting broader industry challenges to support integrated wealth and trading capabilities and unify diverse internal technology stacks. Lending(1) In local currency, revenue and direct contribution remained largely in line with the prior year. The Lending business continues to make good progress transitioning to a subscription revenue model with recurring licence fees contributing approximately 15% of total revenue in 2017, up from 10% in 2016. In the second half of the year, prominent high street bank, TSB, went live with version 2.0 of IRESS’ Mortgage Sourcing and Origination product and IRESS reached agreement to deliver our mortgage solution to an Australian client, the first client for this product outside the UK. 13 Operating & Financial Review continued 01001111 01110000 01100101 01110010 01100001 01110100 01101001 01101110 01100111 00100000 01000110 01101001 01101110 01100001 01101110 01100011 01101001 01100001 01101100 00100000 01010010 01100101 01110110 01101001 01100101 01110111 South Africa Growth momentum remained strong in South Africa in 2017. In local currency, Operating Revenue and Direct Contribution grew 40% and 38% respectively, reflecting the full year contribution from recently- acquired INET BFA and continuing double digit underlying revenue and direct contribution growth due to demand across IRESS’ product suite. Revenue growth was underpinned by increasing demand from existing clients for trading solutions, trading algorithms and automation, market data and SmartHub trading connectivity. Variable revenues, which represent approximately 5% of total revenue in South Africa, were slightly down due to reduced trading volumes on the JSE, which were 5% below the prior year. Canada In local currency, Operating Revenue increased 6% while Direct Contribution increased 16%. This result reflects successful client project deliveries coupled with sell-side client retention and some increased uptake from existing clients. IRESS’ footprint in the Canadian wealth management market continues to progress well and grow following delivery of a number of wealth solution deployments including a complete solution to leading Canadian independent firm Echelon Wealth Partners which has more than CAD 4 billion assets under management. Product and Technology The scale of investment in product and technology is at the heart of IRESS’ success and market position, supporting client retention and future recurring revenue growth. Corporate Corporate costs include IRESS’ central business functions including human resources, finance, communications & marketing, legal and other general corporate costs. Product and Technology cost is primarily made up of people costs and reflects IRESS’ ongoing investment in existing and new technology. Costs increased from $98.4m in 2016 to $108.3m in 2017 which reflects the cost contribution by the acquisitions of Financial Synergy and INET BFA, and headcount and wage increases, much of which resulted from recruitment in the prior year. Cost growth in the second half was approximately 1% (when compared to the first half). Operations Operational costs include core business infrastructure and people, such as internal and external communications technology, information security, operating hardware and software, and help desk. Costs increased from $34.2m in 2016 to $38.7m in 2017 reflecting the cost contribution by acquisitions of Financial Synergy and INET BFA, headcount and wage increases. Costs increased from $28.2m in 2016 to $33.0m in 2017 reflecting the cost contribution by the acquisitions of Financial Synergy and INET BFA, headcount and wage increases and costs associated with a series of IRESS people conferences held as part of a continued focus in investing and developing our people and alignment to our strategic direction and priorities. Corporate costs declined marginally in the second half of 2017. Net Profit after Tax (NPAT) IRESS’ reported NPAT increased 1% on the prior year. The increase in Segment Profit and reduction in share based payments, non-recurring items and interest was offset by higher depreciation and amortisation charges that are discussed in more detail below. The cost of issuing share-based remuneration to employees is amortised to the P&L over the vesting period (generally three years). Share- based payments expense declined from the previous year as a result of a higher forfeiture rate in 2017. REPORTED (AUDm) Segment Profit Share based payments Segment Profit after Share based payments Other non-operating items Profit before interest and income tax expense Depreciation and amortisation EBIT Net interest and financing costs Tax Reported NPAT 2016 123.5 (10.8) 112.7 (9.2) 103.5 (21.1) 82.5 (5.5) (17.5) 59.5 2017 125.4 (9.3) 116.1 (8.8) 107.3 (25.1) 82.2 (4.4) (18.0) 59.8 Movement from 2016 2% (14%) 3% (4%) 4% 19% (0%) (19%) 3% 1% 14 IRESS LIMITED ANNUAL REPORT 2017Non-operating items are primarily related to: – Integration of businesses acquired in 2016 and 2015; – Business restructuring, including re-organisation of the senior leadership team; – Relocating and refurbishment of the Sydney and Melbourne offices; and – Implementation of new corporate core systems. Depreciation and amortisation represents depreciation of operating fixed assets and amortisation of intangible assets acquired within business acquisitions. The increase from 2016 reflects higher depreciation costs on the new Sydney office and amortisation charges in respect of the software acquired as part of the acquisition of Financial Synergy and INET BFA in 2016. Net interest and financing costs reduced by 19% from the prior year which reflects lower average debt levels and a higher proportion of debt in GBP which attracted a lower interest rate. The Group’s effective tax rate of 23.2% is the aggregate of tax rates in the jurisdictions in which the business operates, deductions associated with employee share plans and previously unrecognised tax losses and other true-up adjustments to historical items. Dividends The IRESS dividend policy is to maintain a payout ratio of not less than 80% of underlying earnings on an annualised basis, subject to accounting limitations. The dividend policy may be modified by the Board in the future, where it is felt appropriate. Dividends continue to be franked to the greatest extent possible, while reflecting the geographical context of the business. Balance Sheet The Sydney office was successfully moved to a new, upgraded premises during the year and substantial progress was made on the upgrade of the Melbourne office. The new office environment will facilitate new, more agile ways of working and represents an investment in IRESS’ culture and people. IRESS’ debt facilities were refinanced during the year extending tenor. DIVIDENDS Interim dividend franked to 60% (2016: 60%) Final dividend declared after balance sheet date franked to 60% (2016: 60%) Total $m 2016 25.8 47.6 73.4 The increase in net debt by $9.9 million was due to an increase in borrowings used to fund the fit out of IRESS’ new Sydney premises and investment in computer equipment and systems during the year. As a result, gearing increased marginally, but remains conservative at 1.3x Segment Profit at the end of the year. IRESS continues to actively manage cash holdings to reduce interest costs. The disposal of part of the funds administration business that services customer owned banks and the amortisation of intangibles recognised from past acquisitions has resulted in a decrease in the carrying amount of intangible assets. Plant and equipment has increased, mainly from the fitout of our new Sydney premises and investment in computer equipment and systems during the year. Following a successful reassessment of our prior period tax returns, the Group received a refund during the year resulting in the reduction of current tax payables. Included in provisions are deferred considerations for prior acquisitions. Payments were made during the year for the Pulse acquisition following successful achievement of required milestones. The remaining deferred consideration is expected to be paid in 2018. $m 2017 27.4 48.0 75.4 Cents per share 2016 Cents per share 2017 16.0 28.0 44.0 16.0 28.0 44.0 15 Board of Directors 01000010 01101111 01100001 01110010 01100100 00100000 01101111 01100110 00001010 01000100 01101001 01110010 01100101 01100011 01110100 01101111 01110010 01110011 TONY D’ALOISIO GEOFF TOMLINSON Independent Non-Executive Director since June 2012, Chairman since August 2014 Tony has 45 years’ experience as a senior executive in government, corporate and legal roles. Tony became Chairman of Perpetual in May 2017, following his appointment as independent non-executive director in December 2016. He was appointed as a Commissioner for the Australian Securities and Investment Commission (ASIC) in late 2006 and then as Chairman in 2007 for a four-year term. He was Chairman of the (International) Joint Forum of the Basel Committee on Banking Supervision from 2009 to 2011. Prior to ASIC, he was managing director and chief executive officer at the Australian Securities Exchange (ASX) from 2004 to 2006. Tony was chief executive partner at Mallesons Stephen Jaques between 1992 and 2004, having first joined the firm in 1977. Tony has a depth of experience in executive and non-executive roles, which are directly relevant as we grow our international footprint in financial markets and wealth management. Independent Non-Executive Director since February 2015 Geoff has more than 40 years’ experience in financial services. His executive career encompassed 29 years with the National Mutual Group, including six years as group managing director and chief executive officer. He was a non-executive director of National Australia Bank from March 2000 to December 2014, including Chairman of its wealth management division MLC. Other companies he has been a director of include Amcor, Suncorp, Dyno Nobel, Programmed Management Services and Neverfail Springwater. Geoff is Chairman of Growthpoint Properties Australia, Calibre and Wingate Asset Management, and a director of Wingate Group Holdings. ANDREW WALSH Executive Director and Chief Executive Officer since October 2009 After a career as an actuarial consultant, Andrew co-founded and spearheaded the development of market leading financial planning software XPLAN and joined IRESS when it acquired XPLAN Technology in 2003. Andrew became IRESS’ CEO in 2009 and has since led the growth of the group. Under Andrew’s leadership IRESS’ market capitalisation has doubled to approximately $2 billion. Since Andrew became CEO, IRESS has expanded organically and made several local and international acquisitions and now has more than 1,800 people designing, developing and delivering software solutions for the financial services industry in Australia, New Zealand, the United Kingdom, South Africa, Canada and Asia. JENNY SEABROOK Independent Non-Executive Director since 2008, Chair of the People & Performance Committee since May 2011 Jenny has more than 30 years’ experience as a chartered accountant, investment banker and capital markets adviser. She is highly experienced in mergers and acquisitions and has extensive public company board experience. She is a senior advisor to Gresham Advisory Partners and a non-executive director of listed entities, Iluka Resources and MMG and of federal government corporation Australian Rail Track Corporation and Western Australian Treasury Corporation. Former directorships include Alinta Gas, Amcor, Australia Post, Edith Cowan University, Export Finance and Insurance Corporation, Bankwest, MG Kailis, Princess Margaret and King Edward Hospital, West Australian Newspapers and Western Power. Jenny has been a member of ASIC’s external advisory group and was a member of the Takeovers Panel from 2000 to 2012. 16 IRESS LIMITED ANNUAL REPORT 2017JOHN CAMERON JULIE FAHEY Independent Non-Executive Director since March 2010 John is one of the pioneers of electronic trading. He was a key member of the team that first automated the trading floor of the Australian Securities Exchange, one of the first in the world. He has designed and developed information systems for major financial institutions in the United Kingdom, France, the United States and Australia. In 1997 John created what was to become the world’s leading FIX solution, CameronFIX. It was acquired by Orc Software in 2006 where John served as CTO. John left Orc in 2009 and created the Cameron Foundation. John now works for the global refugee initiative Talent Beyond Boundaries. Independent Non-Executive Director since October 2017 Julie has over 30 years of experience in technology, including in major organisations such as Western Mining, Exxon, Roy Morgan, General Motors and SAP, covering consulting, software vendor and chief information officer roles. In addition to her industry experience, Julie spent 10 years at KPMG as a partner with the firm, during which time she held roles as national lead partner telecommunications, media and technology, and national managing partner - markets. Julie was also a member of the KPMG National Executive Committee. Julie is a non-executive director of SEEK, Datacom Group, CenITex, Vocus Group and non-profit disability services organisation Yooralla, and a member of the Emergency Services Telecommunications Authority’s ICT Advisory Board. JOHN HAYES NIKI BEATTIE Independent Non-Executive Director since June 2011, Chair of the Audit & Risk Committee since June 2011 John has been a non-executive director since June 2011 and Chair of the Audit & Risk Committee. A Fellow of CPA Australia with over 40 years’ experience in financial services. Senior roles included CFO of both ASX and Advance Bank Australia and Vice President Financial Services with BT Australia. John’s previous directorships include ASX Perpetual Registry (now Link Market Services) and Orient Capital as well as executive director roles with the Australian Clearing House, ASTC (CHESS) and ASX Operations. He was also previously a member of the Advisory Council of Comcover, a federal government entity, for six years. Independent Non-Executive Director since February 2015 Niki has more than 25 years’ experience in financial technology and capital markets. She currently runs Market Structure Partners, a strategic consulting firm. Niki spent more than a decade in senior positions at Merrill Lynch International. She is currently non-executive chairman of pan-European share trading platform, Aquis Exchange and of XTX Markets, a quantitative-driven, electronic global market-maker. She is also non-executive director of European financial services company Kepler Cheuvreux International and Borsa Istanbul, the Turkish stock exchange. She was previously on the board of MOEX, the Moscow Exchange. She serves on the Regulatory Decisions Committee of the UK Financial Conduct Authority and the Secondary Markets Advisory Committee to the European Securities Markets Authority. COMPANY SECRETARY Peter Ferguson Peter joined IRESS in 2011 and has many years’ experience in international legal and commercial appointments in the financial technology sector, with prior international and domestic appointments including seven years with Nasdaq OMX, located in Stockholm and later Sydney, GBST and SIRCA. 17 Directors’ Report For the year ended 31 December 2017 The Directors of IRESS Limited and its subsidiaries (“the Group”) submit the annual financial report for the year ended 31 December 2017. DIRECTORS MEETINGS The following table sets out the number of meetings of the Company’s Board of Directors and of each Board Committee held during the year ended 31 December 2017, and the number of meetings attended by each Director. Director Tony D’Aloisio Niki Beattie John Cameron Julie Fahey (1) John Hayes Jenny Seabrook Geoff Tomlinson Andrew Walsh BOARD MEETINGS AUDIT & RISK PEOPLE & PERFORMANCE Eligible Attended Eligible Attended Eligible Attended 6 6 6 2 6 6 6 6 6 6 6 2 5 6 6 6 5 * * 1 5 5 5 * 5 * * 1 5 5 5 * 6 6 6 1 * 6 * * 6 6 6 1 * 6 * * (1) Julie Fahey was appointed as a Director on 6 October 2017. * Not a member of this committee. SUBSEQUENT EVENTS On 22 February 2018, the directors declared a final dividend of 28.0 cents per share franked to 60% totalling $48.0 million. Other than the dividend declared, there has been no other matter or circumstances which has arisen since the end of the financial year which has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in subsequent years. CHANGES IN OPERATIONS DURING THE YEAR During the year, the operations of the Group were not modified in any material way. CHANGES IN STATE OF AFFAIRS Significant changes in the state of affairs of the Group during the financial year are outlined below: (i) Extension of borrowings On 21 November 2017, the Group successfully refinanced its $300 million debt facility of which $181.25 million was expiring in September 2018 and $118.75 million was expiring in September 2020, to a four-year maturity expiring in November 2021. (ii) Divestments On 13 July 2017, IRESS entered into an agreement with Mainstream BPO to divest part of its superannuation administration business that provides services to customer-owned banks for $3.3 million. The transaction was completed on 9 November 2017, with the sale proceeds received in full during the 2017 year. No gain or loss (before transaction costs) was recognised on the transaction. 18 IRESS LIMITED ANNUAL REPORT 2017Directors’ Report For the year ended 31 December 2017 INDEMNIFICATION OF OFFICERS AND AUDITORS During the year, the Company paid a premium in respect of a contract insuring each of the Directors of the Company (as named above), the Company Secretary and each of the Executive Officers of the Company and any related body corporate against a liability or expense incurred in their capacity as a Director, Secretary or Executive Officer to the extent permitted by the Corporations Act 2001. Further details have not been disclosed due to confidentiality provisions in the insurance contract. In addition, the Company has entered into a Deed of Indemnity which ensures that a Director or an officer of the Company will generally incur no monetary loss as a result of defending actions taken against them as a Director or an officer. Certain actions are specifically excluded, for example, penalties and fines which may be imposed in respect of breaches of the law. The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by the law, indemnified or agreed to indemnify an officer or auditor of the Company or of any related body corporate against a liability incurred in their capacity as an officer or auditor. NON-AUDIT SERVICES Details of the amounts paid or payable to the auditor for audit services provided during the year by the auditor are outlined in Note 1.5 to the financial statements. During the year, the Company’s auditor has performed certain other services in addition to its audit responsibilities. The Board is satisfied that the provision of non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services were subject to the corporate governance procedures adopted by the Company to ensure that they do not impact the integrity and objectivity of the auditor; and • the non-audit services provided did not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity of the Company, acting as an advocate of the Company or jointly sharing risks or rewards. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001, is set out on page 45. ROUNDING OF AMOUNTS The amounts shown in this report and in the financial statements have been rounded off, except where otherwise stated, to the nearest thousand dollars, the Company being in a class specified in the ASIC Corporations (Rounding in Financial / Directors’ Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission. CORPORATE GOVERNANCE The Corporate Governance Statement is located on the IRESS website https://www.iress.com/global/company/corporate-governance/ corporate-governance-statement/. 19 Directors’ Report For the year ended 31 December 2017 AUDITED REMUNERATION REPORT This remuneration report provides detail of IRESS’ remuneration policy and practice for Key Management Personnel (KMP) for the 2017 financial year. The information presented in this report has been audited as required under section 308(3C) of the Corporations Act 2001 and forms part of the Directors’ Report. CONTENTS Section 1 Section 2 Section 3 Section 4 Section 5 Section 6 Section 7 Section 8 Section 9 Overview Key Management Personnel Remuneration approach Remuneration components in detail Actual remuneration realised Remuneration awarded and the link between performance and reward Executive KMP service agreements Remuneration governance Non-executive Director fees Section 10 Additional required disclosures 21 23 24 26 30 31 36 37 38 39 20 IRESS LIMITED ANNUAL REPORT 2017Directors’ Report For the year ended 31 December 2017 Section 1 Overview 1.1. REMUNERATION APPROACH IRESS’ remuneration objectives are to attract, retain and reward the people needed to deliver its strategy and to align the interests of shareholders and employees. There are three key aspects to IRESS’ remuneration approach: • • IRESS offers total remuneration (comprised of fixed remuneration and ‘at risk’ incentive opportunity) at market rates to attract and retain individuals who collectively possess the capability IRESS requires to succeed (see Section 3.1); IRESS establishes financial and non-financial objectives for the Group and individual executives at the start of the year, which are used at the end of the year to assess Group and individual performance, and to determine incentive outcomes based on performance (see Section 3.2); and • IRESS delivers a significant proportion of remuneration in equity (IRESS shares and rights to IRESS shares subject to satisfaction of conditions) to further align the interests of executives and staff with shareholders’ long-term interests (see Section 3.3). 1.2 PERFORMANCE AND REMUNERATION OUTCOMES Section 6.2 of this report details the Board’s assessment of the Group’s performance in 2017 against the financial and non-financial objectives it established at the beginning of the year. In summary, performances against financial objectives and some non-financial objectives were below the targets set by the Board at the start of the year. The Board’s assessment of the performance of Executive KMP (as listed in Section 2) and their future contribution to the Group has translated into the following remuneration outcomes: Fixed remuneration Base salary, superannuation, and non-monetary benefits Total fixed remuneration paid to Executive KMP in 2017 was $4,832,885 (2016: $5,005,625). The decrease of 3% primarily reflects changes to the operating structure during 2017, which reduced the number of Executive KMP from nine (as at 1 January 2017) to seven (as at 31 December 2017). The resulting decrease in fixed remuneration was partially offset by the full year impact of 2016 pay rises and a 2017 increase in base salary that reflected a change in role. Short-term incentive (STI) An incentive delivered in cash and equity based on the performance against financial and non-financial objectives Long-term incentive (LTI) An incentive delivered in performance rights that vest subject to a relative Total Shareholder Return (TSR) performance The STI to be awarded to Executive KMP for 2017 performance (see Section 6.4) totals $1,819,952 (2016: $2,476,282), including: • Cash STI to be paid following the release of annual results in February 2018 of $332,510 (2016: $843,765); and • Equity STI of $1,487,442 (2016: $1,632,517) to be delivered in Deferred Share Rights in May 2018 that vest in May 2021 subject to ongoing service and satisfactory performance (Equity STI award is subject to shareholder approval for the MD/CEO). • The decrease is reflective of a reduced number of Executive KMP, and the below target Segment Profit performance of the Group. (a) The LTI to be awarded to Executive KMP for performance in 2017 is performance rights with a face value of $2,095,000 (2016: $2,335,968), inclusive of $1,000,000 (2016: $1,340,000) for the MD/CEO (subject to shareholder approval). The performance rights may or may not vest in future years, subject to the conditions described in Section 4.3. (b) In 2017, Executive KMP LTI awards from prior years vested due to superior TSR performance, as outlined in Section 6.3. 21 Directors’ Report continued For the year ended 31 December 2017 Section 1 Overview continued 1.3 KEY CHANGES TO REMUNERATION STRUCTURE 2017 In 2017, the Board refined the guidelines it uses when determining executive STI outcomes. This initiative was intended to: • Further enhance the process for assessing Group and Executive performance and the impact on remuneration. • Increase transparency for shareholders and executives regarding remuneration outcomes. The following elements were further defined: • Target remuneration outcomes were formalised for each executive with reference to the nature of the role, local market practice and total remuneration opportunity. • The Cash STI pool for the executive group is adjusted based on the Group’s financial performance against budget. • Final Cash STI outcomes for each executive are then determined with a 50% weighting to the performance of the Group against non-financial objectives and a 50% weighting to the executive’s performance against their individual financial and non-financial objectives. The final determination of STI outcomes continues to be subject to overall Board discretion. Additionally, there were several changes made to simplify administration of equity schemes effective for grants made in 2017: • Equity grants will generally be made one week after the AGM. • Deferred share rights and performance rights are now automatically exercised (converted to shares) on the vesting date in all locations. • Participants are no longer required to pay a nominal amount of $1 at the point of exercise of a parcel of rights. 2018 In 2018, a new model for non-executive employee remuneration will be introduced. The goal of this new model is to ensure that IRESS can continue to attract, retain, motivate and reward the exceptional talent that is needed to execute its strategy. This new model is supported by a performance management framework that is focused on collective rather than individual success. The revised model has been based on internal and external research and reflects the changing nature of IRESS’ workforce, and specifically, the competitive landscape in technology globally. The revised model consists of base salary, a profit share component in which all employees receive the same cash award if the company meets or exceeds the budget set by the Board at the start of the year and an equity award, vesting over three years, for individuals who continually exceed expectations. Variable cash bonus payments based on individual performance will not form part of the revised remuneration model. The profit share, combined with equity for key employees, will tangibly align employee and shareholder interests. In light of the work underpinning changes to non-executive employee remuneration, the Board will also review IRESS’ executive remuneration model. However, no significant changes are expected to executive remuneration in 2018. 22 IRESS LIMITED ANNUAL REPORT 2017Directors’ Report continued For the year ended 31 December 2017 Section 2 Key Management Personnel (KMP) IRESS’ KMP are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly. KMP comprises the Executive KMP (the MD/CEO and Group Executives) as well as Non-Executive Directors (NEDs). For the year ended 31 December 2017, the KMP were: KMP Position Term as KMP Non-executive Directors A D’Aloisio N Beattie J Cameron J Fahey J Hayes J Seabrook G Tomlinson Executive Director A Walsh Executives S Barnes P Ferguson J Harris A Knowles J McNeill S New M Rady A Todd Non-executive Chairman Non-executive Director Non-executive Director Non-executive Director (1) Non-executive Director Non-executive Director Non-executive Director Managing Director and CEO (MD/CEO) Chief Operating Officer (2) Group General Counsel and Company Secretary Chief Financial Officer Group Executive, Product Group Executive, Human Resources Group Executive, Strategy Group Executive, Financial Markets (2) Chief Technology Officer (3) Full year Full year Full year Part year Full year Full year Full year Full year Part year Full year Full year Full year Full year Full year Part year Part year (1) J Fahey was appointed to the Board 5 October 2017. (2) S Barnes and M Rady ceased employment on 30 September 2017. (3) A Todd was appointed to the role of Chief Technology Officer effective 27 January 2017. David Walker, the prior incumbent, changed roles and ceased to be KMP on 31 December 2016. 23 Directors’ Report continued For the year ended 31 December 2017 Section 3 Remuneration approach 3.1 APPROACH TO SETTING REMUNERATION IRESS considers the size and complexity of the role, the skills and experience of the individual and market pay levels of comparable roles in determining fixed remuneration and ‘at risk’ remuneration opportunity. IRESS believes that the fixed and total remuneration it offers is competitively positioned against comparable companies (based on sector and market capitalisation). In determining ‘at risk’ remuneration outcomes IRESS considers the individual’s contribution to the business (based on individual performance and future potential), policy remuneration mix, total remuneration and the value of unvested equity held by the individual. 3.2 SUMMARY OF IRESS’ EXECUTIVE REMUNERATION PROCESS 1. The Board sets the financial budget for the Group. The financial budget is the primary driver of Cash STI outcomes. Section 4.2(d) I I G N N N G E B E H T T A R A E Y E H T F O 2. The Board approves non-financial objectives for the Group. Section 4.2(d) 3. The Board sets individual objectives for the CEO and other executives which include financial targets specific for each executive’s role. Section 4.2(d) 4. The Board approves target remuneration (Cash STI, Equity STI, LTI) for each executive. Section 4.2(d) 5. The Board assesses the financial performance of the Group and adjusts the Cash STI pool for executives up or down. 6. The Board assesses the performance of the Group against non-financial objectives. This outcome is given a 50% weighting in the determination of the Cash STI for each executive. 7. The Board assesses the performance of each executive against individual non-financial objectives. This outcome is given a 50% weighting in the determination of the Cash STI for each executive. Process: Section 4.2(e) Outcome: Section 6.2 Process: Section 4.2(e) Outcome: Section 6.2 Process: Section 4.2(e) 8. The Board determines a Cash STI outcome for each executive based on points 4-7 above. The Board applies discretion to establish the final Cash STI outcome. Outcome: Section 6.4 9. The Board determines the deferred equity (STI & LTI) for each executive with reference to: the performance measures in points 5-7 above, their potential future contribution to the organisation and the value of their unvested equity. Outcome: Section 6.4 10. Executive KMP receive any Cash STI in March after the Group’s full-year results have been finalised. Cash STI amounts are subject to revision up to this point in the event of material change to company performance. 11. The MD/CEO’s Equity STI and LTI grants are subject to shareholder approval at the AGM in May each year. Equity STI and LTI are issued after the AGM. 12. Equity STI and LTI grants for other Executive KMP are issued after the AGM, subject to Board approval. Equity grants are subject to revision up to this point in the event of material change to company performance. Section 4.2 (h) Section 4.2 (h) Section 4.2 (h) 13. LTI grants from prior years are tested against the vesting conditions in May (with the portion not vesting eligible for re-testing in November). Process: Section 4.3 Outcome: Section 6.3 R A E Y E H T G N I R U D I R A E Y G N W O L L O F E H T 24 IRESS LIMITED ANNUAL REPORT 2017 Directors’ Report continued For the year ended 31 December 2017 3.3 REMUNERATION FRAMEWORK AND MIX As shown in the diagram below: IRESS uses a mix of fixed and ‘at risk’ remuneration to reward employees and drive performance. IRESS’ Executive remuneration framework (applying to Executive KMP and other senior executives) consists of fixed remuneration, short-term and long-term incentives (STI and LTI). FIXED (see 4.1) 100% of fixed pay awarded in cash during the year STI (see 4.2) LTI (see 4.3) T N A D N E P E D E C N A M R O F R E P , I K S R T A Approximately one third awarded in cash Paid March Approximately two thirds of total STI award deferred in the form of share rights (subject to a three-year service period and satisfactory performance requirement) Vests May 50% of performance rights have a one-year deferred start and a three-year relative TSR hurdle. 50% of performance rights have a four-year relative TSR hurdle. Vests May Performance rights subject to a three-year relative TSR hurdle. Vests May : O E C / D M R E H T O : I S E V T U C E X E Year 0 2017 Year 1 2018 Year 2 2019 Year 3 2020 Year 4 2021 Year 5 2022 IRESS also encourages employee share ownership through the award of deferred shares or deferred share rights to high performing employees, and by offering an employee share ownership plan to all employees in Australia and the UK (see Section 4.4). The objective of the broad reach of IRESS’ equity programs is to retain employees, motivate their long-term commitment to the company and align their interests with those of shareholders. The diagram below shows the mix of total remuneration that would typically be awarded to Executive KMP for a target level of performance (“policy remuneration mix”). A significant portion of total Executive KMP remuneration is variable and at-risk: • MD/CEO: Two-thirds (67%) of total remuneration is at risk (i.e. will not be received if service and performance criteria are not met) and 58% is delivered in deferred equity. More than two-thirds of deferred equity has further vesting hurdles based on IRESS’ relative TSR performance; and • Other Executive KMP: Half of total remuneration (50%) is at risk and 41% is delivered in deferred equity. More than half of deferred equity has further vesting hurdles based on IRESS’ relative TSR performance. The Board believes that this remuneration mix is effective in aligning the interests of Executive KMP with shareholders. O E C / D M R O F E G A R E V A I P M K E V T U C E X E Fixed 33% STI Cash 9% of Total 28% of Fixed STI Deferred 18% of Total 55% of Fixed Fixed 33% Cash 42% Fixed 50% STI Cash 9% of Total 18% of Fixed STI Deferred 18% of Total 36% of Fixed Fixed 50% Cash 59% LTI 40% of Total 123% of Fixed At Risk 67% Equity 58% LTI 23% of Total 55% of Fixed At Risk 50% Equity 41% There are minor differences in the remuneration mix table above to that depicted in the 2016 Annual Report. The 2016 table showed a lower portion of total remuneration as LTI and a higher portion as Fixed and STI. When LTI was converted from fair value to face value in 2016, the face value was incorrect (LTI as a percentage of Total Remuneration was previously shown as 38% for the MD/CEO and 20% for other Executive KMP). 25 Directors’ Report continued For the year ended 31 December 2017 Section 4 Remuneration Components in Detail 4.1 FIXED REMUNERATION a. What is fixed remuneration? b. How is fixed remuneration determined? Base salary, superannuation, and other benefits (e.g. health insurance) As noted in Section 3.1, the following factors are considered when setting fixed remuneration: • The size and complexity of the role • Skills and experience of the individual • Market pay levels for comparable roles Any decision to increase fixed remuneration is considered in the context of the resulting change in total remuneration. 4.2 SHORT-TERM INCENTIVES (STI) a. What is the STI plan? The STI is an ‘at-risk’ incentive awarded annually, subject to performance against pre-set financial and non-financial objectives (refer to Section 4.2(d) below). b. Who participates in the STI plan? The MD/CEO, other Executive KMP and high performing employees were eligible to participate in the STI plan in 2017. c. How are STI awards delivered? The STI is delivered in a combination of cash and deferred equity, which for Executive KMP, as shown in Section 3.3, is typically as follows: • One-third of the STI award is made in cash. • Two-thirds of the award is made in deferred share rights. A deferred share right (DSR) is a deferred right issued by IRESS to acquire one fully paid ordinary share in IRESS (subject to adjustment for certain capital actions) at no cost. DSRs vest subject to a three-year continuing service requirement and achievement of a satisfactory level of individual performance during these three years. At the start of the year the Board sets the budget for the Group (and each business segment) having regard to business strategy and prior year performance. The primary financial metric used to determine the STI pools is segment profit, which is a measure of underlying operating performance. The measure (as shown in Note 1.1 to the Consolidated Financial Statements) excludes items that may fluctuate year-on-year for reasons not related to core business performance in the current year. Consideration is also given to other financial metrics such as Earnings Before Interest, Tax, Amortisation and Depreciation (EBITDA) and Net Profit After Tax (NPAT). The Board also considers the impact of foreign exchange rate movements on financial performance. The Board also confirms non-financial goals and specific targets for the Group at the start of the year in key focus areas: Focus area Performance goals Clients Growth People Maintain resilient leadership in existing markets. Grow revenue organically and pursue inorganic opportunities where appropriate. Position IRESS as an employer of choice globally. Products/Technology Anticipate trends and innovate to maintain product leadership. Group/Corporate Enhance IRESS’ brand through strong stakeholder relationships and communication. Enhance and scale internal systems to support client service, delivery and growth. Individual targets in each of the focus areas are set for the MD/CEO and each Executive KMP. Individual targets include financial and non-financial objectives specific to that executive’s role. Finally, the Board establishes target remuneration (Cash STI, Equity STI and LTI) for the MD/CEO and each Executive KMP. Target remuneration outcomes for each executive have regard to: • The Group’s financial budgets and and non-financial objectives for the year • Policy remuneration mix (refer section 3.3) and an appropriate balance between cash and equity • The nature of each executive’s role and the individual financial and non-financial objectives they have been set for the year • Market practice in the region where each executive is employed • The total remuneration opportunity The target STI outcomes for each executive KMP are shown in Section 6.4. d. What are the performance measures and how are they established? 26 IRESS LIMITED ANNUAL REPORT 2017Directors’ Report continued For the year ended 31 December 2017 e. How is performance assessed and STI awarded at the end of the year? The performance of the Group against budget (primarily segment profit, with consideration of other measures; see 4.2(d)) is used to adjust (up or down) the Cash STI pool for executives. In this way, the performance of the Group against financial budgets set at the beginning of the year is the primary driver of Cash STI outcomes. The Board also assesses the performance of the Group against non-financial objectives set at the beginning of the year and performance of each executive against individual objectives. The subsequent adjustment to each executive’s Cash STI outcomes is 50% weighted to Group performance (see Section 6.2 for how the Group performed against these objectives in 2017) and 50% weighted to individual performance. The STI outcomes that resulted from this assessment (as compared to target) in 2017 are provided for Executive KMP in Section 6.4. The award of Equity STI is determined with reference to the executive’s target outcome, the Group’s performance against financial and non-financial objectives and each executive’s performance against individual objectives. In determining equity awards, other considerations are the individual’s expected future contribution to the organisation, the total value of an executive’s remuneration and the value of their unvested equity. The Board reviews the allocation of STI (cash and equity) between executives and employees, and the total spend as a proportion of segment profit, to confirm that STI is being appropriately and fairly distributed. The final determination of STI outcomes is subject to Board discretion. f. What is the maximum STI opportunity? There is no policy maximum STI opportunity. However, STI outcomes are funded and constrained by the Group’s profitability (Section 4.2(d) and (e)). g. Why does the Group consider the STI an appropriate incentive plan? IRESS’ STI plan promotes a shared focus on the Group’s financial performance and non-financial goals as well as allowing differentiation between individuals. The Equity STI component recognises ongoing contribution, acts as a retention mechanism for key employees and provides continuing alignment with shareholder interests. h. When do executives receive STI? Executives receive Cash STI after the Group’s full year results have been finalised. Cash STI remain subject to Board approval and revision up to this point in the event of material change to company performance. Equity STI is granted to executives following the AGM in May each year and remains subject to Board approval and revision up to this point in the event of material change to company performance. The MD/CEO’s equity grants are subject to shareholder approval at the AGM. Deferred share rights vest three years after the Equity STI is granted, provided the Board is satisfied that the individual’s performance is satisfactory, and the service condition is met. i. What is the vesting period for deferred share rights? j. How will shares to satisfy deferred share rights be sourced? The Board assesses annually whether to issue new shares or buy shares on market based on which would deliver a better outcome for shareholders. The Board considers a range of factors such as share price, balance sheet capacity and debt funding rates. k. Is there a clawback provision? The Board may exercise discretion to determine that Equity STI will be forfeited where there has been unsatisfactory individual performance. l. Are participants entitled to dividends and voting rights? m. How is Equity STI treated upon termination? Deferred Share Rights do not carry any voting rights or entitle the holder to dividends. Shares allocated upon the vesting of DSRs carry the same rights as any other IRESS share. If less than six months of the vesting period has elapsed at the date of cessation of employment: any unvested deferred share rights will lapse. If six months or more of the vesting period has elapsed at the date of cessation of employment: any unvested deferred share rights will lapse, unless the Board exercises its discretion not to lapse the unvested deferred share rights, in which case participants may receive a pro-rata amount (unless the Board determines otherwise) subject to applicable law and the satisfaction of any conditions imposed by the Board under the plan. n. How is Equity STI treated upon a change of control? In the event of a takeover bid, change of control, compromise or arrangement involving a scheme of arrangement, voluntary winding up or compulsory winding up of IRESS, the Board has discretion to allow unvested deferred share rights to vest. 27 Directors’ Report continued For the year ended 31 December 2017 Section 4 Remuneration Components in Detail continued 4.3 LONG-TERM INCENTIVES a. What is the purpose The purpose of the Executive LTI plan at IRESS is to: of the LTI plan? b. Who participates in the LTI plan? • Closely link executives’ interests with those of shareholders; and • Promote the delivery of sustainable returns to shareholders. LTI grants are limited to the MD/CEO and Executives who are most able to influence shareholder value. c. How are LTI awards delivered? LTI awards are granted in the form of performance rights (PRs). A performance right is a right issued by IRESS to acquire one fully paid ordinary share in IRESS, provided specific company performance hurdles are achieved. d. How does IRESS determine the amount of the LTI opportunity awarded? The award of LTI is at the Board’s discretion and is determined with reference to the executive’s target remuneration outcome and performance against individual objectives, as well as the Group’s performance against financial and non-financial objectives. Other factors such as the individual’s future contribution to the organisation, retention considerations, the total value of the executive’s remuneration and the value of unvested equity held by the individual are considered as part of the determination of equity awards. e. How does IRESS determine how many rights to grant? The number of LTI Performance Rights granted to each executive is calculated using a face value approach – total LTI amount divided by the five-trading-day volume weighted average share price in the week up to and including the grant date. f. What are the vesting conditions? Vesting of performance rights is determined based on relative TSR performance over the performance period. Relative TSR provides an objective assessment of the returns from an investment in IRESS (share price growth and dividends), relative to other companies in which shareholders could have invested. IRESS’ TSR performance is measured against a comparator group consisting of companies listed in the S&P/ ASX 200 Index, excluding mining and resources companies, and listed property trusts. The comparator group companies are determined as at 1 January of the year of grant and represent alternative investment options available to shareholders. Prior to 2016 grants, the comparator group was adjusted to exclude companies that exited the S&P/ASX200 Index during the performance period. While there are few ASX companies directly comparable to IRESS, the Board continues to believe that, at this time and given the composition of the IRESS share register, relative TSR is the most appropriate way to align executive and shareholder interests. The TSR calculation for IRESS and companies in the comparator group includes franking credits for grants prior to 2015. For the 2016 and subsequent grants, franking credits will be excluded from calculations. g. What is the vesting Performance rights vest on the following basis: schedule? h. What is the performance and vesting period? IRESS’ relative TSR ranking Percentage of performance rights to vest Below 50th percentile 50th percentile Nil. 50% of performance rights vest. 51st percentile to 74th percentile Pro-rata vesting between 50% and 100%. 75th percentile or higher 100% of performance rights vest. MD/CEO The LTI grant for the MD/CEO consists of two tranches: 1) 50% of performance rights are assessed over a four-year period, commencing at the start of the financial year (e.g. 1 January 2017 to 31 December 2020 for the 2017 grant). The vesting period begins on the date of grant, which is 5-trading days after the Annual General Meeting (AGM) (e.g. 11 May 2017 to 11 May 2021 for the 2017 grant). 2) 50% of performance rights have a one-year deferred start and are assessed over a three-year period (e.g. 1 January 2018 to 31 December 2020 for the 2017 grant); with vesting over the four-year period following grant (e.g. 11 May 2017 to 11 May 2021 for the 2017 grant). Other Executive KMP Performance is assessed over a three-year performance period commencing at the start of the financial year (e.g. 1 January 2017 to 31 December 2019 for the 2017 grant); the vesting period begins on the date of grant, which commences 5-trading days after the Annual General Meeting (AGM) (e.g. 11 May 2017 to 11 May 2020 for the 2017 grant). For all grants prior to 2016 the Group performance period was aligned with the vesting period. i. How will shares to satisfy the rights be sourced? If shares are to be provided on vesting, the Board assesses at the time of vesting whether to issue new shares or buy shares on market based on which would deliver a better outcome for shareholders. The Board considers a range of factors such as share price, balance sheet capacity and debt funding rates. 28 IRESS LIMITED ANNUAL REPORT 2017Directors’ Report continued For the year ended 31 December 2017 j. Are awards subject to re-testing if they do not vest on initial testing? To the extent any portions of awards do not vest on the first test date, the awards are retested once, six months after the initial test date. Rights granted before 2014, are subject to six, monthly retests. k. What happens to unvested LTI grants if an executive leaves the Group? Reason other than resignation, termination for cause or gross misconduct: Unvested LTI grants will lapse in full (if less than 6 months of the performance period has elapsed at the date of cessation of employment) or pro rata if 6 months or more of the performance period has elapsed, unless the Board determines otherwise. Performance rights that do not lapse will remain eligible to vest in accordance with the terms of the plan. Resignation, termination for cause or gross misconduct: All unvested LTI awards at the time of cessation of employment will lapse. l. How are unvested LTI awards treated upon a change of control? In the event of a takeover bid, change of control, compromise or arrangement involving a scheme of arrangement, voluntary winding up or compulsory winding up of IRESS, the Board has the discretion to allow unvested performance rights to vest. m. Are participants entitled to dividends and voting rights? n. Are there restrictions on dealing with securities allocated under the LTI plan? Performance rights do not carry any voting rights or receive dividends. Shares allocated upon the vesting of rights carry the same rights as any other IRESS share. Consistent with the Corporations Act 2001, participants are prohibited from hedging their unvested performance rights. 4.4 EMPLOYEE SHARE PLAN a. How does IRESS encourage share ownership for employees b. How many shares were issued under this plan in 2017? IRESS has an employee share plan covering the two major employee populations of Australia and the UK. Eligible participants are invited to acquire IRESS shares by salary sacrifice and IRESS supplements this with approximately one share for every two shares the employee acquires up to a maximum value of $300 (share matching). The Australian plan has been operating since 2013. In 2017, 358 employees participated (52% of eligible employees), subscribing to 30,072 shares including 9,022 matched shares. The UK plan was established in 2015. In 2017, 311 employees participated (45% of eligible employees), subscribing to 51,163 shares including 6,860 matched shares. 4.5 SPECIAL ACQUISITION-RELATED INCENTIVES (‘AVELO AWARDS’) a. Does IRESS have any other equity plans with awards outstanding? As disclosed in the 2013 Annual Report, a special set of deferred share rights awards were made in September 2013 in relation to the acquisition of Avelo FS Holdings Limited and its subsidiaries in the United Kingdom. b. Who participated in the Avelo awards and what are the vesting criteria? 1. A core group of former Avelo Senior Management (including J McNeill: 54,981 DSRs) and staff to secure their retention and to ensure ongoing support for the integration and development of the business opportunity in the United Kingdom. Vesting is subject to commercially sensitive performance criteria over two tranches: - Tranche 1: 1 January 2014 - 31 December 2017. As at 31 December 2017, the performance conditions were still being assessed. Accordingly, the DSRs had not yet vested. - Tranche 2 (executives only): 1 January 2014 - 31 December 2018. The additional year of vesting was to provide extended executive alignment with IRESS’ non-financial goals in the UK. 2. Select IRESS employees (including P Ferguson: 5,160 DSRs) whose roles and responsibilities increased during and after the acquisition. These DSR vested 2 January 2017. 29 Directors’ Report continued For the year ended 31 December 2017 Section 5 Actual remuneration realised Actual remuneration is provided in addition to statutory remuneration (refer to Section 10) to increase transparency of the remuneration actually received by executives during the year. Actual remuneration realised by Executive KMP increased by 3% in 2017, primarily due to termination payments made to executives whose roles were made redundant. The components included in actual remuneration and the reasons for this increase are summarised below: Component 2017 Inclusions Fixed remuneration Base salary, superannuation, and non- monetary benefits paid in 2017. Cash STI Equity STI LTI 2017 Cash STI (which has been earned and is scheduled for payment in March 2018 following the release of financial results) Equity STI that was granted May 2014 in relation to 2013 performance and vested May 2017. LTI awards that vested in 2017 relating to the May 2013 grants (MD/CEO) and May 2014 grants (Other Executive KMP). Change on 2016 Key driver of change (3%) • M Rady and S Barnes were part year in 2017. (61%) • Below target Segment Profit result in 2017 and consequent impact on Cash STI pool. • M Rady and S Barnes were not eligible for STI for 2017. 3% • Executives had increases to target remuneration in 2013 and J McNeill was included in the IRESS STI plan following the Avelo acquisition. (9%) • 2017 vesting outcome from the MD/CEO four-year performance rights was lower than the 2016 vesting outcome largely due to the 2012 award being for more rights than the 2013 award. • D Walker had LTI vesting in 2016, whereas A Todd’s first LTI will be granted May 2018 (subject to Board approval). Termination payments Payments to S Barnes and M Rady on cessation of employment. n/a • No termination payments in 2016. STI $ Fixed remuneration $ Cash STI earned Financial Year Equity STI LTI vested (a) payments (c) Termination vested (a) $ Position MD/CEO A Walsh Other Executive KMP S Barnes P Ferguson J Harris (b) A Knowles (d) J McNeill (b, d) S New (b, d) M Rady (b) A Todd (b, e) D Walker (f) Total Executive KMP 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 1,025,000 1,030,000 110,000 300,000 707,600 647,900 1,465,464 1,746,772 355,525 445,000 403,951 367,123 570,721 552,429 547,620 536,398 432,880 389,927 562,398 600,962 413,750 530,000 521,040 553,785 – 60,000 29,000 55,000 42,500 70,000 36,770 75,000 32,120 63,950 32,120 54,815 – 80,000 50,000 85,000 4,832,885 5,005,625 332,510 843,765 218,746 191,072 212,651 124,632 – – 244,000 195,195 58,926 – – – – – – 277,818 207,930 177,815 129,906 – – 291,751 205,919 97,210 – – – – – – 235,364 1,441,923 1,394,163 259,812 2,310,058 2,550,339 Total remuneration realised $ 3,308,064 3,724,672 1,449,288 904,002 823,417 676,661 613,221 622,429 1,120,141 1,012,512 621,136 453,877 594,518 655,777 993,728 610,000 571,040 1,133,961 10,094,552 9,793,891 $ – – 597,198 – – – – – – – – – – – 579,978 – – – 1,177,176 – (a) The value of equity that vested is calculated as the share price at vesting date multiplied by the number of rights that vested. There was no clawback of awards in 2017, i.e. no awards eligible for vesting in 2017 were forfeited due to unsatisfactory individual performance during the vesting period. (b) Executive KMP who joined the Group since 2013 did not hold DSRs or PRs that were eligible for vesting in 2017. (c) The termination payments did not require shareholder approval under the Corporations Act. (d) Fixed remuneration and Cash STI of J McNeil, S New, and (as of Dec 2017) A Knowles is denominated in British Pounds and is subject to foreign exchange movements. The Australian dollar amounts shown in the table have been converted at an average exchange rate of 0.5915 (2016: 0.5473). (e) A Todd joined the group and became KMP effective 27 January 2017. (f) D Walker, the prior Chief Technology Officer, changed roles and ceased to be KMP on 31 December 2016. 30 IRESS LIMITED ANNUAL REPORT 2017Directors’ Report continued For the year ended 31 December 2017 Section 6 Remuneration awarded and the link between performance and reward 6.1 OVERVIEW OF GROUP PERFORMANCE The table below provides summary information on the Group’s earnings for the five years to 31 December 2017. Measure 2017 2016 2015 2014 2013 Company Performance Net Profit After Tax (NPAT) ($’000s) Segment profit ($’000s) (a) Statutory EPS – basic (cents) Dividends per share – ordinary (cents) (b) Share price at 31 December Annual TSR (c) Annual TSR ASX200 (c) 59,755 125,383 35.4 44.0 11.58 1.26% 7.05% 59,452 123,531 37.0 44.0 11.87 22.97% 6.99% 55,385 119,175 35.2 42.7 10.00 (2.79%) (2.15%) 50,671 111,444 32.3 41.5 10.71 16.33% 1.09% 24,241 88,201 17.5 38.0 9.44 19.97% 14.09% (a) Segment profit (calculation as set out in Note 1.1 to the Consolidated Financial Statements) is a measure of core underlying business performance and the basis on which the Cash STI Pool is determined. (b) Dividend per share is calculated based on the total of the interim dividend and the announced (but not yet paid) final dividend relating to the financial year. (c) Total Shareholder Return (TSR) amounts have been included above as an indicator of IRESS’ performance relative to the ASX200 index. These TSR amounts are sourced from IRESS’ market data product and are different from that used to determine LTI vesting, which is specific to the IRESS LTI plan. It excludes franking credits (whereas for LTI grants made prior to 2016, franking credits are included). It is shown for IRESS and the ASX200 index (whereas for LTI grants, IRESS is compared to the constituents of the ASX200, excluding mining and resources companies and listed property trusts (see Section 4.2(f)). 6.2 TRANSLATION OF GROUP PERFORMANCE INTO STI AWARDS The Board’s assessment of the Group’s performance against 2017 financial and non-financial objectives is summarised in the table below. This assessment, formed the basis for the determination of STI awards for the year, consistent with the process outlined in Section 3.2: Key focus area Performance goal Performance outcome In 2017, the consolidated financial performance of the company (segment profit, EBITDA and NPAT) was below the budget set by the board at the start of the year. Result Below target Financial measures Financial Non-financial measures Clients Achievement of the Board approved budget (see Section 4.2(d)). Maintain resilient leadership in existing markets, client service excellence, new client implementations and retention of existing clients The APAC financial markets business demonstrated continued resilience and delivered revenue growth despite the ongoing macro challenges being faced by the segment. Above target In 2017 XPLAN was voted the number one financial planning software in Australia for the tenth consecutive year. The APAC wealth management business delivered the scaled advice solution (XPLAN Prime), to three ASX listed financial services businesses and continues to see strong demand for IRESS’ broad range of technology solutions. IRESS’ superannuation solution, Acurity, went live at Statewide Super. The UK business achieved a major milestone as part of the roll-out of IRESS’ integrated wealth solution to Close Brothers Asset Management. In the second half, prominent high street bank, TSB, went live with version 2.0 of IRESS’ Mortgage Sourcing and Origination solution. The South African business continued to experience strong underlying demand, confirming its leading market position. XPLAN was deployed to production for major South African financial services firm Old Mutual. Canada delivered a number of wealth solution deployments following success with independent firm Echelon Wealth Partners. Growth Grow revenue organically and pursue inorganic opportunities where appropriate Integration of the 2016 acquisitions of Financial Synergy and INET BFA are progressing well. The completion of an integrated advice solution for superannuation funds in Australia is generating strong interest. Below target Despite achieving a number of significant client milestones in the roll-out of IRESS’ integrated wealth solution, revenue growth in the UK was below target. This outcome was largely driven by the timing of implementation projects and slower than expected pipeline conversion. 31 Directors’ Report continued For the year ended 31 December 2017 Section 6 Remuneration awarded and the link between performance and reward continued 6.2 TRANSLATION OF GROUP PERFORMANCE INTO STI AWARDS CONTINUED Key focus area Performance goal Performance outcome People Products/ Technology Group/Corporate Result Above target Position IRESS as an employer of choice globally IRESS has actively invested in its position as an attractive employer of the best people. During the year IRESS completed an independent survey to measure engagement, following an extensive program to deliver its oneIRESS message globally. The results showed a significant increase in positive engagement since the last all people survey in 2014. Anticipate trends and innovate to maintain product leadership Enhance IRESS brand through strong stakeholder relationships and communication. Enhance and scale internal systems to support client service, delivery and growth. IRESS continued to respond to regulatory and market changes, as well as client demand, with product updates and releases during the year. At target Significant investments were also made in XPLAN Prime; digital advice for the superannuation industry; IOS+ migration and the rollout of ViewPoint; and MSO V2. During the year the IRESS Foundation was established as a vehicle for IRESS people around the globe to contribute their time, talent and money to support local communities and not-for-profit causes. At target Significant investments have been made during the year into software development and deployment processes, particularly automation, and client and end-user support. The Sydney office was moved to a new, upgraded premises during the year and substantial progress was made on the upgrade of the Melbourne office. IRESS’ debt facilities were refinanced during the year achieving an extension of tenor. External communication was enhanced during the year through social, news media and direct channels as well as hosted and trade-based events. In addition, additional emphasis on internal communications increased alignment between teams to better support client outcomes and company brand. The implementation of new payroll and expense management systems was completed during the year. The implementation of a new Enterprise Resource Planning (ERP) system is also materially progressed with go-live expected in early 2018. 6.3 TRANSLATION OF GROUP PERFORMANCE INTO LTI AWARDS IRESS’ dividends and share price performance directly affect the vesting of LTI awards as all performance rights granted under the Executive LTI plan are subject to a relative TSR performance measure. The table below illustrates the independently verified vesting outcomes for those LTI grants eligible to vest in 2017 based on the Group’s relative TSR performance. LTI Award Performance Period Relative TSR Performance (a) Vesting Outcome MD/CEO – 2013 Four-year performance rights MD/CEO – 2013 Deferred three-year performance rights Other Executive KMP – 2014 performance rights 7 May 2013 to 8 May 2017 67.4th percentile 84.8% of performance rights vested 7 May 2014 to 8 May 2017 78.3rd percentile (b) 100% of performance rights vested 7 May 2014 to 8 May 2017 72.6th percentile (b) 95.2% of performance rights vested (a) Based on maximum relative TSR performance as measured on 8 May 2017 and subsequent retest dates. (b) The Relative TSR differs for these two awards due to changes to TSR calculation methodology that became effective for grants made in 2014. Specifically, for the 2013 MD/CEO award, the TSR calculation is based on closing share price at the start and end of the performance period, with monthly re-tests for six months. Conversely, for the 2014 other Executive KMP award, the TSR calculation is based on a 20-trading-day volume weighted average share price, with one re-test after six months. 32 IRESS LIMITED ANNUAL REPORT 2017Directors’ Report continued For the year ended 31 December 2017 6.4 TRANSLATION OF GROUP AND INDIVIDUAL PERFORMANCE INTO REMUNERATION AWARDED TO EXECUTIVE KMP FOR 2017 The following table shows the 2017 STI and LTI outcomes awarded for each of the Executive KMP in relation to their performance in 2017 (to be paid/granted in 2018). Remuneration awarded to Executive KMP decreased by 11% in 2017, primarily due to the below target Segment Profit result in 2017 and consequent impact on 2017 Cash STI pool. Cash STI amounts are subject to Board approval in February 2018. Equity STI and LTI are subject to Board and shareholder approval in May 2018 (by shareholders for the MD/CEO and by the Board for other Executive KMP). The Board retains the discretion to increase or decrease the Cash STI and equity amounts up to the approval date should the performance of the Group or of individual KMP vary materially. STI AWARDED $ Executive MD/CEO A Walsh Other Executive KMP S Barnes P Ferguson J Harris A Knowles (c) J McNeill (c) S New (c) M Rady A Todd (d) D Walker (e) Total Executive KMP Fixed remuneration paid $ Cash STI Equity STI (a) $ Total remuneration awarded $ LTI(b) $ 1,025,000 1,030,000 110,000 300,000 500,000 510,000 1,000,000 1,340,000 2,635,000 3,180,000 355,525 445,000 403,951 367,123 570,721 552,429 547,620 536,398 432,880 389,927 562,398 600,962 413,750 530,000 521,040 553,785 – 60,000 29,000 55,000 42,500 70,000 36,770 75,000 32,120 63,950 32,120 54,815 – 80,000 50,000 85,000 – 150,000 123,500 115,000 180,500 175,000 175,750 175,000 132,724 76,258 165,968 76,258 – 180,000 209,000 175,000 – 152,778 140,000 118,056 210,000 180,556 200,000 180,556 150,000 82,378 175,000 94,146 – 187,500 220,000 – 4,832,885 5,005,624 332,510 843,765 1,487,442 1,632,516 2,095,000 2,335,970 355,525 807,778 696,451 655,179 1,003,721 977,985 960,140 966,954 747,724 612,513 935,486 826,181 413,750 977,500 1,000,040 813,785 8,747,837 9,817,875 Year 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 (a) (b) (c) Equity STI is shown at grant value. The number of deferred share rights granted to each executive is based on the fair value of a deferred share right. For grant purposes this is the five-trading-day volume weighted average share price in the week up to and including the grant date adjusted for ineligibility to receive dividends. LTI is shown at grant value. The number of performance rights granted to each executive is based on the five-trading-day volume weighted average share price in the week up to and including the grant date. Fixed remuneration and Cash STI of J McNeil, S New and (as of December 2017) A Knowles is denominated in British Pounds and is subject to foreign exchange movements. The Australian dollar amounts shown in the table have been converted at an average exchange rate of 0.5915 (2016: 0.5473). (d) A Todd joined the group and became KMP effective 27 January 2017. (e) D Walker, the prior Chief Technology Officer, changed roles and ceased to be KMP on 31 December 2016. In accordance with the change in role, he was not eligible for an LTI award in 2016. 33 Directors’ Report continued For the year ended 31 December 2017 Section 6 Remuneration awarded and the link between performance and reward continued 6.4 TRANSLATION OF GROUP AND INDIVIDUAL PERFORMANCE INTO REMUNERATION AWARDED TO EXECUTIVE KMP FOR 2017 CONTINUED The table below shows the actual remuneration awarded to Executive KMP for 2017 against each executive’s target remuneration. The Cash STI outcome for each executive resulting from the Board’s assessment of financial performance of the Group against budget, performance of the Group against non-financial objectives and performance against individual objectives is shown in the table below. As noted in Section 6.2 above, the company’s financial performance was below the budget set by the Board at the start of the year. As a result, the cash STI awarded to Executive KMP was substantially less than target. STI equity and LTI equity awards are determined at the discretion of the Board with reference to Group financial performance, performance of the Group against non-financial objectives and the executive’s performance against individual objectives. In addition, the award of equity reflects retention considerations, the expected long-term contribution of the individual and their unvested equity exposure. On average, the award of deferred equity represents 85% of target. The Board considers that this reflects an appropriate balance between long-term goals and short-term financial performance. BASE CASH STI EQUITY STI TOTAL STI LTI TOTAL REMUNERATION Actual (a) Actual Target Actual as a % of target Actual Target Actual as a % of target Actual Target Actual Target Actual Target Actual as a % of target 1,000,000 110,000 275,000 40% 500,000 550,000 91% 610,000 825,000 74% 1,000,000 1,227,273 81% 2,610,000 3,052,273 86% 365,000 540,000 507,153 371,912 507,153 603,900 29,000 42,500 36,770 32,120 32,120 50,000 3,895,118 332,510 66,364 98,182 92,210 67,620 92,210 109,800 801,386 44% 43% 40% 48% 35% 46% 41% 123,500 180,500 175,750 132,724 165,968 209,000 132,727 196,364 184,419 135,241 184,419 219,600 1,487,442 1,602,770 93% 92% 95% 98% 90% 95% 93% 152,500 223,000 212,520 164,844 198,088 259,000 199,091 294,545 276,629 202,861 276,629 329,400 140,000 210,000 200,000 150,000 175,000 220,000 171,630 253,918 238,473 174,880 238,473 283,966 82% 83% 84% 86% 73% 77% 81% 657,500 973,000 919,673 686,756 735,721 1,088,464 1,022,255 749,654 880,241 1,022,255 1,082,900 1,217,266 7,810,070 8,887,888 1,819,952 2,404,155 2,095,000 2,588,613 Actual as a % of target 77% 76% 77% 81% 72% 79% 76% Actual as a % of target 89% 89% 90% 92% 86% 89% 88% Executive MD/CEO A Walsh Executive KMP (b) P Ferguson J Harris A Knowles J McNeill S New A Todd (c) Total (a) Target remuneration is based on base salary at 31 December 2017. It excludes allowances, non-monetary benefits and superannuation. Amounts therefore vary from the Fixed Remuneration disclosed elsewhere in this report. (b) S Barnes and M Rady are not included in the table above as they ceased to be KMP during the year and were not eligible for an award of STI or LTI. (c) A Todd had a salary increase effective 1 October to reflect the increased size of his role. 34 IRESS LIMITED ANNUAL REPORT 2017Directors’ Report continued For the year ended 31 December 2017 6.4 TRANSLATION OF GROUP AND INDIVIDUAL PERFORMANCE INTO REMUNERATION AWARDED TO EXECUTIVE KMP FOR 2017 CONTINUED The table below shows the actual remuneration awarded to Executive KMP for 2017 against each executive’s target remuneration. The Cash STI outcome for each executive resulting from the Board’s assessment of financial performance of the Group against budget, performance of the Group against non-financial objectives and performance against individual objectives is shown in the table below. As noted in Section 6.2 above, the company’s financial performance was below the budget set by the Board at the start of the year. As a result, the cash STI awarded to Executive KMP was substantially less than target. STI equity and LTI equity awards are determined at the discretion of the Board with reference to Group financial performance, performance of the Group against non-financial objectives and the executive’s performance against individual objectives. In addition, the award of equity reflects retention considerations, the expected long-term contribution of the individual and their unvested equity exposure. On average, the award of deferred equity represents 85% of target. The Board considers that this reflects an appropriate balance between long-term goals and short-term financial performance. Executive KMP (b) Executive MD/CEO A Walsh P Ferguson J Harris A Knowles J McNeill S New A Todd (c) Total Actual as a % of target 44% 43% 40% 48% 35% 46% 41% 365,000 540,000 507,153 371,912 507,153 603,900 29,000 42,500 36,770 32,120 32,120 50,000 66,364 98,182 92,210 67,620 92,210 109,800 801,386 123,500 180,500 175,750 132,724 165,968 209,000 132,727 196,364 184,419 135,241 184,419 219,600 Actual as a % of target 93% 92% 95% 98% 90% 95% 93% BASE CASH STI EQUITY STI TOTAL STI LTI TOTAL REMUNERATION Actual (a) Actual Target Actual Target Actual Target Actual as a % of target Actual Target Actual as a % of target Actual Target Actual as a % of target 1,000,000 110,000 275,000 40% 500,000 550,000 91% 610,000 825,000 74% 1,000,000 1,227,273 81% 2,610,000 3,052,273 86% 3,895,118 332,510 1,487,442 1,602,770 1,819,952 2,404,155 152,500 223,000 212,520 164,844 198,088 259,000 199,091 294,545 276,629 202,861 276,629 329,400 77% 76% 77% 81% 72% 79% 76% 140,000 210,000 200,000 150,000 175,000 220,000 171,630 253,918 238,473 174,880 238,473 283,966 2,095,000 2,588,613 82% 83% 84% 86% 73% 77% 81% 657,500 973,000 919,673 686,756 735,721 1,088,464 1,022,255 749,654 880,241 1,022,255 1,082,900 1,217,266 7,810,070 8,887,888 89% 89% 90% 92% 86% 89% 88% 35 Directors’ Report continued For the year ended 31 December 2017 Section 7 Executive KMP service agreements All IRESS Executive KMP have a formal contract, known as a service agreement. These agreements are of an ongoing nature and have no set term of service. The key terms of the service agreements for the MD/CEO and other Executive KMP are summarised below. Executive KMP termination entitlements are limited to 12 months’ base salary. MD/CEO Criterion Arrangements Term of contract Ongoing. Notice period Resignation Retirement Termination on notice by IRESS Redundancy Termination for serious misconduct Non-Compete Six months (from the employee and Group). The MD/CEO may resign by giving six months’ written notice. There are no additional financial entitlements due from IRESS on retirement. IRESS may terminate the employment agreement by providing six months’ written notice, or payment in lieu of the notice period. If IRESS terminates employment for reasons of bona fide redundancy, a severance payment will be made. The quantum of the payment will be determined subject to the Board’s discretion, considering matters such as statutory requirements, the executive’s contribution, position and length of service. IRESS may terminate the employment agreement at any time without notice. A non-compete arrangement exists during the MD/CEO’s employment and for a period of six months following his employment with the Group. EXECUTIVE KMP Details of the contractual terms for the other Executive KMP members are aligned with the terms set out above for the MD/CEO, with the exception that J Harris, J McNeill, S New and A Todd have non-compete clauses for the 12-months following employment (in addition to the non-compete arrangements during employment). 36 IRESS LIMITED ANNUAL REPORT 2017Directors’ Report continued For the year ended 31 December 2017 Section 8 Remuneration Governance The Board and People & Performance Committee (PPC) work closely to apply the Group’s remuneration philosophy and ensure the company’s remuneration strategy supports the creation of sustainable shareholder value. HOW REMUNERATION DECISIONS ARE MADE – ROLES AND RESPONSIBILITIES BOARD • Oversees remuneration. • Ultimately responsible for recommendations and decisions made by the PPC. • Approves remuneration for NEDs and the CEO. • Reviews PPC charter annually. With advice from PEOPLE AND PERFORMANCE COMMITTEE • Reviews remuneration taking into account a wide variety of information including internal budgets, general and specific global and regional market factors, and peer review. • Makes recommendations to the Board on remuneration arrangements for Directors. • Approves remuneration arrangements for direct reports to the MD/CEO. • Governed by PPC charter. Based on input from MANAGEMENT • Management makes relevant proposals to the PPC for consideration by the Board, taking into consideration market practice and external advice. EXTERNAL ADVISORS • At IRESS’ request, external advisors provide both information on current market practice and independent input into key remuneration decisions. • The terms of engagement for external advisors include specific measures designed to protect independence. • External advisors interact with members of IRESS’ management team. Individual executives, including the MD/CEO, do not participate in PPC meetings where their own remuneration is being discussed. To ensure independence, IRESS’ management team is precluded from requesting services from an external advisor that would be considered a ‘remuneration recommendation’ as defined by the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011. No remuneration recommendations (as defined by the Corporations Act 2001) were provided to the IRESS Board during the reporting period. To ensure objective and independent oversight of the Group, Non-executive Directors (NEDs) do not participate in performance-based incentives or receive post-employment benefits. 37 Directors’ Report continued For the year ended 31 December 2017 Section 9 Non-executive Director fees APPROACH TO SETTING NED FEES The Group’s NEDs receive fees for their services plus the reimbursement of reasonable expenses. The NED fee structure considers the responsibilities of NEDs and the time spent by NEDs on IRESS matters. NED fees are reviewed at appropriate intervals and are determined by the Board in consideration of fees paid to NEDs by comparable companies. The Board seeks external advice on this subject where considered necessary. MAXIMUM AGGREGATE NED FEE POOL The total amount of remuneration provided to all NEDs is determined by shareholders at the Annual General Meeting in accordance with the Group’s Constitution. The maximum aggregate remuneration for NEDs is set around the median level for comparable companies, to provide the ability for IRESS to attract and retain appropriately qualified and experienced directors. The maximum aggregate remuneration of $1,200,000 per annum was approved at the Annual General Meeting held on 5 May 2016. The total amount of remuneration paid to NEDs in 2017 was $903,342 (2016: $800,096). The increase on 2016 is due to an increase to policy fees as well as an additional NED joining the Board (J Fahey, 5 October 2017). NED FEE POLICY The table below contains the fee policy for NEDs during 2017. Fees were increased for the first time since 2013 in July 2017. Fees include statutory superannuation contributions or fees in lieu of statutory superannuation contributions paid by the Group. Fee ($) – 1 January to 30 June 2017 Fee ($) – From 1 July 2017 Role IRESS Limited Board Board Chair Board member Audit & Risk Committee Chair Member People and Performance Committee Chair Member The Chairman is entitled to the Board Chair fee only (no additional Committee fees). Non-executive Director statutory remuneration The total statutory remuneration paid to NEDs during 2017 and 2016 is as out in the table below: 200,000 110,000 22,000 Nil 22,000 Nil Non-executive Directors A D’Aloisio N Beattie (a) J Cameron J Fahey (b) J Hayes J Seabrook G Tomlinson Total Non-executive Director fees SHORT-TERM BENEFITS POST- EMPLOYMENT ENTITLEMENTS Fees $ 200,913 182,648 120,000 110,000 109,589 100,457 28,463 – 130,594 120,548 130,594 120,548 109,589 100,457 829,742 734,658 Super- annuation $ 19,087 17,352 6,175 6,096 10,411 9,543 2,704 – 12,406 11,452 12,406 11,452 10,411 9,543 73,600 65,438 Financial year 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 2017 2016 240,000 130,000 24,000 Nil 24,000 Nil Total $ 220,000 200,000 126,175 116,096 120,000 110,000 31,167 – 143,000 132,000 143,000 132,000 120,000 110,000 903,342 800,096 (a) NED fees are paid inclusive of superannuation for all NEDs except for N Beattie. N Beattie is paid superannuation on-top of fees based on the percentage of total fees relating to work performed in Australia. (b) J Fahey was appointed 5 October 2017. 38 IRESS LIMITED ANNUAL REPORT 2017Directors’ Report continued For the year ended 31 December 2017 Section 10 Additional Required Disclosures EXECUTIVE KMP STATUTORY REMUNERATION The table below presents details of Executive KMP remuneration prepared in accordance with statutory requirements and accounting standards. Under this standard deferred share rights and performance rights are expensed based on the grant date fair value over the vesting period. SHORT-TERM BENEFITS (c) POST-EMPLOYMENT BENEFITS (d) LONG-TERM BENEFITS Salary and fees Non monetary benefits Executive Year $ (a) $ (b) Termin- ation payments $ Share- based payments Shares $ (e) Share- based payments DSRs $ Share- based payments PRs $ Super- annuation $ STI $ Long- service leave $ Total Remun- eration $ MD/CEO A Walsh 2017 1,000,000 2016 1,000,000 Executive KMP S Barnes 2017 2016 P Ferguson J Harris 2017 2016 2017 2016 A Knowles (b, f) 2017 2016 J McNeill (b,f) S New (f) M Rady A Todd (g) D Walker (g) Total 2017 2016 2017 2016 2017 2016 2017 2016 315,000 410,000 365,000 330,000 540,000 520,000 506,231 500,000 385,605 319,021 507,153 548,145 382,500 500,000 476,513 520,000 2017 4,478,002 2016 4,647,166 – – – – 2,289 2,123 1,370 529 11,388 2,123 13,803 14,038 4,530 5,311 – – – 2,123 33,380 26,247 110,000 300,000 25,000 30,000 – – – – 529,590 494,892 668,554 629,786 20,741 2,353,885 16,759 2,471,437 – 60,000 29,000 55,000 42,500 70,000 36,770 75,000 32,120 63,950 32,120 54,815 – 80,000 50,000 85,000 40,525 35,000 36,662 35,000 29,350 31,900 30,000 34,275 33,472 27,380 50,715 47,506 31,250 30,000 44,526 31,663 364,170 – – – – – – – – – – – 302,893 – – – 300 – 300 300 – – – – 262 241 262 241 – – – – 96,849 137,869 100,343 106,370 71,185 21,918 168,054 158,139 58,008 183,313 36,496 13,151 119,284 82,301 – 33,162 106,233 75,462 72,542 102,422 66,339 111,343 109,983 30,994 22,631 25,043 8,767 25,601 72,961 – (6,253) 6,253 17,708 7,043 – – 8,847 25,528 – – – – – – – 843,753 755,355 626,764 608,378 786,827 710,686 872,633 905,048 554,264 630,574 656,319 677,936 861,528 765,262 571,039 175,378 138,611 9,884 962,658 332,510 843,765 321,500 302,724 667,063 – 1,124 1,179,809 1,072,581 782 1,373,331 1,227,853 41,043 8,127,012 65,467 8,487,335 Perform- ance- related remun- eration as % of total remun- eration 56% 58% 15% 40% 33% 38% 27% 22% 36% 38% 22% 43% 14% 11% 17% 31% 9% 41% 32% 41% (a) Salary includes allowances and short-term compensated absences paid during the 2016 and 2017 years. (b) Non-monetary benefits include health and life insurance subsidies. The value of non-monetary benefits for J McNeill was overstated in 2016 and has been restated above. Non-monetary benefits for A Knowles additionally includes $9,156 for temporary accommodation and furnishings following his relocation to the UK. Excluded from non-monetary benefits for A Knowles is $35,587 in reimbursed relocation expenses that are not classified as remuneration, e.g. removalist fees and airfares. (c) There were no other short-term employee benefits, provided to Executive KMP during the 2016 or 2017 years. (d) Post-employment benefits for 2016 and 2017 included superannuation and termination payments. Termination payments for accounting purposes exclude equity that vested on termination. The share-based payment expense above includes amounts relating to equity that vested on termination. (e) Share-based payments in Shares relate to matching shares delivered under Employee Share Plans (see Section 4.4). (f) Remuneration of J McNeill, S New, and (from December 2017) A Knowles, is denominated in British Pounds and is subject to FX movements. The Australian dollar amounts shown in the table were converted at an average foreign exchange rate of 0.5915 (2016: 0.5473). (g) A Todd joined the group and became KMP effective 27 January 2017 and D Walker ceased to be KMP on 31 December 2016. 39 Directors’ Report continued For the year ended 31 December 2017 Section 10 Additional Required Disclosures continued RIGHTS HELD DURING THE FINANCIAL YEAR The number of deferred shares (Employee Share Plans), deferred share rights (Equity STI) and performance rights (LTI) held in the Company by each Executive KMP is set out below. No rights are granted to NEDs or related parties. Deferred Shares and Deferred Share Rights MD/CEO A Walsh Executive KMP S Barnes (b) P Ferguson (c) J Harris (d) A Knowles (d) J McNeill S New M Rady (b) A Todd Total Balance as at 1 January 2017 Granted as compen- sation Vested during the year (a) Forfeited during the year Balance as at 31 December 2017 173,000 47,575 (58,000) – 162,575 47,597 37,884 9,756 55,366 71,261 5,876 31,552 – 13,993 10,753 16,325 16,325 7,138 7,138 16,792 – (38,389) (17,570) – (20,000) (4,830) – (24,327) – 432,292 136,039 (163,116) (23,201) – – – – – (24,017) – (47,218) – 31,067 26,081 51,691 73,569 13,014 – – 357,997 (a) All deferred share rights that vest during the year are exercisable. No deferred share rights were, as at 31 December 2017, vested and not yet exercised. (b) On termination, a proportion of unvested deferred share rights vested, and the remainder were forfeited. (c) The opening balance has been reinstated to include Deferred Shares granted under Employee Share Plans (share matching). (d) The opening balance has been reinstated as J Harris and A Knowles Deferred Share Rights granted in 2016 were transposed. Performance Rights MD/CEO A Walsh Executive KMP S Barnes (b) P Ferguson J Harris A Knowles J McNeill S New M Rady (b) A Todd Total Balance as at 1 January 2017 Granted as compen- sation Vested during the year (a) Forfeited during the year Balance as at 31 December 2017 496,000 109,478 (120,120) (9,880) 475,478 57,616 39,461 36,760 59,993 14,252 4,706 40,410 – 12,482 9,646 14,752 14,752 6,731 7,692 15,319 – (22,772) (14,575) – (23,914) (7,968) – – – 749,198 190,852 (189,349) (24,670) (735) – (1,206) (402) – (28,679) – (65,572) 22,656 33,797 51,512 49,625 12,613 12,398 27,050 – 685,129 (a) All performance rights that vested during the year are exercisable. No performance rights were, as at 31 December 2017, vested and not yet exercised. (b) On termination, a proportion of unvested Performance Rights lapsed, and the remainder were retained and remain subject to the original vesting period and performance conditions. 40 IRESS LIMITED ANNUAL REPORT 2017Directors’ Report continued For the year ended 31 December 2017 DEFERRED SHARE RIGHTS AND PERFORMANCE RIGHTS AWARDED DURING THE YEAR The table below discloses deferred share rights and performance rights granted to the Executive KMP during 2017, in relation to performance in 2016. No rights vest if the conditions are not satisfied, hence the minimum value yet to vest is nil. Rights granted in 2017 that subsequently vest will be automatically exercised on or around the time IRESS notifies them that their rights have vested. The maximum value of the grants yet to vest has been determined as the fair value of awards at grant date. Deferred share rights and performance rights are granted for no consideration, and upon vesting, can be exercised at no cost. Executive A Walsh S Barnes P Ferguson J Harris A Knowles J McNeill S New M Rady A Todd Vehicle Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Grant date 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 11–May–17 Number of rights granted Fair value at grant date ($) Vesting date Expiry date $10.86 11–May–20 11–May–20 $6.64 $7.05 $10.86 $7.13 $10.86 $7.13 $10.86 $7.13 $10.86 $7.13 $10.86 $7.13 $10.86 $7.13 $10.86 $7.13 11–May–21 11–May–21 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–21 11–May–21 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 11–May–20 47,575 54,739 54,739 13,993 12,482 10,728 9,646 16,325 14,752 16,325 14,752 7,114 6,731 7,114 7,692 16,792 15,319 – – 41 Directors’ Report continued For the year ended 31 December 2017 Section 10 Additional Required Disclosures continued DEFERRED SHARE RIGHTS AND PERFORMANCE RIGHTS VESTED AND LAPSED DURING THE YEAR The table below discloses deferred share rights and performance rights that had vesting determinations made during the year for the Executive KMP. One ordinary share is provided for each vested right, subject to adjustment for certain capital actions. Shares provided on vesting of rights are fully paid and accordingly there is no unpaid amount. Executive A Walsh S Barnes (a) P Ferguson J Harris A Knowles J McNeill S New M Rady (a) Vehicle Deferred share rights Performance rights Performance rights Deferred share rights Performance rights Deferred share rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights A Todd Deferred share rights Performance rights Grant date 07–May–14 07–May–13 07–May–13 07–May–14 07–May–15 05–May–16 11–May–17 07–May–14 07–May–15 05–May–16 11–May–17 30–Sep–13 07–May–14 07–May–14 07–May–14 07–May–14 07–May–14 07–May–14 07–May–15 05–May–16 11–May–17 07–May–15 05–May–16 11–May–17 Number of rights granted Fair value at grant date Number of rights vested (a) Number of rights lapsed/forfeited Proportion rights vested Proportion forfeited 58,000 65,000 65,000 17,930 15,521 14,146 13,993 23,920 20,755 12,941 12,482 5,160 12,410 15,310 – – 20,000 25,120 4,830 8,370 – – 14,967 16,585 16,792 24,528 15,882 15,319 – – $7.25 $5.03 $4.76 $7.25 $9.02 $10.25 $10.86 $4.18 $5.30 $8.50 $7.13 $7.75 $7.25 $4.18 $7.25 $4.18 $7.25 $4.18 $9.02 $10.25 $10.86 $5.30 $8.50 $7.13 Vesting date (a) 08–May–17 08–May–17 08–May–17 08–May–17 30–Sep–17 30–Sep–17 11–May–20 08–May–17 07–May–18 05–May–19 11–May–20 02–Jan–17 08–May–17 08–May–17 08–May–17 08–May–17 08–May–17 08–May–17 30–Sep–17 30–Sep–17 11–May–20 07–May–18 05–May–19 11–May–20 Expiry date 08–May–17 08–May–17 08–May–17 08–May–17 30–Sep–17 30–Sep–17 11–May–20 08–May–17 07–May–18 05–May–19 11–May–20 02–Jan–17 08–May–17 08–May–17 08–May–17 08–May–17 08–May–19 08–May–19 30–Sep–17 30–Sep–17 11–May–20 07–May–18 05–May–19 11–May–20 58,000 55,120 65,000 17,930 15,521 4,938 22,772 5,160 12,410 14,575 20,000 23,914 4,830 7,968 14,967 9,360 – – – – – – – – – – – – – – 9,880 – – – – 9,208 13,993 1,148 4,162 6,878 12,482 735 – – – – – – – – – – – 1,206 402 7,225 16,792 4,919 8,441 15,319 100.0% 84.8% 100.0% 100.0% 100.0% 34.9% 0.0% 95.2% 0.0% 0.0% 0.0% 100.0% 100.0% 95.2% 100.0% 95.2% 100.0% 95.2% 100.0% 56.4% 0.0% 0.0% 0.0% 0.0% 0.0% 15.2% 0.0% 0.0% 0.0% 65.1% 100.0% 4.8% 20.1% 53.1% 100.0% 0.0% 0.0% 4.8% 0.0% 4.8% 0.0% 4.8% 0.0% 43.6% 100.0% 20.1% 53.1% 100.0% (a) On their termination date of 30 September 2017, a proportion of the deferred share rights granted to S Barnes and M Rady in 2015 and 2016 vested, and the remainder were forfeited. The original vesting dates were 7 May 2018 and 5 May 2019 respectively. 42 IRESS LIMITED ANNUAL REPORT 2017 Directors’ Report continued For the year ended 31 December 2017 Executive A Walsh S Barnes (a) P Ferguson J Harris A Knowles J McNeill S New M Rady (a) Vehicle Deferred share rights Performance rights Performance rights Deferred share rights Performance rights Deferred share rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Deferred share rights Performance rights Grant date 07–May–14 07–May–13 07–May–13 07–May–14 07–May–15 05–May–16 11–May–17 07–May–14 07–May–15 05–May–16 11–May–17 30–Sep–13 07–May–14 07–May–14 07–May–14 07–May–14 07–May–14 07–May–14 07–May–15 05–May–16 11–May–17 07–May–15 05–May–16 11–May–17 Number of rights granted Fair value at grant date 58,000 65,000 65,000 17,930 15,521 14,146 13,993 23,920 20,755 12,941 12,482 5,160 12,410 15,310 20,000 25,120 4,830 8,370 14,967 16,585 16,792 24,528 15,882 15,319 – – – – – – $7.25 $5.03 $4.76 $7.25 $9.02 $10.25 $10.86 $4.18 $5.30 $8.50 $7.13 $7.75 $7.25 $4.18 $7.25 $4.18 $7.25 $4.18 $9.02 $10.25 $10.86 $5.30 $8.50 $7.13 A Todd Deferred share rights Performance rights (a) On their termination date of 30 September 2017, a proportion of the deferred share rights granted to S Barnes and M Rady in 2015 and 2016 vested, and the remainder were forfeited. The original vesting dates were 7 May 2018 and 5 May 2019 respectively. Vesting date (a) 08–May–17 08–May–17 08–May–17 08–May–17 30–Sep–17 30–Sep–17 11–May–20 08–May–17 07–May–18 05–May–19 11–May–20 02–Jan–17 08–May–17 08–May–17 08–May–17 08–May–17 08–May–17 08–May–17 30–Sep–17 30–Sep–17 11–May–20 07–May–18 05–May–19 11–May–20 Expiry date 08–May–17 08–May–17 08–May–17 08–May–17 30–Sep–17 30–Sep–17 11–May–20 08–May–17 07–May–18 05–May–19 11–May–20 02–Jan–17 08–May–17 08–May–17 08–May–17 08–May–17 08–May–19 08–May–19 30–Sep–17 30–Sep–17 11–May–20 07–May–18 05–May–19 11–May–20 Number of rights vested (a) Number of rights lapsed/forfeited Proportion rights vested Proportion forfeited 58,000 55,120 65,000 17,930 15,521 4,938 – 22,772 – – – 5,160 12,410 14,575 – – 20,000 23,914 4,830 7,968 – – 14,967 9,360 – – – – – – – 9,880 – – – 9,208 13,993 1,148 4,162 6,878 12,482 – – 735 – – – 1,206 – 402 – – – 7,225 16,792 4,919 8,441 15,319 – – 100.0% 84.8% 100.0% 100.0% 100.0% 34.9% 0.0% 95.2% 0.0% 0.0% 0.0% 100.0% 100.0% 95.2% 100.0% 95.2% 100.0% 95.2% 100.0% 56.4% 0.0% 0.0% 0.0% 0.0% 0.0% 15.2% 0.0% 0.0% 0.0% 65.1% 100.0% 4.8% 20.1% 53.1% 100.0% 0.0% 0.0% 4.8% 0.0% 4.8% 0.0% 4.8% 0.0% 43.6% 100.0% 20.1% 53.1% 100.0% 43 Directors’ Report continued For the year ended 31 December 2017 Section 10 Additional Required Disclosures continued SHAREHOLDINGS The number of ordinary shares held in the Company during the financial year by each KMP is set out below. Included are shares held on their behalf by the trustee of the IRESS Limited Equity Plans Trust and their personally related parties is set out below. KMP NEDs A D’Aloisio N Beattie J Cameron J Fahey J Hayes J Seabrook G Tomlinson Executive KMP A Walsh (a) S Barnes P Ferguson (b) J Harris A Knowles J McNeill (b) S New (b) M Rady A Todd Total Balance as at 1 Jan 2017 Shares acquired during the year (c) Other changes Balance as at 31 Dec 2017 36,855 – 36,668 – 13,788 37,988 – 370,502 31,110 29,082 – 9,316 697 293 – – 566,299 10,629 – – – – 510 8,000 191,843 64,007 33,955 – 46,649 9,951 315 24,327 – 390,186 – – – – – – – (150,000) – (35,868) – (23,701) (7,207) – – – (216,776) 47,484 – 36,668 – 13,788 38,498 8,000 412,345 95,117 27,169 – 32,264 3,441 608 24,327 – 739,709 (a) Opening balance has been restated for A Walsh to include shares acquired on acquisition of Financial Synergy. (b) Opening balances have been restated for P Ferguson, J McNeill and S New to include shares purchased under Employee Share Plans in prior years. A portion of performance rights vesting in 2016 have not been included as they have not yet been exercised. Shares acquired by Executive KMP during the year were acquired on the exercise of deferred share rights, exercise of performance rights (including those that vested in 2016 that were exercised in 2017) and acquisition of shares under Employee Share Plans. (c) The aggregate number of shares, deferred share rights and performance rights held by each executive is shown below. Executive A Walsh S Barnes P Ferguson J Harris A Knowles J McNeill S New M Rady A Todd Total Shareholdings at 31 Dec 2017 Deferred share rights at 31 Dec 2017 Performance rights at 31 Dec 2017 Total shares/ rights at 31 Dec 2017 412,345 95,117 27,169 - 32,264 3,441 608 24,327 - 595,271 162,575 - 31,016 26,081 51,691 73,492 12,968 - - 357,823 475,478 22,656 33,797 51,512 49,625 12,613 12,398 27,050 - 685,129 1,050,398 117,773 91,982 77,593 133,580 89,546 25,974 51,377 - 1,638,223 Note: Excludes equity instruments that will be issued in May 2018 related to 2017 performance year. TRANSACTIONS WITH KMP No transactions (excluding share-based payment compensation) occurred between KMP and the Company during 2017. LOANS TO KMP OR RELATED PARTIES No loans to KMP or related parties were provided during 2017. Signed in accordance with a resolution of the Directors made pursuant to s.298(2) of the Corporations Act 2001 (Cth). TONY D’ALOISIO CHAIRMAN 22 February 2018 44 A WALSH CHIEF EXECUTIVE OFFICER AND MANAGING DIRECTOR IRESS LIMITED ANNUAL REPORT 2017Auditor’s Independence Declaration Deloitte Touche Tohmatsu ABN 74 490 121 060 550 Bourke Street Melbourne VIC 3000 GPO Box 78 Melbourne VIC 3001 Australia Tel: +61 3 9671 7000 Fax: +61 3 9671 7001 www.deloitte.com.au 22 February 2018 The Board of Directors IRESS Limited Level 18, 385 Bourke Street MELBOURNE VIC 3000 Dear Board Members IRESS Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of IRESS Limited. As lead audit partner for the audit of the financial statements of IRESS Limited for the financial year ended 31 December 2017, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Tom Imbesi Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 45 Financial Statements For the year ended 31 December 2017 This is the financial report for IRESS Limited (the ‘Company’) and its controlled entities (collectively referred to as the ‘Group’ or ‘IRESS’) for the year ended 31 December 2017. CONTENTS Consolidated statement of profit and loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Section 1. Financial results 1.1 1.2 1.3 1.4 1.5 1.6 1.7 Segment information Earnings per share and dividends per share Employee benefit expenses Share based payments Other expenses Deprecation and amortisation Notes to the consolidated statement of cash flows Section 2. Core assets and working capital 2.1 2.2 2.3 2.4 2.5 Intangibles Receivables and other assets Payables and other liabilities Provisions Commitments and contingencies Section 3. Debt and equity 3.1 3.2 3.3 Debt facilities and derivatives Issued capital Managing financial risks Section 4. Other disclosures 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 Taxation Businesses and investments acquired and divested IRESS Limited – parent entity financial information Subsidiaries Deed of cross guarantee Basis of preparation Transactions with related parties Subsequent events 46 IRESS LIMITED ANNUAL REPORT 2017 47 48 49 50 51 51 51 53 54 55 57 57 58 59 59 60 61 62 62 63 63 64 65 66 66 68 68 69 70 71 72 72 Section Heading Financial Statements For the year ended 31 December 2017 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 31 December 2017 Revenue Customer data fees Communication and other technology expenses Employee benefit expenses Other expenses Profit before depreciation, amortisation, interest and income tax expense Depreciation and amortisation expense Profit before interest and income tax expense Interest revenue Financing costs Net interest and financing costs Share of loss of equity-accounted investments, net of tax Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income Items that may be reclassified to profit or loss: Exchange differences on translation of foreign operations Tax related to exchange differences recognised directly in foreign currency translation reserve (1) Total other comprehensive income/(loss) for the period Total comprehensive income for the period Notes 1.3 1.5 1.6 3.1(d) 4.2 4.1 2017 $’000 429,952 (33,333) (24,516) (232,838) (31,880) 107,385 (25,075) 82,310 382 (4,827) (4,445) (100) 77,765 (18,010) 59,755 10,089 88 10,177 69,932 Cents per share 2016 $’000 389,737 (31,385) (23,026) (202,428) (29,389) 103,509 (21,063) 82,446 937 (6,406) (5,469) – 76,977 (17,525) 59,452 (38,931) (1,610) (40,541) 18,911 Cents per share Earnings per share Basic earnings per share Diluted earnings per share 1.2 1.2 35.4 34.9 37.0 36.4 (1) These are exchange differences on monetary items that form part of a reporting entity’s net investment in a foreign operation. The consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 47 Consolidated Statement of Financial Position As at 31 December 2017 ASSETS Current assets Cash and cash equivalents Trade and other receivables Derivative assets Total current assets Non-current assets Intangibles Plant and equipment Investment in associate Deferred tax assets Derivative assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Provisions Total current liabilities Non-current liabilities Trade and other payables Provisions Borrowings Deferred tax liabilities Total non-current liabilities Total liabilities Net assets EQUITY Issued capital Share based payments reserve Foreign currency translation reserve Retained earnings Total equity Notes 2017 $’000 2016 $’000 2.2 3.1(b) 2.1 1.6 4.2 4.1 3.1(b) 2.3 2.4 2.3 2.4 3.1 4.1 3.2 28,615 55,839 306 84,760 547,285 19,773 1,400 18,337 – 586,795 671,555 38,310 12,893 51,203 4,205 6,854 192,865 8,881 212,805 264,008 407,547 376,309 24,213 (6,426) 13,451 407,547 22,951 50,102 – 73,053 553,610 12,096 – 23,276 205 589,187 662,240 44,168 10,979 55,147 7,517 8,040 177,805 12,905 206,267 261,414 400,826 375,287 23,006 (16,603) 19,136 400,826 The consolidated statement of financial position should be read in conjunction with the accompanying notes. 48 IRESS LIMITED ANNUAL REPORT 2017Consolidated Statement of Financial Position As at 31 December 2017 Consolidated Statement of Changes in Equity For the year ended 31 December 2017 Balance at 1 January 2016 Profit for the period Other comprehensive loss Total comprehensive (loss) / income Transactions with owners in their capacity as owners: Shares issued during the year (1) Share raising costs Dividends declared or paid Share-based payment expense, net of tax (3) Transfer of share-based payments reserve (4) Balance at 31 December 2016 Balance at 1 January 2017 Profit for the period Other comprehensive income Total comprehensive income Transactions with owners in their capacity as owners: Shares issued during the year (1) Dividends declared (2) Share-based payment expense, net of tax (3) Transfer of share-based payments reserve (4) Balance at 31 December 2017 Issued capital $’000 275,983 – – – 101,214 (1,910) – – – 99,304 375,287 Issued capital $’000 375,287 – – – 486 536 – – 1,022 376,309 Share based payments reserve $’000 21,155 – – – – – – 11,739 (9,888) 1,851 23,006 Share based payments reserve $’000 23,006 – – – – – 10,757 (9,550) 1,207 24,213 Foreign currency translation reserve $’000 23,938 – (40,541) (40,541) – – – – – – (16,603) Foreign currency translation reserve $’000 (16,603) – 10,177 10,177 – – – – – (6,426) Retained earnings $’000 18,235 59,452 – 59,452 – – (68,439) – 9,888 (58,551) 19,136 Retained earnings $’000 19,136 59,755 – 59,755 – (74,990) – 9,550 (65,440) 13,451 Total equity $’000 339,311 59,452 (40,541) 18,911 101,214 (1,910) (68,439) 11,739 – 42,604 400,826 Total equity $’000 400,826 59,755 10,177 69,932 486 (74,454) 10,757 – (63,211) 407,547 The consolidated statement of changes in equity should be read in conjunction with the accompanying notes. (1) 2017 shares issued to satisfy employee share plan obligations. 2016 shares issued in respect of institutional placements and share offer plan to fund acquisition of Financial Synergy, and satisfy employee share plan obligations. Refer Note 3.2. (2) Shares issued under the Dividend Reinvestment. (3) Share-based payment expense includes the tax impact of $1.4 million (2016: $0.6 million) on vesting of employees share based payments. (4) The movement from share-based payment reserves to retained earnings represents the fair value of share-based payments that have vested or lapsed during the year. The amount has been recognised as a share-based payment expense over the vesting period. Details of share-based payment arrangements are provided in Note 1.4. 49 Consolidated Statement of Cash Flows For the year ended 31 December 2017 Cash flows from operating activities Receipts from customers Payments to suppliers Payments to employees Interest received Interest and borrowing costs paid Income taxes paid Net cash inflow from operating activities Cash flows from investing activities Payments for plant and equipment Payments for intangibles Proceeds from sale of intangible assets Payment of deferred consideration Net cash paid for acquisition for investments and subsidiaries Acquisition and integration costs paid Net cash outflow from investing activities Cash flows from financing activities Proceeds from borrowings Repayments of borrowings Proceeds from share issue Share issue costs paid Proceeds from employee share plan repayments Dividends paid Net cash (outflow) / inflow from financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the end of the year Notes 2017 $’000 2016 $’000 1.7 2.1 2.4 4.2 464,319 (130,397) (223,168) 382 (6,043) (21,350) 83,743 (18,945) (3,279) 3,250 (1,132) (1,500) – (21,606) 167,156 (154,175) – – 487 (74,644) (61,176) 961 22,951 4,703 28,615 428,672 (123,322) (189,940) 937 (6,080) (19,699) 90,568 (7,240) (4,575) – – (101,692) (7,656) (121,163) 48,084 (65,313) 100,623 (1,910) 591 (68,376) 13,699 (16,896) 39,233 614 22,951 The consolidated statement of cash flows should be read in conjunction with the accompanying notes. 50 IRESS LIMITED ANNUAL REPORT 2017Consolidated Statement of Cash Flows For the year ended 31 December 2017 Notes to the Consolidated Financial Statements For the year ended 31 December 2017 Section 1. Financial Results 1.1 SEGMENT INFORMATION IRESS has a global presence, with the Managing Director and Chief Executive Officer, who is IRESS’ Chief Operating Decision Maker, receiving internal reporting split by the segments listed below. Any transactions directly between segments are charged on an arm’s length basis. CHANGE TO A GROSS MARGIN PRESENTATION IRESS has previously reported the financial performance of client-facing segments after the allocation of centrally incurred costs (‘post cost allocation view’). More than 50% of IRESS cost base is incurred centrally with the largest component of these costs being the Product and Technology team. Given the material size of centrally incurred costs, IRESS believes that separate specific disclosure of expenditure in these areas will provide greater transparency to users of the financial statements. In addition, the benefit that each client segment derives from these central costs, and in particular product and technology activity, varies over time. As a result, it was becoming increasingly difficult to assess the performance of each business using the post cost allocation view. In response, IRESS has changed the presentation of segment results to show the financial performance of client segments excluding centrally incurred costs and to separately disclose key centrally incurred costs. The revised segments comprise: Client Segments Client segments which include revenue less the direct costs of customer-facing teams that oversee this revenue generation, are: APAC Financial Markets Provides information, trading, compliance, order management, portfolio systems and related tools to financial markets participants in Australia, New Zealand and Asia. ANZ Wealth Management Provides financial planning systems, fund administration software and related tools to Superannuation and Wealth Management professionals located in Australia and New Zealand. UK Incorporates the financial markets business which provides information, trading, compliance, order management, portfolio systems and related tools to cash equity participants; and the wealth management business which provides financial planning systems and related tools to Wealth Management professionals located in the United Kingdom. Lending The Lending segment operates in the United Kingdom to provide mortgage origination software and associated consulting services to banks. South Africa Provides information, trading, compliance, order management, portfolio systems and related tools to financial markets participants and provides financial planning systems and related tools to Wealth Management professionals located in South Africa. Canada Provides information, trading, compliance, order management, portfolio systems and related tools to financial markets participants in Canada. Cost Segments Product and Technology All costs associated with product and technology will be reported under this segment giving a clear view of the quantum of investment made by IRESS in maintaining and enhancing its products. Operations Includes costs to run client-facing and corporate operations activity, including hosting and networks, information security, client help desks and property infrastructure. 51 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 1. Financial Results continued 1.1 SEGMENT INFORMATION CONTINUED Corporate All other corporate functions including legal, finance and administration, human resources, marketing, board of directors and executives. The revenue, segment profit and reconciliation to the Group results are shown below: OPERATING REVENUE DIRECT CONTRIBUTION S T L U S E R T N E M G E S APAC Financial Markets ANZ Wealth Management Total APAC UK Lending Total UK South Africa Canada Total Group T S O C S Product and Technology T N E M G E S Operations Corporate Total indirect costs 2017 $’000 115,059 125,131 240,190 105,526 23,759 129,285 42,754 17,723 429,952 2016 $’000 113,457 93,825 207,282 110,830 25,994 136,824 28,687 16,944 389,737 2017 $’000 83,763 93,935 177,698 67,323 18,590 85,913 32,784 8,987 2016 $’000 84,092 75,743 159,835 73,230 21,102 94,332 22,357 7,841 305,382 284,365 (108,323) (38,707) (32,969) (179,999) 125,383 (9,327) 116,056 (8,671) (98,428) (34,216) (28,190) (160,834) 123,531 (10,836) 112,695 (9,186) Group Segment Profit Share-based payment expense Segment Profit after share-based payment expense Other non-operating expenses (1) S T L U S E R P U O R G Profit before interest and tax, depreciation and amortisation 107,385 103,509 Depreciation and amortisation Profit before interest and tax Net interest and financing costs Share of loss of equity-accounted investments, net of tax Tax expense Net profit after tax (25,075) 82,310 (4,445) (100) (18,010) 59,755 (21,063) 82,446 (5,469) – (17,525) 59,452 (1) Predominately relates to office move costs, business acquisition and integration expenses and unrealised foreign exchange gains and losses. The below table outlines revenue and non-current assets by geographical area, being Australia and New Zealand, United Kingdom, South Africa, Canada and Asia: Australia and New Zealand Asia Total APAC United Kingdom South Africa Canada Grand total EXTERNAL REVENUES NON-CURRENT ASSETS (1) 2017 $’000 237,416 2,774 240,190 129,285 42,754 17,723 429,952 2016 $’000 204,671 2,611 207,282 136,823 28,687 16,945 389,737 2017 $’000 2016 $’000 372,857 165,784 30 372,887 173,454 12,099 10,018 568,458 56 165,840 377,207 12,072 10,588 565,707 (1) Excludes financial instruments and deferred taxes, and predominately relates to intangible assets (Note 2.1). 52 IRESS LIMITED ANNUAL REPORT 2017 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 1.2 EARNINGS PER SHARE AND DIVIDENDS PER SHARE (a) Basic and diluted earnings per share and dividends per share for the period are: Earnings per share Diluted earnings per share Dividends per share: Interim dividend franked to 60% (2016: 60%) Final dividend declared after balance sheet date franked to 60% (2016: 60%) (b) The weighted average number of shares used to calculate earnings per share is as follows: Weighted average number of ordinary shares used in basic earnings per share Effect of potentially dilutive shares Weighted average number of ordinary shares used in diluted earnings per share (c) Dividends recognised during the year and after the balance sheet date were as follows: Dividends recognised and paid during the year Final dividend for 2016 28.0 cents per share franked to 60% (2015: 26.7 cents per share franked to 60%) Interim dividend for 2017 16.0 cents per share franked to 60% (2016: 16.0 cents per share franked to 60%) Cents per share 2017 Cents per share 2016 35.4 34.9 16.0 28.0 Number of shares 2017 ’000 168,800 2,535 171,335 2017 $’000 47,588 27,402 74,990 37.0 36.4 16.0 28.0 Number of shares 2016 ’000 160,777 2,543 163,320 2016 $’000 42,664 25,775 68,439 Dividends declared after balance date Since the end of the year, the directors declared a final dividend of 28.0 cents per share franked to 60% (2016: 28.0 cents per share franked to 60%) Franking credit balance Franking credits available for subsequent reporting periods based on a tax rate of 30% (2016: 30%) 48,022 47,588 3,141 4,771 53 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 1. Financial Results continued 1.3 EMPLOYEE BENEFIT EXPENSES Short-term employee benefits, mainly comprising of base salary, bonus payments and annual leave costs are expensed as the employee renders services. Post-employment benefits which comprise IRESS contribution to defined contribution retirement plans are expensed as the service is received from the employee. Termination benefits are amounts paid to employees when their employment is terminated. These are expensed when IRESS can no longer withdraw the offer of the termination benefit. Short term and other employee benefits Post employment benefits Termination benefits Share-based payment expense Employee administration expense Notes 1.4 Key management personnel Key Management Personnel compensation included in total employee benefits for the year is set out below: Short term employee benefits Long term employee benefits Post employment benefits Share based payments Termination payments 2017 $’000 197,177 14,183 2,433 9,327 9,718 232,838 2017 $’000 5,673 41 395 2,254 667 9,030 2016 $’000 169,237 11,988 1,427 10,836 8,940 202,428 2016 $’000 6,252 65 368 2,602 – 9,287 Detailed remuneration disclosures are provided in the Remuneration Report. The following changes in the composition of key management personnel occurred during the year: • In January 2017, Andrew Todd commenced as Chief Technology Officer. • Following an executive team restructure in September 2017, Steve Barnes – Chief Operating Officer, and Matt Rady – Group Executive, Financial Markets ceased to be KMP in September and exited the business. • In October 2017, Julie Fahey was appointed to the Board of Directors. 54 IRESS LIMITED ANNUAL REPORT 2017Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 1.4 SHARE BASED PAYMENTS The grant date fair value of equity settled share based payment awards granted to employees is recognised as an expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. (a) Details of share plans To assist in the attraction, retention and motivation of employees, the Group operates the following share based payment plans: Plan Key terms Performance condition Performance / Restriction period Dividends received before vesting 3 years and 4 years No Executive LTI Plan – CEO Executive LTI Plan Employee Deferred Share Plan Employee Deferred Share Rights Plan General Employee Share Plan/ UK Share Incentive Plan CEO receives performance rights at no cost. Eligible participants receive performance rights at no cost. Eligible participants receive deferred shares at no cost. Eligible participants receive deferred rights at no cost. Eligible participants are invited to acquire IRESS shares, IRESS matches this participation to a set value. Total shareholder return (TSR) against peer group 3 years Individual performance criteria 3 years 3 years 3 years Nil No Yes No Yes If participant leaves before end of performance period Generally forfeited (Board discretion may apply) Generally forfeited (Board discretion may apply) Matched shares are forfeited under the UK Share Incentive Plan and granted under the General Employee Share Plan. As at 31 December 2017, the total unvested shares in the General Employee Share Plan/ UK Share Incentive Plan were 37,768 (2016: 29,750). (b) Grant date fair value The grant date fair value of the Executive LTI Plans and the Employee Deferred Share Rights Plan are independently determined using a Monte Carlo simulation option pricing model using standard option pricing inputs such as the underlying share price, exercise price, expected dividends, expected risk free rates and expected share price volatility. Key inputs are summarised below: Grant date fair value Key inputs in determining grant date fair value Model used Risk free rate Share price volatility Dividend yield Executive LTI Plan Employee Deferred Share Rights Plan Monte Carlo 1.68 – 3% 22.5 – 30% 4 – 5% Monte Carlo 1.68 – 3% 22.5 – 30% 4 – 5% As the vesting conditions of the Employee Deferred Share Plan grants are not linked to company performance and participants receive dividends during the vesting period, the grant date fair value approximates the share price at the date of grant. 55 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 1. Financial Results continued 1.4 SHARED BASED PAYMENTS CONTINUED (c) Details of shares or rights on issue during the year is shown below: NUMBER OF SHARES AT GRANT DATE Type Grant date Vesting date At 1 Jan 2017 Granted Forfeited Vested At 31 Dec 2017 Executive LTI Plan – CEO 2013 Grant – 3 year 2013 Grant – 4 year 2014 Grant – 3 year 2014 Grant – 4 year 2015 Grant – 3 year 2015 Grant – 4 year 2016 Grant – 3 year 2016 Grant – 4 year 2017 Grant – 3 year 2017 Grant – 4 year 7/5/13 7/5/13 7/5/14 7/5/14 7/5/15 7/5/15 5/5/16 5/5/16 11/5/17 11/5/17 8/5/17 8/5/17 7/5/18 7/5/18 7/5/19 7/5/19 5/5/20 5/5/20 11/5/21 11/5/21 65,000 65,000 63,000 63,000 60,000 60,000 60,000 60,000 – – – – – – – – – – 54,739 54,739 – (9,880) – – – – – – – – (65,000) (55,120) – – – – – – – – – – 63,000 63,000 60,000 60,000 60,000 60,000 54,739 54,739 496,000 109,478 (9,880) (120,120) 475,478 Executive LTI Plan 2014 Grant 2015 Grant 2016 Grant 2017 Grant 7/5/14 7/5/15 5/5/16 11/5/17 8/5/17 7/5/18 5/5/19 11/5/20 211,964 220,002 161,413 – – – – 144,559 (10,174) (9,081) (18,326) (27,801) (201,790) – – – – 210,921 143,087 116,758 593,379 144,559 (65,382) (201,790) 470,766 Employee Deferred Share Plan 2012 Grant – Special (1) 7/5/12 2014 Grant (2) 7/5/14 7/5/15 2015 Grant 5/5/16 2016 Grant 11/5/17 2017 Grant – Special 11/5/17 2017 Grant 7/12/16 8/5/17 7/5/18 5/5/19 11/5/19 11/5/20 161,032 541,560 556,370 574,116 – – – – – – 47,907 653,238 (28,180) (7,260) (29,827) (58,749) (3,726) (30,875) (132,852) (534,300) (8,713) (3,915) – – – – 517,830 511,452 44,181 622,363 1,833,078 701,145 (158,617) (679,780) 1,695,826 Employee Deferred Share Rights Plan 2012 Grant – Special (3) 2013 Grant 2014 Grant – Special (4) 2014 Grant – Special 2014 Grant 2015 Grant 2016 Grant 2017 Grant 7/5/12 7/5/13 1/1/14 1/1/14 7/5/14 7/5/15 5/5/16 11/5/17 7/12/17 7/12/17 31/12/17 31/12/18 8/5/17 7/5/18 5/5/19 11/5/20 194,826 50,250 486,104 57,244 245,790 257,320 270,272 – – – – – – – – 254,924 (25,328) – (26,952) – (660) (1,150) (22,377) (30,785) (72,085) (50,250) – – (245,130) (30,488) (15,707) – 97,413 – 459,152 57,244 – 225,682 232,188 224,139 1,561,806 254,924 (107,252) (413,660) 1,295,818 Total The weighted average remaining contractual life of the above grants is 1.2 years (2016: 1.2 years) Share price $ 8.51 8.51 8.27 8.27 10.15 10.15 11.87 11.87 12.24 12.24 8.27 10.15 11.87 12.24 6.18 8.27 10.15 11.87 12.24 12.24 6.18 8.51 8.27 8.27 8.27 10.15 11.87 12.39 Fair value $ 5.03 4.76 4.05 3.89 5.17 5.13 8.00 6.24 6.64 7.05 4.18 5.30 8.50 7.13 6.18 8.27 10.15 11.87 12.39 12.39 5.26 5.26 7.73 7.73 7.25 9.02 10.25 10.86 2017 $’000 29 27 64 61 77 77 120 94 58 62 669 103 346 371 178 998 (174) 417 1,623 1,907 175 1,646 5,594 (129) – (202) 1 212 796 869 519 2,066 9,327 (1) The award was fully expensed by 2016. Testing of the non-market based vesting conditions early in 2017 resulted in a partial forfeiture and a negative expense. (2) Opening balance was restated by 230 units to correct an error in the 2016 opening and closing balance. (3) The award was fully expensed by 2016. Testing of non-market based vesting conditions was completed for half of the awards in 2017, resulting in a partial forfeiture and a negative expense. The vesting conditions of the remaining half of awards will be completed early in 2018. Testing of the non-market based vesting conditions will be completed early in 2018 in order to determine the number vested and forfeited. Any forfeiture will result in a negative expense in 2018. (4) 56 IRESS LIMITED ANNUAL REPORT 2017Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 1.5 OTHER EXPENSES (a) Included in other operating and other non-operating expenses are the following items: Other operating expenses General operating expenses Reversal of provision for doubtful debts Rental expense relating to operating leases Fees to auditors Other non-operating expenses Unrealised (gains)/losses on foreign balances Business acquisition and restructure expenses Other project related expenses (1) Notes 1.5(b) 2017 $’000 13,528 (502) 9,352 831 23,209 (426) 1,305 7,792 8,671 2016 $’000 14,061 (1,499) 6,899 742 20,203 666 7,423 1,097 9,186 Other expenses 31,880 29,389 (1) Comprises project related expenses from implementation of corporate core systems. (b) Fees to auditors, Deloitte Touche Tohmatsu, for services rendered are as follows: Auditors of the parent entity Audit or review of the financial report Other non-audit services (1) Network firms of the parent entity auditor Audit or review of the financial report Total fees to auditors (1) Other services comprise assurance and other compliance reviews. 2017 $ 2016 $ 374,418 83,625 458,043 372,773 372,773 830,816 346,037 22,769 368,806 373,316 373,316 742,122 1.6 DEPRECIATION AND AMORTISATION Computer and other plant and equipment are measured at cost less accumulated depreciation and impairment. Depreciation is calculated on a straight line basis over its expected useful life of between 3 to 10 years. Depreciation and amortisation expense Amortisation Depreciation – computer equipment (1) Depreciation – other plant and equipment (2) Notes 2.1 2017 $’000 17,119 4,551 3,405 25,075 2016 $’000 14,628 3,852 2,583 21,063 (1) (2) Cost of computer equipment as at 31 December 2017 was $40.5 million (2016: $35.1 million) and accumulated depreciation was $30.3 million (2016: $27.1 million). Cost of other plant and equipment as at 31 December 2017 was $18.2 million (2016: $18.6 million) and accumulated depreciation was $8.7 million (2016: $14.5 million). 57 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 1. Financial Results continued 1.7 NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS Reconciliation of profit attributable to members of the parent entity to net cash flows from operating activities. Profit for the financial year Adjustments for non-cash items and non-operating cash flow items Depreciation and amortisation Share based payment expense Foreign exchange (gain)/loss Amortisation of prepaid loan establishment fees Business combination and restructure expenses Share of loss of equity-accounted investments, net of tax Change in working capital and tax balances, net of effects from acquisition of controlled entities Increase in receivables Decrease in payables Net change in derivatives Net change in tax balances (Decrease) / increase in provisions Net cash inflow from operating activities 2017 $’000 2016 $’000 59,755 59,452 25,075 9,327 (426) 751 – 100 (5,736) (922) (723) (3,340) (118) 83,743 21,063 10,836 21,925 579 7,656 – (4,804) (3,321) (21,124) (2,170) 476 90,568 58 IRESS LIMITED ANNUAL REPORT 2017 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 2. Core Assets and Working Capital 2.1 INTANGIBLES Intangibles for the Group comprise of goodwill arising from business combinations, customer relationships, computer software and other intangibles (mainly acquired databases and brands). Intangible assets with finite lives are carried at cost less accumulated amortisation and accumulated impairment losses. Goodwill recognised arose from business combinations where the fair value of the consideration paid exceeded the fair value of the assets acquired. Goodwill is considered to have an indefinite life and is not amortised as it represents the synergistic benefits of bringing the businesses together. Customer relationships, some computer software and other intangibles were acquired as part of business combinations. These intangible assets are initially recognised at their fair value at the acquisition date. Some of the computer software was separately acquired, and initially recognised at cost. Subsequent to initial recognition, intangible assets other than goodwill are amortised over the expected useful lives noted below. Internally generated assets will be recognised if the cost of actual development can be reliably measured and clearly distinguished from research and ongoing operating and maintenance activities. Given the development and research phases inherent in software development occur contemporaneously, the separation of these phases is imprecise, other than on an arbitrary basis. Accordingly, the expenditure related to development activity cannot be reliably measured accordingly. No internally generated computer software assets have been recognised during the period. (a) The carrying value of intangibles is shown below: GOODWILL CUSTOMER RELATIONSHIPS COMPUTER SOFTWARE OTHER INTANGIBLES TOTAL 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 2017 $’000 2016 $’000 442,802 435,300 52,873 52,484 200,181 201,670 7,834 6,236 703,690 695,690 Cost Accumulated amortisation Carrying value 442,802 435,300 – – (18,867) 34,006 (12,437) (133,399) (125,676) 40,047 66,782 75,994 (4,139) 3,695 (3,967) (156,405) (142,080) 2,269 547,285 553,610 Opening carrying value Separately acquired Acquired through business combinations (i) Disposal (ii) Amortisation Foreign currency translation Closing carrying value Expected useful life (years) 435,300 467,315 40,047 33,719 75,994 26,385 2,269 2,133 553,610 529,552 – – – – 1,778 4,575 1,501 – 3,279 4,575 – (3,250) – 31,135 – – – – (6,181) 17,070 – (5,981) – – (10,859) 55,639 – (8,586) – – (79) 284 – (61) – (3,250) (17,119) 104,128 – (14,628) 10,752 (63,150) 140 (4,761) (131) (2,019) 4 (87) 10,765 (70,017) 442,802 435,300 34,006 40,047 66,782 75,994 3,695 2,269 547,285 553,610 1 to 10 3 to 15 1 to 10 i) Completion of provisional accounting of prior year acquisitions In 2016, the Group acquired Financial Synergy and INET BFA Pty Ltd. The amount of deferred tax liability and goodwill recognised on the 2016 acquisition of Financial Synergy had been provisionally calculated as the tax values had not been finalised at the last reporting date. These values were finalised during the year and resulted in a reduction in the deferred tax liability recognised of $5.1 million, and a corresponding decrease in goodwill from $33.7 million to $28.6 million. Under accounting standards, such adjustments are recognised in 2016 and not 2017. Accordingly, the 2016 goodwill and deferred tax liability recognised on the acquisition of Financial Synergy have been adjusted. There were no other material changes to the assets and liabilities recognised as previously disclosed on the 2016 annual report. ii) Divestment during the period On 13 July 2017, IRESS entered into an agreement with Mainstream BPO to divest part of its superannuation administration business that provides services to customer-owned banks for $3.3 million. The transaction was completed on 9 November 2017, with the sale proceeds received in full during the 2017 year. No gain or loss (before transaction costs) was recognised on the transaction. 59 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 2. Core Assets and Working Capital continued 2.1 INTANGIBLES CONTINUED (b) Impairment testing for goodwill Goodwill is tested for impairment annually or more frequently whenever indicators of impairment are identified. In testing for impairment, the carrying amount of each Cash Generating Unit (CGU) is compared against the recoverable amount. The recoverable amount has been calculated based on the value in use, using a discounted cash flow (DCF) approach. The DCF uses post-tax cashflow projections that are based on the most recent five year financial plan approved by the Board, and is discounted at an appropriate after tax discount rate taking into account the Group’s weighted average cost of capital adjusted for any risks specific to the CGU. Terminal growth rates applied in the DCF take into account historic growth trends, future strategy and the long term outlook of the business. The allocation of goodwill to each cash generating unit and assumptions applied in calculating the recoverable amounts of the goodwill in testing for impairment are as follows: Cash generating unit ANZ Wealth Management UK UK Lending South Africa Canada ALLOCATED GOODWILL POST-TAX DISCOUNT RATES LONG TERM GROWTH RATES 2017 $'000 45,486 299,258 76,325 13,041 8,692 442,802 2016 $'000 48,706 289,544 75,495 12,730 8,825 435,300 2017 % 8.6 8.5 8.5 15.5 8.1 2016 % 9.0 8.7 8.7 15.4 10.6 2017 % 2.7 2.7 2.7 4.7 0.5 2016 % 2.7 2.7 2.7 4.7 0.5 Significant estimates made UK Lending A new version of an existing product is being rolled out within the UK Lending CGU. The financial performance of the UK Lending CGU is sensitive to the success of this product. Canada The continued profitability and growth of the Canada business is dependent on securing large-scale clients in the financial markets business and introducing wealth products to Canadian clients. During the year, new client wins in Canada has reduced the risk of Canada not meeting its strategic outlook, as reflected by the reduction in the discount rate used for the Canada business. An unforeseen loss in material customers or inability to realise forecast growth targets in the UK Lending or Canada CGUs may result in a decrease in the recoverable amount, and possibly an impairment of the goodwill. 2.2 RECEIVABLES AND OTHER ASSETS Receivables arise from revenue that has been billed, but not yet settled by the customer. Unbilled income arises where revenue has been earned but the invoice has not been issued. Revenue arises from providing access to IRESS software, rendering of services or recharging for access to capital markets data. Revenue is measured at the fair value of the consideration received or receivable. Where services rendered spans over more than one accounting period, revenue is only recognised based on a percentage of completion basis with reference to specific milestones. IRESS credit terms are generally 30 days from the date of invoice. As such, the carrying amount of receivables approximates their fair value. (a) Receivables and other assets comprises: Trade receivables Allowance for doubtful debts Unbilled income Prepayments Other assets 60 2017 $’000 34,058 (668) 33,390 11,465 8,374 2,610 55,839 2016 $’000 32,303 (1,086) 31,217 3,722 11,913 3,250 50,102 IRESS LIMITED ANNUAL REPORT 2017Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 (b) Credit risk and allowance for doubtful debts Credit risk refers to the risk a counterparty will default on its contractual obligations resulting in a financial loss to the Group. The maximum exposure to credit risk is the carrying value of the receivables. The Company actively manages this exposure by dealing only with counterparties with good credit standing and not having any significant credit risk with any single counterparty. The credit risk exposure arising from customers is monitored on a monthly basis. Where an event of default is identified, a provision is raised against the amount owed by the customer to the estimated amount not considered recoverable in the normal course of business. The movement in the allowance for doubtful debts during the period is as follows: Balance 1 January Provision reversed during the period Balance 31 December 2017 $’000 1,086 (418) 668 2016 $’000 2,275 (1,189) 1,086 (c) Quality of trade receivables The quality of debtors is best monitored by the ageing of open invoices in accounts receivable. The ageing at the end of the year is as follows: Neither past due nor impaired – less than 30 days Past due but not impaired: +31 to 90 days +91 days Impaired 2017 $’000 2016 $’000 20,479 23,010 6,847 6,064 668 34,058 7,039 1,168 1,086 32,303 Receivables that are neither past due nor impaired comprise customers with a long term record of timely payments and/or no recent history of default arising from financial difficulty. Receivables that are past due and not impaired comprise customers which do not have any objective evidence that the receivable may be impaired. IRESS has actively engaged these customers and reasons for the invoices remaining outstanding are being actively resolved. An allowance for doubtful debts is recognised where IRESS has identified objective evidence that an amount owing may not be recoverable, mainly arising from observed financial difficulty of a customer. 2.3 PAYABLES AND OTHER LIABILITIES Payables and other liabilities are initially measured at fair value. Subsequent to initial measurement, these are recognised at amortised cost. Deferred revenue represents amounts received from customers for which revenue has not been earned nor recognised. Finance arrangements relate to the acquisition of software licences. Liabilities are classified as current where IRESS does not have an unconditional right to defer settlement beyond 12 months. Due to the short term nature of current liabilities, the carrying amount approximates fair value. Current Trade payables Accruals Deferred revenue Current tax payable GST payable Finance arrangements Employee related liabilities Accrued interest Other Non-current Finance arrangements 2017 $’000 6,736 13,079 6,228 661 2,713 3,076 5,212 598 7 38,310 4,205 4,205 2016 $’000 4,063 14,692 6,256 4,915 4,005 3,076 6,047 734 380 44,168 7,517 7,517 61 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 2. Core Assets and Working Capital continued 2.3 PAYABLES AND OTHER LIABILITIES CONTINUED The Group’s exposure to foreign currency risk arising from translating payables and other liabilities to a Group entity’s functional currency is not considered material. The exposure is monitored on a net working capital basis as disclosed in Note 3.3. Liquidity risk arises from current payables and other liabilities that are payable in less than one year, as well as the finance arrangements with certain software providers that have an average annual contractual payment of $3.1 million per annum, over the life of the arrangements of 3 to 5 years. The Group manages this liquidity risk by maintaining sufficient cash and current assets to meet the contractual obligations as they arise. 2.4 PROVISIONS Provisions are measured at the present value of Management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Employee benefits comprise mainly annual leave and long service leave entitlements to employees. Deferred consideration represents purchase consideration payable for acquisitions once certain conditions are met as stipulated in the contracts. These are measured at the discounted value of the best estimate of the cash payable based on conditions existing at the balance date. Current provisions Employee benefits Deferred consideration Other provisions Non-current provisions Employee benefits Deferred consideration Other provisions 2017 $’000 8,766 3,265 862 12,893 6,267 – 587 6,854 2016 $’000 8,161 2,362 456 10,979 5,137 1,884 1,019 8,040 The decrease in deferred consideration is due to the payment of $1.1 million in February 2017 relating to the Pulse acquisition in 2016, as the required conditions were fulfilled, as well as foreign currency movements. 2.5 COMMITMENTS AND CONTINGENCIES (a) Operating lease commitments IRESS leases office facilities with lease terms between 2 to 10 years of which some are supported by bank guarantees of $8.2 million (2016: $3 million). On renewal, the terms of the leases are negotiated. The below summarises IRESS’ commitments for minimum lease payments in relation to non-cancellable operating leases. Payable within one year Payable later than one year, no later than five years Payable later than five years 2017 $’000 11,175 32,762 19,960 63,897 2016 $’000 8,520 21,782 6,165 36,467 The increase in contractual lease commitments is due to the new Sydney and Melbourne office leases executed during the year. The adoption of AASB 16 Leases will have an impact on the accounting for operating leases. Refer Note 4.6. (b) Capital commitments No capital expenditure has been contracted or provided for at balance date (2016: Nil). (c) Contingencies There are no material contingent liabilities or capital expenditure that have been contracted or provided for at the reporting date. 62 IRESS LIMITED ANNUAL REPORT 2017Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 3. Debt and Equity 3.1 DEBT FACILITIES AND DERIVATIVES Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any gains or losses are recognised in the statement of profit or loss in the event the borrowings are derecognised. (a) Details of borrowings held by the Group are as follows: Non-current 4 year $300 million bank facility to November 2021 AUD GBP 3 year $181.25 million bank facility to September 2018 AUD GBP 5 year $118.75 million bank facility to September 2020 AUD GBP 3 year $0.5 million facility to August 2018 Total amount drawn Borrowing costs capitalised Total borrowings 2017 $’000 2016 $’000 90,000 104,753 – – – – – – – 48,000 59,086 27,000 44,528 495 194,753 179,109 (1,888) (1,304) 192,865 177,805 On 21 November 2017, the Group successfully refinanced its $300 million debt facility of which $181.25 million was expiring in September 2018 and $118.75 million was expiring in September 2020, to a four-year maturity expiring in November 2021. The facilities allow multi-currency drawdowns and are at variable interest rates based on LIBOR and BBSY benchmark rates plus a market margin. As such, the amount drawn approximates fair value. Not included in the table above is a $10 million multi-currency guarantee facility that is used for any bank guarantees required by the Group. The borrowings are unsecured, and the Group has complied with the financial covenants of its borrowing facilities during the year. (b) Derivatives Derivatives are initially recognised at fair value at the date the derivative contract is entered into and are subsequently revalued to fair value at the end of each reporting period. The AUD and GBP borrowings were utilised to fund acquisitions in the UK. To minimise the risk of loss due to unfavourable foreign exchange rate movements that arises from funding a foreign acquisition with AUD debt, the Group entered into cross currency swaps as follows: Assets at fair value 5 year Receive AUD / Pay GBP to September 2018 2017 $’000 2016 $’000 306 205 The fair value of the derivatives is determined by first calculating the future cash flows that are estimated based on forward interest rates (from observable yield curves at the end of the reporting period) and contract interest rates, and then discounting the future cash flows at a rate that reflects the credit risk of various counterparties. The fair value is classified as Level 2 as the calculation is based on observable inputs. The change in the fair value during the year is due to the impact of the depreciation of the British pound against the Australian dollar. No credit risk adjustments have been recognised on the fair value of the derivative assets as these are not material. 63 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 3. Debt and Equity continued 3.1 DEBT FACILITIES AND DERIVATIVES CONTINUED (c) Contractual maturity analysis Contractual cash outflow maturity analysis is shown based on undiscounted cashflows. An estimate – based on forward interest rates and foreign currency rates – has been applied in determining interest and foreign cash outflows (inflows). The actual contractual outflow may vary to the amounts disclosed. 31 December 2017 Outflows/(inflows) 4 year facilities – principal Interest on borrowings 5 year cross currency swap – principal exchange (1) 5 year cross currency swap – interest (1) 31 December 2016 Outflows/(inflows) 3 year facilities – principal 3 year working capital facilities – principal 5 year facilities – principal Interest on borrowings 3 year and 5 year cross currency swap – principal exchange (1) 3 year and 5 year cross currency swap – interest (1) within 1 year $’000 – 3,938 (249) (288) within 1 year $’000 – – – 3,887 – 313 1–3 years $’000 – 11,814 – – 1–3 years $’000 107,085 495 – 9,721 (14) 834 Greater than 3 years $’000 194,753 3,610 – – Greater than 3 years $’000 – – 71,528 3,467 – – (1) Represents expected net cash exchange in AUD that occurs at settlement. Under the terms of the swap, the settlements are on a gross basis where IRESS receives AUD and pays GBP. (d) Interest expense and financing costs Interest expenses are recognised using the effective interest rate method. Interest expenses includes exchange differences arising from foreign currency borrowings to the extent they are regarded as adjustments to interest costs. Net interest expense and financing costs for the year comprised the following: Interest revenue Interest expense Other financing costs comprising: Amortisation of borrowing costs Translation losses on intragroup financing arrangements Fair value changes on cross currency swaps Net interest expense and financing costs 3.2 ISSUED CAPITAL The number of ordinary shares outstanding at the end of the year is as follows: Balance at 1 January Shares issued under the Employee Share Plan (1) Shares issued (2) Less Treasury Shares (3) Number of shares on issue 2017 $’000 382 (4,799) (751) 621 102 (4,445) 2017 Number of shares ‘000 169,957 1,505 45 171,507 (1,964) 169,543 2016 $’000 937 (5,897) (580) (20,993) 21,064 (5,469) 2016 Number of shares ‘000 160,074 1,059 8,824 169,957 (1,933) 168,024 (1) New shares issued to meet obligations in relation to Performance Rights, Deferred Shares and Deferred Share Rights for employees. (2) (3) The change is due to the net movement in shares issued and shares vested under the Employee Share Plan. Shares issued during the current year for Dividend Reinvestment Plan. In 2016 shares issued as part of the Institutional Placement and Share offer plan to fund acquisitions. 64 IRESS LIMITED ANNUAL REPORT 2017 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 3.3 MANAGING FINANCIAL RISKS (a) Market risks Interest rate risk The Group’s exposure to interest rate risk mainly arises from its variable rate borrowings and cross currency swaps. A decrease in the benchmark interest rates of 50 basis points (0.5%), with all other factors held constant, would result in a decrease in the annual interest cost of the Group by $0.9 million (2016: $0.9 million decrease). Foreign currency risk GBP borrowings do not give rise to foreign currency risk to the Group as they are ultimately held in entities that have a GBP functional currency. However, the Group is also exposed to foreign currency risk mainly from intercompany loans denominated in foreign currency, the majority of which is mitigated by cross currency derivatives. Additional foreign currency risk arises from cash balances, receivables and payables denominated in foreign currency. The Group’s exposures to foreign currency arise from monetary balances in a currency other than the functional currency of each of the Group’s subsidiary (assessed from the context of that subsidiary). The material exposure to foreign currency movements arises from working capital balances as summarised below: Working capital denominated in foreign currency AUD impact on profit or loss of a 1% change in foreign currency rates GBP $’000 25,158 (431) ZAR $’000 58,248 (60) The above excludes the exposure of the Group from translating its foreign operations to the Group presentation currency. (b) Capital risk management The Group manages its capital to ensure it will be able to continue as a going concern while maximising the return to shareholders. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group is not subject to any regulatory capital requirements. Management reviews the capital structure of the Group on a regular basis. As part of this review, the cost of capital and the risks associated with each class of capital is considered. The Group’s year end gearing ratio is outlined below. Net debt (1) Net debt plus total equity Gearing ratio (1) Measured as borrowings excluding capitalised borrowing costs, and net derivatives assets less cash and cash equivalents. 2017 $’000 165,832 573,379 28.9% 2016 $’000 155,953 556,779 28.0% 65 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 4. Other Disclosures 4.1 TAXATION Total income tax expense or revenue is comprised of current and deferred tax recognised in the income statement in the period. Current and deferred tax is also recognised directly in equity, and not in the income statement, to the extent it is attributable to amounts and movements which have also been recognised directly in equity. Current tax Current tax represents the businesses expected tax payable/receivable for the period in respect of income and expenses which have been recognised in the income statement. Current tax comprises expected tax payable/receivable on the businesses taxable income/loss which is recognised in the income statement in the current period, as well as any adjustments to tax payable/receivable recognised in the current period which relate to taxable income/ loss recognised in the income statement in prior periods. Current tax is measured using the applicable income tax rates which are enacted, or substantively enacted, at the reporting date in the countries where the Company’s subsidiaries and associates operate. Deferred tax Deferred tax represents the movements in deferred tax assets and liabilities which have been recognised in the period and which are attributable to amounts recognised in the income statement in the current period, as well as amounts recognised in the income statement in prior periods. Deferred tax assets and liabilities are attributable to temporary timing differences between the carrying amount of assets and liabilities recognised for financial reporting purposes and the tax base of assets and liabilities recognised for tax purposes. Deferred tax assets are recognised for deductible temporary differences, unused tax losses and unused tax credits to the extent it is probable that future taxable profits will be available against which they can be realised. Deferred tax liabilities are recognised for all assessable temporary differences as required by accounting standards. Deferred tax is determined using tax rates which are expected to apply when the deferred tax asset/liability is expected to be realised/settled based on laws which have been enacted or substantively enacted at the reporting date. The measurement of deferred tax also reflects the tax consequences flowing from the manner in which the Group expects, at the reporting date, to realise or settle the carrying amount of its assets and liabilities. Tax consolidation The Company and its wholly-owned Australian resident entities are part of a tax consolidated group under Australian Taxation Law. IRESS Limited is the head entity of the tax consolidated group. Tax expense, tax revenue, deferred tax assets and deferred tax liabilities arising from temporary differences of the members of the tax consolidated group are recognised in the separate financial accounts of the members of the tax consolidated group using the ‘stand-alone taxpayer’ approach. Current and deferred tax assets and liabilities arising from unused tax losses and tax credits of the members of the tax consolidated group are recognised by the Company (as head entity of the tax consolidated group). Due to the existence of a tax funding arrangement between the entities in the tax consolidated group, amounts are recognised as payable to or receivable by the Company and each member of the Group in relation to the tax contribution amounts paid or payable between the parent entity and the other members of the tax consolidated group in accordance with the arrangement. (a) Income tax for the year including current and deferred tax is as follows: Income tax expense recognised in profit or loss Current income tax Current income tax charge Adjustments in respect of current income tax of the previous year Defered income tax Origination and reversal of temporary differences Adjustments in respect of deferred income tax of the previous year Total income tax expense recognised in profit or loss Income tax expense recognised in other comprehensive income Arising from gains or losses on long term monetary intercompany balances Income tax expense recognised directly in equity Arising from the vesting of share based payments and share raising costs Total income tax expense recognised in other comprehensive income and equity 66 2017 $’000 2016 $’000 18,547 (1,371) 17,176 2,538 (1,704) 834 22,190 (1,991) 20,199 (3,424) 750 (2,674) 18,010 17,525 (88) 1,610 (1,430) (1,518) (1,463) 147 IRESS LIMITED ANNUAL REPORT 2017Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 (b) The reconciliation of income tax expense at the Australian tax rate to total income tax expense is as follows: Profit from continuing operations before income tax expense Tax at the Australian tax rate of 30% (2016: 30%) Income tax adjustments: Effect of different tax rates in foreign jurisdictions Effect of non-assessable income and non-deductible expenses Adjustments for current and deferred tax of prior periods Employee share plan Previously unrecognised tax losses Income tax expense 2017 $’000 77,765 23,330 (91) (403) (3,075) (221) (1,530) 2016 $’000 76,977 23,093 (534) (2,411) (1,241) (623) (759) 18,010 17,525 (c) Deferred income tax assets and liabilities recognised in the statement of financial position are as follows: Opening balance $’000 Charged to income $’000 Charged to OCI/Equity $’000 From business combinations $’000 Exchange differences $’000 Closing balance $’000 For the year ended 31 December 2017 Deferred tax assets Trade and other receivables Plant and equipment Computer software Trade and other payables Provisions and accruals Derivative liabilities Carry forward tax losses Capital transaction costs Share based payments Other Total deferred tax assets Deferred tax liabilities Computer software Intangibles Other financial assets Total deferred tax liabilities For the year ended 31 December 2016 Deferred tax assets Trade and other receivables Plant and equipment Computer software Trade and other payables Provisions and accruals Derivative liabilities Carry forward tax losses Capital transaction costs Share based payments Other Total deferred tax liabilities Deferred tax liabilities Computer software Intangibles Other financial assets Total deferred tax liabilities 159 5,121 4,443 823 4,249 61 4,036 3,186 1,130 68 23,276 (3,652) (9,174) (79) (12,905) 733 6,859 1,614 359 3,075 6,337 4,700 1,633 883 4 26,197 (2,206) (7,038) (6,337) (15,581) (67) (1,064) (2,656) 171 496 (31) (26) (1,354) (662) 426 (4,767) 3,028 936 (31) 3,933 (582) (1,318) (132) 220 406 (6,276) (1,863) 1,451 1,107 62 (6,925) 1,234 2,089 6,276 9,599 – – – – – – – (121) – – (121) – – – – – – – – – – – (603) (860) – (1,463) – – – – – – – – – – – – – – – – – – – – (111) 2,961 244 744 – 1,719 705 – – 6,262 (2,961) (5,159) (18) (8,138) (2) (123) – – 16 – 64 – (6) – (51) 114 (24) 1 91 8 (309) – – 24 – (520) – – 2 (795) 281 934 – 90 3,934 1,787 994 4,761 30 4,074 1,711 462 494 18,337 (510) (8,262) (109) (8,881) 159 5,121 4,443 823 4,249 61 4,036 3,186 1,130 68 23,276 (3,652) (9,174) (79) 1,215 (12,905) 67 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 4. Other Disclosures continued 4.1 TAXATION CONTINUED (d) Unused tax losses for which no deferred tax asset has been recognised are outlined below: United Kingdom (Tax rate 19%, 2016: 19%) Potential tax benefit 2017 $’000 – – 2016 $’000 7,964 1,513 The Group had unused tax losses in the prior year relating to its businesses in the United Kingdom. No deferred tax asset had previously been recognised on the losses on the basis it was not sufficiently probable whether the Group would derive assessable income of a sufficient quantum or nature to enable the temporary difference to be realised. The unused losses were all realised against assessable income in the current period. The Group does not have any unused losses for which no deferred tax asset has been recognised as at the reporting date. 4.2 BUSINESSES AND INVESTMENTS ACQUIRED AND DIVESTED The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is 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 is measured at fair value at the date of acquisition. If any obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. Investment in associate On 19 September 2017 and 27 December 2017, the Group acquired 10% and 5% equity interest in Lucsan Capital Proprietary Limited (‘Lucsan’) for $1 million and $0.5 million respectively. Under the acquisition agreement, the Group is contracted to acquire a further 5% for $0.5 million to bring its total investment to 20% by 31 July 2018. IRESS has significant influence on the operations of Lucsan due to the contractual rights under the shareholders agreement. Lucsan is an established, Australian-owned RegTech and data analytics company providing leading technology solutions to a wide range of companies, including Australia’s major banks. As at 31 December 2017, Lucsan’s net liabilities are $0.1 million with IRESS share being $0.02 million. During the period, Lucsan’s net loss after tax was $1 million, with IRESS share being $0.1 million. Goodwill of $1.4 million is included as part of the investment in the associate and represents the synergy benefit and future growth envisaged in Lucsan in the regulatory technology space. There were no indicators of impairment identified at year end. 4.3 IRESS LIMITED – PARENT ENTITY FINANCIAL INFORMATION The ultimate controlling entity of the Group is IRESS Limited, which is a for profit entity listed on the Australian Securities Exchange. (a) Summary financial information The individual financial statements for the parent entity, IRESS Limited, show the following aggregate amounts: Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity Profit for the year Total comprehensive income (b) Contingent liabilities The parent entity did not have any contingent liabilities as at 31 December 2017. 68 2017 $’000 34,246 746,488 780,734 31,803 207,994 239,797 540,937 376,309 24,213 140,415 540,937 160,470 160,470 2016 $’000 26,723 635,537 662,260 25,360 193,222 218,582 443,678 375,287 23,006 45,385 443,678 33,281 33,281 IRESS LIMITED ANNUAL REPORT 2017Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 (c) Related party transactions During the period, the parent entity undertook an internal legal restructure of its subsidiary holdings to reduce complexity in the Group’s corporate structure. As part of this restructure, the parent disposed of its investments in Apollo III UK Holdings Limited to IRESS International Holdings Pty Ltd, realising a gain of $101 million and received dividends from subsidiaries of $39 million. The above transactions are all between wholly-owned subsidiaries and have no impact on the reported IRESS Group results. 4.4 SUBSIDIARIES Details of the Group’s wholly-owned subsidiaries at the end of the year are as follows: Australia IRESS International Pty Ltd (formerly: Apollo I Australia Pty Ltd) (1),(2) Apollo II Australia Pty Ltd (1) Financial Synergy Pty Ltd (1) Financial Synergy Actuarial Pty Ltd (1) Financial Synergy Holdings Pty Ltd (1) Innergi Pty Ltd IRESS (AUS) Limited Partnership IRESS Data Pty Ltd (1) IRESS Information Pty Ltd IRESS Wealth Management Pty Ltd (1) IRESS South Africa (Australia) Pty Ltd (1) IRESS Spotlight Wealth Management Solutions (RSA) Pty Ltd (1) Planning Resources Group Pty Ltd (1) Top Quartile Management Pty Ltd (1) Canada IRESS (LP) Holdings Corp. IRESS (Ontario) Limited IRESS Canada Holdings Limited South Africa IRESS Market Technology Canada LP KTG Technologies Corp. Advicenet Advisory Services (Proprietary) Limited IRESS Hosting (Pty) Ltd (formerly: EDM Solutions Pty Ltd) (3) IRESS MD RSA (Pty) Ltd (formerly: INET BFA Pty Ltd) (3) IRESS Financial Markets (Pty) Ltd IRESS Wealth MNGT(Pty) Ltd IRESS Wealth Management (RSA) (Proprietary) Ltd United Kingdom Apollo III (UK) Limited Apollo III UK Holdings Limited IRESS (UK) Limited IRESS FS Group Limited IRESS FS Limited IRESS Mortgage Services Limited IRESS Portal Limited IRESS Solutions Limited Other countries IRESS Technology Limited IRESS UK Holdings Limited IRESS Web Limited Proquote Limited Pulse Software Systems Limited Pulse Software Management Limited TrigoldCrystal Limited IRESS Asia Holdings Limited (Hong Kong) Peresys Software Limited (Ireland) IRESS Malaysia Holdings Sdn Bhd (Malaysia) IRESS (NZ) Limited (New Zealand) IRESS Market Technology (Singapore) Pte Ltd (Singapore) IRESS Limited and its Australian subsidiaries entered into an ASIC Class Order and Deed of Cross Guarantee with IRESS Limited. (1) (2) Change of name for this entity occurred on 17 January 2018. (3) Change of name for this entity occurred on 10 February 2017. 69 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 4. Other Disclosures continued 4.5 DEED OF CROSS GUARANTEE IRESS Limited, and some Australian wholly-owned subsidiaries as specified in the Subsidiaries note, are party to a deed of cross guarantee under which each company guarantees the debts of the others. By entering into the deed, the relevant wholly-owned subsidiaries have been relieved from the requirement to prepare the financial report and Directors’ report under ASIC Corporations (Wholly owned companies) Instrument 2016/785 issued by the Australian Securities and Investments Commission. (a) Consolidated statement of profit or loss and retained earnings Profit before tax (1) Income tax expense Net profit after tax Retained earnings at beginning of the year Transfers from reserves Dividends declared / profit repatriation Retained earnings at end of the year 2017 $’000 62,493 (20,842) 41,651 42,766 9,550 (74,990) 18,977 2016 $’000 76,899 (19,966) 56,933 44,384 9,888 (68,439) 42,766 (1) Included in profit before tax is $39 million dividend received from a fellow subsidiary that is not part of the deed of cross guarantee group. (b) Consolidated statement of financial position Assets Current assets Cash and cash equivalents Trade and other receivables Derivative assets Total current assets Non-current assets Intangibles Plant and equipment Investment in associate Deferred tax assets Derivative assets Investment in subsidiaries Other financial assets Total non-current assets Total assets Current liabilities Trade and other payables Provisions Total current liabilities Non-current liabilities Trade and other payables Provisions Borrowings Deferred tax liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained earnings Total equity 70 2017 $’000 2016 $’000 14,696 29,364 306 44,366 120,551 12,828 1,400 12,667 – 343,461 161,809 652,716 697,082 24,458 8,611 33,069 55,057 6,444 193,171 4,262 258,934 292,003 405,079 376,309 9,793 18,977 405,079 9,770 140,310 – 150,080 124,133 4,016 – 18,437 205 251,655 117,235 515,681 665,761 24,323 11,097 35,420 7,517 5,904 177,541 12,267 203,229 238,649 427,112 375,287 9,059 42,766 427,112 IRESS LIMITED ANNUAL REPORT 2017Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 4.6 BASIS OF PREPARATION This is a general purpose financial report for IRESS Limited (the ‘Company’) and its subsidiaries (collectively referred to as the ‘Group’ or ‘IRESS’ for the year ended 31 December 2017. It: • has been prepared in accordance with the Corporations Act 2001 (Cth), Australian Accounting Standards and Interpretations, and International Financial Reporting Standards (IFRS); • was authorised for issue by the Directors on 22 February 2018; • has been prepared on a historical cost basis, except for derivative financial instruments and investments in financial assets which have been measured at fair value; • has all amounts presented in Australian dollars, unless otherwise stated; • has amounts rounded off to the nearest thousand dollars, unless otherwise stated, as allowed under ASIC Corporations (Rounding in Financial / Directors Reports) Instrument 2016/191 dated 24 March 2016 (ASIC guidance). (a) Adoption of new standards The Group has adopted all the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations and effective for annual reporting periods on or after 1 January 2017. None of these standards have had a material impact on IRESS in the current or future reporting periods or on foreseeable future transactions. The Group does not intend to early adopt any of the pronouncements. (b) Standards on issue but not yet effective At the date of authorisation of the financial report, certain new accounting standards and interpretations have been published that are not mandatory for 31 December 2017 reporting periods and have not yet been applied by IRESS within this financial report. With the exception of AASB 16 Leases and AASB 15 Revenue, IRESS does not believe these Accounting Standards and Interpretations in issue but not effective will have a material impact in future periods on the financial statements of the Group. Management have commenced a detailed assessment of the impact of the adoption of AASB 15 and AASB 16 on the financial statements of the Group in future periods as noted below. AASB 15 Revenue AASB15 is effective for the years commencing 1 January 2018. IRESS has completed a review of their customer contracts and noted that the timing of recognition of non-recurring revenue may change. Where previously, non-recurring revenue which predominately comprises implementation revenue was recognised over the period in which services were provided, some of this revenue may now only be recognised when certain milestones have been reached as prescribed by the contractual terms. Generally, this will align more closely with when billing occurs. Except for additional disclosure required under AASB 15, the financial impact upon adoption is not expected to be material. Further analysis is ongoing to quantify the impact of this if any on prior periods. AASB 16 Leases AASB 16 is effective for years commencing 1 January 2019. AASB 16 eliminates the classification of leases as either operating leases or finance leases as required by AASB 17 and, instead, introduces a single lessee accounting model. Applying that model, a lessee is required to recognise: • assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and • amortisation of lease assets separately from interest on lease liabilities in the income statement. IRESS’s operating leases with terms of more than 12 months relate to office facilities leases. The adoption of AASB 16 will result in revised accounting for any operating leases that have a lease end date of 31 December 2019 or later (as per the transition periods). The impact on the opening balance sheet as at 1 January 2018 is expected to be as follows: Balance sheet impact Increase in non-current asset (recognition of lease assets) Increase in deferred tax asset Increase in liabilities from recognition of lease liabilities Decrease in retained earnings (higher expense recognised under AASB 16) The estimated impact to the 2018 income statement is estimated as follows: Income statement impact Decrease in rent expense resulting in an increase in segment profit Increase in interest expense Increase in depreciation expense Decrease in net profit before tax $’000 37,351 979 40,613 (2,103) $’000 11,175 3,710 8,589 (1,124) 71 Notes to the Consolidated Financial Statements continued For the year ended 31 December 2017 Section 4. Other Disclosures continued 4.6 BASIS OF PREPARATION CONTINUED (c) Summary of general accounting policies The following significant accounting policies have been adopted in the preparation and presentation of the financial report. i) Consolidation The consolidated financial statements include the financial statements of the Company, and the information and results of each subsidiary from the date on which the Company obtains control and until such time as the Company ceases to control such entity. An entity is controlled when IRESS is exposed to, or has rights to, variable returns from involvement with the entity and has the ability to affect those returns through power over the entity. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group’s accounting policies. In reporting the consolidated financial statements, all intercompany balances and transactions, and unrealised profits or losses within the Group are eliminated in full. ii) Foreign currency translation Foreign currency transactions All foreign currency transactions during the financial year are brought to account using the exchange rate in effect at the date of the transaction. Foreign currency monetary items at reporting date are translated at the exchange rate existing at reporting date. Exchange differences are recognised in profit or loss in the period in which they arise except that exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned or likely to occur, which form part of the net investment in a foreign operation, are recognised in the foreign currency translation reserve in the consolidated financial statements and are recognised in profit or loss on disposal of the net investment. Foreign operations Assets and liabilities of foreign operations are translated using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Any exchange differences are recognised in equity. On the disposal of a foreign operation, all of the exchange differences accumulated in equity in respect of that operation are reclassified to profit or loss. 4.7 TRANSACTIONS WITH RELATED PARTIES ASX Limited (‘’ASX’’) owns 18.76% ordinary shares in IRESS. ASX is a major supplier of Australian equity market data to the Group. All transactions with the ASX are conducted on an arm’s length basis. Fees charged by ASX $9,661,438 (2016: $9,082,629), balances outstanding at the end of the year $2,262,630 (2016: $1,437,780). 4.8 SUBSEQUENT EVENTS On 22 February 2018, the directors declared a final dividend of 28.0 cents per share franked to 60% totalling $48.0 million. Other than the dividend declared, there has been no other matter or circumstances which has arisen since the end of the financial year which has significantly affected, or may significantly affect, the operations of the Group, the results of those operations, or the state of affairs of the Group in subsequent years. 72 IRESS LIMITED ANNUAL REPORT 2017Directors’ Declaration 31 December 2017 In the directors’ opinion: (a) the financial statements and notes set out on pages 47 to 72 are in accordance with the Corporations Act 2001, including: (i) complying with the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and (ii) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2017 and of its performance for the financial year ended on that date; 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; and (c) at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identified in note 4.4 will be able to meet any obligations or liabilities to which they are, or may become subject by virtue of the deed of cross guarantees described in note 4.5. Note 4.6 confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the directors. TONY D’ALOISIO CHAIRMAN Melbourne 22 February 2018 ANDREW WALSH CHIEF EXECUTIVE OFFICER AND MANAGING DIRECTOR 73 Independent Auditor’s Report Deloitte Touche Tohmatsu ABN 74 490 121 060 550 Bourke Street Melbourne VIC 3000 GPO Box 78 Melbourne VIC 3001 Australia DX: 111 Tel: +61 3 9671 7000 Fax: +61 3 9671 7001 www.deloitte.com.au Independent Auditor’s Report to the Members of IRESS Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of IRESS Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 31 December 2017, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, notes to the consolidated financial statements, and the directors’ declaration. In our opinion: the accompanying financial report of the Group, is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Group’s financial position as at 31 December 2017 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited 74 IRESS LIMITED ANNUAL REPORT 2017 Key Audit Matter How the scope of our audit responded to the Key Audit Matter Carrying value of goodwill and non- current assets Our procedures included but were not limited to: Refer to Note 2.1 - Impairment assessment. As at 31 December 2017, the Group’s goodwill and intangible assets totalled $547.2 million which is allocated to the relevant Cash Generating Units (CGUs). Goodwill is required to be assessed for impairment on an annual basis or when any indicators of impairment exist. The Canadian and UK Lending CGU’s have been identified as having a higher risk of impairment due to their dependency on securing key contracts and the achievement of forecast growth rates. Included within these CGU’s is goodwill of $8.7 million and $76.3 million respectively. The Group has prepared value in use models to determine the recoverable amounts of the Canada and UK Lending CGUs. Due to the level of judgement involved in determining the recoverable amounts of the CGUs, this was considered to be a key audit matter.  Obtaining an understanding of the key controls associated with the preparation of the value in use models and critically evaluating management’s methodologies. With the assistance of Deloitte valuation experts, we:       assessed key assumptions, including forecast growth rates by comparing to economic and industry growth rates challenged the forecasted revenue for each CGU with reference to: - - review of the historical accuracy of forecasting of the Group evaluation of current pipeline and historical pipeline conversion rate evaluated discount rates used to assess the cost of capital for each CGU against comparable organisations verified the consistency of the cash flows used with the latest Board approved five year financial plan for each CGU tested on a sample basis the mathematical accuracy of the cash flow models assessed the net present value of each CGU in local currency to their respective carrying values in local currency. We performed a sensitivity analysis to stress test the key assumptions used in the value in use models, including revenue growth, terminal growth rates and discount rates used. We have also assessed the appropriateness of the disclosures included in Note 2.1 of the financial report. 75 Independent Auditor’s Report continued Other Information The directors are responsible for the other information. The other information comprises the information in the Company’s annual report for the year ended 31 December 2017, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, 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. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are 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 the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and 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. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.   Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material 76 IRESS LIMITED ANNUAL REPORT 2017 uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report which forms part of the directors’ report and is included in the annual report the year ended 31 December 2017. In our opinion, the Remuneration Report of IRESS Limited, for the year ended 31 December 2017, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU Tom Imbesi Partner Chartered Accountants Melbourne 22 February 2018 77 Shareholder Information The shareholder information set out below was applicable as at 31 December 2017. DISTRIBUTION OF MEMBERS AND THEIR HOLDINGS 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Total SUBSTANTIAL SHAREHOLDERS ASX LIMITED HYPERION ASSET MANAGEMENT LIMITED GREENCAPE CAPITAL PTY LIMITED Total substantial shareholders Balance of register Total Number of shareholders Number of shares % of issued capital 3,502 3,052 597 351 37 7,539 1,565,128 7,324,937 4,219,124 8,036,391 150,361,389 171,506,969 Number held 32,181,994 22,193,114 10,698,537 65,073,645 106,433,324 0.91 4.27 2.46 4.69 87.67 100.00 % 18.76 12.94 6.24 37.94 62.06 171,506,969 100.00 78 IRESS LIMITED ANNUAL REPORT 201720 LARGEST SHAREHOLDERS OF QUOTED EQUITY SECURITIES Rank Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED ASX LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED BNP PARIBAS NOMS PTY LIMITED AUSTRALIAN FOUNDATION INVESTMENT COMPANY LIMITED BNP PARIBAS NOMINEES PTY LIMITED PACIFIC CUSTODIANS PTY LIMITED CITICORP NOMINEES PTY LIMITED PACIFIC CUSTODIANS PTY LIMITED RBC INVESTOR SERVICES AUSTRALIA NOMINEES PTY LIMITED MIRRABOOKA INVESTMENTS LIMITED ARGO INVESTMENTS LIMITED AVANTEOS INVESTMENTS LIMITED DJERRIWARRH INVESTMENTS LIMITED AMCIL LIMITED NAVIGATOR AUSTRALIA LIMITED AMP LIFE LIMITED NULIS NOMINEES (AUSTRALIA) LIMITED Total top twenty shareholders Balance of register Total Number held % of issued shares 47,365,740 32,181,994 24,356,196 10,890,003 8,744,767 4,543,748 3,892,333 3,607,161 3,091,404 1,497,302 1,161,639 1,104,604 840,000 791,884 755,080 515,702 500,000 373,365 333,036 300,638 146,846,596 24,660,373 171,506,969 27.62 18.76 14.20 6.35 5.10 2.65 2.27 2.10 1.80 0.87 0.68 0.64 0.49 0.46 0.44 0.30 0.29 0.22 0.19 0.18 85.62 14.38 100.00 79 Corporate Directory Directors A D’Aloisio – Chairman A Walsh – Chief Executive Officer and Managing Director N Beattie J Cameron J Fahey J Hayes J Seabrook G Tomlinson Company Secretary P Ferguson Registered Office Share Registry Level 18, 385 Bourke Street Melbourne VIC 3000 Phone: +61 3 9018 5800 Fax: +61 3 9018 5844 Link Market Services Limited Level 4, 333 Collins Street Melbourne VIC 3000 Stock Exchange Listings IRESS Limited shares are quoted on the Australian Securities Exchange under the code: IRE Auditor Deloitte Touche Tohmatsu 80 IRESS LIMITED ANNUAL REPORT 2017www.iress.com.au

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