iSelect Ltd
Annual Report 2011

Plain-text annual report

Breaking new ground ANNUAL FINANCIAL REPORT 2011 1 CONTENTS Directors’ Report Auditors’ Independence Declaration to the Directors of iSelect Limited Statement of Comprehensive Income Statement of Financial Position Statement of Cash Flows Statement of Changes in Equity Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report to the members of iSelect Limited 2 4 5 6 7 7 8 37 38 iSelect Annual Report 2011 2 Directors’ Report The Directors of iSelect Limited and its controlled entities (‘iSelect Group’) submit herewith its financial report in respect of the year ended 30 June 2011. iSelect Limited was incorporated on 7 March 2007 and is the holding Company for the iSelect Group, comprising health, life and general insurance and mortgages brokerage activities and media referral services. On 16 July 2010 iSelect Limited converted to an unlisted public Company, where the Company name was changed from iSelect Pty Ltd to iSelect Limited. In addition on 30 November 2011 iSelect Media Pty Ltd, and on 14 January 2011 iSelect Mortgages Pty Ltd were incorporated as wholly owned subsidiaries. DIRECTORS The names of the Directors in office during or since the end of the financial year are: Martin Dalgleish Non-Executive Chairman Damien Waller Chief Executive Officer and Managing Director Shaun Bonett Non-Executive Director Leslie Webb Non-Executive Director Nicholas Gray Non-Executive Director – resigned 22 September 2010 Joanne Pollard Non-Executive Director – resigned 25 May 2011 Michael McLeod Non-Executive Director Patrick O’Sullivan Non-Executive Director – appointed 22 September 2010 COMPANY SECRETARY Matthew McCann Appointed – 22 September 2010 Paul Cullinan Resigned – 22 September 2010 PRINCIPAL ACTIVITIES The Group’s principal activity during the course of the financial year were health, life and general insurance and mortgages brokerage activities and media referral services. DIVIDENDS The Directors do not recommend the payment of a dividend for the current year. No dividends have been paid during the financial year, or to the date of this report. REVIEW OF OPERATIONS The Consolidated Entity achieved a net profit after tax for the year ended 30 June 2011 of $10,657,000 (2010: $5,780,000). This financial report reflects the financial performance of the consolidated Group from 1 July 2010 to 30 June 2011 and the financial position of the consolidated Group at 30 June 2011. Except as so disclosed, information on likely developments in the Consolidated Entity’s operations in future financial years and the expected results of those operations have not been included in this report because the Directors believe it would be likely to result in unreasonable prejudice to the Consolidated Entity. ENVIRONMENTAL REGULATIONS Given the nature of its business the Consolidated Entity is not subject to any particular or significant environmental regulation under any law of the Commonwealth of Australia or any of its States or Territories. The Consolidated Entity has not incurred any liability (including any liability for rectification costs) under any environmental legislation. INSURANCE OF OFFICERS During the financial year, the Group paid a premium of $20,600 to insure the Directors, secretary and executive officers of the Consolidated Entity. The liabilities insured are costs and expenses that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the Group. PROCEEDINGS ON BEHALF OF THE GROUP No proceedings have been brought on behalf of the Group nor has any application been made in respect of the Group under section 237 of the Corporations Act 2001. SIGNIFICANT CHANGES IN STATE OF AFFAIRS In the opinion of the Directors, there were no significant changes in the state of affairs of the Group during the financial year under review not otherwise disclosed in this report or the Consolidated Financial Statements. SIGNIFICANT EVENTS AFTER BALANCE DATE In relation to the current premises, which iSelect intend to move out from in late October 2011, iSelect Health Pty Ltd (a wholly owned subsidiary of iSelect Limited) has raised provisions of $500k and $549k for make good costs and onerous contracts for rent respectively. The Group is in the process of formalising the surrender of the lease over its current premises before the end of the lease (with no make good obligation). As part of the surrender arrangements, the Group has agreed to pay a licence fee for the continued display of its outdoor signage at the premises at a cost of $165k. As a result, in the 2012 financial year, iSelect anticipates to recoup the $500k in relation to the make good costs and will likely be able to recoup approximately $314k in relation to the onerous contract for rent, subject to finalisation of all arrangements. On 19 August 2011, iSelect Limited announced an off-market takeover bid for all of the shares of Infochoice Ltd for total consideration of $33.538 million. iSelect’s offer to Infochoice shareholders is now unconditional. As at the date of this report, iSelect has received acceptances from 98.72% of the Infochoice shares. iSelect will fund the acquisition from drawings under a $35 million bridge loan note facility arranged by Goldman Sachs & Partners Australia Capital Markets Limited with a maturity date of 20 August 2012. Other than the matters discussed above, in the interval between the end of the financial year and the date of this report no item, transaction or event of a material and unusual nature likely, in the opinion of the directors of Group, to affect significantly the operations of the Group, the results of those operations or the state of affairs of the Group, in future financial years. 3 LIKELY DEVELOPMENTS AND FUTURE RESULTS Except as so disclosed, information on likely developments in the Consolidated Entity’s operations in future financial years and the expected results of those operations have not been included in this report because the Directors believe it would be likely to result in unreasonable prejudice to the Consolidated Entity. ROUNDING OFF The Group is of a kind referred to in ASIC Class Order 98/100 dated 10 July 1998 and in accordance with the Class Order, amounts in the consolidated financial statements have been rounded off to the nearest thousand dollars, unless otherwise stated. AUDITOR Ernst & Young has been appointed by the Consolidated Entity in accordance with section 327 of the Corporations Act 2001. AUDITOR INDEPENDENCE DECLARATION A copy of the auditors’ independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 4 of this report. NON AUDIT SERVICES The following non-audit services were provided by the Group’s auditor, Ernst & Young. The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. Ernst & Young received or are due to receive the following amounts for the provision of non-audit services: Other services: – tax compliance – assurance related – due diligence – equity raising – regulatory compliance Total CONSOLIDATED 2011 $ 2010 $ 47,800 25,650 94,615 58,674 26,400 253,139 30,000 39,000 – – 24,720 93,720 REGISTERED OFFICE Level 4, 973 Nepean Highway, Moorabbin Victoria 3189 Signed in accordance with a resolution of the Board of Directors: Damien Waller Chief Executive Officer & Managing Director Melbourne, 27 October 2011 iSelect Annual Report 2011 4 Auditor’s Independence Declaration to the Directors of iSelect Limited and its controlling entities Auditor’s Independence Declaration to the Directors of iSelect Ltd Auditor’s Independence Declaration to the Directors of iSelect Ltd In relation to our audit of the financial report of iSelect Ltd for the financial year ended 30 June 2011, to the best of my knowledge and belief, there have been no contraventions of the auditor independence In relation to our audit of the financial report of iSelect Ltd for the financial year ended 30 June 2011, to requirements of the Corporations Act 2001 or any applicable code of professional conduct. the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct. Ernst & Young Ernst & Young Ashley Butler Partner Ashley Butler 27 October 2011 Partner 27 October 2011 Liability limited by a scheme approved under Professional Standards Legislation Liability limited by a scheme approved under Professional Standards Legislation Statement of Comprehensive Income for the year ended 30 June 2011 Sales revenue Cost of sales Gross profit Other income Share based payments expense Administrative expenses Relocation expenses Acquisition expenses Profit before interest, tax, depreciation and amortisation Amortisation Depreciation Profit before interest and tax Interest revenue Income tax expense Profit for the period Other comprehensive income for the period, net of tax Total comprehensive income for the period 5 CONSOLIDATED 2011 $‘000 2010 $‘000 Notes 4 72,442 43,491 4 20 4 4 4 4 4 5 (36,026) (22,369) 36,416 21,122 215 (658) 244 (274) (16,795) (11,835) (1,592) (217) 17,369 (617) (2,568) 14,184 841 (4,368) 10,657 – 10,657 – – 9,257 (456) (972) 7,829 400 (2,449) 5,780 – 5,780 iSelect Annual Report 2011 6 Statement of Financial Position as at 30 June 2011 Assets Cash and cash equivalents Trade and other receivables Net present value of future trail commission Other assets Total current assets Net present value of future trail commission Deferred tax assets Property, plant and equipment Intangible assets Total non-current assets Total assets Liabilities Trade and other payables Provisions Total current liabilities Provisions Deferred tax liabilities Total non-current liabilities Total liabilities Nets assets Equity Issued capital Share based payments reserve Business combination reserve Retained earnings Total equity CONSOLIDATED 2011 $‘000 2010 $‘000 Notes 6 7 8 9 8 5 10 11 12 13 13 5 17,499 5,111 20,239 1,053 43,902 41,241 8,062 1,969 3,678 54,950 98,852 9,520 3,423 12,943 183 19,383 19,566 32,509 66,343 7,438 3,963 8,923 346 20,670 29,327 5,011 2,932 1,893 39,163 59,833 7,221 1,838 9,059 267 11,965 12,232 21,291 38,542 14 36,582 20,096 1,827 5,571 22,363 66,343 1,169 5,571 11,706 38,542 Statement of Cash Flows for the year ended 30 June 2011 Receipts from customers and related parties Payments to suppliers and employees Net cash flows from/(used in) operating activities Interest received Purchase of property, plant and equipment Purchase of intangible assets Net cash flows from/(used in) investing activities Proceeds from issue of shares Net cash flows from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents – at the beginning of the period – at the end of the period Notes 6 6 Statement of Changes in Equity for the year ended 30 June 2011 Share based payment reserve $‘000 CONSOLIDATED Issued capital $‘000 Business combination reserve $‘000 Balance at 1 July 2010 1,169 20,096 5,571 Total comprehensive income for the period Transactions with owners in their capacity as owners: Share based payment expense Issues of share capital Balance at 30 June 2011 Balance at 1 July 2009 Total comprehensive income for the period Transactions with owners in their capacity as owners: Share based payment expense Issues of share capital Balance at 30 June 2010 – 658 – 1,827 895 – 274 – – – 16,486 36,582 – – – 5,571 22,363 19,929 5,571 – – 167 – – – 5,926 5,780 – – 1,169 20,096 5,571 11,706 38,542 7 CONSOLIDATED 2011 $‘000 48,665 (51,924) (3,259) 841 (1,562) (2,445) (3,166) 16,486 16,486 10,061 7,438 17,499 Retained earnings $‘000 11,706 10,657 – – 2010 $‘000 30,679 (32,906) (2,227) 375 (997) (979) (1,601) 167 167 (3,661) 11,099 7,438 Total $‘000 38,542 10,657 658 16,486 66,343 32,321 5,780 274 167 iSelect Annual Report 2011 8 Notes to the Financial Statements For the year ended 30 June 2011 1. CORPORATE INFORMATION The financial report of iSelect Limited for the year ended 30 June 2011 was authorised for issue in accordance with a resolution of the Directors on 27 October 2011. iSelect Limited is a Company limited by shares incorporated in Australia and is a holding entity whose principal activity during the financial year was the holding of investments in its wholly owned subsidiaries; iSelect Health Pty Ltd, iSelect Life Pty Ltd, iSelect Mortgages Pty Ltd, iSelect Media Pty Ltd and , iSelect General Pty Ltd. On 16 July 2010 iSelect Limited converted to an unlisted public Company. The Company name has changed from iSelect Pty Ltd to iSelect Limited. The Group’s registered office is at Level 4, 973 Nepean Highway, Moorabbin. The nature of the operations and principal activities are described in the Directors’ Report. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a) BASIS OF PREPARATION The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. The financial report has been prepared on a historical cost basis, except for certain assets, which as noted, have been measured at fair value. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars unless otherwise stated. b) STATEmENT OF COmPLIANCE The financial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board. 9 c) NEW ACCOuNTING STANDARDS AND INTERPRETATIONS Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Group for the annual reporting period ending 30 June 2011. These are outlined in the table below: Reference Title Summary Application date of standard* Impact on Group financial report Application date for Group* AASB 9 Financial Instruments 1 January 2013 1 July 2013 These amendments are only expected to affect the presentation of the Group’s financial report and will not have a direct impact on the measurement and recognition of amounts disclosed in the financial report. AASB 9 includes requirements for the classification and measurement of financial assets resulting from the first part of Phase 1 of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition and Measurement). These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The main changes from AASB 139 are described below. a) b) c) Financial assets are classified based on (1) the objective of the entity’s business model for managing the financial assets; (2) the characteristics of the contractual cash flows. This replaces the numerous categories of financial assets in AASB 139, each of which had its own classification criteria. AASB 9 allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument. Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases. * Application date is for the annual reporting periods beginning on or after the date shown in the above table. iSelect Annual Report 2011 10 Notes to the Financial Statements For the year ended 30 June 2011 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) c) NEW ACCOuNTING STANDARDS AND INTERPRETATIONS (CONTINuED) Reference Title Summary Application date of standard* Impact on Group financial report Application date for Group* The revised Standard introduces a number of changes to the accounting for financial assets, the most significant of which includes: 1 January 2013 1 July 2013 The Group does not expect any material impact as a result of these amendments, if any. AASB 2009–11 Amendments to Australian Accounting Standards arising from AASB 9 [AASB 1, 3, 4, 5, 7, 101, 102, 108, 112, 118, 121, 127, 128, 131, 132, 136, 139, 1023 & 1038 and Interpretations 10 & 12] AASB 124 (Revised) Related Party Disclosures (December 2009) – – – – – – two categories for financial assets being amortised cost or fair value removal of the requirement to separate embedded derivatives in financial assets strict requirements to determine which financial assets can be classified as amortised cost or fair value, Financial assets can only be classified as amortised cost if (a) the contractual cash flows from the instrument represent principal and interest and (b) the entity’s purpose for holding the instrument is to collect the contractual cash flows an option for investments in equity instruments which are not held for trading to recognise fair value changes through other comprehensive income with no impairment testing and no recycling through profit or loss on derecognition reclassifications between amortised cost and fair value no longer permitted unless the entity’s business model for holding the asset changes changes to the accounting and additional disclosures for equity instruments classified as fair value through other comprehensive income The revised AASB 124 simplifies the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition, including: a) b) c) the definition now identifies a subsidiary and an associate with the same investor as related parties of each other; entities significantly influenced by one person and entities significantly influenced by a close member of the family of that person are no longer related parties of each other; and the definition now identifies that, whenever a person or entity has both joint control over a second entity and joint control or significant influence over a third party, the second and third entities are related to each other. A partial exemption is also provided from the disclosure requirements for government-related entities. Entities that are related by virtue of being controlled by the same government can provide reduced related party disclosures. * Application date is for the annual reporting periods beginning on or after the date shown in the above table. 1 January 2011 1 July 2011 AASB 124 is a disclosure standard so will have no impact on the amounts included in the Group’s financial statements. The Group does not expect any material impact on the disclosure. 11 Reference Title Summary Application date of standard* Impact on Group financial report Application date for Group* AASB 2009–12 Amendments to Australian Accounting Standards [AASBs 5, 8, 108, 110, 112, 119, 133, 137, 139, 1023 & 1031 and Interpretations 2, 4, 16, 1039 & 1052] This amendment makes numerous editorial changes to a range of Australian Accounting Standards and Interpretations. In particular, it amends AASB 8 Operating Segments to require an entity to exercise judgement in assessing whether a government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures. It also makes numerous editorial amendments to a range of Australian Accounting Standards and Interpretations, including amendments to reflect changes made to the text of IFRSs by the IASB. 1 January 2011 1 July 2011 These amendments are only expected to affect the presentation of the Group’s financial report and will not have a direct impact on the measurement and recognition of amounts disclosed in the financial report. * Application date is for the annual reporting periods beginning on or after the date shown in the above table. iSelect Annual Report 2011 12 Notes to the Financial Statements For the year ended 30 June 2011 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d) BASIS OF CONSOLIDATION The consolidated financial statements comprise the financial statements of iSelect Limited and its controlled entities as at 30 June each year (‘the Group’). The financial statements of subsidiaries are prepared for the same reporting year as the consolidated group, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealised profits arising from intra-group transactions, have been eliminated in full. Unrealised losses are eliminated unless costs cannot be recovered. Subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where there is loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting year during which iSelect Limited has control. e) BuSINESS COmBINATION RESERvE The internal group restructure performed in the 2007 financial year, which interposed the holding Company, iSelect Limited, into the consolidated Group was exempted by AASB 3 Business Combinations as it precludes entities or businesses under common control. The carry-over basis method of accounting was used for the restructuring of the iSelect Group. As such the assets and liabilities were reflected at their carrying amounts. No adjustments were made to reflect fair values, or recognise any new assets or liabilities. No goodwill was recognised as a result of the combination and any difference between the consideration paid and the ‘equity’ acquired was reflected within equity as an equity reserve entitled “Business Combination Reserve”. f) SIGNIFICANT ACCOuNTING JuDGEmENTS, ESTImATES AND ASSumPTIONS Significant accounting estimates and assumptions The carrying amounts of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of certain assets and liabilities within the next annual reporting year are: Present value of trail commissions The Group has elected to account for trail commission revenue at the time of selling a health, life and general insurance policy or mortgage settlements to which trail commission attaches, rather than on the basis of actual payments received from the relevant health, life and general funds or mortgage providers involved. This method of revenue recognition requires the Directors and management to make certain estimates and assumptions based on industry data and the historical experience of the Group. In undertaking this responsibility, the Group engages Deloitte Actuaries & Consultants Limited, a firm of consulting actuaries, to assist in reviewing the accuracy of assumptions for health and life trail revenue. The iSelect General trail commission is a director valuation and is based on the same principles as outlined above. These estimates and assumptions include but are not limited to: termination or lapse rates, mortality rates, inflation, risk free and other discount rates, counter party credit risk, forecast health fund premium increases and the estimated impact of known Australian Federal and State Government policy. The Directors made an estimate of the likely impact of the Federal Government’s intention to introduce tiered means testing for the private health insurance rebate within the present value of health fund trail commission calculations. Currently there is uncertainty as to possible changes to the Federal Government’s health insurance rebate and as such the Directors have again estimated the impact upon the present value of the health trail commission. The full impact of any legislative changes are still yet to be determined with any known certainty as at the date of this financial report. The Directors consider this method of trail commission recognition to be a more accurate representation of the Group’s financial results. This method is further detailed in Note 2 (g). Clawback provisions Marketing fees received from certain insurance funds can be clawed back in the event of early termination of membership. They vary across the insurance industry and insurers alike: Health Health insurance clawbacks are usually triggered where a referred member terminates their policy. The fund has an individual agreement and the clawback period ranges between 2 to 12 months depending on fund. The Group provides for this liability based upon historic average rates of attrition. For the year ended 30 June 2011, the Directors have assessed these provisions in light of any estimated impact of the Federal Government’s proposed health insurance rebate changes. Life Life insurance clawbacks are usually triggered where termination occurs up to 12 months from the sale of the policy. The Group provides for this liability based upon historic average rates of attrition. General General insurance clawbacks are usually triggered where termination occurs within 3 months of the sale of the policy. The Group provides for this liability based upon historic average rates of attrition. Mortgages Mortgage brokerage clawbacks are usually triggered where termination occurs within 0–24 months settlement of the loan. The Group provides for this liability based upon historic average rates of attrition. Taxation The Group’s accounting policy for taxation requires management’s judgement as to the types of arrangements considered to be a tax on income in contrast to an operating cost. Judgement is also required in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the statement of financial position. Deferred tax assets, including those arising from unrecouped tax losses, capital losses and temporary differences, are 13 i) marketing fees Marketing fees are upfront fees earned upon new members joining a health fund, initiating a life insurance policy, obtaining general insurance or obtaining media products via iSelect. Marketing fees are recognised at the time customers make their first payment with the relevant fund and the insurer accepts the underlying risk. Marketing fees may trigger a ‘clawback’ of revenue in the event of early termination by customers as specified in individual health fund agreements. These clawbacks are provided for by the Group on a monthly basis by utilising industry data and historical experience. ii) Trail commission Trail commissions are ongoing fees related to existing health, life and general fund members referred to individual funds via iSelect. Furthermore it includes any individuals who settle their mortgages via iSelect. Trail commission revenue represents commission earned from health, life and general funds calculated as a percentage of the value of the underlying policy relationship of the expected life and in the case of mortgages a proportion of the underlying value of the loan. The Group is entitled to receive health, life, general and mortgage trail commission without having to perform further services. On initial recognition, trail revenue and receivables are recognised at fair value, being the present value of expected future trail revenue receivables discounted to their net present value using discounted cash flow valuation techniques for all of the above beside mortgages. These calculations require the use of assumptions. The key assumptions underlying the fair value calculations of trail revenue receivable at balance date include: lapse and mortality rates, commission term, premium increases and discount rate, incorporating risk free rates and estimates of the likely credit risk associated with the health and life funds. It is the Directors’ responsibility to determine the assumptions used and the fair value of trail revenue. In undertaking this responsibility, the Group engages Deloitte Actuaries & Consultants Limited, a firm of consulting actuaries, to assist in reviewing the accuracy of assumptions and the fair value model utilised to determine the fair value of health and life fund trail revenue and the accompanying asset. The iSelect General trail commission is a director valuation and is based on the same principles as outlined above. Subsequent to initial recognition and measurement, the trail revenue asset is measured at amortised cost. The carrying amount of the trail revenue asset is adjusted to reflect actual and revised estimated cash flows by recalculating the carrying amount through computing the present value of estimated future cash flows at the original effective interest rate. The resulting adjustment is recognised as income or expense in the statement of comprehensive income. recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient future taxable profits. Deferred tax liabilities arising from temporary differences in investments, caused principally by retained earnings held in foreign tax jurisdictions, are recognised unless repatriation of retained earnings can be controlled and are not expected to occur in the foreseeable future. Assumptions about the generation of future taxable profits and repatriation of retained earnings depend on management’s estimates of future cash flows. These depend on estimates of future sales volumes, operating costs, capital expenditure, dividends and other capital management transactions. Judgements are also required about the application of income tax legislation. These judgements and assumptions are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised on the statement of financial position and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred tax assets and liabilities may require adjustment, resulting in a corresponding credit or charge to the statement of comprehensive income. Provisions for employee entitlements Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date using the discounted cash flow methodology. The risks specific to the provision are factored into the cash flows and as such a risk-free government bond rate relative to the expected life of the provision is used as a discount rate. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the time value of money and the risks specific to the liability. The increase in the provision resulting from the passage of time is recognised as finance costs. Research and development costs Internal project costs are classified as research or development based on management’s assessment of the nature of each cost and the underlying activities performed. Management performs this assessment against the Group’s development costs policy which is consistent with the requirements of AASB 138 Intangible Assets. Share based payments Accounting judgements, estimates and assumptions in relation to share based payments have been discussed in note 2 (u). g) REvENuE RECOGNITION Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Fee Revenue iSelect earns two distinct types of revenue: – Marketing fees – Trail commission iSelect Annual Report 2011 14 Notes to the Financial Statements For the year ended 30 June 2011 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) to the carrying amount of the leased asset and recognised over the lease term on the same basis as the lease income. g) REvENuE RECOGNITION (CONTINuED) In the 2009 federal budget, the government announced an intention to introduce tiered means testing for the private health insurance rebate. During mid 2009, draft legislation was passed by the House of Representatives but was rejected in the Senate. However, it remains an announced government policy. Under the arrangement, the rebate would be reduced or removed for higher income groups and in some cases a higher Medicare Levy Surcharge would also apply. The expectation is that this will impact the future amount of health fund trail commission to be received as it is likely that some existing members below these income levels may opt out of health insurance. The full impact of the type and number of members that may withdraw this cover is not yet known as at the date of this financial report. The impact of the estimated effect of a tiered means testing has been considered by the consulting actuaries in reviewing the commission valuation at 30 June 2011. This assessment of the impact was based on reports prepared by independent parties at the time of performing the valuation. The valuation has been based on the assumption that the legislation will be passed, therefore higher thresholds and higher estimated terminations have been included in the assumptions of the valuation. The Directors are of the belief that the revenue recognised in the financial year is appropriate and reasonable given the uncertainty surrounding the actual impact of the proposed health insurance rebate charges. Interest Revenue is recognised as interest accrues (using the effective interest method, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial instrument) to the net carrying amount of the financial asset. Dividends Revenue is recognised when the Group’s right to receive the payment is established. h) LEASES The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised as an expense in profit and loss. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset or the lease term if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classified as operating leases. Initial direct costs incurred in negotiating an operating lease are added Operating lease payments are recognised as an expense in the statement of comprehensive income on a straight-line basis over the lease term. Lease incentives are recognised when they are received and amortised over the life of the lease. i) CASh AND CASh EquIvALENTS Cash and short-term deposits in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less. For the purposes of the statement of cash flows, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. j) TRADE AND OThER RECEIvABLES All trade receivables recognised as current assets are due for settlement within no more than 30 days for marketing fees and within one year for trail commission. Trade receivables are measured on the basis of amortised cost and trail commission is measured at fair value. Recoverability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful debts is raised where some doubt as to collection exists. k) INCOmE TAx Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance date. Deferred income tax is provided on all temporary differences at the balance date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences: – – except where the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of taxable temporary differences associated with investments in subsidiaries, except where the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry-forward of unused tax assets and unused tax losses can be utilised: 15 – – except where the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and in respect of deductible temporary differences associated with investments in subsidiaries, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. The carrying amount of deferred income tax assets is reviewed at each balance date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each balance date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the statement of comprehensive income. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. Tax consolidation legislation iSelect Limited and its wholly owned Australian controlled entities have implemented the tax consolidation legislation. Members of the tax consolidated group have entered into a tax funding agreement. Each entity is responsible for remitting its share of the current tax payable (receivable) assumed by the head entity. In accordance with UIG 1052 and Group accounting policy, the Group has applied the “separate taxpayer within Group approach” in which the head entity, iSelect Limited, and the controlled entities in the tax consolidated Group continue to account for their own current and deferred tax amounts. In addition to its own current and deferred tax amounts, iSelect Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated Group. The allocation of taxes to the head entity is recognised as an increase/decrease in the controlled entities intercompany accounts with the tax consolidated Group head entity. l) OThER TAxES Revenues, expenses and assets are recognised net of the amount of GST except: – where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and – receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. m) PROPERTy, PLANT AND EquIPmENT Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of replacing parts that are eligible for capitalisation when the cost of replacing the parts is incurred. Similarly, when each major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement only if it is eligible for capitalisation. Depreciation is calculated over the estimated useful life of the asset as follows: useful life method Computer software/equipment 2 – 4 years Straight-line method Furniture, fixtures and fittings 8 years Straight-line method Leasehold Improvements 5 to 6.5 years Straight-line method An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the item) is included in the statement of comprehensive income in the period the item is derecognised. Impairment The carrying values of plant and equipment are reviewed for impairment at each reporting date, with recoverable amount being estimated when events or changes in circumstances indicate that the carrying value may be impaired. The recoverable amount of plant and equipment is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. iSelect Annual Report 2011 16 Notes to the Financial Statements For the year ended 30 June 2011 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) m) PROPERTy, PLANT AND EquIPmENT (CONTINuED) For an asset that does not generate largely independent cash inflows, recoverable amount is determined for the cash-generating unit to which the asset belongs, unless the asset’s value in use can be estimated to be close to its fair value. Impairment exists when the carrying value of an asset or cash-generating units exceeds its estimated recoverable amount. The asset or cash-generating unit is then written down to its recoverable amount. n) INTANGIBLE ASSETS Intangible assets are initially measured at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is recognised in profit or loss in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed to be either finite or infinite. Intangible assets with finite lives are amortised over the useful life and tested for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are either reviewed at the end of each financial period or amortised over the life of the asset. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis. Research and development costs Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefit from the related project. Web site development costs capitalised as an intangible asset are amortised on a straight-line basis with a useful life between 2 to 4 years. o) INvESTmENTS Investments in controlled entities are carried at the lower of cost and recoverable amount. p) ImPAIRmENT OF ASSETS The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of its fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets and the asset’s value in use cannot be estimated to be close to its fair value. In such cases the asset is tested for impairment as part of the cash-generating unit to which it belongs. When the carrying amount of an asset or cash-generating unit exceeds its recoverable amount, the asset or cash-generating unit is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment losses relating to continuing operations are recognised in those expense categories consistent with the function of the impaired asset. An assessment is also made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the recoverable amount is estimated. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. If that is the case the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior periods. Such reversal is recognised in statement of comprehensive income. After such a reversal the depreciation charge is adjusted in future periods to allocate the asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining useful life. q) TRADE AND OThER PAyABLES Trade payables and other payables are carried at amortised cost and represent liabilities for goods and services provided to the Group prior to the end of the financial period that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. r) PROvISIONS Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. 17 Where the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a borrowing cost. s) EmPLOyEE BENEFITS Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits include wages and salaries, annual leave and long service leave. Liabilities arising in respect of wages and salaries, annual leave and any other employee benefits expected to be settled within twelve months of the reporting date are measured at their nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. All other employee benefit liabilities are measured at the present value of the estimated future cash outflow to be made in respect of services provided by employees up to the reporting date. In determining the present value of future cash outflows, the market yield as at the reporting date on national government bonds, which have terms to maturity approximating the terms of the related liability, are used. Employee benefit expenses and revenues arising in respect of the following categories: – – wages and salaries, non-monetary benefits, annual leave, long service leave and other leave benefits; and other types of employee benefits are recognised against profits on a net basis in their respective categories. t) CONTRIBuTED EquITy Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. u) ShARE BASED PAymENTS The Group provides benefits to its employees (including key management personnel) in the form of share based payments, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions). There are currently three plans in place to provide these benefits: – – – the Employee Share Option Plan, which provides benefits to all employees, including Directors; CEO Plan, which provides benefits to the Chief Executive Officer; and ninemsn Option agreement, which provides benefits to ninemsn, a major shareholder. The cost of these equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they were granted. The fair value was determined by the Directors and management using a Binomial model. In valuing equity-settled transactions, no account is taken of any vesting conditions. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become fully entitled to the award (the vesting date). At each subsequent reporting date until vesting, the cumulative charge to the statement of comprehensive income is the product of (i) the grant date fair value of the award; (ii) the current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met; and (iii) the expired portion of the vesting period. The charge to the statement of comprehensive income for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corresponding credit to equity. Until an award has vested, any amounts recorded are contingent and will be adjusted if more or fewer awards vest than were originally anticipated to do so. Any award subject to a market condition is considered to vest irrespective of whether or not that market condition is fulfilled, provided that all other conditions are satisfied. If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognwhe date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. v) COmPARATIvE BALANCES Accounting policies adopted are consistent with those of the previous year. Where expenses have been reallocated between departments or within expense lines, the comparatives for the previous year have been reallocated also to assist comparability between the years. w) ONEROuS CONTRACTS A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from the contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Group recognises any impairment loss on assets associated with the contract. iSelect Annual Report 2011 18 Notes to the Financial Statements For the year ended 30 June 2011 3. FINANCIAL RISK MANAGEMENT AND OBjECTIVES AND POLICIES The Group has limited exposure to financial risks. The Group does not use derivative financial instruments such as foreign exchange contracts and interest rate swaps to hedge certain risk exposures. It does not operate internationally and is not exposed to either securities price risk, foreign exchange risk or commodity price risk. The main risks arising from the Group’s financial instruments are interest rate risk, credit risk, liquidity risk and fair value risk. The Group uses different methods to measure and manage different types of risks to which it is exposed. These include monitoring levels of exposure to interest rate risk and assessments of market forecasts for interest rates. Ageing analyses and monitoring of specific credit allowances are undertaken to manage credit risk, liquidity risk is monitored through the development of future rolling cash flow forecasts and comprehensive capital management planning. The Board of Directors is continuing to review the Group’s risk management framework and has established an Audit and Risk Committee to aid and oversee this process. The Group’s policies in relation to financial risks to which it has exposure are detailed below. a) mARkET RISk Cash flow and fair value interest rate risk The Group’s main interest rate risk arises from cash and cash equivalents and net present value of future trail commission receivables. The Group does not have borrowings and therefore is not exposed to interest rate risk on borrowings. The following sensitivity analysis is based on the interest rate risk exposures in existence at the balance sheet date: Financial Assets Current Cash and cash equivalents Trade and other receivables Net present value of future trail commission Non-current Net present value of future trail commission Financial Liabilities Current Trade and other payables Net Exposure CONSOLIDATED 2011 $‘000 2010 $‘000 17,499 5,111 20,239 41,241 84,090 7,438 3,963 8,923 29,327 49,651 9,520 9,520 7,221 7,221 74,570 42,430 19 At 30 June 2011, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post tax profit would have been affected as follows: TOTAL Consolidated +1% (100 basis points) -1% (100 basis points) TRAIL COmmISSION Consolidated +1% (100 basis points) -1% (100 basis points) CASh AT BANk Consolidated +1% (100 basis points) -1% (100 basis points) Post Tax Profit higher/(Lower) CONSOLIDATED 2011 $‘000 2010 $‘000 (1,189) 1,295 (1,311) 1,417 122 (122) (840) 920 (892) 972 52 (52) Judgements of reasonably possible movements The movements in profit are due to higher/lower interest income from cash balances and higher/lower net present value of future trail commission. The sensitivity is higher in 2011 than in 2010 because of higher net present value of future trail commission. b) FOREIGN CuRRENCy RISk The Group has minimal transactional currency exposure. Such exposure arises from purchases by an operating entity in currencies other than the functional currency. c) CREDIT RISk Credit risk is managed on a group basis. Credit risk arises from cash and cash management equivalents through deposits with banks and financial institutions. Additionally, the Group has exposure to credit risk associated with the health, life and general funds and mortgage providers, with regard to the fair value calculation of the trail commissions (as discussed in note 2 (g) and outstanding receivables. Estimates of the likely credit risk associated with the health, life and general funds and mortgage providers are incorporated in the discount rates (one of the assumptions used in the fair value calculation). The Group trades only with recognised, creditworthy third parties (health and life funds, major financial institutions and large media suppliers), and as such collateral is not requested. It is the Group’s policy that all key partners who wish to trade on credit terms are subject to credit verification procedures including an assessment of their capital and solvency position and industry reputation. Risk limits are set for each individual key partner in accordance with parameters set by the board. These risk limits are regularly monitored. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. d) LIquIDITy RISk The Group’s liquidity risk exposure is minimal due to the Group not having any debt, loans or financial liabilities. The Group does not have contractual financial liabilities and all trade and other payables are payable within no greater than six months. e) FAIR vALuE RISk The Group uses various methods in estimating the fair value of a financial instrument. The methods comprise: Level 1 – the fair value is calculated using quoted prices in active markets. Level 2 – the fair value is estimated using inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices). Level 3 – the fair value is estimated using inputs for the asset or liability that are not based on observable market data. iSelect Annual Report 2011 20 Notes to the Financial Statements For the year ended 30 June 2011 3. FINANCIAL RISK MANAGEMENT AND OBjECTIVES AND POLICIES (CONTINUED) The fair value of the financial instruments as well as the methods used to estimate the fair value are summarised in the table below. Consolidated Financial Assets Net present value of future trail commission Financial Liabilities Consolidated Financial Assets Net present value of future trail commission Financial Liabilities year ended 30 June 2011 valuation technique – market observable inputs (Level 2) $‘000 valuation technique – non-market observable inputs (Level 3) $‘000 quoted market price (Level 1) $‘000 Total $‘000 – – – – – – – – 61,480 61,480 61,480 61,480 – – – – year ended 30 June 2010 valuation technique – market observable inputs (Level 2) $ valuation technique – non-market observable inputs (Level 3) $ quoted market price (Level 1) $ Total $ – – – – – – – – 38,250 38,250 38,250 38,250 – – – – For financial instruments not quoted in active markets, the Group used valuation techniques such as present value techniques, comparison to similar instruments for which market observable prices exist and other relevant models used by market participants. These valuation techniques use both observable and unobservable market inputs. 21 CONSOLIDATED 2011 $‘000 2010 $‘000 38,250 29,893 (2,551) (14,439) 4,310 6,017 22,890 13,884 (1,031) (6,586) 3,081 6,012 61,480 38,250 Reconciliation of Level 3 fair value movements Opening Balance New Receivable Lapsed Receivable Cash Receipts Gains/(Losses) from movement in discount rate Gains/(Losses) from movement in other fair value assumptions Closing Balance The Group uses the discounted cash flow method in determining the fair value of the unlisted asset. The potential effect of using reasonable possible alternative assumptions based on a change in relevant inputs by 1% would have the effect of reducing the fair value by up to $5,050,000 should the discount rate increase, premium price decrease or termination rates increase, or increase the fair value by $5,590,160 should the opposite apply. If the assumption that there is a potential impact of future regulatory or federal government policy change be removed, the valuation would increase by $586,334. 4. REVENUES AND ExPENSES a) Revenue Sales Revenue health Insurance Marketing fees, net of clawback Present value of trail commissions Life Insurance Marketing fees, net of clawback Present value of trail commissions General Insurance Marketing fees, net of clawback Present value of trail commissions Total insurance revenue Other business revenue Total sales revenue Interest revenue Other Income Total income b) Employee entitlement expenses Cost of sales and administrative expenses include the following personnel expenses: Employee benefits Share based payments expense Total employee benefits expenses CONSOLIDATED 2011 $‘000 2010 $‘000 24,161 33,355 14,096 19,701 4,932 3,271 5,591 1,013 4,676 2,519 2,499 – 72,323 43,491 119 – 72,442 43,491 841 215 400 244 73,498 44,135 23,628 658 24,286 15,113 274 15,387 iSelect Annual Report 2011 22 Notes to the Financial Statements For the year ended 30 June 2011 4. REVENUES AND ExPENSES (CONTINUED) c) Research and development costs Amortisation of previously capitalised development costs d) Depreciation expense Property, plant and equipment The depreciation amounts shown include accelerated depreciation for fixed assets being disposed of prior to the premises relocation scheduled for the end of October 2011. e) Lease expenditure Operating lease expenditure f) Relocation expenses Relocation expenses CONSOLIDATED 2011 $‘000 2010 $‘000 617 2,568 456 972 543 262 1,592 – Relocation costs relate to the expenditure incurred as a result of the planned move to the new premises at Bay Road, Cheltenham. The costs relate to legal, property management and property fees. Make good and onerous contract for rental costs incurred in the current building are also included. g) Acquisition expenses Acquisition expenses 217 – Acquisition costs relate to the legal and due diligence costs in association with the Info Choice acquisition. Refer to note 17 for further information on the Info Choice acquisition. 5. INCOME TAx Current income tax Current income tax benefit/(charge) Adjustment in respect of current income tax of previous years Deferred income tax Relating to origination and reversal of temporary differences Adjustments in respect of deferred income tax of previous years Income tax reported in income statement A reconciliation of income tax benefit/(expense) applicable to account profit before income tax at the statutory income tax rate is as follows: Accounting profit before income tax Statutory income tax rate of 30% Adjustments in respect of current income tax of previous years Adjustments in respect of deferred income tax of previous years Share based payments Entertainment Research and development concessional deduction Investment Allowance Other Total income tax expense Deferred tax assets relate to the following: Deferred tax assets from temporary differences on: Trade and other payables Provisions Carried forward losses Other Total deferred tax assets Deferred tax liabilities from temporary differences on: Present value of trail commission Accrued Interest Development costs Other Total deferred tax liabilities 23 CONSOLIDATED 2011 $‘000 2010 $‘000 2,216 2,154 286 (52) (6,778) (4,569) (92) 18 (4,368) (2,449) 15,025 (4,508) 286 (92) (197) (27) 170 – – 8,229 (2,469) (52) 18 (82) (17) – 155 (2) (4,368) (2,449) 221 1,082 6,695 64 8,062 199 619 4,193 – 5,011 (18,444) (11,475) (12) (927) – (1) (489) – (19,383) (11,965) Tax consolidation The iSelect Group formed an income tax consolidated group as at 30 April 2007. iSelect Limited continue to act as the head Company of this Group. In addition on 30 November 2011, iSelect Media Pty Ltd and on 14 January 2011 iSelect Mortgages Pty Ltd were incorporated as wholly owned subsidiaries and therefore joined the tax consolidated group. Members of the Group entered into a tax sharing agreement at that time that provided for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts are expected to be recognised in the financial statements in respect of this agreement on the basis that the probability of default is remote. The head entity and the controlled entities in the likely tax consolidated group continue to account for their own current and deferred tax balances. iSelect Annual Report 2011 24 Notes to the Financial Statements For the year ended 30 June 2011 6. CASH AND CASH EqUIVALENTS Cash at bank and in hand Term deposits Total cash and cash equivalents CONSOLIDATED 2011 $‘000 6,999 10,500 17,499 2010 $‘000 2,807 4,631 7,438 Cash at bank and in hand earns interest at floating rates based on daily bank deposit rates. Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. Reconciliation of statement of cash flows Reconciliation of net profit after tax to net cash flows from operations Net profit after tax Adjustments for non-cash income and expense items: Depreciation/amortisation Share options expensed Interest income classified as investing cash flow Net (gain)/loss on disposal of intangible asset Increase/decrease in assets and liabilities Trade and other receivables Net present value of future trail commission Other assets Deferred Tax Assets Trade and other payables Deferred Tax Liabilities Income tax payable Provisions 10,657 5,780 3,185 658 (841) – 1,428 274 (375) 35 (1,148) (677) (23,230) (15,361) (707) (3,051) 2,299 7,418 – 1,501 (174) 2,290) 4,141 – 4,739 253 Net cash from/(used in) operating activities (3,259) (2,227) 7. TRADE AND OTHER RECEIVABLES Trade receivables, third parties Total trade and other receivables 8. NET PRESENT VALUE OF FUTURE TRAIL COMMISSION Net present value of future trail commission Total net present value of future trail commission Current Net present value of future trail commission Non-current Net present value of future trail commission 9. OTHER ASSETS Prepayments Other Assets Total other assets 5,111 5,111 61,480 61,480 20,239 20,239 41,241 41,241 716 337 1,053 3,963 3,963 38,250 38,250 8,923 8,923 29,327 29,327 330 16 346 25 Total $‘000 2,932 1,562 43 CONSOLIDATED Leasehold improvements $‘000 Office/ Computer equipment $‘000 Computer Software $‘000 Furniture fixtures and fittings $‘000 1,075 87 – (1,162) 716 589 – (396) 617 722 43 524 164 – (366) (644) (2,568) 10. PROPERTY, PLANT AND EqUIPMENT year ended 30 June 2011 At 1 July 2010 Net of accumulated depreciation Additions Transfers Depreciation for the period At 30 June 2011 Net of accumulated depreciation – 909 1,016 44 1,969 At 1 July 2010 Cost value Accumulated depreciation Net carrying amount At 30 June 2011 Cost value Accumulated depreciation Net carrying amount year ended 30 June 2010 At 1 July 2009 Net of accumulated depreciation Additions Disposals Depreciation for the period At 30 June 2010 1,682 (607) 1,075 1,769 (1,769) – 1,713 (997) 716 2,302 (1,393) 909 1,227 (610) 617 1,992 (976) 1,016 752 (228) 524 916 (872) 44 CONSOLIDATED Leasehold improvements $‘000 Office/ Computer equipment $‘000 Computer Software $‘000 Furniture fixtures and fittings $‘000 1,386 1 _ (312) 668 378 _ (330) 348 515 _ (246) 505 103 _ (84) 5,374 (2,442) 2,932 6,979 (5,010) 1,969 Total $‘000 2,907 997 _ (972) Net of accumulated depreciation 1,075 716 617 524 2,932 At 1 July 2009 Cost value Accumulated depreciation Net carrying amount At 30 June 2010 Cost value Accumulated depreciation Net carrying amount 1,681 (295) 1,386 1,682 (607) 1,075 1,335 (667) 668 1,713 (997) 716 712 (364) 348 1,227 (610) 617 649 (144) 505 752 (228) 524 4,377 (1,470) 2,907 5,374 (2,442) 2,932 iSelect Annual Report 2011 26 Notes to the Financial Statements For the year ended 30 June 2011 11. NON–CURRENT ASSETS – INTANGIBLE ASSETS year Ended 30 June 2011 At 1 July 2010 Net of accumulated amortisation and impairment Additions Transfers Amortisation At 30 June 2011 Net of accumulated amortisation and impairment At 30 June 2011 Cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount year Ended 30 June 2010 At 1 July 2009 Net of accumulated amortisation and impairment Additions Disposals Amortisation At 30 June 2010 Net of accumulated amortisation and impairment At 30 June 2010 Cost (gross carrying amount) Accumulated amortisation and impairment Net carrying amount CONSOLIDATED Development costs $‘000 Trademarks & Domain Names $‘000 Computer Software $‘000 Total $‘000 1,893 2,445 (43) (617) 3,678 6,143 (2,465) 3,678 1,405 979 (35) (456) 43 – (43) – – – – – 119 – – (76) 43 1,893 229 (186) 43 3,741 1,848) 1,893 1,649 2,445 – (617) 3,477 5,942 (2,465) 3,477 1,189 840 – (380) 1,649 3,311 (1,662) 1,649 201 – – – 201 201 – 201 97 139 (35) – 201 201 – 201 a) DESCRIPTION OF INTANGIBLE ASSETS i) Development costs Development costs are carried at cost less accumulated amortisation and accumulated impairment losses. This intangible asset has been assessed as having a finite life and is amortised using the straight-line method over a period of two and four years. The amortisation has been recognised in the statement of comprehensive income in amortisation. If an impairment indication arises, the recoverable amount is estimated and an impairment loss is recognised to the extent that the recoverable amount is lower than the carrying amount. ii) Trademark and domain names Trademark and domain names are carried at cost and are not amortised. These intangible assets have been determined to have infinite useful lives. These assets were tested for impairment as at 30 June 2011, on a ‘value-in-use’ basis. iii) Software Capitalised software is carried at cost less accumulated amortisation and accumulated impairment losses. The software has been assessed as having a finite life and is amortised using the straight-line method over a period of 2 to 4 years. The amortisation has been recognised in the statement of comprehensive income in amortisation. If an impairment indication arises, the recoverable amount is estimated and an impairment loss is recognised to the extent that the recoverable amount is lower than the carrying amount. b) ImPAIRmENT LOSSES RECOGNISED No impairment losses were recognised during the period. (2010: Nil) 12. TRADE AND OTHER PAYABLES Trade payables (a) Other payables (b) Total trade and other payables a) TRADE PAyABLES Trade payables are non-interest bearing and are normally settled on 30 day terms. b) OThER PAyABLES Other payables are non-interest bearing and are normally settled on 30 day terms. 13. PROVISIONS Current Provisions Annual Leave Long Service Leave Lease incentive Clawback Other Total Non-current Provisions Long Service Leave Lease incentive Total 27 CONSOLIDATED 2011 $‘000 833 8,687 9,520 2010 $‘000 1,652 5,569 7,221 CONSOLIDATED 2011 $‘000 2010 $‘000 1,011 153 48 1,162 1,049 3,423 183 – 183 692 102 191 775 78 1,838 124 143 267 a) NATuRE AND TImING OF PROvISIONS i) Clawback provision The Group has recognised a provision for expected clawback of marketing fees receivable from health, life and general funds due to early termination of policies by new members. This is based on historic and average industry rates of attrition. Clawback of fees is incurred within two to twelve months of the sale of the relevant policies. ii) Provision for lease incentive Relates to the receipt of lease incentive payments in relation to the Group’s operating premises. This revenue has been deferred and is being recognised in the statement of comprehensive income over the life of the lease as other income. ii) Other Relates to the net of the provision for make good and onerous contract costs for the existing lease at 973 Nepean Highway, Moorabbin, which will be vacated for new premises in the next financial year. iSelect Annual Report 2011 28 Notes to the Financial Statements For the year ended 30 June 2011 13. PROVISIONS (CONTINUED) b) mOvEmENT IN PROvISIONS Movements in each class of provision during the financial year, other than provisions relating to employee benefits, are set out below: Consolidation As at beginning of the period Arising during the year Utilised At end of the period 14. ISSUED CAPITAL Issued and paid up capital Ordinary shares fully paid (number) Clawback 2010 $‘000 2011 $‘000 Lease Incentive 2010 $‘000 2011 $‘000 2011 $‘000 Other 2010 $‘000 775 694 334 526 78 3,721 2,407 – – 1,049 (3,334) (2,326) (286) (192) (78) 1,162 775 48 334 1,049 – 78 – 78 CONSOLIDATED 2011 $‘000 2010 $’000 36,582,000 20,095,510 14,692,314 12,733,588 Share capital increased during the year as a result of the issue of ordinary shares to option holders exercising 832,000 share options (2010: 75,000) as well as capital raising of 1,126,726 shares (2010: Nil). The total number of share options outstanding at 30 June 2011 is 6,286,797 (2010: 5,138,201). Ordinary shares have the right to receive dividends as declared and, in the event of winding up the Group, to participate in the proceeds from the sale of all surplus assets in proportion to the number of and amounts paid up on shares held. Ordinary shares entitle their holder to one vote, either in person or by proxy, at a meeting of the Group. Effective 1 July 1998, the Corporations legislation in place abolished the concepts of authorised capital and par value shares. Accordingly, the Group does not have authorised capital nor par value in respect of its issued shares. 15. COMMITMENTS AND CONTINGENCIES a) OPERATING LEASE COmmITmENTS The Group had entered into commercial lease for the current premises which had a life of 10 years. The Group has also entered into a new commercial lease for the new premises which also has an initial life of 10 years with the option to renew at the end of the contract period. During 2011 the Group also entered into several hire purchase motor vehicle leases with a life of 3 years. There are no restrictions placed upon the lessee by entering into these leases. Future minimum rentals payable under non-cancellable operating leases are as follows: Operating Lease Commitments minimum lease payments Not later than one year Later than 1 year and not later than 5 years More than 5 years Total operating lease commitments Operating lease expenses recognised as an expense during the period: CONSOLIDATED 2011 $‘000 2010 $’000 1,963 10,843 10,161 22,967 543 541 414 – 955 462 29 b) CONTINGENCIES On 24 October 2011, iSelect Life Pty Ltd reported to the Australian Securities & Investments Commission a breach in relation to its Australian Financial Services Licence relating to life insurance policies sold between April 2009 and March 2011. As a result of this breach, an internal review of all life insurance policies sold during that period is being undertaken. The amount (if any) of any liability cannot be reliably determined at this time, accordingly no amounts have been recorded in the Financial Statements for the year ended 30 June 2011. Potential liabilities for the Group, should any obligation be identified, are expected to be covered by insurance maintained by the Group. 16. RELATED PARTY DISCLOSURE a) SuBSIDIARIES The consolidated financial statements include the financial statements of iSelect Limited and the subsidiaries listed in the following table: Name iSelect Health Pty Ltd iSelect Life Pty Ltd iSelect General Pty Ltd iSelect Media Pty Ltd iSelect Mortgages Pty Ltd Country of incorporation Australia Australia Australia Australia Australia 2011 100% 100% 100% 100% 100% 2010 100% 100% 100% 0% 0% 2011 $ 2011 $ 21,044,113 20,386,038 6,900,000 3,250,000 7,530,000 5,730,000 1,190,000 775,000 – – b) uLTImATE PARENT iSelect Limited is the ultimate Australian parent entity of the Group. c) kEy mANAGEmENT PERSONNEL Details relating to key management personnel, including remuneration paid, are included in note 19. d) TRANSACTIONS WITh RELATED PARTIES The following table provides the total amount of transactions that were entered into with related parties for the relevant financial year (for information regarding outstanding balances on related party trade receivables and payables at year end, refer to notes 7 and 12 respectively): Related party Consolidated Shareholder related entities Ninemsn – Advertising Services 2011 2010 Director related entities martin Dalgleish – Consultancy fees 2011 2010 Sales to related parties $ Purchases from related parties $ Other transactions with related parties $ Balances outstanding at balance date $ – – – – 174,504 59,337 20,000 80,000 85,000 – – – 259,504 59,337 20,000 80,000 Terms and conditions of transactions with related parties Sales to and purchases from related parties are made in arm’s length transactions both at normal market prices and on normal commercial terms. Outstanding balances at period-end are unsecured, interest free and settlement occurs in cash. No guarantees were provided or received for any related party receivables or payables. iSelect Annual Report 2011 30 Notes to the Financial Statements For the year ended 30 June 2011 17. EVENTS AFTER THE BALANCE SHEET DATE In relation to the current premises, which iSelect intend to move out from in late October 2011, iSelect Health Pty Ltd (a wholly owned subsidiary of iSelect Limited) has raised provisions of $500k and $549k for make good costs and onerous contracts for rent respectively. The Group is in the process of formalising the surrender of the lease over its current premises before the end of the lease (with no make good obligation). As part of the surrender arrangements, the Group has agreed to pay a licence fee for the continued display of its outdoor signage at the premises at a cost of $165k. As a result, in the 2012 financial year, iSelect anticipates to recoup the $500k in relation to the make good costs and will likely be able to recoup approximately $314k in relation to the onerous contract for rent, subject to finalisation of all arrangements. On 19 August 2011, iSelect Limited announced an off-market takeover bid for all of the shares of Infochoice Ltd for total consideration of $33.538 million. iSelect’s offer to Infochoice shareholders is now unconditional. As at the date of this report, iSelect has received acceptances from 98.72% of the Infochoice shares. iSelect will fund the acquisition from drawings under a $35 million bridge loan note facility arranged by Goldman Sachs & Partners Australia Capital Markets Limited with a maturity date of 20 August 2012. Other than the matters discussed above, in the interval between the end of the financial year and the date of this report no item, transaction or event of a material and unusual nature likely, in the opinion of the Directors of Group, to affect significantly the operations of the Group, the results of those operations or the state of affairs of the Group, in future financial years. 18. AUDITORS’ REMUNERATION The following total remuneration was received, or is due and receivable, by the auditor of the Group in respect of: Amounts received or due and receivable by Ernst & Young Australia for: Audit of the financial statements Other Services: – tax compliance – assurance related – due diligence – equity raising – regulatory compliance Total CONSOLIDATED 2011 $ 2010 $ 149,300 114,073 47,800 25,650 94,615 58,674 26,400 30,000 39,000 _ _ 24,720 402,439 207,793 31 Non-Executive Chairman Chief Executive Officer and Managing Director Non-Executive Director Non-Executive Director Non-Executive Director – resigned 22 September 2010 Non-Executive Director – resigned 25 May 2011 Non-Executive Director Non-Executive Director – appointed 22 September 2010 19. DIRECTOR AND ExECUTIVE DISCLOSURE a) DETAILS OF kEy mANAGEmENT PERSONNEL Directors Martin Dalgleish Damien Waller Shaun Bonett Leslie Webb Nicholas Gray Joanne Pollard Michael McLeod Patrick O’Sullivan Executives Chris Brant Mark Blackburn Matthew McCann Gerald Brown Paul Cullinan David May Alla Keogh Chris Billing Group Chief Financial Officer – appointed 24 October 2011 Group Chief Financial Officer – appointed 1 October 2010 – resigned 4 October 2011 Corporate Development Director/Company Secretary (from 22 September 2010) Chief Executive Officer – Insurance Chief Financial Officer – Insurance – resigned 22 January 2011 (Company Secretary to 22 September 2010) Chief Marketing Officer – appointed 1 June 2011 Human Resource Director – to 19 September 2011 Products Director b) COmPENSATION OF kEy mANAGEmENT PERSONNEL Aggregated compensation of Directors and key management personnel was as follows: Consolidated 2011 Total compensation 2010 Total compensation Short-term employee benefits $ Post employment benefits $ Termination benefits $ Share based payment $ Other long-term benefits $ Total $ 2,610,643 215,804 1,850,435 157,190 – – 369,046 233,204 – – 3,195,493 2,240,829 All equity transactions with key management personnel other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the Group would have adopted if dealing at arm’s length. iSelect Annual Report 2011 32 Notes to the Financial Statements For the year ended 30 June 2011 19. DIRECTOR AND ExECUTIVE DISCLOSURE (CONTINUED) c) OPTION hOLDINGS OF kEy mANAGEmENT PERSONNEL Balance at 1 July 2010 Granted as Remun- eration Options Exercised Net Change Balance at end of period Other # 30 June 2011 Total Exercisable Not Exercisable Total Options vested at 30 June 2011 30 June 2011 Directors Damien Waller 2,685,276 450,000 (113,202) Martin Dalgleish Shaun Bonnett Leslie Webb Michael McLeod Patrick O’Sullivan* Executives Mark Blackburn** 180,000 139,147 30,000 – – – – – – – – 100,000 – (109,147) – – – – – – – – – – – 3,022,074 2,751,483 2,572,074 179,409 180,000 134,836 134,836 30,000 30,000 – – 30,000 30,000 – – 30,000 30,000 – – – – – – – 100,000 39,869 _ 39,869 Matthew McCann 90,000 150,000 93,750 150,000 – – – 240,000 149,803 90,000 59,803 – 243,750 153,553 93,750 59,803 Gerald Brown Paul Cullinan^^ David May*** Alla Keogh~ Chris Billing*** Total 30 June 2010 Directors Martin Dalgleish Shaun Bonnett Leslie Webb Nicholas Gray^ Joanne Pollard^^^ Michael McLeod Patrick O’Sullivan* Executives Mark Blackburn** Matthew McCann Gerald Brown Paul Cullinan Total 195,000 – (90,000) 105,000 74,918 15,000 59,918 – 100,000 – 100,000 20,000 100,000 – – – – 100,000 24,691 – 24,691 – 100,000 39,869 – 39,869 – 120,000 50,243 – 50,243 3,433,173 1,150,000 (312,349) – 4,270,824 3,479,265 2,965,660 513,605 Balance at 1 July 2009 Granted as Remun- eration Options Exercised Net Change Balance at end of period Other # 30 June 2010 Total Exercisable Not Exercisable Total Options vested at 30 June 2010 180,000 139,147 105,000 – – – – – 90,000 90,000 195,000 – – – – – – – – – – 3,750 – – – – (75,000) – – – – – – – – – – – – – – – – – – – – – 2,685,276 2,685,276 2,685,276 180,000 139,147 30,000 74,945 139,147 30,000 74,945 139,147 30,000 – – – – – – – – – – 90,000 93,750 56,976 89,918 – – – – – – 17,984 195,000 135,000 101,250 – – – – – – – – – 56,976 71,934 33,750 3,413,173 3,211,262 3,048,602 162,660 Damien Waller 2,685,276 3,484,423 3,750 (75,000) ^ * ** ^^ Nicholas Gray Resigned 22 September 2010 Patrick O’Sullivan appointed 22 September 2010 Mark Blackburn appointed 4 October 2010, resigned 4 October 2011 Paul Cullinan resigned 22 January 2011 ^^^ Joanne Pollard resigned 25 May 2011 ~ *** # Alla Keogh departed 19 September 2011 Staff were not considered KMP in 2010 included forfeiture 33 d) ShAREhOLDINGS OF kEy mANAGEmENT PERSONNEL (CONSOLIDATED) 30 June 2011 Directors Damien Waller Martin Dalgleish Shaun Bonett Leslie Webb Nicholas Gray^ Joanne Pollard^^^ Michael McLeod Patrick O’Sullivan * Executives Mark Blackburn** Matthew McCann Gerald Brown Paul Cullinan^^ David May Alla Keogh~ Chris Billing Total 30 June 2010 Directors Damien Waller Martin Dalgleish Shaun Bonett Leslie Webb Nicholas Gray^ Joanne Pollard^^^ Michael McLeod Patrick O’Sullivan* Executives Mark Blackburn** Matthew McCann Gerald Brown Paul Cullinan^^ David May Alla Keogh~ Chris Billing Total Balance at Granted as 30 June 2010 Remuneration On Exercise Other changes of Options during the year Balance at 30 June 2011 1,487,234 – 113,202 (439,641) 1,160,795 – – – – – 389,017 – 109,147 (498,164) – 310,000 – – (70,000) 240,000 – – – – – – – – – – – – – 14,935 14,935 – – – – – – – – 32,258 32,258 7,035 – – – 7,035 7,035 – – – 7,035 41,497 – 90,000 (51,497) 80,000 – – – – – – – – – – – – – – – 2,241,818 – 312,349 (1,012,109) 1,542,058 Balance Granted as 1 July 2009 Remuneration On Exercise Other changes of Options during the year Balance 30 June 2010 1,487,234 – 389,017 235,000 – – – – – 7,035 7,035 41,497 – – – 2,166,818 – – – – – – – – – – – – – – – – – – – 75,000 – – – – – – – – – – – 75,000 – – – – – – – – – – – – – – – – 1,487,234 – 389,017 310,000 – – – – – 7,035 7,035 41,497 – – – 2,241,818 Paul Cullinan resigned 22 January 2011 Nicholas Gray Resigned 22 September 2010 Patrick O’Sullivan appointed 22 September 2010 ^ * ** Mark Blackburn appointed 4 October 2010, resigned 4 October 2011 ^^ ^^^ Joanne Pollard resigned 25 May 2011 ~ *** # Alla Keogh departed 19 September 2011 Staff were not considered KMP in 2010 included forfeiture iSelect Annual Report 2011 34 Notes to the Financial Statements For the year ended 30 June 2011 19. DIRECTOR AND ExECUTIVE DISCLOSURE (CONTINUED) All equity transactions with key management personnel other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the Group would have adopted if dealing at arm’s length. 20. SHARE BASED PAYMENT PLANS a) RECOGNISED ShARE BASED PAymENT ExPENSES The expense recognised for employee services received during the period is shown in the table below: Expense arising from equity settled share based payment transactions CONSOLIDATED 2011 $‘000 658 2010 $‘000 274 The share based payment plans are described below. There have been no cancellations or modifications to any of the plans during the period. On the reorganisation of the corporate group on 27 April 2007, all plans were novated from iSelect Health Pty Ltd (formerly iSelect Pty Ltd) to the parent Company iSelect Limited. b) TyPES OF ShARE BASED PAymENT PLANS Employee Share Option Plan (ESOP) ESOP (Post 1 July 2010) Under the iSelect ESOP, share options may be granted to Company Directors, Company Secretary, Senior Executives and employees. The ESOP is designed to align participant’s interests with those of shareholders by increasing the value of the Group’s shares. Under the ESOP, the exercise price of the options is set at or above the market price of the shares on the date of grant. Typical vesting period for options granted is the equivalent of two and half years. The term of the options is typically three years. For all participants, in the event of change of control or departure from iSelect after the required service period, the issued options will be pro-rated to determine the applicable qualifying options based on service term. In addition, all shares have an attached Groups performance condition hurdle which needs to be achieved in order for options to be exercisable. Specific conditions exist in relation to a takeover where more than 90% of the share capital is acquired by another entity. When a participant ceases employment prior to the service period of their share options, the non vested share options are pro-rated based on the proportion of the service period completed. The vested options will also be forfeited in circumstances where the participant has breached their contract of employment. All ESOP options are forfeited on the insolvency of the iSelect Limited. There are no cash settlement alternatives. ESOP (Pre 1 July 2010) Under the iSelect ESOP, share options are granted to Company Directors, secretary and Senior Executives. The ESOP is designed to align participant’s interests with those of shareholders by increasing the value of the Group’s shares. Under the ESOP, the exercise price of the options is set at or above the market price of the shares on the date of grant. For all participants, excluding Company Directors and secretary, 50% of deemed options granted will vest over the prescribed vesting period subject to CEO performance assessment. Typical vesting period for options granted varies from three to four years. The term of the options is typically five years. For all participants, excluding Company Directors and secretary, vested options can be exercised on an Initial Public Offering (IPO) event or trade sale event or within six months prior to their expiry or at the discretion of the Board. For all participants, 75% of any unvested options immediately vest on an IPO or trade sale event. When a participant ceases employment prior to the vesting of their share options, the non vested share options are forfeited. The vested options will also be forfeited in circumstances where the participant has breached their contract of employment. All ESOP options are forfeited on the insolvency of the iSelect Limited or iSelect Health Pty Ltd. There are no cash settlement alternatives. CEO Performance Plan The CEO Performance Plan (CEO Plan) is a contract between the Group and the current Chief Executive Officer (CEO) Damien Waller for the grant of share options in the Group. The share options under the CEO Plan were granted on 20 December 2005 by iSelect Health Pty Ltd and novated to the Group on 27 April 2007. The CEO Plan is designed to align the CEO’s interests with those of shareholders by increasing the value of the Group. If all vesting conditions are met and the Group’s valuation is equal to or exceeds $265m then all options can be exercised. The share options have an exercise price of $2.22 and fully vested to 30 June 2008. The share options expire two years (or later if a compulsory escrow period is required) from the date of IPO or Trade Sale or if neither of these have occurred prior to 1 January 2010 then the expiry will be 1 January 2012. Terms of an agreement with ninemsn Pty Ltd relating to the purchase of shares in the Group on 31 March 2006 granted ninemsn Pty Ltd share options in the Group. The exercise price of the options is $4.25. The number of exercisable options is calculated, so that ninemsn Pty Ltd has the same equity interest in the Group based on the total number of shares on issue after the CEO options are exercised but before any additional ninemsn exercisable options are issued. 35 c) SummARIES OF OPTIONS GRANTED uNDER ESOP, CEO PLAN AND NINEmSN PTy LTD AGREEmENTS The following table illustrates the number (No.) and weighted average exercise prices (WAEP) of, and movements in, share options during the year: Outstanding at the beginning of the period Granted during the period Forfeited during the period Exercised during the period Expired during the period Outstanding at the end of the period Exercisable at the end of the year 2011 No. 2011 WAEP $ 2010 No. 2010 WAEP $ 5,119,597 2,000,000 – (832,800) – 6,286,797 3,901,797 3.93 22.50 – 1.78 – 10.12 3.56 5,213,767 118,750 – (189,716) (23,204) 5,119,597 4,537,272 3.70 9.82 – 1.13 4.25 3.93 3.05 The outstanding balance as at 30 June 2011 is represented by: – – – – 2,557,074 options over ordinary shares with an exercise of $2.22, exercisable upon meeting the ESOP conditions and CEO Plan conditions; 945,384 options over ordinary shares with an exercise of $4.25, exercisable upon meeting the ESOP conditions and CEO Plan conditions; 291,681 options over ordinary shares with an exercise price of $7.50 to $9.50 (WAEP of $8.31), exercisable upon meeting the ESOP conditions; 355,000 options over ordinary shares with an exercise price ranging from $10.00 to $12.50 (WAEP of $11.26), exercisable upon meeting the ESOP conditions; – 47,658 options over ordinary shares with an exercise price of $15.35, exercisable upon meeting the ESOP conditions. – 90,000 options over ordinary shares with an exercise price of $20.00, exercisable upon meeting the ESOP conditions. – 2,000,000 options over ordinary shares with an exercise price of $22.50, exercisable upon meeting the ESOP conditions. d) WEIGhTED AvERAGE REmAINING CONTRACTuAL LIFE The weighted average remaining contractual life for the share options outstanding as at 30 June 2011 is 1.11 years. e) RANGE OF ExERCISE PRICE The range of exercise prices for options outstanding at the end of the period was $2.22 to $22.50. As the range of exercise prices is wide, refer to section (c) above for further information in assessing the number and timing of additional shares that may be issued and the cash that may be received upon exercise of those options. f) WEIGhTED AvERAGE FAIR vALuE The weighted average fair value of options granted during the year was $0.72. iSelect Annual Report 2011 36 Notes to the Financial Statements For the year ended 30 June 2011 20. SHARE BASED PAYMENT PLANS (CONTINUED) g) OPTION PRICING mODEL: ESOP, CEO PLAN AND NINEmSN PTy LTD AGREEmENTS The fair value of the equity settled share options granted under the ESOP, CEO Plan and ninemsn Pty Ltd agreements is estimated as at the date of grant using a Binomial model taking into account the terms and conditions upon which the options were granted. The following table lists the inputs to the models used for the period ended 30 June 2011: Dividend Yield (%) Years 0 to 3 Years 4 to 5 Years 6 to 7 Years 8 plus Expected Volatility (%) Expected life of Options (years) Option Exercise price (WAEP) ($) Weighted average share price at measurement date ($) * inclusive of ninemsn Pty Ltd agreement ESOP Post 1 July 2010 ESOP Pre 1 July 2010 CEO PLAN* – N/A N/A N/A 42.00 3 22.50 15.50 – 1.00 1.50 2.00 – 1.00 1.50 2.00 40.00 40.00 4.98 6.33 3.80 5.97 2.74 2.44 The expected volatility was determined by considering volatility for similar sized and industry listed companies. The expected volatility therefore reflects the assumption that the comparison volatility is indicative of future trends, which may also not necessarily be the actual outcome. 21. PARENT ENTITY INFORMATION Information relating to iSelect Limited Current assets Non-current assets Total Assets Current liabilities Non-current liabilities Total Liabilities Issued capital Share based payments reserve Retained earnings Total shareholders’ equity Profit or loss of parent entity Total comprehensive income of the parent entity 2011 $‘000 2010 $‘000 11,284 41,633 52,917 541 12,073 12,614 36,581 1,827 1,895 40,303 409 409 4,653 33,559 38,212 2,200 13,262 15,462 20,095 1,169 1,486 22,750 208 208 37 Directors’ Declaration In accordance with a resolution of the Directors of iSelect Limited (formerly iSelect Pty Ltd), I state that: 1. In the opinion of the Directors: a) the financial statements and notes of the Company and of the Consolidated Entity are in accordance with the Corporations Act 2001, including: i) giving a true and fair view of the Company’s and Consolidated Entity’s financial position as at 30 June 2011 and of their performance for the period ended on that date. ii) complying with Accounting Standards and Corporations Regulations 2001. b) there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June 2011. On behalf of the Board Damien Waller Chief Executive Officer & Managing Director Melbourne 27 October 2011 iSelect Annual Report 2011 38 Independent Auditor’s Report to the members of iSelect Limited Independent auditor's report to the members of iSelect Limited Independent auditor's report to the members of iSelect Limited Report on the financial report Report on the financial report We have audited the accompanying financial report of iSelect Limited, which comprises the consolidated statement of financial position as at 30 June 2011, the consolidated statement of comprehensive We have audited the accompanying financial report of iSelect Limited, which comprises the consolidated income, the consolidated statement of changes in equity and the consolidated statement of cash flows for statement of financial position as at 30 June 2011, the consolidated statement of comprehensive the year then ended, notes comprising a summary of significant accounting policies and other income, the consolidated statement of changes in equity and the consolidated statement of cash flows for explanatory information and the directors' declaration of the consolidated entity comprising the company the year then ended, notes comprising a summary of significant accounting policies and other and the entities it controlled at the year's end or from time to time during the financial year. explanatory information and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year. Directors' responsibility for the financial report Directors' responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for The directors of the company are responsible for the preparation of the financial report that gives a true such internal controls as the directors determine are necessary to enable the preparation of the financial and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for report that is free from material misstatement, whether due to fraud or error. such internal controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. Auditor's responsibility Auditor's responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with Our responsibility is to express an opinion on the financial report based on our audit. We conducted our relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain audit in accordance with Australian Auditing Standards. Those standards require that we comply with reasonable assurance about whether the financial report is free from material misstatement. relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgment, including the assessment An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in of the risks of material misstatement of the financial report, whether due to fraud or error. In making the financial report. The procedures selected depend on the auditor's judgment, including the assessment those risk assessments, the auditor considers internal controls relevant to the entity's preparation and of the risks of material misstatement of the financial report, whether due to fraud or error. In making fair presentation of the financial report in order to design audit procedures that are appropriate in the those risk assessments, the auditor considers internal controls relevant to the entity's preparation and circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's fair presentation of the financial report in order to design audit procedures that are appropriate in the internal controls. An audit also includes evaluating the appropriateness of accounting policies used and circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's the reasonableness of accounting estimates made by the directors, as well as evaluating the overall internal controls. An audit also includes evaluating the appropriateness of accounting policies used and presentation of the financial report. the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence Independence In conducting our audit we have complied with the independence requirements of the Corporations Act 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a In conducting our audit we have complied with the independence requirements of the Corporations Act copy of which is included in the directors’ report. 2001. We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the directors’ report. Liability limited by a scheme approved under Professional Standards Legislation Liability limited by a scheme approved under Professional Standards Legislation 39 2 Opinion In our opinion: a. the financial report of iSelect Ltd is in accordance with the Corporations Act 2001, including: i ii giving a true and fair view of the consolidated entity's financial position as at 30 June 2011 and of its performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Ernst & Young Ashley Butler Partner Melbourne 27 October 2011 iSelect Annual Report 2011 40 Corporate Directory DIRECTORS Martin Dalgleish Damien Waller Chairman Group Chief Executive Officer and Managing Director Shaun Bonett Non-Executive Director Michael McLeod Non-Executive Director Pat O’Sullivan Non-Executive Director Leslie Webb Non-Executive Director COMPANY SECRETARY Matt McCann DISCLAIMER Although care has been taken by iSelect, its related companies and their contractors and agents (iSelect parties) in the preparation of this document to ensure that the information provided is accurate, the contents of the document have not been independently verified by the iSelect parties (other than to the extent that Ernst & Young have carried out verification). No liability other than that which may not be excluded by law is accepted for any damage, loss, injury or expense caused by errors or omissions in this document or arising from any action taken by any person in reliance upon it. The information in this document is subject to variation if changes occur after the document has been prepared. REGISTERED OFFICE AND PRINCIPAL PLACE OF BUSINESS 294 Bay Road Cheltenham, Victoria 3192 Nothing in the contents (express or implied) of this document will be taken to constitute any warranty or representation by any iSelect party. BANKERS ANZ Bank Limited Level 3, 287 Collins Street Melbourne, Victoria 3000 AUDITORS, ACCOUNTING AND TAxATION SERVICES Ernst & Young 8 Exhibition Street Melbourne, Victoria 3000 WEBSITE ADDRESS www.iselect.com.au Any person using the information in this document does so at his or her own risk and should conduct independent enquiries to verify the accuracy of the information. The contents of this document are the confidential information of iSelect and its related companies. This document is provided on the condition that the contents must not, in whole or in part, be disclosed to any person except to the extent that any part of the document is already in the public domain through no breach of this confidentiality obligation. © 2011 All rights reserved. No part of this document may be reproduced, stored on a retrieval system or transmitted in any form or by any means without the prior written consent of iSelect Ltd, other than as permitted under the Copyright Act 1968 (Cth). iSelect Ltd 294 Bay Road Cheltenham Victoria 3192 Australia 

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