Annual Report For the Year ended 31 December 2020 APPENDIX 4E Annual Report Under ASX listing rule 4.3A Moelis Australia Limited ABN 68 142 008 428 Current reporting period: 1 January 2020 to 31 December 2020 Previous corresponding period: 1 January 2019 to 31 December 2019 RESULTS FOR ANNOUNCEMENT TO THE MARKET Revenues from ordinary activities Total income Profit after income tax from ordinary activities attributable to ordinary equity holders Net profit after income tax attributable to ordinary equity holders Total comprehensive income DIVIDEND PER ORDINARY SHARE 2020 final dividend per share Record Date: 24 February 2021 Payment Date: 3 March 2021 OTHER DISCLOSURE REQUIREMENTS Net tangible assets per ordinary share Year ended 31 Dec 2020 $m 142.7 161.1 26.5 26.5 22.5 Year ended 31 Dec 2019 $m Up/Down Movement % 136.3 153.7 23.5 23.5 25.0 Up Up Up Up Down 4.7% 4.8% 12.7% 12.7% -10.0% Amount per share (cents) Franked amount per share (cents) Tax rate for franking credit 10.0 10.0 30.0% Year ended 31 Dec 2020 Year ended 31 Dec 2019 $1.45 $1.36 Additional Appendix 4E disclosure requirements and commentary on significant events relating to operating performance and results are included in the Annual Report for the year ended 31 December 2020 and the Directors’ Report for the year ended 31 December 2020. This information should be read in conjunction with the 2020 Annual Report, and any public announcements made in the period by the Group in accordance with the continuous disclosure requirements of the Corporations Act 2001 (Cth) and the ASX Listing Rules. This report is based on the consolidated financial statements for the year ended 31 December 2020 which have been audited by Deloitte Touche Tohmatsu. This page has been intentionally left blank. 2 0 2 0 A N N U A L R E P O R T M O E L I S A U S T R A L I A L I M I T E D Contents Moelis Australia at a glance Independent Chairman’s Letter Joint Chief Executive Officer’s Letter Year in review 2020 Directors' Report Remuneration Report Auditor’s Independence Declaration Financial Report Consolidated Statement of Profit or Loss and other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Directors’ Declaration Independent Auditor’s Report Additional Information Glossary Corporate Directory 2 4 6 8 19 28 37 38 40 41 42 43 44 104 105 110 112 115 Moelis Australia Limited 2020 Annual Report 1 Moelis Australia at a glance Our business Moelis Australia is an ASX listed financial services firm specialising in Asset Management, Corporate Advisory and Equities. The Group was founded in 2009 as a joint venture with NYSE-listed Moelis & Company, a leading global independent investment bank, and Australian executives. Since establishment, the Group has advised on $110 billion of transactions, assisted clients to raise $11.5 billion from equity capital markets, and has grown assets under management (AUM) to $5.4 billion. While Moelis Australia’s business units operate independently, sector knowledge and expertise are shared across divisions enhancing our sector perspective and our ability to identify and respond to emerging trends and opportunistic investments. A core strength of Moelis Australia has been to hire, develop and retain motivated and talented team integrity and are ambitious, optimistic and intelligent is critical to our long-term success. By developing the capability of our people over time we reinforce, build and evolve our positive culture. Our purpose and values Moelis Australia’s purpose is to deliver long term value to our clients and partners, our people and our shareholders. We do this by: • partnering with clients who value strong alignment, complementary expertise and sustainable performance; • empowering our people through a culture of growth, cohesion, innovation and accountability; • delivering a high standard of technical expertise in both fiduciary and advisory roles; and • being active managers of risk. members. Hiring team members who have high The Moelis Australia Differentiating Values and Behaviours are: Differentiating Values and Behaviours Growth • We actively seek sustainable value creation Cohesion • We recognise the whole is greater than the sum • We are committed to continuous improvement of its parts and technical excellence • We encourage each other to pursue opportunities • We pursue ongoing learning, and we invest in and empower one another to succeed practical individual and team development • We actively find solutions, not problems • Our growth is always paired with acting • We value diversity of thought and constructive with integrity. debate and feedback. Innovation • We uncover opportunities others may miss and Accountability • We accept our commitments and are transform them into actionable and meaningful accountable to deliver on them outcomes for our clients • We own and discuss our mistakes and learn • We constantly develop and share new ideas from them across business units • We actively think about and manage risk • We are entrepreneurial and think and act like • We speak up and we don’t accept inappropriate business owners • We are hard-working and resilient. 2 Moelis Australia Limited 2020 Annual Report behaviour and actions. Moelis Australia at a glance (cont.) Asset Management Corporate Advisory and Equities We manage funds for institutional, high net worth Our team provides strategic and financial advice for (HNW) and retail investors with a core focus on real mergers and acquisitions, equity capital markets (ECM), estate, hospitality and credit assets, with a growing debt capital markets and restructuring. Our offering is focus on listed equities, private equity and venture enhanced by our long-standing partnership with NYSE capital. Alongside traditional asset classes such as cash listed global investment bank Moelis & Company. and bonds, we manage $5.4 billion across more than 40 funds. Our specialised capabilities include real estate, restructuring, technology and small to mid-cap Our funds are managed by an experienced senior companies. leadership team who have on average over 25 years experience in their areas of specialisation. The team benefits from sharing the expertise of the Corporate Advisory & Equities division, gaining sector insights and access to different investment opportunities in our core areas of focus. Since 2009, we have advised on $110 billion worth of transactions, including SABMiller's acquisition of Fosters and the spin-off of Woolworths' property business into SCA. The team has also led the recapitalisation and reconstruction of Slater and Gordon, advised on the sale of the Ten Network to CBS and advised Saputo on In Real Estate, we manage $2.2 billion in assets its acquisition of Murray Goulburn. including commercial, retail, aged care, child care and industrial properties. We have deep expertise in helping both domestic and international clients raise money through ECM Our specialist Hospitality platform manages $1.3 billion including IPOs. We are a leading M&A advisor and in hotel assets, including the ASX listed Redcape one of Australia’s most active real estate advisory and Hotel Group. In Credit, we manage $1.1 billion across various credit ECM investment banks. We are also ranked Australia’s leading special situations advisor.1 strategies with a growing lending business. We have Our Equities business provides securities research, deep expertise in providing credit to borrowers and sales and trading execution services to institutional and structuring transactions in a range of asset classes and HNW clients. We are primarily focused on small-cap and economic conditions. Our Asset Management team were pioneers of the Significant Investor Visa (SIV) program. We are now mid-cap industrial and real estate companies and offer the largest research coverage of small-cap real estate companies (including REITs) in Australia. leaders in SIV funds management and one of the The Equities team complements the Corporate Advisory largest specialist managers of Chinese HNW capital division by providing ECM expertise and distribution in Australia. Our journey capabilities to facilitate transactions on behalf of clients. 2010 Equities started with acquisition of Foresight Securities 2014 Melbourne office opened 2017 Moelis Australia Limited listed on the ASX, + $100m Revenue 2019 Over 200 staff 2009 Moelis & Company opened in Australia 6 staff 1. Eilon SDC Platinum 2019. 2013 Asset Management division established 2016 Over 70 staff, surpassed $1 billion of AUM 2018 Shanghai office opened, 180 staff 2020 Surpass $5 billion of AUM Listing of Redcape Hotel Group (ASX:RDC) MKM Capital joins the Group Moelis Australia Limited 2020 Annual Report 3 Independent Chairman’s Letter Dear Shareholder, We are pleased to present our 2020 Annual Report after what was a year full of challenges for our Corporate Advisory & Equities (CA&E) business. With the improved business momentum, we were able to reinstate staff and executive salaries. Company and, of course, the broader community. Moelis Australia has more than a decade of track When I wrote to you in last year’s Annual Report I highlighted a promising outlook for Moelis Australia. Soon after, the onset of the COVID-19 pandemic presented an unprecedented challenge. I am pleased at how our Board, executive team and staff have navigated the complexities of COVID-19 and delivered a strong financial result that positions the business for strong growth in the years ahead. To deliver an increase in both our Statutory and Underlying revenue and an Underlying EBITDA of $60.5 million, only 5% lower than our record 2019 result, is an excellent outcome in the face of significant COVID-19 related headwinds experienced during the year. This has allowed the Board to again declare a fully franked 10 cents per share dividend. The business retains a balance sheet with substantial cash holdings, important to fund our growth ambitions. record in operating and growing a profitable financial services business. The many years of experience of our executive team in working together with a single focus of delivering consistent and strong shareholder returns was never more evident than in 2020. I believe that our business has never been more balanced, nor better positioned for growth. Our CA&E business together with our fast-growing Asset Management platform continues to prove to be a powerful combination. Under the umbrella of our Asset Management division we continue to grow our capability in raising and then managing our clients’ capital across a diversified spectrum of investment strategies. Underlying these investment strategies we have built substantial operational expertise in Real Estate ($2.2 billion), Hospitality ($1.3 billion), Credit & Lending ($1.1 billion) in addition to a growing focus on managing listed equities ($470 million). Further, we I am particularly pleased with the smooth transition to are constantly innovating and looking to develop new our new Joint CEO’s, Julian Biggins and Chris Wyke. investment strategies. They have demonstrated calm and assured leadership qualities, particularly given the volatile and uncertain operating environment that confronted the business world in the first half of 2020. They swiftly positioned the business on a defensive footing, managed costs, reset business activity where appropriate, and conserved cash. Appropriately given the economic uncertainty, the Board, senior executives, and most staff agreed to temporary salary reductions, demonstrating strong shareholder alignment and the collegiate spirit that we are so proud of. These measures positioned the business well to take advantage of improving market sentiment in the second half of 2020. Business activity levels rebounded strongly, characterised by accelerating client inflows and new fund launches for our Asset Management business, new hotel acquisitions for our Hospitality platform and an accelerated number of equity capital markets (ECM) transactions for our Scaling our operational capability in our key areas of asset management driven activities continues to be a focus. Utilising a combination of our highly experienced executives and market leading technology, our asset management clients and shareholders benefit from our growing and deep capability in operating businesses associated with our real estate, hospitality and credit platforms. We increasingly believe that by actively managing in-house the assets invested in by our clients and our own balance sheet we can deliver superior returns and best manage risk. Our significant platform and notable strength in managing the capital of wealthy Chinese families continues to be a powerful area of differentiation for Moelis Australia. Today we manage $2.5 billion for foreign high net worth individuals. This unique strength is complimented by our increasing success with domestic high net worth and retail investors ($1.6 billion) and institutional partnerships ($1.3 billion). 4 Moelis Australia Limited 2020 Annual Report I would like to thank our staff from across the business Kate has almost 20 years’ experience in the investment for their hard work and adaptability throughout the banking industry and is currently Chief Operating year. It has been a year of significant change, including Officer of Investment Banking at our NYSE listed to work practices, client engagement and in our strategic partner Moelis & Company. She has replaced everyday lives. Whilst our priority has been to look Joe Simon as a Non-Executive Director and I would like after our people’s health and wellbeing through this to thank Joe for his excellent contribution during his difficult time, our staff have continued to deliver strong tenure on the Board. outcomes for our clients and shareholders. The 2020 financial result is a testament to their dedication. Alexandra joined the Board as an Independent Non- Executive Director. She is the Vice Chair of Korn Ferry I am proud of the contribution staff have made to their Australasia and has 30 years’ experience in executive own communities and causes through the Moelis search and consulting. Alexandra’s leadership and Australia Foundation. Since its inception in 2018, the expertise in people, culture and governance has Foundation has received $7.7 million of contributions and has donated $4.7 million across a diverse range of worthy causes. Supporting the less fortunate is already proven highly additive to the business, in particular in her role as the new Chair of the Nomination and Remuneration Committee. important to our social wellbeing and we look forward to this contribution growing substantially in the future. Promising Outlook The significant business momentum generated in the second half of 2020 has delivered a strong start to 2021 and confidence in the outlook for the year ahead. Accordingly, management have forecast that the Group’s 2021 Underlying earnings per share will be between 10% and 20% higher than in 2020. This is subject to the uncertainty of global markets and that current COVID-19 related restrictions in Australia do not change materially over the year. The focus in 2021 will be on scaling our strengths in real estate, hospitality, credit and corporate restructuring, while continuing to expand our emerging business capabilities in equities funds management, lending, mid-cap ECM and technology banking. The Board continues to carefully monitor business and governance risks and to note and assess any potential impact of experiences of our peers and others in the wider business community, in order to maintain business and governance best practice. I believe our Board has performed extremely well and I would like to thank all our Board Directors and executives for their continued efforts over such a challenging year. A significant effort goes into maintaining a workplace culture based on entrepreneurship, excellence, mutual trust and hard work. These qualities have been fundamental to growing our business and will drive our future ambitions. Our business is in a strong position and we are looking forward to the year ahead. Thank you for your ongoing support of Moelis Australia. We have also invested in our Asset Management Yours faithfully, distribution capabilities and anticipate this will continue to deliver strong fund flows to the business. Additions to the Board Reflective of the ongoing growth of Moelis Australia we welcomed Alexandra Goodfellow and Kate Pilcher Ciafone to the Board of Directors in August. These two appointments have added valuable skills, diversity, and greater independence to our Board. Jeffrey Browne Independent Chairman Moelis Australia Limited 2020 Annual Report 5 Joint Chief Executive Officer’s Letter Dear Shareholder, Moelis Australia entered 2020 with a strong balance sheet, headlined by significant cash holdings. Navigating an environment challenged by the uncertainty of a global pandemic reinforced the importance of our longstanding focus on financial prudence and continued investment in great people. The strong operating performance of our Hospitality management platform was a key driver of this momentum, with the Moelis-managed Redcape Hotel Group delivering an outstanding result for the six months to 31 December 2020 and the Beach Hotel in Byron Bay trading strongly through the recent holiday season. The combination of balance sheet strength, a diverse Assets under management (AUM) increased by 11% and time-tested business model and of course our over the year to $5.4bn. Most of this growth occurred in experienced staff enabled Moelis Australia to perform the second half, supported by a substantial increase in strongly, despite the challenges thrown at us. fund inflows from foreign and domestic high net worth We would like to thank the Board and staff of Moelis Australia for their commitment and resolve throughout 2020 which was obviously a testing year for everyone clients. There were limited client redemptions during the year which demonstrates the quality and strong performance of our managed funds. both personally and professionally. Significantly, we are preparing to launch our first credit We are both proud of what was achieved in 2020. Our achievements can largely be attributed to the fund offerings available to retail investors in the first half of the year. depth of the expertise of those in our business and the Our purpose is to deliver long term value to our collaborative approach of all executives in what was a shareholders, clients and people. We believe that difficult year for our community. sustainability is key to this and as material owners in the FY20 Underlying earnings per share (EPS) was down business we have a long-term view to value creation. only 5% on our record FY19 result. The lower EPS We invest in people and innovation. Since inception in reflects the significant impact, most notably in the first 2009 as a start-up investment bank we have continued half of 2020, of lockdowns and other Government to promote innovation with the aim of creating mandated health orders on many areas of our business. complimentary businesses where we have, or can, However, as we adapted to the challenges associated create operational edge in a scalable market. with COVID-19 our overall operating performance strengthened appreciably as the year progressed. This strength and positive business momentum has continued into 2021. A recent example of this strategy is in credit and lending. We have materially invested in this strategy over the last couple of years with the earlier years being a drag on earnings, although always with a focus We believe that the challenges related to COVID-19 have on building a highly profitable business. resulted in short-term dilution of performance of some areas of our business. However, we are confident that these short-term challenges will result in us being an even stronger and more dynamic business going forward. The acquisition of a 47.5% interest in MKM Capital in October 2020 was a key milestone for our credit and lending strategy as it provided the Group with a direct position in the $1.8 trillion home loans market as a From June 2020, business momentum began to non-bank lender. We believe that the non-bank lending accelerate as market conditions improved and lock down restrictions eased. The strength of this market is a significant opportunity for the Group and have been following it closely for a number of years momentum is illustrated by the fact that our Underlying before making this investment. EPS in the second half of 2020 was 10% higher than in the second half of 2019. 6 Moelis Australia Limited 2020 Annual Report While the investment will only provide a small In looking forward, we are optimistic about the contribution this year, and probably next, it does momentum in the business with significant activity provide us with the operational expertise and business across the business in late 2020 to deliver a strong platform to participate in a large addressable market. start to 2021 and live transaction activity across many We are confident this strategy, coupled with our of our investment strategies. expertise and relationships, will be an important contributor to Moelis Australia in the future. In closing, 2020 was clearly a trying year for all and we hope our shareholders, clients, partners and staff have The credit and lending strategy is just one example of been able to navigate the difficult year safely. We are how we aim to create value for shareholders by starting optimistic about how we are positioned at the start of small, focusing on operational excellence and gaining 2021 and look forward to delivering on our purpose of an intimate understanding of a market. Albeit the key building long term value for those who support us. Yours sincerely, Chris Wyke Julian Biggins Joint Chief Executive Officers consideration is always how to build meaningful value for our shareholders, clients and people. While we have focused on the lending business, there are many examples of how we have done this in the past including the Significant Investor Visa product, our Hospitality platform and originally our Corporate Advisory business. Further, there are other initiatives that we are currently investing in for the future. Given our approach there will be years of investment in people and development prior to the visible value creation and there may be failures. However, through a diversified portfolio of complimentary businesses we believe we can continue to innovate and materially grow shareholder value over the medium and long term. We often talk about the importance of our people to the business and its long-term prospects. In this regard we are very excited to be launching the MA Academy this year which will provide a tailored development tool for our people to learn from. Moelis Australia Limited 2020 Annual Report 7 Year in review 2020 at a glance Statutory revenue1 $161.1m 5% increase from 2019 Statutory EBITDA2 $61.4m 18% increase from 2019 Statutory NPAT $26.5m 13% increase from 2019 Statutory earnings per share 18.5c 19% increase from 2019 Dividend per share 10.0c Fully franked No change from 2019 Cash and cash equivalents3 $112.2m -11% decrease from 2019 Underlying revenue4 $160.1m 1% increase from 2019 Underlying EBITDA4 $60.5m -5% decrease from 2019 Underlying NPAT4 $36.0m -10% decrease from 2019 Underlying earnings per share4 25.1c -5% decrease from 2019 Asset under management as at 31 December 2020 $5.4bn 11% increase from December 2019 Return on equity % 15.5% 17.2% in 2019 Moelis Australia Foundation donations $4.7m Since establishment in late 2017 MA Academy Established in 2020 Developing and retaining talent Our people are the core of our business, and our competitive advantage 1. Statutory Revenue refers to total income on the consolidated statement of profit or loss and other comprehensive income. 2. Statutory Earnings Before Interest, Taxation, Depreciation and Amortisation (EBITDA) is not a recognised International Financial Reporting Standards (IFRS) measure but has been presented to give a comparable measure to the Underlying Result. 3. Adjusted to reflect the total economic exposure of the Group by removing the consolidation of a Moelis Australia managed credit fund. 4. Underlying revenue, EBITDA, Net Profit After Tax (NPAT) and earnings per share and other measures of underlying performance are not prepared in accordance with IFRS and are not audited. Detailed reconciliations between the Underlying and IFRS measures are provided in Moelis Australia's 2020 Financial Report and 2020 Investor Presentation. 8 Moelis Australia Limited 2020 Annual Report Year in review (cont.) Our response to COVID-19 COVID-19 was declared a world-wide pandemic • Managing staff costs through a temporary by the World Health Organisation in March 2020 reduction in fixed compensation of 25% for senior and continues to have a significant impact on executives, including Board members and Joint global economies. The Group’s response to the Chief Executive Officers, as well as the majority of unprecedented uncertainty was to take rapid and the Group’s staff agreeing to the same or smaller decisive action to protect the business and its key reductions in salary, and the deferral of pay assets, being its people. increases until July 2020; and Some of the key initiatives implemented by the Group included: • Rigorous stress testing of the business, it’s managed funds and investments to identify and • Transitioning all staff to a working from home capability, with no notable interruption to client service, and enhanced wellbeing programs and communications provided to support staff. respond to any areas of risk; These actions highlight the Group’s strong risk culture • Focusing attention on maximising and then preserving cash by implementing working capital optimisation strategies, reducing non-essential expenditure and realising non-core assets; • Investigating all government support packages and applying for those that the Group qualified for including: • $3.3 million relating to COVID-19 government wage subsidies; and • deferral of $18.5 million of payments to the Australian Taxation Office with $14.1 million repaid by 31 December 2020 under the agreed instalment payment plans. • Issuing a new $40 million unsecured note to successfully refinance $32 million of notes that matured in September 2020; and proactive response to economic uncertainty. Coupled with a conservatively positioned balance sheet coming into the pandemic and a resilient business model based on contracted recurring income, the Group demonstrated it could withstand significant shocks if required. Whilst there were one-off financial impacts as a result of the pandemic, particularly relating to assets in the hospitality and aged care sectors, with the improving business momentum and economic outlook in the second half of the year, the Board determined to repay the temporary reductions in fixed compensation to staff. Moelis Australia Limited 2020 Annual Report 9 Year in Review (cont.) Group performance Statutory Results The Group recorded total comprehensive income for the year of $22.5 million (2019: $25.0 million) and profit after income tax for the year of $26.5 million (2019: $23.5 million). Basic earnings per share was 18.5 cents, an increase of 19.3% on the prior comparative period. Statutory results Total income Profit before tax Profit after income tax Total comprehensive income Basic earnings per share (cents per share) Diluted earnings per share (cents per share) Dividend (cents per share) Underlying results Revenue EBITDA Net profit after income tax 31 Dec 2020 31 Dec 2019 Movement $'000 161,101 38,690 26,480 22,517 18.5 18.0 10.0 $'000 153,728 35,274 23,493 25,025 15.5 14.9 10.0 % 4.8% 9.7% 12.7% -10.0% 19.3% 21.0% – 31 Dec 2020 31 Dec 2019 Movement $'000 160,134 60,498 35,998 $'000 158,348 63,481 40,154 % 1.1% -4.7% -10.4% Earnings per share (cents per share) 25.1 26.5 -5.3% Non-IFRS Underlying results The Group also utilises non-IFRS Underlying financial information in its assessment and presentation of Group performance. When reading our Statutory and Underlying results, we note that there are some adjustments that a reader may find useful to understand in more detail. For further information on adjustments between Statutory and Underlying results, please refer to the detailed reconciliation provided in note 3 of the 2020 Financial Report and to the explanation on page 25 of the Directors’ Report as to why the Directors believe that, when read in conjunction with the IFRS measures, the Underlying measures are useful to the reader. Underlying revenue proved resilient, up 1% on the FY19 result, despite a $6.1 million impact from COVID-19. Underlying EBITDA was down 5% on FY19 due to a 5% increase in expenses arising from investment in platform capabilities largely undertaken in FY19 and one-off costs of approximately $3.0 million associated with the impacts of COVID-19. 10 Moelis Australia Limited 2020 Annual Report Year in review (cont.) Group performance (cont.) Our businesses The Group is divided into two operating business units. Asset Management and Corporate Advisory and Equities (CA&E) and unallocated costs related to the corporate support functions (Corporate Services). The Group’s Underlying measures depicted in the previous and following table directly align with the segment measures required by AASB 8 Operating Segments. Further information and reconciliations are provided in note 3 of the Financial Report. The table below shows the contributions to Underlying NPAT of the Group’s business segments. Asset Management Corporate Advisory and Equities Corporate Services Underlying EBITDA Depreciation and amortisation Interest expense Income tax expense Underlying NPAT Asset Management 31 Dec 2020 31 Dec 2019 $'000 60,041 11,860 $'000 55,712 17,050 (11,403) (9,282) 60,498 3,741 5,332 15,427 35,998 63,481 3,276 2,842 17,209 40,154 The Asset Management division contributed approximately 84% of Moelis Australia’s Underlying EBITDA before Corporate Services in FY20. This result was derived from Underlying Revenue of $106.8 million, up 10% from $96.7 million in FY19. Assets under Management (AUM) grew by $0.5 billion over the year to $5.4 billion at 31 December 2020. Net client inflows were $270 million in 2H20, up $110 million on 1H20 despite $130 million of institutional outflows from the successful realisation of two large construction finance loans. Recurring revenue growth of 3% lagged AUM growth due to impacts to base management fees and distributions from COVID-19 impacted assets and investments in the hospitality and aged care sectors. Transactional revenue was up 26% on FY19 to $27.0 million largely due to a 44% increase in performance fees driven by the strong performance of the Group’s hospitality assets in 2H20, equity fund strategies and successful asset realisations. Expense growth was largely due to investment in platform growth undertaken in FY19 and one-off expenses related to COVID-19. Platform investment was focused on the distribution capability, appointing a dedicated resource to build institutional reach and establishing a presence in Hong Kong to extend our foreign HNW network. Moelis Australia Limited 2020 Annual Report 11 Year in Review (cont.) Group performance (cont.) Asset Management Revenue ($ million) 96.7 106.8 84.8 44.4 15.6 FY16 FY17 FY18 FY19 FY20 Business highlights Hospitality - $1.3 billion AUM MA Hotel Management (MAHM) is the Group’s unique hospitality operating platform that applies strong sector expertise across the high-quality real estate 2.8 backed community venues it manages. The hospitality assets under management have demonstrated the 1.1 Credit and Lending - $1.1 billion AUM 5.4 The Group has continued to expand the credit 4.9 platform and grow its lending business. Credit AUM 3.7 grew 23% in the year despite gross institutional outflows of $160m from the successful realisation of construction finance loans. All credit strategies continued to deliver consistent defensive nature of the asset class by exhibiting performance through FY20, with no material strong trading performance since the easing of impairments across the portfolio reflective of the COVID-19 related venue restrictions in 1H20. Key Group’s conservative underwriting standards. FY16 FY17 FY18 FY19 FY20 highlights include: Furthermore, the Group completed the 47.5% first stage acquisition of MKM Capital in October 2020 which will provide a platform to grow the Group’s lending strategy for the residential mortgage market. Credit AUM grew 23% in the year • Redcape Hotel Group (RDC) reported a 25% increase in distributable earnings for its half year to 31 December 2020 relative to the prior corresponding period. • MAHM earned a $5.8 million performance fee from RDC, driven by valuation uplift of $63.5 million for 12 venues independently valued at 31 December 2020. • Established the $115 million Beach Hotel Byron Bay Fund in 1H20. • MAHM facilitated the acquisition of six new hotels in 2H20 worth over $160 million including the new $70 million MA Taylor Square Fund. 12 Moelis Australia Limited 2020 Annual Report Year in Review (cont.) Group performance (cont.) Real Estate - $2.2 billion AUM Equities, Private Equity and Venture Capital - The Group manages a range of retail and commercial $0.8 billion AUM real estate assets. The MA Prime Logistics Fund was established in 2H20 to invest in high quality industrial and logistics real estate assets and successfully settled its first asset, a $63 million cold storage facility, in December 2020. Retail shopping centres were materially impacted due to COIVD-19 related restrictions implemented in 1H20. Over 2H20 foot traffic and portfolio centre sales have trended back to pre-COVID levels, with sales across most centres ahead of the prior year in November and December resulting in the reinstatement of 84.8 distributions for all funds. The Group’s core areas of focus in asset management have traditionally been real estate, hospitality and credit investing. However, equities funds management significantly increased its scale and earnings contribution in FY20, growing AUM by 70% or $170 million to $470 million over the year. Strong equity portfolio performance and venture capital asset realisations delivered growing performance fees in the year. 96.7 106.8 Furthermore, new product offerings were delivered to the market in 2H20, including: • MA Equity Opportunities Fund, an absolute return 15.6 44.4 focused Australian equities fund; and • MA Real Asset Opportunities Fund, a Private Equity fund targeting operating asset-back investment opportunities. FY16 FY17 FY18 FY19 FY20 Assets Under Management ($ billion) 4.9 5.4 3.7 2.8 1.1 FY16 FY17 FY18 FY19 FY20 Equities AUM grew by $170 million over the year Moelis Australia Limited 2020 Annual Report 13 Year in Review (cont.) Group performance (cont.) Corporate Advisory & Equities (CA&E) Business highlights FY20 Underlying revenue for CA&E was down 14% Equity Capital Markets (ECM) Activity on FY19 to $53.4 million. This was primarily driven by a weaker transaction environment relative to FY19, particularly for M&A activity, and the timing of large transaction completions. Equities commissions in FY20 were 3% higher than FY19 largely due to a significant increase in market volatility and volumes during March and April. Corporate advisory fees were down 16% to $44.2m representing revenue per executive of $1.0 million, slightly below the target productivity range of $1.1 to $1.3 million. This was largely due to transaction completion timing with one large restructuring mandate anticipated to complete in 2H20 subsequently completing in early 1H21. The business maintains its target productivity range for FY21 with a growing transaction pipeline and more supportive market conditions. ECM activity levels over the year were pleasing, but characterised by smaller transactions compared to 2019. The business raised over $1.4 billion across 19 transaction in FY20, compared to $2.2 billion across 18 transaction in FY19. Real Estate & Restructuring Advisory In FY20 the business raised $935 million across 9 real estate transactions. Significant work was undertaken on corporate restructuring mandates throughout the year, however due to deal completion timing these transactions will only deliver fees in FY21. Technology Advisory & Mid-cap ECM The business continues to build its presence and expertise in the technology sector. In FY20 Moelis Australia acted as advisor on the ASX listings of Cashrewards and Ansarada as well as Fineos Corporation’s takeover of Limelight Health. The growing focus on mid-cap ECM capability resulted in successfully completing the role as lead advisor on the $530 million IPO of Maas Group, the fifth largest IPO on the ASX in 2020. Our specialised capabilities include: Real estate Restructuring Technology Small to mid-cap companies 14 Moelis Australia Limited 2020 Annual Report Year in Review (cont.) Financial position Statutory total assets amounted to $569.3 million (2019: $513.9 million) with net assets of $236.9 million representing the Group’s maximum contractual economic exposure .1 (2019: $227.1 million) as at 31 December 2020. Management also uses an operating balance sheet The statutory consolidated statement of financial which excludes the MCT when reviewing the Group’s position includes the consolidation of the MA Master financial position. The operating balance sheet Credit Trust (MCT), a Moelis Australia managed credit presents a simplified view of the total economic fund . The Group holds a 10% “first loss” equity co- exposure of the Group and the capital available for investment in MCT of $17.3 million (2019: $9.7 million) management to allocate. Assets Cash and cash equivalents Loans receivable Investments Goodwill and other intangibles Other assets Total assets Liabilities Borrowings Other liabilities Total liabilities 31 Dec 2020 31 Dec 2019 31 Dec 2020 31 Dec 2019 Statutory Statutory Operating Operating $'000 $'000 $'000 $'000 138,004 224,271 119,497 30,864 56,707 128,800 199,767 103,837 32,587 48,951 112,192 63,215 136,752 30,864 48,686 126,082 92,671 113,539 32,587 48,776 569,343 513,942 391,708 413,655 267,570 189,202 64,916 97,614 95,030 59,821 92,180 94,349 332,486 286,816 154,851 186,529 Net assets 236,857 227,126 236,857 227,126 1. See note 24(c) for further information relating to MCT. Moelis Australia Limited 2020 Annual Report 15 Year in Review (cont.) Financial position (cont.) Notable movements in the Group’s operating balance • The average operating cash balance for the year sheet during the year were as follows: was $132 million as a result of prudent COVID-19 • During the year the Group successfully refinanced $32 million of borrowings and extended the tenor of its debt profile. This was achieved through the positioning. Group cash reduced on the prior year as capital allocations returned to growth investing in the second half; issue of a new unsecured note, raising $40 million • Movements in the Group’s investments, including with a maturity date of September 2024; strategic and co-investment positions, is shown • Loans receivable and other liabilities decreased by $25.5 million respectively as a result of the disposal of a subsidiary that had issued Redeemable Preference Shares (RPS) to fund an investment in a loan asset of identical size. There was no net asset impact as a result of this transaction; in the table below. Growth in co-investments is predominantly attributable to the first stage investment in MKM Capital of $10 million, continued investment in credit funds and short- term seed capital invested in new funds managed by the Group. Operating Investments Cash and cash equivalents Credit Redcape Hotel Group (ASX:RDC) Japara Health Care Limited (ASX:JHC) Co-investments Other investments Total operating investments Capital management 31 Dec 2020 31 Dec 2019 $'000 112,192 54,477 58,232 9,291 75,278 2,690 $'000 126,082 84,707 59,348 14,760 44,596 2,799 312,159 332,292 The Group manages its capital with the primary aim of when deploying capital. Fundamental to this is ensuring it will be able to continue as a going concern maintaining a strong balance sheet, which not only while maximising the return to shareholders through stands the business in good stead through economic the optimisation of debt and equity capital balances. shock but can also facilitate attractive investment or The current level of cash holding is indicative of a consistent approach in managing the business for the long term and we will remain patient and prudent business opportunities. 16 Moelis Australia Limited 2020 Annual Report Additional Information Corporate Advisory strategic alliance with Moelis & Company demonstrated by our willingness to both invest alongside clients and closely align the interests of our Moelis Australia and Moelis & Company have a longstanding strategic alliance in relation to Corporate Advisory. shareholders and staff. Our people Moelis & Company is a leading global independent investment bank listed on the NYSE. Moelis & Company holds just under 20% of the issued capital in Moelis Australia. The Moelis Australia and Moelis & Company strategic alliance agreement is designed to ensure that Moelis Australia continues to remain integrated with Moelis & Company in the delivery and execution of corporate advisory services to its Australian and global clients. The strategic alliance is highly beneficial to both parties and will continue to benefit Moelis Australia by: • Providing access to a global network of advisory executives sharing intellectual capital and access to client relationships; • Allowing cooperation on cross-border or industry specific advisory mandates; and • Leveraging a strong and recognisable global brand in Moelis & Company. Our clients Moelis Australia acknowledges and appreciates the trust that clients have placed in the Group to provide the most relevant advice and innovative solutions across our businesses. We are at our best when we partner with clients who our values align with and recognise that we work best when we operate in partnership with our clients to deliver great outcomes. As a custodian of clients’ money, we hold ourselves to the highest standards. In particular the Asset Management division takes on the responsibility of being a custodian of clients’ money with great care. Moelis Australia will endeavour to return this client trust with high-quality products and services. Moelis Australia is focused on creation of long term, sustainable value by partnering with clients who value strong alignment, complementary expertise and sustainable performance. Alignment of interests is a feature of Moelis Australia’s client-focused business, Moelis Australia’s purpose is to deliver long-term and sustainable value creating outcomes to clients and investors. Key to achieving this is our commitment to attracting, developing and retaining talent that lives our values. We encourage all of our team to think and act like owners, ensuring we always remain aligned with the objectives of our investors and clients. During 2020, we were faced with remote working during the pandemic related lockdowns. Our team showed enormous energy and resilience in the face of delivering for our clients whilst operating remotely. The team transitioned seamlessly to remote working, road-testing the full technology capability. The experiences of 2020 have taught us valuable lessons in communication, care and innovation, which we have, and will continue to incorporate into our values and our practices. 2020 tested our team in unexpected ways and we are extraordinarily proud of how our people faced adversity, supported one another and prioritised our clients. Having experienced fully the benefits of technology enabled operations in the 2020 remote working period, we have been able to accelerate and re- prioritise technology enablement and enhancements to our operations. We see this as critical to a simplified, streamlined customer experience and enhancing the nature and quality of the work our team does, Embedding data and analytics into all facets of our business is something we see as critical to the development and retention of our people, as well as materially enhancing our client experience. Moelis Australia Limited 2020 Annual Report 17 Additional Information (cont.) MA Academy Moelis Australia Foundation Twelve months ago, and prior to the onset of the The Moelis Australia Foundation (the Foundation) was COVID-19 pandemic, we announced the launch of established following our IPO to support community the MA Academy. The MA Academy is a key tenet of initiatives that align with the culture and broader retaining the best people, ensuring that during their community interests of Moelis Australia and its time at Moelis Australia, all staff can continue to learn executives. and, in time, teach. We believe that “in learning you will teach and in teaching you will learn” (Phil Collins). The Independent Chairman of the Foundation is Mark Nelson. Mark is a founder and Chairman of We are pleased that despite the demands of 2020, the Caledonia Investment Group and a director of we were able to launch the MA Academy and have The Caledonia Foundation. He is Chairman of Art made material progress on programmes for 2021 Exhibitions Australia, a director of Kaldor Public Art and beyond. About the MA Academy Our people are the core of our business, and our competitive advantage, The MA Academy is the umbrella of learning that encompasses all training and development of Moelis Australia staff, It is a structured and formalised way to pass the baton of learning from one generation to the next. The MA Academy is practical and focuses on current, best-in-class business and investment practises in the real world; practical learning with real life edge. The program delivers structured teaching, capitalising on the talents and experience of our senior company executives, along with highly credentialed external presenters. 18 Moelis Australia Limited 2020 Annual Report Projects, a trustee of the Sydney Swans Foundation and governor of the Florey Institute of Neuroscience. Andrew Pridham and Christopher Wyke are also directors of the Foundation. The Moelis Australia team believes strongly in giving back to the community through projects the team is passionate about. Empowering the team to suggest and drive community initiatives that are close to their heart through the Foundation, underpins our approach. The Foundation has two Community Partners, the GO Foundation and Beyond Blue. It also asks staff members to nominate the charities they would like the Foundation to support. All staff members may request that Moelis Australia donate to the Foundation in lieu of what may otherwise have been compensation paid to them individually for their services. Some of the charities staff members have nominated include the Sydney Children’s Hospital, Westmead Children’s Hospital, UNICEF, Dementia Australia, and the Fred Hollows Foundation. In 2020, the Foundation introduced matched giving of up to $2,500 for eligible staff members. Since inception in 2017, the Moelis Australia Foundation has received $7.7 million in contributions from staff and the Group. Corporate Governance Statement Moelis Australia’s Corporate Governance Statement has been approved by the Board and lodged with the ASX. A copy of the Corporate Governance Statement is available at https://moelisaustralia.com/investors/#governance 2 0 2 0 A N N U A L R E P O R T Directors’ Report M O E L I S A U S T R A L I A L I M I T E D Moelis Australia Limited 2020 Annual Report 19 The Directors of Moelis Australia Limited (Company) submit their report together with the consolidated financial report of the Company and its subsidiaries (Group) for the year ended 31 December 2020. The names of the Directors of the Company during or since the end of the year are: Independent Chairman and Non-Executive Director Jeffrey Browne Andrew Pridham Group Vice Chairman Alexandra Goodfellow Non-Executive Director Non-Executive Director Kenneth Moelis Non-Executive Director Kate Pilcher Ciafone Non-Executive Director Joseph Simon Joint Chief Executive Officer Julian Biggins Joint Chief Executive Officer Christopher Wyke Appointed 19 August 2020 Appointed 19 August 2020 Resigned 19 August 2020 Appointed 2 March 2020 The Directors have been in office since the start of the year to the date of this report unless otherwise noted. Jeffrey Browne Independent Chairman and Non-Executive Director Experience and expertise Jeffrey was appointed to the Board on 27 February 2017. Jeffrey was a senior executive at Nine Network Australia from 2006 until 2013, including serving as Managing Director from 2010 to 2013. Jeffrey holds a Degree in Arts from La Trobe University, Melbourne and a Degree in law from Monash University, Melbourne. Other directorships and appointments Chairman of Premoso Pty Ltd (owner of the business of “Holden Special Vehicles”) Former Chairman and Director of carsales.com (from December 2013 to March 2018) Special responsibilities Chairman of the Board Chairman of the Audit and Risk Committee Member of the Nomination and Remuneration Committee Interests in the Company Shares: 390,625 Share Options: 390,625 20 Moelis Australia Limited 2020 Annual Report Directors’ Reportfor the year ended 31 December 2020 Andrew Pridham AO Group Vice Chairman Experience and expertise Andrew has served as a Director since the formation of Moelis Australia in 2009. On 22 March 2020, Andrew transitioned from the role as Chief Executive officer to the Group Vice Chairman role. Andrew has 30 years of experience in investment banking and prior to the formation of Moelis Australia he served as Executive Chairman of Investment Banking at JP Morgan Australia. Andrew holds a Bachelor of Applied Science from the University of South Australia. In January 2019, Andrew was appointed as an Officer in the General Division of the Order of Australia for distinguished service to the investment banking and asset management sector, to sporting groups, and to philanthropy. Other directorships and appointments Chairman of Sydney Swans Limited Special responsibilities Member of the Nomination and Remuneration Committee Interests in the Company Shares: Andrew also holds 500,000 shares as well as a beneficial equity interest in 18,477,262 Shares as a result of his holdings in the Existing Staff Trusts. As a result of Andrew’s ownership of the Trustee of one of the Existing Staff Trusts, Andrew has a deemed relevant interest in 26,800,000 Shares. Restricted Shares: 57,198 Alexandra Goodfellow (appointed 19 August 2020) Non-Executive Director Experience and expertise Alexandra is Vice Chair of Korn Ferry Australasia and has 30 years’ experience in executive search and consulting. She joined Korn Ferry in 2014 and works with clients at Board, CEO and C-suite level assisting with executive search, leadership succession planning and human capital advisory. She is on the Advisory Board of the Westmead Children’s Hospital Grace Centre Foundation and is a Non-Executive Director of the Sydney Swans. Other directorships and appointments Vice Chair of Korn Ferry Australasia Non-Executive Director of Sydney Swans Limited Special responsibilities Chairman of the Nomination and Remuneration Committee Interests in the Company None Moelis Australia Limited 2020 Annual Report 21 Directors’ Report (cont.)for the year ended 31 December 2020 Kenneth Moelis Non-Executive Director Experience and expertise Ken has served as a Director since the formation of Moelis Australia. Ken is Chairman of Moelis & Company and has served as Chief Executive Officer of that company since 2007. Ken has over 30 years of investment banking and mergers and acquisitions experience. Prior to founding Moelis & Company, Ken worked at UBS from 2001 to 2007, where he was most recently President of UBS Investment Bank. Ken holds a Bachelor of Science and an MBA from the Wharton School at the University of Pennsylvania. Other directorships and appointments Chairman and CEO of Moelis & Company Group LP (Moelis & Company) Non-Executive Chairman of the Board of Directors, Atlas Crest Investment Corp. Non-Executive Chairman of the Board of Directors, Moelis Asset Management Member, Board of Trustees, University of Pennsylvania Member, Business Roundtable Member, Board of Advisors, Ronald Reagan UCLA Medical Center Member, The Business Council Special responsibilities Member of the Nomination and Remuneration Committee Interests in the Company Ken has 50.8% of the combined voting power of Moelis & Company Class A and Class B common stock. As a result, Ken has a deemed relevant interest in all shares held by Moelis & Company. Moelis & Company presently holds 29,500,000 ordinary shares in the Group. Kate Pilcher Ciafone (appointed 19 August 2020) Non-Executive Director Experience and expertise Kate is Chief Operating Officer of Investment Banking and a founding member of Moelis & Company. Kate has almost 20 years’ experience in the investment banking industry as both a banker and operations executive having begun her career with UBS Investment Bank prior to joining Moelis & Company as a founding member in 2007. Kate holds a B.S. in Commerce with distinction from the McIntire School of Commerce at the University of Virginia. Other directorships and appointments None Special responsibilities None Interests in the Company None 22 Moelis Australia Limited 2020 Annual Report Directors’ Report (cont.)for the year ended 31 December 2020 Julian Biggins Executive Director Experience and expertise Julian was appointed to the Board on 2 February 2017, and was one of the Founders of the Company in 2009. On 2 March 2020, Julian was appointed Joint Chief Executive Officer alongside Chris Wyke. Julian has over 20 years of investment banking experience covering the real estate industry. Julian previously held senior roles within JP Morgan’s Investment Banking division and UBS’ Equities research division. Julian holds a Bachelor of Business (Real Estate) and a Bachelor of Business (Banking and Finance) from the University of South Australia. Other directorships and appointments None Special responsibilities Member of the Audit and Risk Committee Interests in the Company Shares: Julian holds 245,874 shares as well as a beneficial equity interest in 5,556,504 shares as a result of his holding in the Existing Staff Trusts. Share Rights: 111,021 Restricted Shares: 255,549 Christopher Wyke (appointed 2 March 2020) Executive Director Experience and expertise Chris was appointed to the Board on 2 March 2020 and was one of the founders of the Company in 2009. On March 2020, Chris was appointed Joint Chief Executive Officer alongside Julian Biggins. Chris has over 20 years’ industry experience, including extensive private equity, turnaround, restructuring, M&A, equity and debt capital markets transactions experience. Chris previously worked in investment banking for J.P. Morgan and UBS in London, Singapore and Sydney. Chris holds a Bachelor of Economics with Honours from University College London. Other directorships and appointments None Special responsibilities None Interests in the Company Shares: Chris holds 139,736 shares as well as a beneficial equity interest in 5,556,504 shares as a result of his holding in the Existing Staff Trusts. Share Rights: 117,778 Restricted Shares: 269,220 Moelis Australia Limited 2020 Annual Report 23 Directors’ Report (cont.)for the year ended 31 December 2020 Former Directors Joseph Simon (resigned 19 August 2020) Non-Executive Director Experience and expertise Joe was appointed to the Board on 7 June 2016 and concluded his term as a Non-Executive Director on 19 August 2020. Joe is the Chief Financial Officer of Moelis & Company serving in that role since joining in 2010. Joe has over 25 years of experience as a senior manager of financial controls, operations and strategy and has particular experience with financial services firms. Joe holds a Bachelor of Science from Cornell University and an MBA from the University of Michigan. He is a Certified Public Accountant in the United States. Other directorships and appointments Partnership Fund for New York City Special responsibilities None Interests in the Company None Company secretaries’ qualifications and experience Janna Robertson Joint Company Secretary appointed 30 September 2019. Janna has over 20 years’ experience in financial services and prior to joining the Group was a partner at Deloitte. Janna holds a Bachelor of Business from the University of Technology Sydney, is a Member of the Institute of Chartered Accountants in Australia and New Zealand and graduate of the Australian Institute of Company Directors. Rebecca Ong Joint Company Secretary appointed 19 February 2020. Rebecca has over 15 years’ experience as a lawyer in the financial services industry, and prior to joining the Group was Regional Counsel at UBS, advising its Asset Management business across Asia Pacific. Rebecca holds a Bachelor of Commerce (Finance)/ Bachelor of Laws from the University of New South Wales and is a Fellow with the Governance Institute of Australia. 24 Moelis Australia Limited 2020 Annual Report Directors’ Report (cont.)for the year ended 31 December 2020 Directors’ meetings The following table sets out the number of Directors’ meetings (including meetings of committees of Directors) held during the financial year: Board Meeting Audit & Risk Committee Nomination & Remuneration Committee Jeffrey Browne Andrew Pridham Alexandra Goodfellow Kenneth Moelis Kate Pilcher Ciafone Joseph Simon Julian Biggins Christopher Wyke A 9 9 4 9 4 6 9 8 B 9 9 4 9 4 6 9 8 A 6 # # # # 4 6 # B 6 # # # # 4 6 # A 1 1 1 1 # # # # B 1 1 1 1 # # # # A = Number of meetings attended. B = Number of meetings held during the time the Director held office during the year. # = Not a member of committee. Principal activities The Group is a financial services provider with offices in Sydney, Melbourne and Shanghai. The Group’s principal activities are providing asset management, corporate advisory and equities services. In the opinion of the Directors, there were no significant changes to the principal activities of the Group during the financial year under review that are not otherwise disclosed in this report. Results The financial report for the years ended 31 December 2020 and 31 December 2019, and the results have been prepared in accordance with Australian Accounting Standards, which comply with International Financial Reporting Standards (IFRS). Total comprehensive income attributable to ordinary equity holders of the Group for the year ended 31 December 2020 was $22.5 million (2019: $25.0 million) and the profit after tax for the year ended 31 December 2020 was $26.5 million (2019: $23.5 million). Dividends Subsequent to the year ended 31 December 2020, the Directors have resolved to pay a fully franked dividend of 10.0 cents per share for the financial year ended 31 December 2020. The dividend is payable on 3 March 2021. On 4 March 2020, the Company paid a dividend of $14.5 million (10.0 cents per share), fully franked, for the financial year ended 31 December 2019. Operating and financial review Please refer to the Year in Review section of this Annual Report for the following in respect of the Group: • the Group response to COVID-19 • a review of operations during the year and the results of those operations • likely developments in the operations in future financial years and the expected results of those operations • comments on the financial position • comments on business strategies and prospects for future financial years. Non-IFRS Underlying results The Group also utilises non-IFRS Underlying financial information in its assessment and presentation of Group performance. In particular, the Group references Underlying Revenue, Underlying Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA), Underlying Net Profit After Tax (NPAT) and Underlying Earnings Per Share (EPS). Underlying EBITDA and Underlying NPAT achieved for the year ended 31 December 2020 was $60.5 million (2019: $63.5 million) and $36.0 million (2019: $40.2 million) respectively. Moelis Australia Limited 2020 Annual Report 25 Directors’ Report (cont.)for the year ended 31 December 2020 The Directors place great importance and value on the IFRS measures. As such, the Directors believe that, when read in conjunction with the IFRS measures, the Underlying measures are useful to the reader as: • The Underlying measures reveal the underlying run rate business economics of the Company; • The Underlying measures are used by management to allocate resources and make financial, strategic and operating decisions. Further, all budgeting and forecasting is based on Underlying measures. This provides insight into management decision making; and • The Underlying adjustments have been consistently applied in all reporting periods, regardless of their impact on the Underlying result. The Underlying financial information is not prepared in accordance with Australian Accounting Standards and IFRS and is not audited. Adjustments to the IFRS information align with the principles by which the Company views and manages itself internally and consist of both differences in classification and differences in measurement. Differences in classification arise because the Company chooses to classify some IFRS measures in a different manner to that prescribed by IFRS. Differences in measurement principally arise where the Company prefers to use non-IFRS measures to better: • Align with when management has greater certainty of timing of cash flows; • Regulate the variability in the value of key strategic assets, specifically the investment in Japara Healthcare Limited (Japara); • Normalise for the impacts of one-off transaction costs; and • Recognise staff share-based bonus expense when granted as opposed to over the vesting period. Please refer to note 3 for a detailed reconciliation between the IFRS and Underlying measures. State of affairs There were no other significant changes in the state of affairs of the Group that occurred during the financial year under review that are not otherwise disclosed in this report. Likely developments The Group continues to pursue its strategy of focusing on its core operations. In particular, the Group will look to grow its lending operations and continue to market its managed funds and launch new managed funds with the aim of growing assets under management. Events subsequent to balance date On 8 February 2021 the Group entered into a credit related partnership with a major Australian bank. The partnership initially involves the Group acquiring a $24 million loan note in a A$300 million portfolio of asset finance loans. $18 million of this investment will be sourced from a credit fund managed by Moelis Australia in addition to a $6 million co-investment by the Company. The balance of the funding for the loan portfolio is to be provided via a non-recourse loan facility. On 16 February 2021 the Group agreed to acquire retail property manager RetPro Pty Ltd for an initial cash consideration of $10.5 million. An additional deferred consideration is payable in a combination of cash and shares up to a maximum of $6.75 million dependant on achieving increased revenue hurdles up to 30 June 2022. Environmental regulation The Group’s operations are not subject to any significant environment regulation. Non-audit services The Directors are satisfied that the provision of non-audit services during the year, by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 (Cth). The Directors are of the opinion that the services as disclosed in note 9 to the financial statements do not compromise the external auditor’s independence, for the following reasons: • all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. 26 Moelis Australia Limited 2020 Annual Report Directors’ Report (cont.)for the year ended 31 December 2020 Indemnification and insurance of Directors’, officers and auditors During the year, the Company paid a premium in respect of a contract insuring the Directors and officers of the Company against liabilities and legal expenses incurred as a result of carrying out their duties as a Director or officer. The Directors have not included details of the nature of the liabilities covered or the amount of premium paid in respect of this insurance, as such disclosure is prohibited under the terms of the contract. The Company has agreed to indemnify all current and former Directors and company secretaries and certain officers of the Company and its controlled entities against all liabilities to persons (other than the Company or a related body corporate) which arise out of the performance of their normal duties as a Director, company secretary or officer to the extent permitted by law and unless the liability relates to conduct involving wilful misconduct, bad faith or conduct known to be in breach of law. The Company has not otherwise, during or since the end of the financial year, except to the extent permitted by law, indemnified or agreed to indemnify an officer or auditor of the Company or any related body corporate against a liability incurred as such an officer or auditor. Rounding of amounts In accordance with ASIC Corporations (Rounding in Financial/ Directors’ Reports) Instrument 2016/191 amounts in the Directors’ Report and the Financial Report have been rounded off to the thousand dollars unless otherwise indicated. Signed in accordance with a resolution of the Directors. Jeffrey Browne Independent Chairman and Non-Executive Director Julian Biggins Director and Joint Chief Executive Officer Sydney 17 February 2021 Sydney 17 February 2021 Moelis Australia Limited 2020 Annual Report 27 Directors’ Report (cont.)for the year ended 31 December 2020 Remuneration Report This Remuneration Report is for the financial year ended 31 December 2020. The Report has been prepared in accordance with section 300A of the Corporations Act 2001 (Cth) and the Corporations Regulations 2001 (Cth) and has been audited. The Remuneration Report provides information about the remuneration arrangements for Key Management Personnel (KMP) for the year to 31 December 2020. The list of KMP is assessed each year and comprises the Non-Executive Directors of the Group, the Chief Executive Officers (Joint CEOs) and those employees of the Group who have authority and responsibility for planning, directing and controlling the activities of the Group. Details of Key Management Personnel Name Non-Executive KMP Jeffrey Browne Kenneth Moelis Alexandra Goodfellow Kate Pilcher Ciafone Joseph Simon Executive KMP Andrew Pridham1 Julian Biggins2 Christopher Wyke2 Graham Lello Janna Robertson Position Term Independent Chairman and Non-Executive Director Full Year Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Full Year Appointed 19 August 2020 Appointed 19 August 2020 Resigned 19 August 2020 Group Vice Chairman Full Year Executive Director and Joint Chief Executive Officer Full Year Executive Director and Joint Chief Executive Officer Full Year Chief Financial Officer Chief Operating Officer Full Year Full Year 1. Transitioned from CEO to Group Vice Chairman effective 2 March 2020. 2. Appointed as Joint CEO effective 2 March 2020. Christopher Wyke appointed as a Director effective 2 March 2020. Remuneration governance The Nomination and Remuneration Committee, on behalf of the Board has primary carriage of the Group’s remuneration strategy, framework and principles. Remuneration principles and link to performance The Board recognises the important role people play in achieving the Group’s long-term objectives and as a key source of competitive advantage. To grow and be successful, the Group must be able to attract, motivate and retain quality individuals. Moelis Australia’s purpose is to deliver long term, sustainable value to its shareholders, clients and people. This is done by: • Partnering with clients who value strong alignment, complementary expertise and sustainable performance; • Empowering our people through a culture of growth, cohesion, innovation and accountability (Our Differentiating Values and Behaviours); • Delivering a high standard of technical expertise in both fiduciary and advisor roles; and • Being active managers of risk. These objectives are embedded in the Group’s remuneration principles. 28 Moelis Australia Limited 2020 Annual Report The Board exercises significant oversight and judgement to ensure the appropriate alignment of individual, shareholder and client outcomes and seeks to strike a balance in setting remuneration between having a transparent aligned and structured remuneration framework and retaining some discretion and flexibility to change remuneration arrangements to meet changing market conditions as well as to comply with regulatory and corporate governance developments. Critical to effective remuneration outcomes is a consistent and rigorous process for determination of company-wide and individual remuneration outcomes. Key features of the Group’s remuneration principles are: • Ensuring competitive rewards are provided to attract and retain the best talent. We seek to recruit and develop a diverse, values aligned team; • Linking remuneration to an individual’s overall contribution so that higher levels of performance and innovation attract higher rewards; • Providing consistent and aligned rewards over time to all staff, but particularly senior management, to promote the creation of sustained long-term value to shareholders; • Recognition that delivering long term value requires a wide range of skills and experience. We seek to encourage the right balance of cohesive behaviours and individual excellence as critical tenets of long term sustained growth; Directors’ Report (cont.)for the year ended 31 December 2020 • Driving behaviours which reflect the Group’s risk culture by motivating staff to be active managers of risk and accountable for all business decisions and their accompanying, client, economic and reputational consequences. Growth is always paired with acting with integrity; • Ensuring the overall cost of remuneration is aligned to operating performance and return to shareholders over the long-term; and • Appropriately rewarding outperformance in value creation. In determining what proportion of the aggregate annual bonus is provided in deferred equity, the Board considers several factors including the need to align Executive KMP with the goals of the Group as well as market practice for the industries within which the Group operates. The Group’s Equity Incentive Plan allows a variety of types of deferred equity to be issued to Executive KMP, including: • Shares; • Restricted shares; Remuneration features • Rights to receive shares in the future (share rights); • Loan funded shares; and • Share options. Deferred equity is subject to vesting conditions as determined by the Board including continuation of employment with the Group. Generally, employees who leave before the relevant vesting dates will forfeit their equity. The Board retains discretion to allow employees to retain their equity upon ceasing employment and may do so depending on the circumstances of an employee’s departure. Recipients of equity grants are not permitted to hedge their economic interest. Performance of Executive KMP The contribution and performance of each Executive KMP determines his or her annual bonus and any salary increase. For financial performance, a key measurement is how the Group’s Underlying result has performed compared to the prior year. The table below compares the Group’s performance for 2020 against 2019. The events of 2020 have been unprecedented and the impacts of COVID-19 have spanned health, economic and social consequences. As set out in the Chairman’s letter and this report, the Group has not been immune to these impacts. However, the resilience of the business model and the effects of our risk practices have enabled the delivery of a strong result notwithstanding the extraordinary circumstances. As an early response to COVID-19, as of 1 April 2020, and by agreement, staff including KMP agreed to temporary pay reductions and deferrals of pay increases. These temporary arrangements concluded on 1 July 2020. Following further certainty regarding COVID-19 impacts and the business outlook, the Board determined to repay all reductions and deferrals to staff other than Directors. In February 2021, the Board determined to repay the Directors. The Group’s remuneration for employees comprises: • Fixed remuneration, being base salary inclusive of superannuation; and • Variable short term incentive, delivered through the annual bonus scheme. The short term incentive is awarded as cash and deferred equity. As the business grows, there is a recognition of the value of adding a long term incentive to align executives to sustained growth. The Board has been working on the structure of a long term incentive scheme which it intends to introduce in 2021. In 2020, the award of a long term incentive was limited to the newly appointed Joint CEOs, whose compensation arrangements were otherwise unchanged from their pre-promotion compensation. The process for determining variable short term remuneration is consistent for all employees, but in this Remuneration Report the process is described to the extent it applies to the Executive KMP. Remuneration of Executive KMP Each Executive KMP is eligible to participate in the annual bonus scheme. The Executive KMP must be employed at the time bonuses are paid in order to receive a bonus. Payment of bonuses may be in cash or in deferred equity, or a combination of both. The review of salaries and the payment of bonuses to Executive KMP and whether it is delivered in cash or deferred equity is determined annually by the Board on recommendation from the Nomination and Remuneration Committee. In determining any salary increases and bonus amounts for Executive KMP, the Board considers factors referable to the Remuneration Principles including: • the performance of the Group; • market remuneration levels; • • the impact of the demonstrated application of our differentiating values and behaviours; the effectiveness of upholding and enhancing the Group’s culture of being active managers of risk; • key metrics such as total compensation of all employees as a percentage of Group revenue; and • the performance and contribution of each Executive KMP. Moelis Australia Limited 2020 Annual Report 29 Directors’ Report (cont.)for the year ended 31 December 2020 Underlying EBITDA ($'000)1 Underlying NPAT ($'000)1 Underlying EPS (cents/share)1 Statutory EBITDA ($'000)2 Statutory Comprehensive Income ($'000) Statutory EPS (cents/share) Dividends declared (cents/share) 31 Dec 2020 31 Dec 2019 % change 60,498 35,998 25.1 61,368 22,517 18.5 10.0 63,480 40,154 26.5 52,012 25,025 15.5 10.0 -5% -10% -5% 18% -10% 19% – 1. Underlying numbers are not audited. Please see note 3 within the Annual Financial Report for a reconciliation of Underlying to Statutory measures. 2. Statutory EBITDA is not an IFRS measure but has been presented to give a comparable measure to the Underlying result. The remuneration of KMP shown in the table below includes salary and annual bonus paid during the year, including the accounting fair value of share-based compensation granted in the year. Remuneration of KMP Remuneration of Executive KMP during the year Variable remuneration: Short Term Incentives 31 Dec 2020 $’000 31 Dec 2019 $’000 7,106 6,674 % change 6% The 2019 and 2020 annual bonuses granted by the Board to Executive KMP consisted of a combination of cash and deferred equity. As part of the Group culture of giving back to the community, prior to the annual bonus reward, some staff members, including KMP, elect to forgo a portion of variable remuneration in favour of the Company making a donation to the Moelis Australia Foundation. As in 2019, the 2020 share-based component will be delivered as restricted shares. Key terms of the deferred equity arrangements are detailed in the table below: 2020 restricted shares 2019 restricted shares 2018 share rights 2017 share rights Vesting period First vesting date Last vesting date Grant price 3 years February 2022 February 2024 3 years 3 years 5 years January 2021 January 2023 January 2020 January 2022 January 2019 January 2023 $4.72 $4.98 $4.36 $6.08 The deferred equity instruments are subject to a continuation of employment vesting condition and do not include future performance hurdle targets, as the Board considers that the annual bonus and related equity grant represents remuneration for performance during the year of grant. Deferred equity recipients are entitled to receive a payment equivalent to the dividend paid by the Company (if any) excluding the dividend to be paid for the year when the deferred equity was granted. The value of each share right was been determined by reference to the trading in the Company’s shares in the five business days up to the date of the grant, adjusted for the dividend to be paid for that year. The value of each restricted share granted for the 2020 grant has been determined by reference to the trading in the Company’s shares in the five business days up to 31 December 2020, adjusted for the dividend to be paid for that year. The shares required to discharge the liability under the deferred equity granted to any Directors will be acquired by the Employee Share Trust through the purchase of shares on-market. 30 Moelis Australia Limited 2020 Annual Report Directors’ Report (cont.)for the year ended 31 December 2020 Remuneration outcomes Having regard to both the individual performance of each KMP and the Group’s performance in 2020, the cash and deferred equity remuneration outcomes for each KMP for the year ended 31 December 2020 and the proportion of the bonus compared to fixed remuneration is detailed in the table below: Executive Fixed remuneration 2020 Annual Bonus Fixed remuneration Variable remuneration Salary including superannuation $ Cash component $ Deferred equity3 $ Salary including superannuation % units Cash bonus % Deferred equity % Andrew Pridham1 Julian Biggins1 Christopher Wyke1 Graham Lello Janna Robertson2 423,188 423,188 423,188 330,000 270,000 57,198 866,250 708,750 150,146 962,500 787,500 166,829 450,000 256,750 138,250 29,287 445,000 319,000 261,000 55,291 41% 21% 19% 53% 43% 32% 43% 44% 30% 31% 27% 36% 37% 17% 26% 1. Salary does not reflect repayment of 2020 temporary pay reductions which are to be repaid to the Directors in February 2021. 2. Janna Robertson’s salary reflects a voluntary donation to the Moelis Australia Foundation. 3. Amounts disclosed represent the accounting value of the award that will vest in three annual and equal instalments commencing February 2022 and ending in January 2025. The maximum value of the award would be the number of Restricted Shares at the Group’s share price at the time of vesting. The minimum total value of the award would be $0 in the event that the service condition attached to the award is not met prior to February 2022. Variable remuneration: Long Term Incentives Joint CEO Award 10-Year Anniversary Award In recognition that there is significant value in our senior executives being aligned to long term performance and outperformance of the Group, as part of a one-off issuance and independent of annual performance assessment, certain employees including KMPs were awarded loan funded shares at the ten year anniversary as a long term incentive reward. Loan funded shares are restricted and are subject to both market and service conditions. The shares awarded under the Plan are treated as in-substance options. Further details of the Plan are described in note 33 of the Annual Financial Report. In recognition of the importance of the Joint CEOs in driving long term growth and value creation, the 2020 variable remuneration granted by the Board to the Joint CEOs is proposed to include a long term incentive component. Subject to shareholder approval at the Annual General Meeting, the Board determined to grant the Joint CEOs 250,000 loan funded shares each. The shares issued will be accounted for as in-substance options. The grant terms will be substantially the same as those set out in note 33.4 of the Annual Financial Report, other than the following: • 5 year vesting period, with half of the loan funded shares vesting at the end of the 4th year, and the balance vesting at the end of the 5th year • Share price at grant date of $4.72 As the grant will only occur in 2021, no expense has been recognised in FY20 for these instruments. Moelis Australia Limited 2020 Annual Report 31 Directors’ Report (cont.)for the year ended 31 December 2020 Statutory remuneration table The following table sets out the statutory executive remuneration disclosures which have been prepared in accordance with the Corporations Act 2001 (Cth) and Australian Accounting Standards. Short-term employee benefits Long- term benefits Equity- based benefits3,4 Performance- related remuneration Total Cash salary including superannuation $ Bonus (cash component)1 $ Total cash $ Non- monetary $ Long service leave $ $ $ 423,188 330,000 753,188 26,274 7,576 97,500 884,538 450,000 – 450,000 31,369 7,528 – 488,897 423,188 866,250 1,289,438 450,000 962,500 1,412,500 423,188 962,500 1,385,688 450,000 935,000 1,385,000 450,000 256,750 706,750 437,500 256,750 694,250 445,000 319,000 764,000 435,996 475,000 910,996 – – – – – – – – 6,790 738,768 2,034,996 7,187 642,601 2,062,288 6,810 771,527 2,164,025 7,188 658,761 2,050,949 7,748 192,337 906,835 11,947 194,795 900,992 2,238 144,065 910,303 885 34,975 946,856 2,164,564 2,734,500 4,899,064 26,274 31,162 1,944,197 6,900,697 2,223,496 2,629,250 4,852,746 31,369 34,735 1,531,132 6,449,982 Executive Andrew Pridham2 Julian Biggins2 Christopher Wyke2 Graham Lello Janna Robertson5 Total 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 % 48% 0% 79% 78% 80% 78% 48% 50% 49% 54% 1. The cash component of bonuses received in respect of 2020 is expected to be paid in March 2021. Andrew Pridham elected not to be considered for a bonus in 2019. 2. Cash salary does not reflect repayment of 2020 temporary pay reductions which are to be repaid to the Directors in February 2021. 3. Reflects the amortisation of unvested deferred equity granted to KMP including share rights, restricted shares and loan funded shares. The expense is based on grant date fair value, amortised on a straight line basis over the vesting period. 4. Amortisation expense has been restated in the prior period to reflect an adjustment for the amortisation of the 2019 Restricted Shares grant. 5. Janna Robertson’s 2020 cash salary reflects a voluntary donation of $5,000 to the Moelis Australia Foundation. 32 Moelis Australia Limited 2020 Annual Report Directors’ Report (cont.)for the year ended 31 December 2020 Key terms of employment contracts Joint Chief Executive Officers The major terms and conditions of the employment contracts are summarised as follows: • Fixed compensation inclusive of minimum superannuation contributions; • Eligible to participate in the annual bonus incentive scheme, with payment in any one year determined at the discretion of the Board; • The Group may terminate the employment contract by providing three months written notice or provide payment in lieu of the notice period. Any payment in lieu of notice will be based on the total fixed compensation package; and Remuneration of Non-Executive Directors The total amount provided to Non-Executive Directors for their services must not exceed in aggregate, and in any financial year, the amount fixed by the Company at its annual general meeting. This amount was fixed by shareholders at $1,000,000 per annum at the Annual General Meeting in May 2020. Any change to the aggregate annual sum is required to be approved by shareholders. The Independent Chairman, who is also a Non-Executive Director, receives a fixed fee regardless of performance. The Chair of the Nomination and Remuneration Committee, who is also a Non-Executive Director, also receives a fixed fee regardless of performance. • The Group may terminate the employment contract at any time without notice if serious misconduct has occurred. The remaining Non-Executive Directors receive no remuneration. • When termination with cause occurs, the CEO is only entitled to remuneration up to the date of termination. Other Executive KMP The employment contracts of other Executive KMP are substantially on the same terms as that of the Joint CEOs, with the following exceptions: • Andrew Pridham may terminate his employment contract by providing three months written notice. • Andrew Pridham receives car parking within the building occupied by the Group. • The Group may terminate Graham Lello’s contract by giving six months written notice. Graham Lello may terminate his contract by giving six months written notice. Remuneration of Non-Executive Directors during the year Kenneth Moelis, Joseph Simon and Kate Pilcher Ciafone do not receive any remuneration for their role as Non-Executive Directors. Jeffrey Browne is paid a fixed fee of $150,000 per annum plus reimbursement of expenses for his role as Non-Executive Director and Independent Chairman. Alexandra Goodfellow is paid a fixed fee of $140,000 per annum plus reimbursement of expenses for her role as Non-Executive Director and Chair of the Nomination and Remuneration Committee. Moelis Australia Limited 2020 Annual Report 33 Directors’ Report (cont.)for the year ended 31 December 2020 Non-Executive Director remuneration The following payments were made to Non-Executive Directors in the 2020 and 2019 financial years. Non-Executive Director Jeffrey Browne2 Kenneth Moelis Alexandra Goodfellow3 Kate Pilcher Ciafone Joseph Simon Total Short-term employee benefits Cash salary and fees including superannuation $ 128,125 150,000 – – 28,320 – – – – – Equity-based benefits Total Options1 $ 43,281 74,168 – – – – – – – – $ 171,406 224,168 – – 28,320 – – – – – 156,445 150,000 43,281 74,168 199,726 224,168 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 2020 2019 1. Reflects the amortisation of the fair value of the unvested portion of options issued to Jeffrey Browne in 2017. The expense is based on grant date fair value, amortised on a straight line basis over the vesting period. The fair value of the options on grant date was calculated under AASB2 Share-based payments using a Black-Scholes valuation method. The assumptions underpinning this valuation are set out in note 33 in the Annual Financial Report. 2. Cash salary does not reflect repayment of 2020 temporary pay reductions which are to be repaid to the Directors in February 2021. 3. Fees paid to Alexandra Goodfellow are reported from commencement of term as Non-Executive Director on 19 August 2020. 34 Moelis Australia Limited 2020 Annual Report Directors’ Report (cont.)for the year ended 31 December 2020 Movements in Executive equity holdings The details of equity holdings in the Group held by executives (including close family members and/or any entity they, or their close family members, control, jointly control or significantly influence) are set out below. There have been no changes to the terms and conditions of these awards since the awards were granted. There are no amounts unpaid on any of the shares exercised and all restricted shares and rights are exercised automatically when vested. Executive Equity instrument1 Number at start of year Granted during the year2 Vested Purchased Lapsed or sold Number at signing date Andrew Pridham Ordinary shares 18,477,262 – Restricted shares – 57,198 – – Ordinary shares 5,585,369 Julian Biggins Share rights 275,329 – 217,009 – (164,308) Restricted shares – 308,250 (52,701) Ordinary shares 5,556,504 Christopher Wyke Share rights 294,858 – 228,276 – (177,080) Graham Lello Restricted shares Ordinary shares Share rights Restricted shares Loan funded shares – 320,416 (51,196) 121,678 133,737 – – 65,729 (56,477) – – 57,043 (9,252) 300,000 – Ordinary shares 40,001 – 6,692 Janna Robertson Restricted shares Loan funded shares – – 75,368 (6,692) 400,000 – 500,000 – 18,977,262 – – – – – – – – – – – – – – – – – – 57,198 5,802,378 111,021 255,549 (88,540) 5,696,240 – – – – – – – – – 117,778 269,220 187,407 77,260 47,791 300,000 46,693 68,676 400,000 1. Ordinary share holding includes directly held shares and beneficial interests in ordinary shares as a result of holdings in the Existing Staff Trusts. 2. Includes restricted shares granted as part of the 2020 short term incentive award. Non-Executive Director equity and other equity instruments The number of equity instruments in the Group held (directly and nominally) by Non-Executive Directors or their related parties (their close family members and/or any entity they, or their close family members, control, jointly control or significantly influence) are set out below. Executive Jeffrey Browne Equity instrument1 Number at start of year Granted during the year Ordinary shares Options – 781,250 Kenneth Moelis Ordinary shares Alexandra Goodfellow Ordinary shares Kate Pilcher Ciafone Ordinary shares Joseph Simon Ordinary shares – – – – Vested or exercised 390,625 (390,625) – – – – Purchased Lapsed or sold – – – – – – – – – – – – Number at signing date 390,625 390,625 – – – – – – – – – – 1. Jeffrey Browne purchased share options in 2017 exercisable in two tranches. Exercise of the first tranche occurred in 2020. The remaining unexercised options have an expiry date of 7 April 2021 and an exercise date of 8 April 2020. No other Non-Executive Director or their related parties have been granted options, restricted rights or restricted shares. There are no performance conditions attached to the options granted to Jeffrey Browne. Further details of the option plan are described in note 33 of the Annual Financial Report. Moelis Australia Limited 2020 Annual Report 35 Directors’ Report (cont.)for the year ended 31 December 2020 Loans to KMP There were no loans to KMP during the year. Loan balances under the non-recourse Loan Funded Share Plan represent a transaction with a KMP that is an in-substance option and not a loan to the KMP. Other transactions The Group encourages all staff, including its KMP to invest in the managed schemes and investment vehicles of the Group. Any investments made by staff are conducted on the same terms offered to third-party investors. Andrew Pridham and Julian Biggins entered into property management service arrangements with the Group on the same terms offered to third-party investors in a property managed by the Group. Total management fees payable by Andrew Pridham and Julian Biggins for 2020 amounted to $69,542 and $21,342 respectively. 36 Moelis Australia Limited 2020 Annual Report Directors’ Report (cont.)for the year ended 31 December 2020 Moelis Australia Limited 2020 Annual Report 37 Auditor’s independence declarationfor the year ended 31 December 2020 Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte organisation. Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW, 2000 Australia Phone: +61 2 9322 7000 www.deloitte.com.au 17 February 2021 Dear Board Members Moelis Australia Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Moelis Australia Limited. As lead audit partner for the audit of the financial statements of Moelis Australia Limited for the financial year ended 31 December 2020, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i)the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii)any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Delarey Nell Partner Chartered Accountants The Board of Directors Moelis Australia Limited Governor Phillip Tower Level 27, 1 Farrer Place SYDNEY NSW 2000 Financial Report M O E L I S A U S T R A L I A L I M I T E D Consolidated statement of profit or loss and other comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements 1 Significant accounting policies 2 Application of new and revised Australian Accounting Standards 3 Segment information 4 Fees and commission income 5 Investment income 6 Other income 7 Personnel expenses 8 Interest expense 9 Other expenses 10 Income tax expense 11 Cash & cash equivalents 12 Receivables 13 Loan receivables 14 Loss allowance 15 Other assets 16 Restricted cash 17 Other financial assets 18 Property, plant and equipment 19 Right-of-use asset 20 Investments in associates and joint ventures 21 Intangible assets 22 Goodwill 23 Trade and other payables 24 Borrowings 25 Redeemable preference shares 26 Lease liabilities 27 Provisions 28 Financial instruments 29 Contributed equity 30 Earnings per share 31 Dividends 32 Reserves 33 Share-based payments 34 Key management personnel compensation 35 Related party transactions 36 Parent entity disclosures 37 Investment in subsidiaries 38 Commitments 39 Subsequent events 40 41 42 43 44 44 58 59 63 64 64 64 64 64 65 67 68 70 71 73 73 74 74 75 75 80 80 81 81 83 83 83 84 91 92 93 93 94 99 99 101 102 103 103 Moelis Australia Limited 2020 Annual Report 39 Financial Report Fee and commission income Fee and commission expense Net fee and commission income Share of (loss)/profit of associates Investment income Other income Total income Personnel expenses Marketing and business development expenses Communications, data and information technology expenses Occupancy expenses Interest expense Depreciation and amortisation Credit loss allowance Other expenses Total expenses Profit before tax Income tax expense Profit after income tax Other comprehensive income, net of income tax Items that will not be classified subsequently to profit or loss: Fair value loss on investments in equity instruments designated at FVTOCI Share of other comprehensive (loss)/income of associates Total other comprehensive income Total comprehensive income Earnings per share From continuing operations Basic (cents per share) Diluted (cents per share) Note 4 20 5 6 7 8 18, 19 14 9 10 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 142,700 (13,016) 129,684 (4,844) 31,543 4,718 161,101 83,049 3,144 4,954 1,076 16,847 5,831 15 7,495 122,411 38,690 (12,210) 26,480 (3,618) (345) (3,963) 22,517 136,261 (8,218) 128,043 82 25,238 365 153,728 80,049 4,977 3,625 885 11,564 5,174 4,848 7,332 118,454 35,274 (11,781) 23,493 (594) 2,126 1,532 25,025 30 30 18.5 18.0 15.5 14.9 The above consolidated statement of profit or loss and other comprehensive income is to be read in conjunction with the accompanying notes. 40 Moelis Australia Limited 2020 Annual Report Consolidated statement of profit or loss and other comprehensive incomefor the year ended 31 December 2020 Assets Current assets Cash and cash equivalents Receivables Loans receivable Other assets Other financial assets Total current assets Non-current assets Restricted cash Loans receivable Other financial assets Property, plant and equipment Right-of-use assets Investments in associates and joint ventures Intangible assets Goodwill Deferred tax asset Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Borrowings Lease liabilities Income tax payable Provisions Total current liabilities Non-current liabilities Trade and other payables Borrowings Lease liabilities Provisions Redeemable preference shares Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Retained earnings Total shareholders equity 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 Note 11 12 13 15 17 16 13 17 18 19 20 21 22 10 23 24 26 10 27 23 24 26 27 25 29 32 138,004 46,122 132,943 6,635 18,429 342,133 2,500 91,328 25,779 1,450 5,338 75,289 11,794 9,827 3,905 227,210 128,800 32,258 80,723 12,158 – 253,939 2,650 119,044 26,886 1,885 7,181 76,951 13,356 9,827 2,223 260,003 569,343 513,942 23,076 30,030 2,930 6,345 28,779 91,160 – 237,540 2,944 842 – 241,326 22,951 67,180 2,459 2,479 29,451 124,520 8,990 122,022 5,526 258 25,500 162,296 332,486 286,816 236,857 227,126 154,579 25,141 57,137 236,857 156,972 24,965 45,189 227,126 The above consolidated statement of financial position is to be read in conjunction with the accompanying notes. Moelis Australia Limited 2020 Annual Report 41 Consolidated statement of financial positionas at 31 December 2020 Consolidated Balance as at 1 January 2019 Adjustments from adoption of AASB 16 Restated balance at 1 January 2019 Profit after income tax Other comprehensive income/(loss), net of tax Total comprehensive income/(loss) Payment of dividends Treasury shares Ordinary share buy-back and cancellation Capitalised buy-back costs Share-based payments Non controlling interests on disposal of subsidiaries Balance as at 31 December 2019 Balance as at 1 January 2020 Profit after income tax Other comprehensive loss, net of tax Total comprehensive income/(loss) Payment of dividends Issue of ordinary shares Treasury shares Equity transaction costs Share-based payments Balance as at 31 December 2020 Contributed equity $’000 Share-based payment reserve $’000 Associates OCI reserve $’000 FVTOCI reserve $’000 Retained earnings $’000 Attributable to owners of the parent $’000 Non-controlling interests $’000 Total equity $’000 189,924 16,198 9,472 (8,927) 35,320 241,987 (1,161) 240,826 – – – – 95 95 95 189,924 16,198 9,472 (8,927) 35,415 242,082 (1,161) 240,921 – – 23,493 23,493 – 23,493 – – – – (5,640) (27,200) (112) – – – – – – – 6,690 – – (32,952) 6,690 2,126 (594) – 1,532 2,126 (594) 23,493 25,025 (12,558) (12,558) – (5,640) – – – – 1,532 25,025 (12,558) (5,640) – – – – – – – – – – – – – (27,200) – (27,200) (112) (112) – 6,690 – 6,690 (1,161) (1,161) 1,161 – (13,719) (39,981) 1,161 (38,820) 156,972 22,888 11,598 (9,521) 45,189 227,126 – 227,126 156,972 22,888 11,598 (9,521) 45,189 227,126 – – – – 14,125 (16,590) (26) 98 (2,393) – – – – – – 4,139 4,139 – – 26,480 26,480 (345) (3,618) – (3,963) (345) (3,618) 26,480 22,517 – – – – – – – (14,532) (14,532) – – – – – – – – – 14,125 (16,590) (26) 4,237 (14,532) (12,786) – – – – – – – – – – 227,126 26,480 (3,963) 22,517 (14,532) 14,125 (16,590) (26) 4,237 (12,786) 154,579 27,027 11,253 (13,139) 57,137 236,857 – 236,857 The above consolidated statement of changes in equity is to be read in conjunction with the accompanying notes. 42 Moelis Australia Limited 2020 Annual Report Consolidated statement of changes in equityfor the year ended 31 December 2020 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 Note Cash flows from operating activities Receipts from customers Interest received Amounts received from affiliates Payments to suppliers and employees Cash generated from operations Interest paid Income taxes paid Net cash generated by operating activities 11 Cash flows from investing activities Net payments for financial investments Proceeds from disposals of associates Receipts for employee loans Amounts advanced to third parties Amounts received from related parties Payments to acquire shares in associates Payments to acquire property, plant and equipment Distributions received from investments Net cash used in investing activities Cash flows from financing activities Purchase of treasury shares Proceeds from exercise of share options Share issue transaction costs Cash transferred (to)/from restricted cash accounts Payments for share buy-back and cancellation Payments of lease liabilities Proceeds from borrowings Dividends paid to shareholders Net cash generated by financing activities 123,729 12,714 – (90,111) 46,332 (10,810) (8,075) 27,447 (17,737) – 17 (38,445) 6 (9,538) (401) 2,523 (63,575) (8,950) 1,094 – (147) – (4,036) 72,057 (14,764) 45,254 124,864 602 8,772 (76,187) 58,051 (10,119) (19,899) 28,033 (6,658) 11,448 130 (81,146) – – (2,773) 7,486 (71,513) (7,404) – (112) 3,315 (27,200) (2,459) 132,052 (12,558) 85,634 Net increase in cash and cash equivalents 9,126 42,154 Cash and cash equivalents at the beginning of the year 128,800 86,652 Effects of exchange rate changes on the balance of cash held in foreign currencies 78 (6) Cash and cash equivalents at the end of the year 11 138,004 128,800 The above consolidated statement of cash flows is to be read in conjunction with the accompanying notes. Moelis Australia Limited 2020 Annual Report 43 Consolidated statements of cash flowsfor the year ended 31 December 2020 1 a Significant accounting policies Basis of preparation The Financial Report is a General Purpose Financial Report which has been prepared in accordance with Australian Accounting Standards and the Corporations Act 2001 (Cth). The Financial Report comprises the consolidated financial statements of the Group and accompanying notes. Moelis Australia Limited is a for-profit company for the purposes of preparing this Financial Report. The principal accounting policies adopted in the preparation of this Financial Report and that of the previous financial year are set out below. These policies have been consistently applied to all the financial years presented and are applicable to both Moelis Australia Limited and its subsidiaries (Group) as well as to Moelis Australia Limited (Company), unless otherwise stated. All amounts are presented in Australian dollars. The financial statements were authorised for issue by Directors on 17 February 2021. Compliance with International Financial Reporting Standards Compliance with Australian Accounting Standards ensures that the Financial Report complies with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Consequently this Financial Report has also been prepared in accordance with and complies with IFRS as issued by the IASB. Basis of measurement The Financial Report has been prepared on the basis of historical cost, except for financial instruments that are measured at fair value at the end of the reporting period. Historical cost is generally based on the fair values of the consideration given in exchange for goods and services. Going concern The directors have, at the time of approving the financial statements, a reasonable expectation that the Group have adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Critical accounting estimates and significant judgements The preparation of the Financial Report in conformity with Australian Accounting Standards requires the use of certain critical accounting estimates. It also requires management to exercise judgement in the process of applying the accounting policies. The notes to the consolidated financial statements set out areas involving a higher degree of judgement or complexity, or areas where assumptions are significant to the Group such as: • determination of control of subsidiaries (note 1(b) and 37) • determination of significant influence over associates and joint control over joint ventures (note 1(p) and 20) • determination of impairment of finite life intangible assets (note 1(h), 1(q) and 21) • • • the impairment of goodwill (note 1(o) and 22) recognition and measurement of employee benefits including share rights, options restricted shares, Loan Funded Share Plan and salary sacrifice shares (note 1(k) and 33) timing and amount of impairment of interests in associates and joint ventures (note 1(h), 1(p) and 20) • measurement of Expected Credit Loss (ECL) including the choice of inputs, estimates and assumptions relating to information about past events, current conditions and forecasts of economic conditions (note 1(l), 13 and 14) • recognition of fees subject to performance criteria and other conditions, including conditions outside of the Group’s control (note 1(c)). Estimates and judgements are continually evaluated and are based on historical experience and other factors, including reasonable expectations of future events. Coronavirus (COVID-19) impact During the year the Group recognised other income of $3.3 million, related to COVID-19 government wage subsidies. In addition, the Group was granted deferral of $18.5 million of payments to the Australian Tax Office with PAYG payable of $4.4 million outstanding at 31 December 2020 payable in instalments to May 2021. 44 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statementsfor the year ended 31 December 2020 1 b Significant accounting policies (cont.) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and its subsidiaries. Subsidiaries are all those entities controlled by the Company. Control is achieved when the Company: • has the power over the investee; • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affects its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Company has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee. The Company considers all relevant facts and circumstances in assessing whether or not the Company’s voting rights in an investee are sufficient to give it control, including: • the size of the Company’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; • potential voting rights held by the Company, other vote holders or other parties; • rights arising from other contractual arrangements; and • any additional facts and circumstances that indicate that the Company has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Company gains control until the date when the Company ceases to control the subsidiary. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members of the Group are eliminated on consolidation. c Revenue recognition Fee and commission income includes fees from fund management, brokerage, corporate advisory, and underwriting and is recognised as the control of the underlying service is transferred to the customer. Where commissions and fees are subject to clawback or meeting certain performance hurdles, they are recognised as income when it is highly probable those conditions will not significantly affect the outcome. Fee and commission income and expenses that are integral to the effective interest rate on a financial asset or liability are capitalised and included in the effective interest rate and recognised in the income statement over the expected life of the instrument. Performance fees from managed funds are recognised when it is highly probable that a significant reversal of the fee will not occur. Factors that are taken into consideration for performance fees include: • • the proportion of assets already realised returns on assets realised to-date • downside valuation on remaining unrealised assets and reliability of those estimates • nature of unrealised investments and their returns Dividends and distributions are recognised as income when the Group becomes entitled to the dividend or distribution. Interest income is brought to account using the effective interest method. The effective interest method calculates the amortised cost of a financial instrument and allocates the interest income or interest expense over the relevant period. The effective interest rate is the rate that discounts estimated future cash receipts or payments through the expected life of the financial instrument or, when appropriate, a shorter period, to the net carrying amount of the financial asset or liability. Fees and transaction costs associated with loans are capitalised and included in the effective interest rate and recognised in the income statement over the expected life of the instrument. Interest income is included with dividend and distribution income as “investment income” in the statement of profit or loss and other comprehensive income. Government grants and assistance are accounted for in accordance with AASB 120 Accounting for Government Grants and Disclosure of Government Assistance. Government grants related to income are presented as other income where they are not considered to be related to an expense and are offset against expenses when they are received by the Group when they are closely related to an expense incurred by the Group. COVID-19 government wage subsidies received by the Group have been recognised as other income in the statement of profit or loss. Moelis Australia Limited 2020 Annual Report 45 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 c Significant accounting policies (cont.) Revenue recognition (cont.) At a point in time revenue recognition: Type of service Advisory success fees Nature, timing of satisfaction of performance obligations, significant payment terms Fees from corporate advisory contracts arise from providing services relating to mergers and acquisitions, restructurings, capital fund raising and other advisory services. Each service has identifiable performance obligations - being completion of the merger and acquisition, restructuring, or capital fund raising. Amounts assigned to each identifiable performance obligation are based on the standalone selling price of each individual performance obligation. Facilitation and transaction fees from asset management services Other upfront fees Commission and brokerage income The Group earns fees for successful transactions relating to assets and funds managed by the Group such as the acquisition and disposal of assets. These fees can only be invoiced when the performance obligation (i.e. the completion of the transaction) has occurred. The amount of fee is based on a percentage of the transaction and payable immediately as defined within the underlying trust agreements. Other upfront fees are typically establishment fees charged to new investors on entry into a fund. The performance obligation to earn these fees is the establishment of the client’s investment account. These fees are defined in the underlying trust agreements. The Group is remunerated for the provision of security trading services. Customers are invoiced monthly. The fees are defined within the underlying customer contract. 46 Moelis Australia Limited 2020 Annual Report Revenue recognition policy under AASB 15 Judgements used to identify performance obligations Revenue is only recognised on completion of the performance obligations specified in the contracts including any necessary regulatory and shareholder approvals. No amounts are recognised if the performance obligations are not met in full. For contracts that have key milestones defined, each key milestone represents a separate performance obligation. Revenue is recognised once performance obligations have been met. Revenue recognised at the time the transaction is completed. The type of fees have high correlation with how fees are charged. The Group has looked at its revenue history to look at the following (1) the determination of the type of fees; (2) the timing of when revenue was recognised and when invoices were raised; and (3) the key milestones that were met and not met. The Group considers that control of the services are only passed to the customer when the transaction has completed, does not create an asset with alternative use and the benefits provided are consumed at completion of the transaction. As such Advisory success fees are recognised at a point in time. The probability of transactions occurring is dependent on factors outside of the Group’s control. As the benefits of the transaction will only be consumed on completion, transaction fees are recognised at a point in time. Revenue is recognised when the customer is set up and invested into their chosen fund. Revenue is recognised when the customer is set up and invested into their chosen fund. The Group has no control on the timing and amount investors invest in funds. Revenue is recognised at the point in time when the account is set up and the investment account established when the customer is able to invest and thus obtain the benefits of the account. As the customer can only benefit at the completion of the trade, the Group recognises the brokerage revenue at the point in time when the brokerage services are provided. Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 c Significant accounting policies (cont.) Revenue recognition (cont.) Over time revenue recognition: Type of service Advisory retainer fees Nature, timing of satisfaction of performance obligations, significant payment terms Fees for on-going performance obligations as specified in each contract. Retainer fees are generally pre-defined within the contract. Invoices are issued on a monthly basis for ongoing work and payable within 30 days. Revenue recognition policy under AASB 15 Judgements used to identify performance obligations Revenue is recognised over time as the Group provides services. Performance and distribution fees relating to asset management services Fees are earned for asset management services when the fund is managed such that it exceeds performance benchmarks. The benchmarks and associated distribution fee are defined within each trust agreement. The Group takes into account the impact of contracts arising from variable consideration by only recognising revenue up to the amount where it is considered to be highly probable that it will not be significantly reversed. Management, administrative and trustee fees from asset management services The provision of asset management services per investment contracts. The amounts charged for the separate performance obligations are determined based on the relevant clauses of the investment management contracts. Customers are invoiced monthly. The performance obligations represent a series of distinct services, and are recognised by progress of completion (i.e. over time). Revenue is recognised as performance obligations are met based on standalone selling price of the performance obligation. As the customer will consume the benefit as the Group perform its obligations, the amount of revenue recognised over time on a straight-line basis in accordance within the contract entered into is the most appropriate depiction of the transfer of services. Services are provided in equal amounts through the course of the year. As the customer consumes the benefit as the Group provides asset management services, the Group recognises the performance and distribution fees over time. However, as the fees vary based off the performance above benchmark, the Group will only recognise the fees up to the amount that will not be reversed for each reporting period (i.e. when the fee is crystalized). In determining the amount to be recognised, the Group considers past performance across its portfolio of assets and closely monitors for any potential signs of adverse impact on the fees. The Group considers the performance of these management and trustee services as a series of distinct services that have similar pattern of transfer (i.e. the customer benefits as the Group performs its obligations). As such it has determined that recognising the revenue over time on a straight-line basis is the most appropriate depiction of the transfer of services. Services are provided in equal amounts through the course of the year. Moelis Australia Limited 2020 Annual Report 47 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 c Significant accounting policies (cont.) Revenue recognition (cont.) Over time revenue recognition: Type of service Management fees relating to hotel management services Nature, timing of satisfaction of performance obligations, significant payment terms Fees that are earned for providing hotel management services. The amounts charged for the separate performance obligations are determined based on the relevant clauses of the individual contracts. Revenue recognition policy under AASB 15 Judgements used to identify performance obligations The performance obligations represent a series of distinct services that have similar pattern of transfer (i.e. the customer benefits as the Group performs its obligations). As such it has determined that recognising the revenue over time on a straight-line basis is the most appropriate depiction of the transfer of services as services are provided in equal amounts through the year. The Group considers the performance of these management and trustee services as a series of distinct services that have similar pattern of transfer (i.e. the customer benefits as the Group performs its obligations). As such it has determined that recognising the revenue over time on a straight-line basis is the most appropriate depiction of the transfer of services as services are provided in equal amounts through the year. d Foreign currency transactions The functional currency of each entity in the Group is determined as the currency of the primary economic environment in which the entity operates (the functional currency). The Group’s consolidated financial statements are presented in Australian dollars (the presentation currency), which is also the Company’s functional currency. In preparing the consolidated financial statements, transactions in currencies other than the Group’s functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. Foreign exchange differences arising on translation are recognised in the profit or loss. At the end of each reporting period, monetary items denominated in foreign currencies are re-translated at the rates prevailing at that date. non-monetary items carried at fair value that are denominated in foreign currencies are re-translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical costs in a foreign currency are not re-translated. e Employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, bonus, annual leave and long service leave in the period the related service is rendered. Liabilities recognised in respect of short-term employee benefits are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. Liabilities recognised in respect of long-term employee benefits are measured as the present value of the estimated 48 Moelis Australia Limited 2020 Annual Report future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. f Taxation The Group is a tax-consolidated Group (Tax Group) under Australian taxation law, of which the Company is the head entity. As a result, the Company is subject to income tax as the head entity of the Tax Group. The consolidated current and deferred tax amounts for the Tax Group are allocated to the members of the Tax Group using the ‘separate taxpayer within group’ approach, with deferred taxes being allocated by reference to the carrying amounts in financial statements of each member entity and the tax values applying under tax consolidation. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and relevant tax credits arising from this allocation process are then accounted for as immediately assumed by the head entity, as under Australian taxation law the head entity has the legal obligation (or right) to those amounts. Entities within the Tax Group have entered into a tax funding agreement and a tax sharing agreement with the head entity. Under the terms of the tax funding agreement, the Company and its subsidiaries have agreed to pay a tax equivalent payment to or from the head entity equal to the tax liability or asset assumed by the head entity for the period as noted above. The amount arising under the tax funding arrangement for each period is equal to the tax liability or asset assumed by the head entity for that period and no contribution (or distribution to) equity participants arises in relation to income taxes. Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 f Significant accounting policies (cont.) Taxation (cont.) The tax sharing agreement entered into between members of the Tax Group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations or if an entity should leave the Tax Group. The effect of the tax sharing agreement is that each company in the Tax Group’s liability for tax payable to the head entity under the tax funding arrangement. Current tax The current tax payable is based on taxable profit for the year. Taxable profit differs from profit before tax as reported in consolidated statement of comprehensive income because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences. Deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit. Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the year Current and deferred tax are recognised as an expense or income in the profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case the current and deferred tax are also recognised in other comprehensive income or directly in equity, respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for business combination. g Plant and equipment Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Depreciation is recognised so as to write off the cost of assets less their residual values over their useful lives, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis. The depreciation periods are as follows: • computer and office equipment 3 years • • furniture and fittings 7 years leasehold improvements are amortised over the term of the lease The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. Moelis Australia Limited 2020 Annual Report 49 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 h Significant accounting policies (cont.) Impairment of tangible and intangible assets other than goodwill At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Recoverable amount is the higher of fair value less costs of disposal 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 for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. When an impairment loss subsequently reverses, the carrying amount of the asset (or cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. i 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 the Company will be required to settle the obligation; and • a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. j Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: (i) where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or (ii) for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified within operating cash flows. k Share-based payment transactions of the Group Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of fair value of equity-settled share-based transactions are set out in note 33. The fair value determined at the grant date of the equity settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the share-based payment reserve. Equity-settled share-based payment transactions with parties other than employees are measured at the fair value of goods or services received, except where that fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service. 50 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 l Significant accounting policies (cont.) Financial instruments By default, all other financial assets are subsequently measured at FVTPL. Financial assets and financial liabilities are recognised when the Group becomes a party to the contractual provisions of the instrument. Despite the aforegoing, the Group may make the following irrevocable election/designation at initial recognition of a financial asset: Financial assets and financial liabilities are initially measured at fair value. Transactions costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. Financial assets • Financial assets are classified into the following categories: • financial assets ‘at fair value through profit or loss’ (FVTPL); • equity instruments ‘at fair value through other comprehensive income’ (FVTOCI), and • ‘amortised cost’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Classification of financial assets Debt instruments that meet the following conditions are subsequently measured at amortised cost: • The financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on principal amount outstanding. Debt instruments that meet the following conditions are subsequently measured at FVTOCI: • The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling the financial assets; and • The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The Group holds no debt instruments measured at FVTOCI. • The Group may irrevocably elect to present subsequent changes in fair value of an equity investment in other comprehensive income if certain criteria are met such as, if the equity instrument is not held for trading; and • The Group may irrevocably designate a debt investment that meets the amortised cost or FVTOCI criteria as measured at FVTPL if doing so eliminates or significantly reduces an accounting mismatch. Financial assets classified as amortised cost The amortised cost of a financial asset is: • the amount at which the financial asset is measured at initial recognition; • minus the principal repayments; • plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount; and • adjusted for any loss allowance. The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) excluding expected credit losses, through the expected life of the debt instrument to the gross carrying amount of the debt instrument on initial recognition. Interest income is recognised using the effective interest method for debt instruments measured subsequently at amortised cost. Interest income is calculated by applying the effective interest rate to the gross carrying amount of a financial asset. For financial assets that have subsequently become credit-impaired, interest income is recognised by applying the effective interest rate to the amortised cost of the financial asset. If, in subsequent reporting periods, the credit risk on the credit-impaired financial instrument improves so that the financial asset is no longer credit impaired, interest income is recognised by applying the effective interest rate to the gross carrying amount of the financial asset. Interest income is recognised in profit or loss and is included in the investment income line item. Equity investments at FVTOCI On initial recognition, the Group may make an irrevocable election (on an instrument-by-instrument basis) to designate investments in equity instruments as at FVTOCI on the basis that they are held for strategic purposes. Designation at FVTOCI is not permitted if the equity investment is held for trading. Moelis Australia Limited 2020 Annual Report 51 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 l Significant accounting policies (cont.) Financial instruments (cont.) Equity investments at FVTOCI (cont.) A financial asset is held for trading if: • It has been acquired principally for the purpose of selling it in the near term; or • On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has evidence of a recent actual pattern of short-term profit-taking; or • It is a derivative. Investments in equity instruments at FVTOCI are initially measured at fair value plus transaction costs. Gains and losses relating to these financial assets will be recognise in other comprehensive income. Dividends from such investments are recognised as income in profit or loss when the Group has the right to receive payments unless the dividend clearly represents a recovery of part of the cost of the investment. The accumulated fair value reserve related to these investments will never be reclassified to profit or loss. The Group has designated all investments in equity instruments that are not held for trading as at FVTOCI on initial application of AASB 9 Financial Instruments. Financial assets at FVTPL Financial assets that do not meet the criteria for being measured at amortised cost or FVTOCI are measured at FVTPL. Specifically: • Investments in equity instruments are classified as FVTPL, unless the Group designates an equity investment that is neither held for trading nor a contingent consideration arising from a business combination as at FVTOCI on initial recognition. • Debt instruments that do not meet the amortised cost criteria or the FVTOCI criteria are classified as at FVTPL. In addition, debt instruments that meet either the amortised cost criteria or the FVTOCI criteria may be designated as at FVTPL upon initial recognition if such designation eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets and liabilities or recognising the gains and losses on them on different bases. The Group has not designated any debt instruments as at FVTPL. • Financial assets at FVTPL are measured at fair value at the end of each reporting period, with any fair value gains or losses recognised in profit or loss. Net gains and losses, including any interest or dividend income earned on the financial asset, are recognised in profit or loss in the ‘other gains and losses’ line item. Fair value is determined in the manner described in note 28. 52 Moelis Australia Limited 2020 Annual Report Impairment of financial assets The Group recognises a loss allowance for expected credit losses on investments in debt instruments that are measured at amortised cost or at FVTOCI, lease receivables, amounts due from customers under construction contracts, as well as on loan commitments and financial guarantee contracts. No impairment loss is recognised for investments in equity instruments. The amount of ECL is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument. For trade receivables, the Group has elected to use the simplified approach and has determined the loss allowance based off the lifetime ECL. The expected credit losses on these financial assets are estimated based on the Group’s historical credit loss experience, adjusted for factors that are specific to debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including the time value of money where appropriate. For all other financial instruments, the Group recognises lifetime ECL when there has been a significant increase in credit risk since initial recognition. If, on the other hand, the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to 12 months ECL. The assessment whether lifetime ECL should be recognised is based on significant increases in the likelihood or risk of a default occurring since initial recognition instead of on evidence of a financial asset being credit impaired at the reporting date or an actual default occurring. Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial instrument. In contrast, 12 month ECL represents the portion of lifetime ECL that is expected to result from default events on a financial instrument that are possible within 12 months after the reporting date. Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. The Group has provided for commitments that are both drawn and undrawn. The undrawn commitment is contingent on the counterparty achieving contractual milestones. Once they are achieved, the amount can be drawn upon and expected to be met within 12 months. The Group has included a loss allowance on all commitments based on the 12 month ECL for these commitments. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets. Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 l Significant accounting policies (cont.) Financial instruments (cont.) Significant increase in credit risk When determining whether the credit risk of a financial asset has increased significantly since initial recognition and when estimating ECLs, the Group considers reasonable and supportable information that is relevant and available without undue cost or effort. This includes both quantitative and qualitative information and analysis, based on the Group’s historical experience and informed credit assessment including forward-looking information. As part of the forward looking assessment, the Group has considered economic indicators such as economic forecast and outlook, GDP growth, unemployment rates and interest rates. The Group determines a significant increase in credit risk based on the number of days past due. A non-trade receivable loan is assessed to have increased in credit risk when the number of days past due is over 90 days. This is based on historical data. In particular, the following information is taken in account when assessing whether credit risk has increased significantly since initial recognition: • existing or forecast adverse changes in business, financial or economic conditions that are expected to cause a significant decrease in the debtor’s ability to meet its debt obligations; • an actual or expected significant deterioration in the operating results of the debtor; and • an actual or expected significant adverse change in regulatory, economic, or technological environment of the debtor that results in a significant decrease in the debtor’s ability to meet its debt obligations. The Group assumes that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date. A financial instrument is determined to have low credit risk if: (i) the financial instrument has a low risk of default; (ii) the borrower has a strong capacity to meeting its contractual cash flow obligations in the near term; and (iii) adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. For loan commitments and financial guarantee contracts, the date that the Group has become a party to the irrevocable commitment is considered to be the date of initial recognition for the purposes of assessing the financial instrument for impairment. In assessing whether there has been a significant increase in the credit risk since initial recognition of a loan commitment, the Group considers changes in the risk of a default occurring on the loan to which a loan commitment relates; for financial guarantee contracts, the Group considers the changes in the risk that the specified debtor will default on the contract. The Group regularly monitors the effectiveness of the criteria used to identify whether there has been a significant increase in credit risk and revises them as appropriate to ensure that the criteria are capable of identifying significant increase in credit risk before the amount becomes past due. Definition of default The Group considers the following as constituting an event of default for internal credit risk management purposes as historical experience indicates that receivables that meet either of the following criteria are generally not recoverable. • When there is a breach of financial covenants by the counterparty, or • Information developed internally or obtained from external sources indicates that the debtor is unlikely to pay its creditors, including the Group, in full (without taking into account any collaterals held by the Group). Write off policy The Group writes off a financial asset when there is information indicating that the counterparty is in severe financial difficulty and there is no realistic prospect of recovery. Any recoveries made are recognised in profit or loss. Trade receivables are written off when there is no reasonable expectation of recovery. Indicators that there is no reasonable expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Group. Measurement and recognition of expected credit losses ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls (i.e. the difference between the cash flows due to the entity in accordance with the contract and the cash flows that the Group expects to receive). It consists of 3 components: (i) probability of default (PD): represents the possibility of a default over the next 12 months and remaining lifetime of the financial asset; (ii) a loss given default (LGD): expected loss if a default occurs, taking into consideration the mitigating effect of collateral assets and time value of money; (iii) exposure at default (EAD): the total exposure at time of default. For financial assets, the expected credit loss is estimated as the difference between all contractual cash flows that are due to the Group if the holder of the loan commitment draws down the loan, and the cash flows that the Group expects to receive, discounted at the original effective interest rate. For undrawn loan commitments, the expected credit loss is the present value of the difference between the contractual cash flows that are due to the Group if the holder of the loan commitment draws down the loan, and the cash flows that the Group expects to receive if the loan is drawn down. The Group has applied the three stage model based on the change in credit risk since initial recognition to determine the loss allowance of its financial assets. Moelis Australia Limited 2020 Annual Report 53 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 l Significant accounting policies (cont.) Financial instruments (cont.) Financial liabilities and equity instruments Classification as debt or equity Debt or equity instruments issued by a Group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Equity instruments An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by a Group entity are recognised at the proceeds received, net of direct issue costs. Repurchase of the Company’s own equity instruments is recognised and deducted directly in equity. No gain or loss is recognised in profit or loss on the purchase, sale, issue or cancellation of the Company’s own equity instruments. Financial liabilities Financial liabilities that are not designated as at FVTPL, are subsequently measured at amortised cost using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the financial liability, or (where appropriate) a shorter period, to the amortised cost of a financial liability. Other financial liabilities Other financial liabilities, including borrowings and trade and other payables, are initially measured at fair value, net of transaction costs. m Loans receivable Loans receivable are recognised on settlement date, when cash is advanced to the borrower. A loss allowance for expected credit losses on loans receivable is recognised upon inception of a loan. Please refer to note 14 for further information. n Leases The Group recognises a right-of-use asset and a lease liability at the lease commencement date in the consolidated statement of financial position, except for short-term leases and leases of low value assets. Measurement and recognition of expected credit losses (cont.) Stage 1: 12 month ECL At initial recognition, ECL is collectively assessed and measured by classes of financial assets with the same level of credit risk as a product of the PD within the next 12 months and LGDs with consideration to forward looking economic indicators. Loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets. Stage 2: Lifetime ECL When the Group determines that there has been a significant increase in credit risk since initial recognition but not considered to be credit impaired, the Group recognises a lifetime ECL calculated as a product of the PD for the remaining lifetime of the financial asset and LGD, with consideration to forward looking economic indicators. Similar to Stage 1, loss allowances for financial assets measured at amortised cost are deducted from the gross carrying amount of the assets. Stage 3: Lifetime ECL - credit impaired At each reporting date, the Group assesses whether financial assets carried at amortised cost and debt securities at FVTOCI are credit-impaired. A financial asset is ‘credit impaired’ when one or more events have a detrimental impact on the estimated future cash flows of the financial asset have occurred. For financial assets that have been assessed as credit impaired, a lifetime ECL is recognised as a collective or individually assessed (specific) provision, and interest revenue is calculated by applying the effective interest rate to the amortised cost instead of the carrying amount. The Group recognises a loss allowance for expected credit losses on investments in debt instruments that are measured at amortised cost or at FVTOCI, as well as on loan commitments. No impairment loss is recognised for investments in equity interests. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument. The Group applies the AASB 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance for all trade receivables. To measure the expected credit losses, trade receivables have been grouped based on the shared credit risk characteristics and the days past due. The ECLs were calculated based on actual credit loss relating to revenue from experience over the past 4 years adjusted for the Group’s forward looking expectations based off economic indicators. The Group performed the calculations of ECL rates separately for receivables arising from the advisory business and other asset management fees as asset management fees have historically been received in full. 54 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 n Significant accounting policies (cont.) Leases (cont.) Right-of-use assets Right-of-use assets are measured at cost and comprise of the amount that corresponds to the amount recognised for the lease liability on initial recognition together with any lease payments made at or before the commencement date (less any lease incentives received), initial direct costs and restoration-related costs. The right-of-use asset is depreciated over the shorter of the asset’s useful life and the lease term on a straight-line basis. Depreciation of right-of-use assets starts at the commencement date of the lease and is recognised in the consolidated statement of profit or loss. The Group applies AASB 136 Impairment of Assets to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss in accordance with note 1(h). The right-of-use assets recognised under AASB 136 Impairment of Assets is an intangible asset, and hence excluded from the Group’s net tangible assets, despite the related lease liability being included as a reduction in the net tangible assets calculation. Lease liabilities The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group’s incremental borrowing rate. Generally, the Group uses its incremental borrowing rate as the discount rate. Interest on lease liabilities is recognised in the consolidated statement of profit or loss. Lease payments included in the measurement of the lease liability comprise: • Fixed lease payments (including in-substance fixed payments), less any lease incentives receivable; • Variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payment made. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, a change in the estimate of the amount expected to be payable under a residual value guarantee, or as appropriate, changes in the assessment of whether a purchase or extension option is reasonably certain to be exercised or a termination option is reasonably certain not to be exercised. Lease payments are recognised as amortisation expense of the right of use asset over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use asset) whenever: • The lease term has changed or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. • The lease payments change due to changes in an index or rate or a change in expected payment under a guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used). • A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of the modification. The Group has applied judgement to determine the lease term for some lease contracts in which it is a lessee that include renewal options. The assessment of whether the Group is reasonably certain to exercise such options impacts the lease term, which significantly affects the amount of lease liabilities and right-of-use assets recognised. o Goodwill Goodwill arising on acquisition of a business is carried at cost as established at the date of acquisition of the business less accumulated impairment losses, if any. For the purposes of impairment testing, goodwill is allocated to each of the Company’s cash generating-units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently where there is indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. p Investments in associates and joint ventures An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Moelis Australia Limited 2020 Annual Report 55 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 p Significant accounting policies (cont.) Investments in associates and joint ventures (cont.) A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control. The results and assets and liabilities of associates or joint ventures are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, an investment in an associate or a joint venture is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the associate or joint venture. When the Group’s share of losses of an associate or a joint venture exceeds the Group’s interest in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate or joint venture), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. On acquisition of the investment in an associate or a joint venture, any excess of the cost of the investment over the Group’s share of the net fair value of the identifiable assets and liabilities of the investee is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognised immediately in profit or loss in the period in which the investment is acquired. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with AASB 136 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value-in-use and fair value less costs of disposal) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with AASB 136 to the extent that the recoverable amount of the investment subsequently increases. Refer to note 20 for further details. q Intangible assets Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to their initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses. Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life 56 Moelis Australia Limited 2020 Annual Report and amortisation method are reviewed at the end of each reporting period, with the effect of any changes in estimate being accounted for on a prospective basis. For intangible assets that have a finite useful life, an assessment is made at each reporting date for indications of impairment. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of the asset’s fair value less costs to sell and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Intangible assets (other than goodwill) that suffered impairment are reviewed for possible reversal of the impairment at each reporting date. Software Certain internal and external costs directly incurred in acquiring and developing certain computer software programmes are capitalised and amortised over their estimated useful life. The capitalised software assets are subject to impairment testing on an annual basis. Derecognition of intangible assets An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised. r Business combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition-date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are generally recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the date of acquisition. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interests in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 1 r Significant accounting policies (cont.) Business combinations (cont.) Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. When the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value and included as part of the consideration transferred in a business combination. Changes in fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. The subsequent accounting for changes in the fair value of the contingent consideration that do not qualify as measurement period adjustments depends on how the contingent consideration is classified. Contingent consideration that is classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity. Contingent consideration that is classified as an asset or a liability is remeasured at subsequent reporting dates in accordance with AASB 9 Financial Instruments, or AASB 137 Provisions, Contingent Liabilities and Contingent Assets, as appropriate, with the corresponding gain or loss being recognised in profit or loss. When a business combination is achieved in stages, the Group’s previously held equity interests in the acquiree is remeasured to its acquisition-date fair value and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to profit or loss where such treatment would be appropriate if that interest were disposed of. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts or circumstances that existed at the acquisition date that, if known, would have affected the amounts recognised at that date. s Earnings per share Basic earnings per share is calculated by dividing the Group’s profit after income tax by the weighted average number of ordinary shares outstanding during the financial year. Diluted earnings per share is calculated by dividing the Group’s profit after income tax adjusted by profit attributable to all the dilutive potential ordinary shares by the weighted average number of ordinary shares and potential ordinary shares that would be issued on the exchange of all the dilutive potential ordinary shares into ordinary shares. t Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds. u Comparatives Where necessary, comparative information has been reclassified to conform to changes in presentation in the current year. v Rounding of amounts In accordance with ASIC Corporations (Rounding in Financials/Directors’ Reports) Instrument 2016/91, amounts in the Directors’ Report and the Financial Report are rounded off to the nearest thousand dollars, unless otherwise indicated. Moelis Australia Limited 2020 Annual Report 57 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 2 Application of new and revised Australian Accounting Standards Amendments to Accounting Standards that are mandatorily effective for the current reporting period The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to the Group’s operations and mandatorily effective on or after 1 January 2020, including: • AASB 2018-6 Amendments to Australian Accounting Standards – Definition of a Business • AASB 2018-7 Amendments to Australian Accounting Standards – Definition of Material Standards and interpretations not yet adopted Standard/Interpretation • AASB 2019-1 Amendments to Australian Accounting Standards – References to the Conceptual Framework • AASB 2019-3 Amendments to Australian Accounting Standards – Interest Rate Benchmark Reform • AASB 2019-5 Amendments to Australian Accounting Standards – Disclosure of the effect of new IFRS standards not yet issued in Australia The new and revised Standards and Interpretations adopted during the period do not materially affect the Group’s accounting policies or any of the amounts recognised in the condensed consolidated financial statements. Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending AASB 2020-4 Amendments to Australian Accounting Standards – Covid-19- Related Rent Concessions 1 June 2020 31 December 2021 AASB 2020-1 Amendments to Australian Accounting Standards – Classification of Liabilities as Current or Non-Current 1 January 2022 31 December 2022 AASB 2020-3 Amendments to Australian Accounting Standards – Annual Improvements 2018-2020 and Other Amendments AASB 2014-10 Amendments to Australian Accounting Standards – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture, AASB 2015-10 Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 and AASB 2017- 5 Amendments to Australian Accounting Standards – Effective Date of Amendments to AASB 10 and AASB 128 and Editorial Corrections 1 January 2022 31 December 2022 1 January 2022 31 December 2022 58 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 Segment information 3 AASB 8 Operating Segments requires the ‘management approach’ to disclose information about the Group’s reportable segments. The financial information is reported on the same basis as used by senior management and the Board of Directors for evaluating operating segment performance and for deciding how to allocate resources to operating segments. The segment note is prepared on the same basis as the Group’s non-IFRS (Underlying) financial measures. Please refer to the Directors’ Report for an explanation of why the Directors believe these measures are useful. The Board of Directors is considered to be the Chief Operating Decision Maker (CODM). The Group is organised into the following business segments: • Asset Management • Corporate Advisory and Equities (CA&E) Corporate Services represents the unallocated costs associated with the central executives and corporate support functions. 3.1 Services from which reportable segments derive their revenues The Asset Management segment incorporates the provision of asset management services and principal co-investment and strategic investments. The Corporate Advisory and Equities segment provides corporate advice, underwriting and institutional stockbroking services. Corporate Services segment represents the cost of the executive and central support functions. The main items of profit or loss and other comprehensive income used by management to assess each business are Underlying revenue, Underlying net income, Underlying Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) and Underlying profit after tax. Information regarding these segments is presented below. The accounting policies of the reportable segments are the same as the Group’s reporting policies. Moelis Australia Limited 2020 Annual Report 59 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 3 3.2 Segment information (cont.) Segment results Assets, liabilities, depreciation and amortisation and interest expense are not disclosed by segment as they are not provided to the CODM and are only reported on a Group basis. The following is an analysis of segment performance: Asset Management $’000 CA&E $’000 Corporate Services $’000 Total Underlying segment $’000 Statement of comprehensive income $’000 Adjustments $’000 106,756 53,378 – 160,134 967 161,101 (46,715) (41,518) (11,403) (99,636) 60,041 11,860 (11,403) 60,498 (3,741) (5,332) 51,425 (15,427) 35,998 – (97) 870 (2,090) (11,515) (12,735) 3,217 (9,518) (3,963) 35,998 (13,481) (99,733) 61,368 (5,831) (16,847) 38,690 (12,210) 26,480 (3,963) 22,517 96,667 61,681 – 158,348 (4,620) 153,728 (40,955) (44,631) 55,712 17,050 (9,282) (9,282) (94,868) (6,847) 63,481 (11,468) (3,276) (2,842) 57,363 (17,209) 40,154 – (1,898) (8,722) (22,087) 5,427 (16,660) 1,533 40,154 (15,127) (101,715) 52,013 (5,174) (11,564) 35,275 (11,781) 23,494 1,533 25,027 31 Dec 2020 Revenue1 Expenses EBITDA2 Depreciation and amortisation Interest expense Profit before tax Income tax expense Profit after income tax Other comprehensive income Total comprehensive income 31 Dec 2019 Revenue1 Expenses EBITDA2 Depreciation and amortisation Interest expense Profit before tax Income tax expense Profit after income tax Other comprehensive income Total comprehensive income 1 2 Revenue refers to total income on the condensed consolidated statement of profit or loss and other comprehensive income. Statutory EBITDA is not an IFRS measure but has been presented to provide a comparable measure to the Underlying result. 60 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 3 3.2 Segment information (cont.) Segment results (cont.) A reconciliation of the Underlying segment measures to the statutory measures is as follows: Statutory result for the year ended 31 Dec 2020 161,101 61,368 26,480 22,517 Note Revenue1 $’000 EBITDA2 $’000 NPAT $’000 Comprehensive Income $’000 Differences in measurement Business acquisition adjustments Equity issued to staff Net unrealised losses on investments Adjustments relating to associates Credit Investments Differences in classification (a) (b) (c) (d) (g) – – – 9,506 234 640 (591) – 9,506 782 Adjustments relating to Master Credit Trust (h) (5,578) (5,393) Interest income (i) & (j) (6,115) Net unrealised losses on investments Credit Investments Tax on adjustments Total adjustments (k) (l) 301 685 – (967) (6,115) 301 – – (870) 2,738 (591) – 9,506 782 – – 301 – (3,218) 9,518 Underlying results for the year ended 31 Dec 2020 160,134 60,498 35,998 2,738 (591) 5,469 9,999 782 – – – – (4,916) 13,481 35,998 Statutory result for the year ended 31 Dec 2019 153,728 52,012 23,493 25,025 Differences in measurement Business acquisition adjustments Equity issued to staff Net unrealised losses on investments Adjustments relating to associates Deferred performance fees Profit on sale of joint venture Credit Investments Differences in classification Adjustments relating to Master Credit Trust Interest income Net unrealised losses on investments Credit Investments Tax on adjustments Total adjustments (a) (b) (c) (d) (e) (f) (g) – – – 8,487 6,400 2,221 (258) (h) (2,508) (i) & (j) (6,346) (k) (l) 1,175 (4,550) – 2,673 (929) – 8,486 6,400 2,221 137 (2,349) (6,346) 1,175 – – 4,621 11,468 Underlying results for the year ended 31 Dec 2019 158,349 63,480 1 2 Revenue refers to total income on the consolidated statement of profit or loss and other comprehensive income. Statutory EBITDA is not an IFRS measure but has been presented to provide a comparable measure to the Underlying result. 4,571 (929) – 8,513 6,400 2,221 137 – – 1,175 – (5,427) 16,661 40,154 4,571 (929) 2,024 5,475 6,400 2,221 137 – – – – (4,770) 15,129 40,154 Moelis Australia Limited 2020 Annual Report 61 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 3 3.2 Segment information (cont.) Segment results (cont.) Differences in measurement (a) The acquisition of Armada Funds Management in 2017 for cash and shares gives rise to non-cash IFRS expenditure relating to the amortisation of intangible assets of $2.1 million (2019: $1.9 million) and share-based payment expense to the vendors, who are now employees of the Company, of $0.6million (2019: $2.7 million). (b) The Underlying measure expenses the full value of the share-based equity awards issued to staff as part of the annual bonus awards in the year of grant as opposed to over the vesting period (up to 5 years) per AASB 2 Share-Based Payments. (c) Adjustment to remove unrealised (gains)/losses on the Group’s strategic investment in Japara Healthcare Ltd. (d) Relating principally to the Group’s investments in Redcape Hotel Group and the Aged Care sector, the Underlying treatment records dividends and distributions received from associates in underlying Revenue as opposed to the IFRS treatment of recording the Group’s share of accounting profit or loss of an associate. Underlying Revenue further recognises gains / losses in management’s assessment of the movement in the underlying value of the associate. (e) Performance fees relating to Redcape Hotel Group recorded in the statutory results but deferred in the Underlying Result to closely align with transaction settlement and cash flows. (f) The profit on sale of the Group’s interest in Acure Asset Management was recorded in the 2018 statutory results but deferred to 2019 to closely align with transaction settlement and cash flows. (g) The Underlying treatment excludes the movement in AASB 9 Expected Credit Loss provisions relating to loans receivable. Where there is an increased likelihood of credit loss, specific provisions individually assessed against loans receivable are included in both the statutory and Underlying results. See note (l) for treatment of specific provisions that are reclassified by management. Differences in classification (h) The Underlying treatment records the distributions received from the MA Master Credit Trust (MCT) in Underlying Revenue as opposed to the IFRS treatment of consolidating MCT into the Group’s results. (i) The Group previously consolidated the assets and liabilities of a fund related Special Purpose Vehicle which was disposed of in December 2020. The interest expense of $5.4 million (2019: $4.8 million) relating to the liabilities is reclassified to Underlying Revenue to offset against the interest income derived from the related loan receivable to reflect the total net return to the Group. (j) Interest income on cash and bank balances of $0.8 million (2019: $1.6 million) is reclassified to Underlying net interest expense. (k) Unrealised (gains)/losses on investment, other than those identified in (c) above, are reclassified from Other Comprehensive Income to Underlying Revenue. (l) The movements in the specific provisions for impairment of loan receivables is reclassified from statutory expense to Underlying Revenue, to be consistent with how management view the movement in value of investments. 3.3 Revenue for major products and services The table below represents a disaggregation of fee and commission income by operating segment: Revenue type Operating segment 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 Fee and commission income Management fees Transaction fees Performance fees Corporate advice Equity services Asset Management Asset Management Asset Management CA&E CA&E 57,378 14,555 16,860 44,186 9,721 51,893 15,123 5,155 54,886 9,204 Total fee and commission income 142,700 136,261 3.4 Geographical information The Group primarily operates in Australia. 3.5 Information about major customers Two funds managed by the Group contributed more than 10% to Group revenue with fees of $21.6 million and $16.8 million respectively. No other single customer contributed 10% or more to Group revenue in 2020 or 2019. 62 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 Fee and commission income 4 Fee and commission income is accounted for in accordance with AASB 15 Revenue from Contracts with Customers. 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 Timing of revenue recognition At a point in time Advisory success fees Commission and brokerage income Facilitation and transaction fees Total revenue earned at a point in time Over time Advisory retainer fees Performance fees Distribution fees Management fees Total revenue earned over time Total fee and commission income Fee and commission income by segment At a point in time Asset Management Corporate Advisory and Equities Total revenue earned at a point in time Over time Asset Management Corporate Advisory and Equities Total revenue earned over time Total fee and commission income 42,157 8,455 14,555 65,167 3,295 16,860 6,022 51,356 77,533 142,700 14,555 50,612 65,167 74,238 3,295 77,533 142,700 51,162 9,204 15,123 75,489 3,724 5,155 5,404 46,489 60,772 136,261 17,221 58,268 75,489 57,048 3,724 60,772 136,261 Moelis Australia Limited 2020 Annual Report 63 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 5 Investment income Interest income on cash and bank balances Interest income on loan receivables Dividends and distributions from investments Total investment income 6 Other income Other income Net foreign exchange losses Realised gains from disposal of investments Unrealised losses from investments held at fair value through profit or loss (FVTPL) Total other income 768 29,691 1,084 31,543 4,026 (268) 1,138 (178) 4,718 During the year the Group recognised in other income $3.3 million related to COVID-19 government wage subsidies. 7 Personnel expenses Salary, superannuation and bonuses paid in cash Termination benefits Amortisation of share-based payments (refer to note 33) Other employment expenses1 Total personnel expenses 1 Includes recruitment fees, payroll tax, insurance, fringe benefits tax and leave entitlements. 8 Interest expense Interest on unsecured notes Fund preferred unit distribution Interest on lease liabilities Redeemable preference share dividend Total interest expense 65,438 1,763 9,592 6,256 83,049 5,778 5,402 283 5,384 16,847 1,728 21,813 1,697 25,238 96 (6) 275 – 365 62,380 661 9,052 7,956 80,049 3,925 2,473 386 4,780 11,564 Refer to note 24 & 25 for more detail on the unsecured note program, fund preferred units and redeemable preference shares. 9 Other expenses Charitable donations Professional fees Other expenses Total other expenses 774 2,292 4,429 7,495 2,036 1,721 3,575 7,332 The charitable donations paid by the Group in 2020 and 2019 were made to the Moelis Australia Foundation, a registered charity, and were made principal in respect to staff elections 64 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 9 9.1 Other expenses (cont.) Remuneration of auditors During the financial year, Deloitte Touche Tohmatsu, the auditor of the Group and the Company, earned the following remuneration: 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 Audit or review of the financial statements Advisory related services Tax related services Total remuneration paid to Deloitte Touche Tohmatsu 10 10.1 Income tax expense Income tax expense Current tax expense Deferred tax (expense)/benefit Total income tax expense 10.2 Reconciliation of income tax expense to prima facie tax payable Profit before tax from continuing operations Prima facie income tax expense at the Australian corporate tax rate of 30% Effect of losses/(income) that is exempt from tax Non-deductible expenses Prior year (under)/over adjustment Total income tax expense 10.3 Income tax benefit/(expense) recognised in other comprehensive income Deferred Tax Fair value remeasurement of investments Share of revaluations in associates Income tax benefit/(expense) in other comprehensive income 10.4 Current tax assets and liabilities Current tax liabilities Income tax payable 543 – 33 576 (12,192) (18) (12,210) 38,690 (11,607) 8 (331) (280) (12,210) 1,552 148 1,700 476 78 133 687 (18,178) 6,397 (11,781) 35,275 (10,583) (418) (1,035) 255 (11,781) 255 (911) (656) 6,345 6,345 2,479 2,479 During the year the Group was granted deferral of $18.5 million of payments to the Australian Tax Office with PAYG payable of $4.4 million outstanding at 31 December 2020 payable in instalments to May 2021. 10.5 Deferred tax balances Deferred tax asset 3,905 3,905 2,223 2,223 Moelis Australia Limited 2020 Annual Report 65 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 Opening balances $’000 Recognised in profit or loss $’000 Recognised in other comprehensive income $’000 103 4,009 (2,366) (1,276) 1,408 1,664 1,087 (3,383) 279 698 2,223 (455) – 2,069 (3,272) 274 (1,085) 322 627 1,394 108 (18) – 1,552 148 – – – – – – – 1,700 Opening balances $’000 Recognised in profit or loss $’000 Recognised in other comprehensive income $’000 53 3,754 (4,458) (1,027) 1,382 237 (2,223) (3,952) 2,239 478 50 – 3,003 (249) 26 1,427 3,310 569 (1,960) 220 – 255 (911) – – – – – – – Closing balances $’000 (352) 5,561 (149) (4,548) 1,682 579 1,409 (2,756) 1,673 806 3,905 Closing balances $’000 103 4,009 (2,366) (1,276) 1,408 1,664 1,087 (3,383) 279 698 (3,517) 6,396 (656) 2,223 10 10.5 Income tax expense (cont.) Deferred tax balances (cont.) 31 Dec 2020 Temporary differences Property, plant and equipment Financial assets Investments in associates and joint ventures Deferred revenue Provisions Loss allowance Expense accruals Intangible assets Share-based payments Other Total 31 Dec 2019 Temporary differences Property, plant and equipment Financial assets Investments in associates and joint ventures Deferred revenue Provisions Loss allowance Expense accruals Intangible assets Share-based payments Other Total 66 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 Cash and cash equivalents 11 Cash and cash equivalents at the end of the financial year are reflected in the related items in the statement of financial position as follows: 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 Cash and bank balances Cash and cash equivalents at the end of the financial year 11.1 Reconciliation of profit for the year to net cash flows from operating activities Profit after income tax Adjustments to profit after income tax: Income tax expense recognised in profit or loss Net foreign exchange loss Realised gain on investments Non-cash interest income Non-cash investment income Distribution from financial assets Share-based payments Intangible amortisation Share of profits of associates Loss allowance expense Depreciation of right-of-use assets Depreciation of non-current assets Total adjustments to profit after income tax Changes in assets and liabilities: Change in trade and other receivables Change in other assets Change in trade and other payables Change in provisions Total changes in assets and liabilities Cash generated from operations Income taxes paid Net cash generated by operating activities 138,004 138,004 128,800 128,800 26,480 23,493 12,210 268 (1,138) (11,325) (113) (2,254) 9,592 2,090 4,844 15 2,285 1,456 17,930 (13,864) 5,523 125 (672) (8,888) 35,522 (8,075) 27,447 11,781 6 (321) (12,120) (164) (1,134) 9,052 2,176 (82) 4,848 2,311 687 17,040 (27) (10,208) 10,738 6,896 7,399 47,932 (19,899) 28,033 Moelis Australia Limited 2020 Annual Report 67 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 12 Receivables Accounts receivable Fees receivable Interest receivable Sundry debtors Receivables from associates Loss allowance on receivables Total receivables 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 4,798 16,748 528 13,644 11,367 (963) 46,122 1,869 16,167 9,193 359 5,078 (408) 32,258 Fees receivable disclosed above include amounts that are past due at the end of the reporting period for which the Group has not recognised a loss allowance because the amounts are still considered recoverable. See below table for an aged analysis of receivables: 12.1 Ageing of receivables $’000 31 Dec 2020 Accounts receivable Fees receivable Interest receivable Sundry debtors Receivables from associates Total receivables 31 Dec 2019 Accounts receivable Fees receivable Interest receivable Sundry debtors Receivables from associates Neither past due nor credit impaired 4,757 16,242 94 9,510 8,702 Past due but not credit impaired 60 – 90 days 90+ days Total past due but not credit impaired Total receivables Loss allowance on receivables Total receivables net of loss allowance 41 – 58 – – 506 376 41 506 434 4,134 4,134 – 2,665 2,665 4,798 16,748 528 13,644 11,367 39,305 99 7,681 7,780 47,085 1,869 16,060 9,193 313 4,671 – 107 – – – – – – 46 407 453 – 107 – 46 407 560 1,869 16,167 9,193 359 5,078 (13) (83) (7) (200) (660) (963) (1) (10) (179) (40) (178) 4,785 16,665 521 13,444 10,707 46,122 1,868 16,157 9,014 319 4,900 Total receivables 32,106 107 32,666 (408) 32,258 Average ageing of receivables that are past due but not credit impaired (days) 236 294 Fees receivable and receivables from associates aged 90+ days primarily relate to fees receivable from funds managed by the Group. Sundry debtors aged 90+ days of $4.1 million relate to the restructure of a single senior secured credit loan asset into separate identifiable receivables with different counterparties and supported by collateral ranging from cash on deposit and real estate. Settlement of the receivables is expected within 12 months upon the completion of certain future events. 68 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 12 12.2 Receivables (cont.) Loss allowance on receivables In response to COVID-19 the Group undertook a review of its receivables balances and expected credit losses. The review considered the macroeconomic outlook, counterparty credit quality, the type of collateral held and exposure of default as at the reporting date. While the model inputs and forward-looking information were revised, the accounting policies of the Group remained consistent with prior periods. The Group’s loss allowance provisions are a determination of probabilities of default and a determination of losses that may be incurred should a default occur. As a result of a deterioration in the global macroeconomic environment the Group placed further weighting to its downside scenario that was determined utilising economic forecasts available at the end of the year. 12.3 Movement in loss allowance on receivables Collectively assessed loss allowance on receivables Balance at the beginning of the year Loss allowance on receivables movement for the year Balance at the end of the year Individually assessed loss allowance on receivables Balance at the beginning of the year Loss allowance on receivables movement for the year Balance at the end of the year 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 (368) (533) (901) (40) (22) (62) (105) (263) (368) (40) – (40) Total loss allowance on receivables (963) (408) Moelis Australia Limited 2020 Annual Report 69 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 13 Loans receivable Current Loans to third parties Loans to associates Loss allowance Non-current Loans to third parties Loans to associates Loan to employees Loss allowance 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 131,317 2,000 (374) 132,943 439 4,318 87,502 (931) 91,328 85,737 - (5,014) 80,723 450 - 118,908 (314) 119,044 Loans to third parties comprises commercial loans provided to Australian corporates. The loans have terms of between three months and five years and are either fully or partially secured against the assets of the borrowers. 13.1 Loans receivable which were past due and impaired Past due 90 days or more – 7,865 During the year the $7.9 million loan receivable, with an individually assessed loss allowance of $4.6 million, which was past due by greater than 90 days at 31 December 2019, was restructured from a single senior secured credit loan asset into separate identifiable receivables with different counterparties resulting in the Group receiving $0.4 million in cash and recognising $4.1 million reclassified to sundry debtors (refer to note 12) as at 31 December 2020. $3.4 million of the $4.6 million loss allowance was utilised with the remaining $1.2 million being written back to the statement of profit or loss (refer to note 14.1 for further details). No loans receivable at 31 December 2020 are past due or impaired. 70 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 13 13.2 Loans receivable (cont.) Loans receivable by industry Consolidated 31 Dec 2020 Child care Construction and real estate Financial services Professional services Other 31 Dec 2019 Aged care Child care Construction and real estate Financial services Professional services Other Loans receivable $’000 Loss allowance $’000 Total $’000 15,044 7,282 109,291 93,520 439 (472) (268) 14,572 7,014 (375) 108,916 (167) (23) 93,353 416 225,576 (1,305) 224,271 25,505 (298) 25,207 12,115 (4,600) 7,515 21,295 56,678 89,010 (12) 21,283 (142) 56,536 (263) 88,747 491 (13) 478 205,094 (5,328) 199,767 Loss allowance 14 The table below presents the gross exposure and related ECL allowance for assets subject to impairment requirements of AASB 9. Consolidated 31 Dec 2020 Receivables Loans receivable Loans to associates 31 Dec 2019 Receivables Loans receivable Gross exposure for asset $’000 Loss allowance $’000 Total $’000 47,085 (963) 46,122 219,258 (1,030) 218,228 6,318 (275) 6,043 272,661 (2,268) 270,393 32,666 (368) 32,298 205,094 (5,328) 199,766 237,760 (5,696) 232,064 Moelis Australia Limited 2020 Annual Report 71 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 14 14.1 Loss allowance (cont.) Credit loss allowance Credit loss allowance recognised in the statement of profit or loss: Credit loss allowance on receivables Credit loss allowance on loans receivable Credit loss allowance on loans to associate Amounts written off, previously provided for Individually assessed credit loss allowance on loans receivable Total credit loss allowance for the year 14.2 Loss allowance on loans receivable 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 555 252 275 108 (1,175) 15 263 35 – – 4,550 4,848 By providing loans to customers, the Group bears the risk that the future circumstances of customers might change, including their ability to repay their loans in part or in full. While the Group’s credit lending policies and procedures aim to minimise this risk, there will always be instances where the Group will not receive the full amount owed and hence a provision for impaired loans will be necessary. The calculation of both the collectively and individually assessed expected loss allowance contains various factors that require judgement and estimates by management. 14.3 Movement in loss allowance on loans receivable Current Collectively assessed loss allowance Balance at the beginning of the year Loss allowance movement for the year Balance at the end of the year Individually assessed loss allowance Balance at the beginning of the year Loss allowance movement for the year Balance at the end of the year Non-current Collectively assessed loss allowance Balance at the beginning of the year Loss allowance movement for the year Balance at the end of the year (464) 90 (374) (4,550) 4,550 – (314) (617) (931) (391) (73) (464) – (4,550) (4,550) (295) (19) (314) Total loss allowance at the end of the year (1,305) (5,328) The Group periodically assesses exposures to determine whether the credit risk of a loan receivable has increased significantly since initial recognition. The assessment, which requires judgement, considers both quantitative and qualitative information that is based on the Group’s historical experience and informed credit assessment including forward-looking information, such as economic forecast and outlook, GDP growth, unemployment rates and interest rates. 72 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 Loss allowance (cont.) 14 In response to COVID-19 the Group undertook a review of its loans receivable portfolio and expected credit losses. The review considered the macroeconomic outlook, counterparty credit quality, the type of collateral held and exposure at default as at the reporting date. While the model inputs and forward-looking information were revised, the accounting policies of the Group remained consistent with prior periods. The Group’s loss allowance provisions are a determination of probabilities of default and a determination of losses that may be incurred should a default occur. As a result of deterioration in the global macroeconomic environment the Group placed further weighting to its downside scenario that was determined utilising economic forecasts available at the end of the financial year. 14.4 Loss allowance on loans receivable by industry Industry 31 Dec 2020 Child care Construction and real estate Financial services Professional services Other 31 Dec 2019 Aged care Child care Construction and real estate Financial services Professional services Other 15 Other assets Prepayments Deposits Other 16 Restricted cash Employee share trust Equities clearing collateral Premises bonds Stage 1 12 months ECL Collectively assessed $’000 Stage 3 Lifetime ECL Individually assessed $’000 (472) (268) (375) (167) (23) (1,305) (298) (50) (12) (142) (263) – – – – – – – – – – – (13) (4,550) Total $’000 (472) (268) (375) (167) (23) (1,305) (298) (4,600) (12) (142) (263) (13) (778) (4,550) (5,328) 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 1,438 4,454 743 6,635 – 700 1,800 2,500 1,270 10,407 481 12,158 150 700 1,800 2,650 Moelis Australia Limited 2020 Annual Report 73 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 17 Other financial assets Current Financial assets held at FVTPL (equity securities) Non-current Financial assets held at FVTOCI Financial assets held at FVTPL (non-equity securities) Refer to note 28.8 for further detail of non-current financial assets Property, plant and equipment 18 The below table sets out the carrying value of the Group’s property, plant and equipment: Office equipment – at cost Less accumulated depreciation Total office equipment Furnitures and fixtures – at cost Less accumulated depreciation Total furniture and fixtures Lease improvements – at cost Less accumulated depreciation Total leasehold improvements Total property, plant and equipment 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 18,429 18,429 25,097 682 25,779 2,553 (2,013) 540 765 (236) 529 1,536 (1,155) 381 1,450 – – 26,204 682 26,886 2,270 (1,625) 645 732 (166) 566 1,486 (812) 674 1,885 74 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 18 18.1 Property, plant and equipment (cont.) Movement in carrying value of property, plant and equipment The movement in the carrying value of the Group’s property, plant and equipment was as follows: Office equipment $’000 Furniture and fixtures $’000 Leasehold improvements $’000 573 414 (342) 645 283 (388) 540 528 93 (55) 566 32 (69) 529 833 131 (290) 674 50 (343) 381 Total $’000 1,934 638 (687) 1,885 365 (800) 1,450 Consolidated Assets for own use Balance as at 1 Jan 2019 Additions Depreciation expense Balance as at 31 Dec 2019 Additions Depreciation expense Balance as at 31 Dec 2020 19 Right-of-use asset Right-of-use asset – at cost Less accumulated depreciation Total right-of-use asset Balance at the beginning of the year Additions Depreciation Balance at the end of the year 20 Investments in associates and joint ventures Infinite Care Group MA Aged Care Fund MA Kincare Fund MA Senior Secured Credit Fund II MKM Capital Redcape Hotel Group 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 9,934 (4,596) 5,338 7,181 442 (2,285) 5,338 – – 9,037 2,353 5,667 58,232 75,289 9,492 (2,311) 7,181 9,248 244 (2,311) 7,181 2,774 3,833 8,721 2,275 – 59,348 76,951 Moelis Australia Limited 2020 Annual Report 75 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 Investments in associates and joint ventures (cont.) 20 Impairment of investments in associates and joint ventures In line with the Group’s accounting policies, after application of the equity method of accounting, the Group’s investments in associates and joint ventures were assessed for impairment at the reporting date, which included consideration of the impact of COVID-19. The Group performs an assessment to determine whether there is any objective evidence that its investments in associates and joint ventures are impaired. The main indicators of impairment are significant financial difficulty of the investee, significant changes in the technological, market, economic or legal environment and a significant or prolonged decline in fair value below cost. Refer to note 20.3 below for further information on the Group’s investments in associates and joint ventures. 20.1 Details of ownership interest Associates Infinite Care Group Place of incorporation Australia MA Aged Care Fund Australia Principal activity Aged care facility operator Investor in aged care facility operator MA Kincare Fund Australia Credit funds management MA Senior Secured Credit Fund II MKM Capital Redcape Hotel Group Australia Credit funds management Australia Australia Residential mortgage lending Owner and operator of hotels Proportion of ownership interest and voting power held by the Group 2020 5.2% 10.1% 25.5% 13.0% 47.5% 9.4% 2019 5.2% 10.1% 25.5% 13.0% – 9.4% 76 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 20 20.2 Investments in associates and joint ventures (cont.) Reconciliation of movements in carrying values of investments in associates and joint ventures Infinite Care Group MA Aged Care Fund MA Kincare Fund MA Senior Secured Credit Fund II MKM Capital Redcape Hotel Group MA Exchanges Fund Total $’000 Opening balance as at 1 Jan 2019 Adjustments to retained earnings from adoption of AASB 16 Acquisition Disposal and capital returns 4,722 6,846 7,738 1,900 – – – – 53 – – – – – – – Share of profit/(loss) (1,948) (3,066) 983 375 Share of other comprehensive income Less dividends/ distributions received Closing balance as at 31 Dec 2019 – – – – – – – – 2,774 3,833 8,721 2,275 Acquisition – – Share of profit/(loss) (2,774) (3,833) Share of other comprehensive income Less dividends/ distributions received Closing balance as at 31 Dec 2020 – – – – – – – 316 – – – 78 – – 5,727 – (60) 1,429 – – (495) (2,050) 9,037 2,353 5,667 58,232 – – – – – – – – 58,547 6,448 86,201 95 – – – – 95 53 (6,448) (6,448) 2,246 1,492 82 3,038 – 3,038 (4,578) (1,492) (6,070) 59,348 – – – – – – 76,951 5,727 (4,844) (495) (2,050) 75,289 Moelis Australia Limited 2020 Annual Report 77 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 – – – – – – – – – – 20 20.3 Investments in associates and joint ventures (cont.) Summarised financial information for the Group’s material associates and joint ventures Infinite Care Group MA Aged Care Fund MA Kincare Fund MA Senior Secured Credit Fund II MKM Capital Redcape Hotel Group MA Exchanges Fund $’000 31 Dec 2020 Assets and liabilities Current assets Non-current assets Current liabilities Non-current liabilities Net assets 42,046 42,215 417,783 420,480 (242,520) (239,111) (224,493) (225,595) (4,318) (4,877) 45 35,826 (398) – 35,473 5,392 13,140 (412) 151,351 71,310 10,604 1,082,252 (73,656) (2,070) (455,871) – (156,883) 3,002 624,035 18,120 The above net assets include the following: Cash and cash equivalents Revenue, expenses and results Revenue Profit/(loss) for the year Other comprehensive income for the year Total comprehensive income for the year 38,374 38,543 18 29 3,104 55,257 87,120 (56,077) – (56,077) 87,120 (45,732) – (45,732) 1,311 1,241 – 1,241 675 597 – 597 3,335 (125) – (125) 270,740 19,200 (5,280) 13,920 31 Dec 2019 Assets and liabilities Current assets Non-current assets Current liabilities Non-current liabilities Net assets The above net assets include the following: Cash and cash equivalents Revenue, expenses and results Revenue Profit/(loss) for the year Other comprehensive income for the year Total comprehensive income for the year 65,195 413,078 (129,125) (297,947) 51,201 65,419 415,774 (131,221) (308,558) 41,414 53 34,515 (336) – 34,232 4,721 13,140 (338) – 17,523 90,292 – – 1,066,010 (46,766) – (473,606) – 635,930 – 34 21,923 – – 21,957 53,788 54,008 6 39 – 29,638 25 54,323 (37,456) – (37,456) 42,048 (30,433) – (30,433) 4,780 4,473 – 4,473 2,840 2,578 – 2,578 – – – – 303,316 24,080 37,056 61,136 16,502 16,485 – 16,485 The following information outlines the level of control the Group has over its associates and the resultant accounting treatment. Details of investment in Infinite Care Group (Infinite) The magnitude and variability of returns the Group receives from Infinite, including the fees it earns as trustee and asset manager of the Moelis Australia Aged Care Fund and the investment return on its holdings is such that the Group is not considered to control Infinite. The Group’s equity holdings in addition to its roles as trustee and asset manager of Moelis Australia Aged Care Fund is considered sufficient for the Group to retain significant influence over Infinite. 78 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 20 20.3 Investments in associates and joint ventures (cont.) Summarised financial information for the Group’s material associates and joint ventures (cont.) Details of investment in MA Aged Care Fund, MA Kincare Fund and MA Senior Secured Credit Fund II The magnitude and variability of returns the Group receives from the Funds including the fees it earns as trustee and asset manager and the investment return on its holdings is such that the Group is not considered to control the Funds. The Group’s equity holdings in addition to its roles as trustee and asset manager is considered sufficient for the Group to retain significant influence over the Funds. Details of investment in Redcape Hotel Group At 31 December 2020, the Group has a 9.4% direct equity investment in Redcape Hotel Group (Redcape) and funds managed by the Group own a further 29.4% of Redcape. The Group earns trustee, asset manager, performance and hotel operator fees from Redcape, as well as investment returns on its direct investment. The Group is considered to have significant influence over Redcape as a result of participating in the financial and operating policy decisions of Redcape through its roles as responsible entity, asset manager and hotel operator. Redcape owns or operates 32 hotels in New South Wales and Queensland and was forced to temporarily close its hotels during the period due to Government restrictions as a result of COVID-19. Redcape’s hotels subsequently reopened progressively from June 2020 and has traded profitably. During the financial period, Redcape exchanged contracts to acquire 4 hotels with anticipated settlements in February 2021 and June 2021. Redcape assessed their assets for impairment at 31 December 2020, including considering the impact of COVID-19 on current trading performance. The Directors are satisfied that the impairment testing performed by Redcape is reasonable, and that no additional impairment is required for the Group’s investment in Redcape. For the year ended 31 December 2020, Redcape has recognised a decrease in its net assets at 31 December 2020, of which the Group’s share has been equity accounted. Details of investment in MKM Capital On 16 October 2020, the Group acquired 47.5% of MKM Capital at a cost of $5.7 million. MKM Capital is a residential mortgage lending business, providing bespoke solutions to borrowers, secured against residential property. The Group is considered to have a significant influence over MKM Capital as a result of participating, through MKM Capital’s Board, in the financial and operating policy decisions. In addition to its equity investment, the Group has provided $4.3 million of shareholder loans to MKM Capital and $2 million of mezzanine finance into MKM Capital’s mortgage warehouse. 21 Intangible assets Carrying amounts of: Identifiable intangible assets Cost Balance at the beginning of the year Additions Balance at the end of the year Accumulated amortisation and impairment Balance at the beginning of the year Amortisation expense Balance at the end of the year 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 11,794 13,356 18,676 1,183 19,859 (5,320) (2,745) (8,065) 16,542 2,134 18,676 (3,144) (2,176) (5,320) Moelis Australia Limited 2020 Annual Report 79 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 Intangible assets (cont.) 21 Identifiable intangible assets comprised: • $9.2 million (2019: $11.3 million) relating to the net present value of management rights recognised as part of the 2017 acquisition of Armada Funds Management (Armada). • $2.6 million (2019: $2.1 million) related to software and trademarks. Included in the deferred tax liability of the Group as at 31 December 2020 is an amount of $2.8 million (2019: $3.4 million) relating to the intangible asset recognised from the Armada acquisition. Identifiable intangible assets recognised as part of the Armada acquisition were determined as the net present value of the forecast management fees less operating expenses, based on the expected lives of each fund which ranged from 2 years and 7 months to 7 years and 9 months at the time of acquisition. As at 31 December 2020, the Armada funds have remaining expected lives ranging from 5 months to 4 years and 2 months. Amortisation of Armada intangible assets The amortisation of the aggregate value of the intangible assets over their useful lives is based on the forecast profile of the profit generated by the management rights, and is reassessed at the end of each reporting period. Impairment assessment of Armada intangible assets At 31 December 2020, the Group has assessed the Armada intangible asset for impairment, which included consideration of the impact of COVID-19. A value-in-use model was used that incorporated inputs for post-tax cash flow projections based on financial budgets over five years, a terminal growth rate of 1% (2019: 2.5%) and a discount rate of 12.5% (2019: 12.5%). The values assigned to the inputs represent the Group’s assessment of future trends and have been based on historical data from both internal and external sources and include an assessment of the likely lives of the management rights, expectations about variations to management fee rates and amount and timing of transaction fees. In addition, the assessment includes consideration of expected changes to operating costs and discount rates that reflect the relative security of the cashflows and the market pricing for similar management rights. No impairment charge was recognised in relation to Armada intangible assets during the year as the recoverable amount was determined to be in excess of the carrying amount. A sensitivity analysis was performed on the value-in-use calculation, stress testing the model inputs for reasonably possible changes in assumptions, such as discount rates and post-tax cash flows, to test for impairment and no changes in assumptions indicated an impairment. 22 Goodwill Cost Goodwill is allocated to the following cash-generating units: Asset Management Corporate Advisory and Equities 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 9,827 9,827 8,501 1,326 9,827 8,501 1,326 9,827 Goodwill with indefinite lives relates to the Group’s integrated acquisitions. Goodwill is not amortised but reviewed for impairment at least annually. 80 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 Goodwill (cont.) 22 Impairment of goodwill At 31 December 2020, the Group has assessed goodwill for impairment, which included consideration of the impact of COVID-19. A value-in-use model of the cash-generating unit (CGU), to which goodwill has been allocated, was used that incorporated inputs for post-tax cash flow projections based on financial budgets over five years, a terminal growth rate of 1% (2019: 2.5%) and a discount rates ranging from 11% to 12.5% (2019: 11% to 12.5%). The values assigned to the inputs represent the Group’s assessment of future trends and have been based on historical data from both internal and external sources and include an assessment of the estimated future cash flows the Group expects to derive from the asset and the time value of money, represented by a market risk-free rate of interest. In addition the assessment considers of other factors that market participants would reflect in pricing the future cash flows the Group expects to derive from the asset. No impairment charge was recognised in relation to goodwill during the year as the recoverable amount was determined to be in excess of the carrying amount. A sensitivity analysis was performed on the value-in-use calculation, stress testing the model inputs for reasonably possible changes in assumptions, such as discount rates and post-tax cash flows, to test for impairment and no additional indicators of impairment were identified. 23 Trade and other payables Current Accounts payable and accrued expenses Other liabilities GST payable Non-current Preference dividends payable1 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 17,801 4,589 686 23,076 – – 11,505 10,435 1,011 22,951 8,990 8,990 1 On 21 December 2020, the Group disposed its wholly owned subsidiary, KC Finance Pty Ltd, and as a result derecognised the preference dividends payable. Refer to note 25 for further details. 24 Borrowings Current Unsecured notes Unsecured notes – limited recourse Non-current Unsecured notes Fund preferred units – 30,030 30,030 65,000 172,540 237,540 32,150 35,030 67,180 25,000 97,022 122,022 Except for the obligation to pay periodic interest and repay the principal at the end of the term, the terms of the unsecured notes, including the limited recourse notes, do not include any material undertakings or obligations which, if not complied with, would result in an acceleration of the amount owing. Moelis Australia Limited 2020 Annual Report 81 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 24 (a) Borrowings (cont.) Unsecured notes Classification Issue Maturity date Amount ($m) Interest rate per annum Issue costs ($’000) MOE Bond I MOE Bond II MOE Bond IV Repaid Sep 2020 Non-current Non-current 2017 2018 2020 Sep 2020 Sep 2022 Sep 2024 32.2 5.25% 24.2 25.0 5.75% 6.5 40.0 5.85% 9.0 During the year the Group raised $40.0 million through the issue of a new unsecured note (MOE Bond IV). The proceeds of MOE Bond IV were partially used to repay the MOE Bond I notes that matured in September 2020. (b) Unsecured notes – limited recourse Classification Issue Maturity date Amount ($m) Interest rate per annum MOE Bond III Current 2019 May 2024 30.0 Variable The limited recourse notes constitute unsecured, unsubordinated obligations of an issuing special purpose Group entity (issuing entity). The issuing entity was capitalised by the Group and invests the proceeds of the note issuance in a diversified portfolio of cash and loans. The notes have sole recourse to the assets of the issuing entity and are not guaranteed by the Company. Whilst the notes have a five year stated maturity, they can be redeemed at the option of the note holders subject to a minimum 12 month holding period following issue. The limited recourse notes are held for investors under the Significant Investor Visa (SIV) program and, given the nature of the investors, redemptions may be requested by the note holders prior to the stated maturity of the notes as investors receive their permanent residency status. The interest rate is calculated at a margin of 4.35% over the RBA cash rate at the time of issue per tranche and then resets in February and August of each year. $5.0 million of MOE Bond III was redeemed during the year ended 31 December 2020 (2019: nil). (c) Fund preferred units The Group manages the MA Fixed Income Fund (MAFIF). MAFIF provides investors with exposure to a diversified portfolio of credit investments via an investment in Class A Units (fund preferred units) in the MA Master Credit Trust (Master Credit Trust). As a 10% co-investment, the Group holds Class B units in the Master Credit Trust. The Master Credit Trust is a consolidated entity of the Group. The fund preferred units held by MAFIF receive a preferential distribution from the realised profit of the Master Credit Trust, up to a maximum equal to the RBA cash rate plus 4.00%. The Class B units receive any excess distributable profits after paying the preferential distribution on the fund preferred units and any fund expenses. The Class B units further provide a maximum 10% “first loss” capital buffer which affords the fund preferred units preferential treatment on distribution and wind-up of the Master Credit Trust. As such the Group’s maximum economic exposure is limited to the value of the Class B units which at 31 December 2020 amounted to $17.3 million (2019: $9.7 million). Redemptions of the fund preferred units are at the discretion of the Master Credit Trust Trustee and require the consent of the Group. Therefore the units are treated as non-current liabilities as the Group has an unconditional right to defer settlement for at least 12 months after the end of the reporting period. 82 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 25 Redeemable preference shares Redeemable preference shares 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 – 25,500 On 21 December 2020 the Group disposed of its wholly owned special purpose entity, KC Finance Pty Ltd, that held the RPS and corresponding loan asset which was funded by the issuance of the RPS. As a result of the disposal of the subsidiary the RPS and corresponding loan asset and related accrued dividends, interest receivable and loss allowance were derecognised by the Group on the disposal date. 26 Lease liabilities Current Lease liabilities Non-current Lease liabilities Total lease liabilities 26.1 Movement in lease liabilities Opening balance at the beginning of the year Interest on lease liabilities Payment of lease liabilities Additions Incremental borrowing rate adjustment Closing balance at the end of the year 26.2 Lease liabilities maturity analysis - contractual undiscounted cashflows Less than one year One to five years More than five years Total undiscounted lease liabilities at the end of the year 27 Provisions Current Employee benefits Non-current Employee benefits Total provisions 2,930 2,459 2,944 5,874 7,985 283 (2,667) 273 – 5,874 3,179 2,552 846 6,577 5,526 7,985 9,735 386 (2,459) 610 (287) 7,985 2,758 4,794 1,333 8,885 28,779 29,451 842 29,621 258 29,709 Employee benefits provisions include annual leave, long service leave and annual bonus entitlements. Moelis Australia Limited 2020 Annual Report 83 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 28 28.1 Financial instruments Financial risk management objectives The Group’s principal financial assets comprise cash and cash equivalents, trade and other receivables, commercial loans and investments in listed and unlisted securities. The Group’s principal financial liabilities comprise of trade and other creditors and borrowings. The Group’s activities expose it to a variety of financial risks. The material risks faced by the Group include market risk (including interest rate risk and foreign currency risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to ensure the potential adverse effects on the financial performance of the Group are kept to within acceptable limits. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate risk, and ageing analysis for credit risk. Risk management is carried out by senior management and the Board. The Board identifies and monitors the risk exposure of the Group and determines appropriate procedures, controls and risk limits. Senior management identifies, evaluates and monitors financial risks within the Group’s operations. In response to COVID-19 the Group reviewed the financial risks it is exposed to, and the manner in which these risks are managed and measured. The Group’s review included stress testing credit and liquidity risks and responding to short term capital management risks with the consideration to an evolving macroeconomic environment. Financial assets and liabilities are accounted for in accordance with AASB 9 and comprises of the following categories. 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 138,004 2,500 46,122 224,271 44,208 4,454 744 128,800 2,650 32,258 199,767 26,886 10,407 481 460,303 401,249 23,076 95,030 172,540 – 31,941 92,180 97,022 25,500 290,646 246,643 Financial assets Cash and cash equivalents Restricted cash Receivables Loans receivable Listed and unlisted equity securities Deposits Other assets Total financial assets Financial liabilities Trade and other payables Unsecured notes Fund preferred units Redeemable preference shares Total financial liabilities 84 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 28 28.2 Financial instruments (cont.) Capital management The capital structure of the Group consists of net cash (cash and bank balances offset by the unsecured notes detailed in note 24) and equity (comprising contributed equity, retained earnings and reserves). The Group manages its capital with the aim of ensuring that the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance. The Group’s overall capital management strategy remains unchanged from 2019. The Group’s borrowings comprise unsecured notes of $95.0m (2019: $92.2m), fund preferred units $172.5m (2019: $97.0m) and redeemable preference shares of nil (2019: $25.5m). The maturity dates of the unsecured notes are shown in the table below. Except for the obligation to pay periodic interest and repay the principal at the end of the term, the terms of the unsecured notes do not include any material undertakings or obligations which, if not complied with, would result in an acceleration of the amount owing. The limited recourse unsecured notes can be redeemed at the option of noteholders subject to a minimum 12 month holding period and are treated as current borrowings. Unsecured notes Current Unsecured notes MOE Bond I Unsecured notes – limited recourse MOE Bond III Non-current Unsecured notes MOE Bond II MOE Bond IV Total unsecured notes Maturity date 31 Dec 2020 $’000 31 Dec 2019 $’000 18 September 2020 – 32,150 16 May 2024 30,030 35,030 14 September 2022 30 September 2024 25,000 40,000 95,030 25,000 – 92,180 A subsidiary of the Company, Moelis Australia Securities Pty Ltd, is an ASX market participant and therefore has an externally imposed capital requirement. In addition, certain subsidiaries of the Company hold an Australian Financial Services Licence and therefore have externally imposed separate capital requirements. The Group’s subsidiaries have satisfied all externally imposed capital requirements throughout the financial year. 28.3 Foreign currency risk The Group undertakes transactions denominated in foreign currencies, including fee income on corporate advisory engagements and expenses. The Group manages its exposure to corporate advisory fee income denominated in foreign currency when fees are invoiced, as generally the receipt revenue is too uncertain prior to invoicing. Foreign currency debtors and foreign currency bank balances are periodically reviewed relative to the Group’s balance sheet and liquidity requirements. Revenue received in foreign currency may be retained in those currencies, in order to meet future foreign currency denominated expenses, and exposes the Group to unrealised foreign currency gains or losses. Moelis Australia Limited 2020 Annual Report 85 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 28 28.3 Financial instruments (cont.) Foreign currency risk (cont.) The net carrying amounts of the Group’s foreign currency denominated monetary assets and liabilities at the end of the year are set out below: Currency United States dollar Chinese Yuan Great British pound Total Liabilities Assets 31 Dec 2020 $’000 31 Dec 2019 $’000 31 Dec 2020 $’000 31 Dec 2019 $’000 – 9 (23) (14) – – – – 2,468 88 103 2,659 1,553 5 – 1,558 Foreign currency sensitivity analysis The Group’s exposure to foreign exchange risk is measured using sensitivity analysis. The following table summarises the sensitivity on the Group’s net profit from a reasonably possible change in foreign exchange rates against the Australian dollar at the year end. The sensitivity is assessed against the foreign currencies that have the most impact on the Group. Currency United States dollar Chinese Yuan Great British pound Total 28.4 Interest rate risk Sensitivity +/-10% +/-10% +/-10% 31 Dec 2020 $’000 +/- 31 Dec 2019 $’000 +/- 247/(247) 155/(155) 10/(10) 8/(8) 1/(1) – 265/(265) 156/(156) The Group is exposed to interest rate risk from changes in market interest rates on its cash at bank balances and variable interest rate borrowings. The Group’s borrowings, are at fixed and variable rates of interest (refer to notes 24 and 25). Interest rate sensitivity analysis The table below demonstrates the sensitivity of the Group’s profit for the year to a reasonably possible change in interest rates: Impact on profit for the year +/-1% 779/(779) 667/(667) Change in interest rates 31 Dec 2020 $’000 +/- 31 Dec 2019 $’000 +/- 86 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 28 28.5 Financial instruments (cont.) Equity investment market price risk The Group is exposed to increases and decreases in the market prices of its equity investments held at FVTPL and FVTOCI, which would cause an increase or decrease in their carrying value and may result in a lower realised profit on sale. The table below illustrates the sensitivity of the Group’s profit for the year and other comprehensive income for the year to a reasonably possible change in market prices: Impact on profit for the year Impact on other comprehensive income for the year Change in market prices 31 Dec 2020 $’000 +/- 31 Dec 2019 $’000 +/- +/-5% +/-5% 956/(956) 34/(34) 1255/(1255) 1310/(1310) The methods and assumptions used in preparing the sensitivity analysis above have not changed significantly from the prior year. 28.6 Credit risk management Credit risk management is the risk that a counterparty defaults on its contractual obligations resulting in financial loss to the Group. A default may arise through a counterparty failing to repay loans and interest thereon, and through failing to meet its obligation to pay invoiced fees. In order to minimise credit risk, the Group assesses the creditworthiness of counterparties and obtains sufficient collateral, where appropriate, as a means of mitigating the risk of financial loss from defaults. For all loans receivable, the Group only transacts with counterparties that the Group considers to have an acceptable level of credit risk through a shadow rating process using publicly available financial information. The Group’s exposure and the shadow credit ratings of its counterparties are continuously monitored. At each reporting period, the Group reviews the recoverable amount of each receivable on an individual basis to ensure that adequate loss allowance is made for irrecoverable amounts. Invoices for services The creditworthiness of clients is taken into account when accepting client assignments, however, the nature of the Group’s advisory work includes engaging with clients which are under financial stress where the risk of non-payment of invoices is elevated. Receivables consist of a number of customers, spread across diverse industries and geographical areas. Ongoing credit evaluation is performed on the financial condition of accounts receivable. As at 31 December 2020 and 31 December 2019, the Group did not have a significant credit risk exposure to any single customer. Note 12 includes an aged summary of receivables past due. Commercial loans The Group has provided commercial loans during the year. The loans are secured by charges over the assets of the borrowers, with the loans having maturity dates ranging from three months to five years from the balance sheet date, with an average maturity of two years. Credit risk analysis is focused on ensuring that risks have been fully identified and that the downside risk is properly understood and acceptable. Prior to providing lending facilities to counterparties, each loan is subjected to approval from the relevant Fund or Group, which assess the credit risks of the borrower and determines whether the lending is aligned with the Group’s lending strategy. The detailed due diligence performed on the counterparty includes an assessment of: • borrower’s experience in the industry; • borrower’s credit policy to ascertain their underwriting practices; • internal shadow rating calculations using public market comparable transactions and financial information of the borrower; • historical loan performance, nature of risk and yield; • alignment to the Group’s risk appetite; and • securitisation of assets and undertakings. Moelis Australia Limited 2020 Annual Report 87 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 Financial instruments (cont.) Credit risk management (cont.) 28 28.6 Commercial loans (cont.) To mitigate the Group’s exposure to loan defaults, securitisation and collateral are negotiated and documented in executed loan agreements to protect the interests of the Group. Monthly monitoring of all borrowers financial performance (including arrears balances, ageing of arrears and losses incurred) is performed and any exceptions reported to senior management. Senior management will use the information collated to review individual loan exposures, make decisions on reducing commitments, and where required refinancing options to refinance out of certain exposures no longer aligned to the Group’s risk appetite. The Group completes an assessment of whether there is a significant increase in credit risk when an amount becomes more than 30 days past due on a case by case basis due to the fact that: • the majority of the counterparties for commercial loans made are through Moelis managed funds, and therefore the credit risk is lower compared to external counterparties; and • historically there has been no defaults from loans described above despite being over 30 days with amounts being repaid in full within a reasonable period. Refer to note 14.4 for the staging of the Group’s receivables and loans receivable balance as at 31 December 2020. Cash at bank balances The credit risk on the banks holding the Group’s cash at bank balances is considered limited because the banks have high credit ratings assigned by international credit-rating agencies. 28.7 Liquidity management Liquidity risk is the risk that financial obligations of the Group cannot be met as and when they fall due without incurring significant costs. The Group manages liquidity risk by monitoring forecast cash requirements, both short and longer term, against its current liquid assets. Regard is had to cash flows required over the next 12 months, regulatory obligations such as Australian Financial Services Licence requirements and financial covenants attached to any relevant contractual obligations of the Group. The following table details the Group’s remaining contractual maturity for its non-derivative financial liabilities. The table reflects the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. Liabilities $’000 31 Dec 2020 Non-interest bearing Variable interest rate instruments1 Fixed interest rate instruments Total 31 Dec 2019 Non-interest bearing Variable interest rate instruments1 Fixed interest rate instruments Total Weighted average effective interest rate Less than 1 month 1-3 months 3-12 months 1-5 years Total – 15,434 5,371 2,123 148 23,076 4.2% 5.8% – – – – 30,030 172,540 202,570 – 65,000 65,000 15,434 5,371 32,153 237,688 290,646 – 14,495 7,273 – 10,185 31,953 5.3% 8.4% – – – – 35,050 97,022 132,072 32,150 50,500 82,650 14,495 7,273 67,200 157,707 246,675 1 The amounts included above for variable interest rate instruments for both non-derivative financial assets and liabilities is subject to change if changes in variable interest rates differ to those estimates of interest rates determined at the end of the reporting period. 88 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 28 28.7 Financial instruments (cont.) Liquidity management (cont.) The following table details the Group’s expected maturity of its non-derivative financial assets. The table reflects the undisclosed contractual maturities of the financial assets. The inclusion of information on non-derivative financial assets is necessary in order to understand the Group’s liquidity risk management as the liquidity is managed on a net asset and liability basis. Assets $’000 31 Dec 2020 Non-interest bearing Cash held at variable interest rates Variable interest rate instruments1 Fixed interest rate instruments Weighted average effective interest rate Less than 1 month 1-3 months 3-12 months 1-5 years 5 + years Total – 42,127 2,827 21,285 27,984 439 94,662 0.3% 138,004 – – 2,500 6.0% 15.2% – – 25,000 27,500 42,600 38,668 42,149 49,220 – – – 140,504 95,100 130,037 Total 180,131 66,495 90,934 122,304 439 460,303 31 Dec 2019 Non-interest bearing Cash held at variable interest rate Variable interest rate instruments Fixed interest rate instruments – 802 19,512 23,365 26,375 1.2% 128,800 – – – 6.6% 8.4% – – 46 79,008 101,980 – 12,383 9,000 Total 129,602 19,558 114,756 137,355 – – – – – 70,054 128,800 181,034 21,383 401,271 1 The amounts included above for variable interest rate instruments for both non-derivative financial assets and liabilities is subject to change if changes in variable interest rates differ to those estimates of interest rates determined at the end of the reporting period. 28.8 Fair value of financial assets and financial liabilities Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes is determined on such a basis except for measurements that have some similarities to fair value but are not fair value, such as value in use in AASB 136 Impairment of Assets. In addition, for financial reporting purposes, fair value measurements are categorised into level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; • Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and • Level 3 inputs are unobservable inputs for the asset or liability. Moelis Australia Limited 2020 Annual Report 89 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 28 28.8 Financial instruments (cont.) Fair value of financial assets and financial liabilities (cont.) Valuation processes The Group has an established control framework with respect to the measurement of fair values. This includes a valuation function that has overall responsibility for overseeing all significant fair value measurements, including level 3 fair values, and reports directly to the Chief Financial Officer. The valuation function regularly reviews significant unobservable inputs and valuation adjustments. Significant valuation issues are reported to the Group’s Audit and Risk Committee. Some of the Group’s financial assets and financial liabilities are measured at fair value at the end of each reporting period. The following table summarises the levels of the fair value hierarchy and provides information about how the fair values of these financial assets and financial liabilities are determined (in particular, the valuation techniques and inputs used): Mandatorily at FVTPL FVTOCI-equity instruments Total Level 1 (a) Level 2 (b) Level 3 (c) Total 31 Dec 2020 Loans receivable1 Non-equity securities Equity securities Financial assets measured at fair value 31 Dec 2019 Loans receivable1 Non-equity securities Equity securities Financial assets measured at fair value 10,752 682 18,429 – – 10,752 682 – – 682 – 10,752 10,752 – – 682 43,526 25,097 43,526 10,859 32,667 29,863 25,097 54,960 10,859 33,349 10,752 54,960 9,158 682 – – 9,158 682 – – 682 – 9,158 9,158 – 26,204 26,204 16,430 9,774 – – 682 26,204 9,840 26,204 36,044 16,430 10,456 9,158 36,044 1 Represents loan that group does not intend to hold for the purpose of collecting contractual cash flows. The carrying amount of the Group’s financial assets (cash and cash equivalents, restricted cash and trade receivables) and financial liabilities (unsecured notes, fund preferred units, redeemable preference shares and trade payables) which are not fair valued approximated their fair value at the current and prior reporting date and are not presented in the table above. The Group reviewed its valuation techniques and key inputs for its level 2 and level 3 assets during the period, including a consideration of the impact of COVID-19 on the estimated fair values. The review considered the most recent independent valuations, quoted unit prices of recent equity transactions, expected duration the assets are likely to be held for and the macroeconomic outlook for the industries each asset operates in. As a result of the review, no significant change in the fair values of the assets was identified and the Group considers the fair values adopted to be appropriate at the end of the year. Valuation techniques and key inputs (a) Quoted bid prices in an active market. (b) Inputs other than quoted prices, that are observable, such as unit prices or based on recent transactions. (c) Short-term held assets or valued using a discounted cash flow valuation technique with inputs that are not based on observable market data (unobservable inputs) but are based on assumptions by reference to historical company and industry experience. Discount rate inputs range between 6.65% – 22.0%. 90 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 28 28.8 Financial instruments (cont.) Fair value of financial assets and financial liabilities (cont.) Reconciliation of balances in level 3 of the fair value hierarchy During the period there were no transfers between level 1, level 2 and level 3 fair value hierarchies. The following table summarises the movements in level 3 of the fair value hierarchy for the financial instruments measured at fair value by the Group. Balance as at the beginning of the year Additions Disposals and repayments Fair value movements recognised in profit or loss Closing balance as at the end of the year 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 9,158 24,388 (22,616) (178) 10,752 – 9,163 (5) – 9,158 Changing inputs to the level 3 valuations to reasonably possible alternative assumptions would not change significantly amounts recognised in profit or loss, total assets, total liabilities or total equity. 29 Contributed equity Ordinary share capital Treasury shares Total contributed equity 188,620 (34,041) 154,579 174,423 (17,451) 156,972 31 Dec 2020 Number of shares 31 Dec 2019 Number of shares 31 Dec 2020 $’000 31 Dec 2019 $’000 Contributed equity Ordinary share capital Balance as at the beginning of the year 147,641,070 155,641,070 Ordinary shares issued Share buy-back and cancellation Equity transaction costs Transfer from share-based payment reserve on vesting of awards 3,500,000 – – – – (8,000,000) – – 174,423 14,125 – (26) 98 201,735 – (27,200) (112) – Balance as at the end of the year 151,141,070 147,641,070 188,620 174,423 Treasury shares Balance as at the beginning of the year (4,429,137) (2,679,741) (17,451) (11,811) Ordinary shares issued for staff equity awards On market purchases of shares Off market purchases of shares (3,500,000) (1,889,326) – (159,868) (378,030) (2,000,000) Shares allocated upon exercise of options 390,625 – Shares allocated under employee share plans 1,199,759 410,472 Balance as at the end of the year (8,606,109) (4,429,137) Contributed equity at the end of the year 142,534,961 143,211,933 (14,125) (7,012) (1,989) 1,094 5,442 (34,041) 154,579 – (604) (6,800) – 1,764 (17,451) 156,972 Moelis Australia Limited 2020 Annual Report 91 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 Contributed equity (cont.) 29 The Company had authorised share capital amounting to 151,141,070 ordinary shares at 31 December 2020 (2019: 147,641,070). Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Shares purchased on-market for the purpose of an employee incentive scheme During the year, the Group purchased 1,889,326 shares on-market (2019: 159,868 shares) and 378,030 shares via an off-market transfer from its employees during the staff trading window (2019: 2,000,000 shares acquired via an off-market transfer from Moelis & Company) in order to meet the Group’s shared based payments award requirements. The average price of all share purchases during the year was $3.97 (2019: $3.43). Ordinary share buy-back and subsequent cancellation Following shareholder approval at the General Meeting held on 31 October 2019, Moelis Australia Limited bought back 8,000,000 Moelis Australia shares from Moelis & Company at a cost of $27.2 million. These shares were subsequently cancelled. Shares issued for the Loan Funded Share Plan On 13 March 2020 the Company issued 3,500,000 fully paid ordinary shares in order for eligible employees of the Group to acquire shares in the Company as part of the Loan Funded Share Plan (LFSP) employee equity incentive scheme. The issue price of the shares was $4.04, being the volume weighted average price of the Company’s shares over the 5 business days to 11 March 2020. The purchase price of the shares acquired by eligible employees under the LFSP was fully funded by a limited recourse loan provided by the Company. The shares are subject to vesting conditions, including performance conditions and continuous employment, and carry the same rights as other fully paid ordinary shares. Refer to note 33.4 for further details on the LFSP. 30 Earnings per share Basic earnings per share Diluted earnings per share 31 Dec 2020 Cents per share 31 Dec 2019 Cents per share 18.5 18.0 15.5 14.9 The earnings used in the calculation of basic and diluted earnings per share is the Group’s profit after tax. Weighted average number of ordinary shares (net of treasury shares) used in calculating basic earnings per share Potential equity shares Share options Share rights Restricted shares Salary sacrifice shares Total potential equity shares 31 Dec 2020 Number of shares 31 Dec 2019 Number of shares 143,171,674 151,348,830 243,834 2,060,394 1,354,739 22,675 1,873,916 3,187,526 1,366,651 – 3,681,642 6,428,093 Total weighted average number of ordinary shares (net of treasury shares) and potential equity shares used in calculating diluted earnings per share 146,853,316 157,776,923 92 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 31 Dividends During the year, Moelis Australia Limited made the following fully franked dividend payments: 2018 dividend (8 cents per share paid on 6 March 2019) 2019 dividend (10 cents per share paid on 4 March 2020) Dividends paid Dividends not recognised at the end of the financial year 31 Dec 2020 Consolidated $’000 31 Dec 2019 Consolidated $’000 – 14,532 14,532 12,558 – 12,558 Since the end of the financial year, the Directors have resolved to pay a fully franked dividend of 10 cents per share, payable on 3 March 2021. The aggregate amount of the proposed dividend expected to be paid from retained profits, but not recognised as a liability at the end of the year is $15.1 million. This amount has been estimated based on the number of shares eligible to participate as at 31 December 2020. Franking credits Franking credits available for the subsequent financial year1 32,324 30,523 1. Calculated at a corporate tax rate of 30% (2019: 30%) 32 Reserves Share-based payment reserve (refer to note 33) Investment revaluation reserve FVTOCI reserve Total reserves Investment revaluation reserve Balance at the beginning of the year Share of other comprehensive income of associates Income tax relating to the revaluation of associates Balance at the end of the year FVTOCI reserve Balance at the beginning of the year Net loss arising on revaluation of financial assets Income tax relating to gain arising on revaluation of financial assets Balance at the end of the year 27,027 11,253 (13,139) 25,141 11,598 (493) 148 11,253 (9,521) (5,170) 1,552 (13,139) 22,888 11,598 (9,521) 24,965 9,472 3,038 (912) 11,598 (8,927) (848) 254 (9,521) Moelis Australia Limited 2020 Annual Report 93 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 33 Share-based payments Share-based payment reserve Balance at the beginning of the year Amortisation of option fair value Amortisation of share rights Amortisation of restricted shares Amortisation of salary sacrifice shares Amortisation of loan funded shares Amortisation of Armada deferred remuneration Vesting of share–based payments Balance at the end of the year 31 Dec 2020 Consolidated $’000 22,886 212 3,139 5,133 113 390 694 (5,540) 27,027 31 Dec 2019 Consolidated $’000 16,198 184 3,103 2,458 – – 2,708 (1,765) 22,886 The component of annual bonus expected to be paid in shares has been accounted for as a share-based payment, with the amounts accruing over the expected vesting period of between 1 to 3 years. The profit or loss impact (after tax) of the estimated share component for services received for the year ended 31 December 2020 was $4.8 million (2019: $3.2 million). The accounting standards require the value of the share-based component to be determined when there is a shared understanding of the terms and conditions of the scheme and so the estimate of the accrual to date could change until this grant date is achieved. 33.1 Employee share options The Group has granted options to employees and its Chairman. For accounting purposes, fair value of the options is amortised as an expense over the vesting period of the options. Number of options employees Number of options Chairman Number of options total Balance at the beginning of the year 4,048,550 781,250 4,829,800 Granted during the year Forfeited during the year Exercised during the year Expired during the year 250,000 (447,100) – – – – 250,000 (447,100) (390,625) (390,625) – – Weighted average exercise price ($) employees 3.17 4.04 3.17 – – Balance at the end of the year 3,851,450 390,625 4,242,075 3.22 Weighted average exercise price ($) Chairman 2.90 – – 2.80 – 3.00 No share options were issued, forfeited or exercised since the end of the reporting period. 390,625 Chairman share options were exercisable as at year end. 2017 share options Prior to the listing of the Company, a number of employees were provided the opportunity to purchase options (share option), with each share option carrying the right to acquire one share in the Company at a future date. As a result of the offer, the Company issued 5,468,750 share options on 8 April 2017. At the same time, the Company offered the Chairman and Non-Executive Director, Jeffrey Browne, the opportunity to purchase 781,250 share options, with each share option carrying the right to acquire one share in the Company at a future date. On 25 February 2020, Jeffrey Browne, exercised 390,625 options at an exercise price of $2.80 per option. 94 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 33 33.1 Share-based payments (cont.) Employee share options (cont.) Each share option is exercisable for a period of one year, commencing on the first exercise date applicable to the relevant tranche (exercise window) as set out in the table below. Each share option expires if it is not exercised within the relevant exercise window. The vesting period of the share options runs from the grant date to the first exercise date as shown in the table below. Unless otherwise determined by the Board, a share option holder must continue to be employed by the Group in order to exercise the share option. Share options do not carry any dividend entitlement. Shares issued on exercise of share options will rank equally with other shares of the Company on and from issue. There are no inherent participating rights or entitlements inherent in the share options and share option holders will not be entitled to participate in new issues of capital offered to shareholders during the life of the share options. The issue price of the share options was paid by the recipient on receipt of the share option. The table below provides the details of options issued on 8 April 2017: Numbers of options at beginning of year Acquired by 1,349,517 Employees 1,349,517 Employees 1,349,516 Employees 390,625 Chairman 390,625 Chairman 4,829,800 Grant date share price Exercise price of option Issue price Earliest date of exercise Options forfeited during the year Options exercised during the year Expiry date $2.35 $2.35 $2.35 $2.35 $2.35 $3.00 $0.03 8 Apr 2021 7 Apr 2022 149,032 $3.15 $0.03 8 Apr 2022 7 Apr 2023 149,032 $3.36 $0.01 8 Apr 2023 7 Apr 2024 149,036 – – – $2.80 $0.02 8 Apr 2019 7 Apr 2020 $3.00 $0.02 8 Apr 2020 7 Apr 2021 – – 390,625 – – 390,625 447,100 390,625 3,992,075 Number of options at year end 1,200,485 1,200,485 1,200,480 The weighted average value of the share options at the time of grant was $0.0375. The fair value of the share options was calculated using a Black-Scholes model, adjusted for expectations of forfeiture due to employee departures. The assumptions used in calculating the fair value are shown below and are common to all tranches of share options, unless otherwise stated: • Dividend yield 4.0% • Risk-free rate 2.5% • Expected volatility of 30% • Expected life of option is the maximum term up to last day of the exercise window • Forfeiture assumptions for the options granted to employees are that 16%, 20% and 23% of Share options are forfeited for tranches 1, 2 and 3 respectively. No allowance for forfeiture has been made for the share options granted to the Chairman. Moelis Australia Limited 2020 Annual Report 95 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 33 33.1 Share-based payments (cont.) Employee share options (cont.) 2020 share options On 13 March 2020, the Group granted share options to non-Australian domiciled Group employees who were not eligible for the Loan Funded Share Plan listed in note 33.4 below. The terms of the 2020 share options plan are the same as the 2017 share options plan unless otherwise stated below. The table below provides the details of options issued on 13 March 2020: Numbers of options at beginning of year Numbers of options issued during the year Grant date share price Exercise price of option Issue price Earliest date of exercise Options forfeited during the year Options exercised during the year Expiry date – – – – 83,334 83,334 83,332 250,000 $3.09 $3.09 $3.09 $4.04 $0.00 13 Mar 2024 13 Mar 2025 $4.04 $0.00 13 Mar 2025 13 Mar 2026 $4.04 $0.00 13 Mar 2026 13 Mar 2027 – – – – – – – – Number of options at year end 83,334 83,334 83,332 250,000 The weighted average value of the share options at the time of grant was $0.85. The fair value of the share options was calculated using a Monte-Carlo model, adjusted for expectations of forfeiture due to employee departures. The assumptions used in calculating the fair value are shown below and are common to all tranches of share options, unless otherwise stated: • Performance Hurdle of 8% per annum increase in total shareholder return. • Risk-free rate 0.67%. • Expected volatility of 42.78%. • Expected life of option is the maximum term up to last day of the exercise window. • Forfeiture assumptions for the options granted to employees are that 20%, 25% and 30% of Share options are forfeited for tranches 1, 2 and 3 respectively. 33.2 Share rights Employee benefits include share rights granted to staff on commencement of employment and as part of the bonus incentive scheme, the vesting of which are subject to continuous employment conditions. The value of these grants are amortised over the vesting period, on the basis that employees do not leave prior to vesting. The value of the grant has been determined by reference to the trading in the Company’s shares. The amortising period commences from the date employees first had an expectation of receiving an equity component to their bonus incentive scheme. Determination of this date required a degree of judgement. Share rights granted as sign-on incentive The Company has periodically granted share rights to senior executives commencing employment with the Group. The share rights are priced with reference to the trading price of the Company’s shares at the time the offer of employment is made. Vesting is subject to continuous employment, with terms varying on a case by case basis. Amortisation of the expense commences on the day the senior executive starts their employment. Share rights granted as part of the annual bonus incentive scheme Share rights have been granted to employees in connection with their 2017 and 2018 annual bonus which entitles the employees to ordinary shares in the Company in the future for no payment. The share rights vest over a prescribed vesting period, and are conditional on continuous employment, unless otherwise determined by the Board. 96 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 33 33.2 Share-based payments (cont.) Share rights (cont.) The table below sets out the movement in share rights during the year: Balance at the beginning of the year Granted during the year Forfeited during the year Vested during the year Balance at the end of the year 33.3 Restricted shares Number of share rights 3,247,604 – (3,821) (1,183,389) 2,060,394 Grant date fair value $’000 14,681 – (17) (5,325) 9,339 As part of the 2019 annual bonus incentive scheme, the share-based component of remuneration was delivered in the form of restricted shares, issued to employees as part of their annual bonus awards in March 2020. The restricted shares were priced at the 5-day volume weighted average price of the shares in the Company at the end of the 2019 financial year. The restricted shares vest over a prescribed vesting period of 10 months to 34 months, and are conditional on continuous employment, unless otherwise determined by the Board. The amortising period has been assessed to commence from the date employees first had an expectation of receiving an equity component to their annual bonus (being 1 January of each financial year). Balance at the beginning of the year Granted during the year Forfeited during the year Vested during the year Balance at the end of the year Number of restricted shares – 1,365,781 – (11,042) Grant date fair value $’000 – 6,803 – (55) 1,354,739 6,748 Restricted shares - 2020 bonus incentive scheme As at 31 December 2020, the Group has estimated the expected 2020 annual bonuses, including an estimate of the amount of bonuses to be paid in cash and the share-based component, which is anticipated to be delivered in the form of restricted shares. The profit or loss impact (after tax) of the estimated equity component for services received for the year ended 31 December 2020 was $4.7 million (2019: $4.8m). 33.4 Loan funded share plan During the year the Group established a Loan Funded Share Plan (LFSP) for certain employees that enabled the employees to invest in shares of the Company in order to more closely align their long term interests with shareholders of the Group. The Group provided an interest fee and unlimited recourse loan to the employees that was used to acquire shares in the Company. The loans to employees are secured on the shares which are not transferable until the loan is fully repaid. Shares granted under the LFSP are subject to a vesting period of four to six years and are subject to a service condition and an 8% per annum total shareholder return performance hurdle. Shares acquired under the LFSP rank equally in all respects with all shareholder entitlements for the same class of shares including dividends. Moelis Australia Limited 2020 Annual Report 97 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 33 33.4 Share-based payments (cont.) Loan funded share plan (cont.) Balance at the beginning of the year Granted during the year Forfeited during the year Vested during the year Balance at the end of the year Number of loan funded shares – 3,500,000 (20,000) – Grant date fair value $’000 – 17,433 (100) – 3,480,000 17,333 The shares issued under the LFSP have been treated as ’in substance options’ which have been valued using a Monte-Carlo pricing methodology with key inputs shown below. The resulting value is amortised over the vesting period on a probability adjusted basis. The total expense recorded for the period was $0.37 million. LFSP Vesting period Share price at grant date Expected volatility Risk-free rate Fair value per security Performance hurdle (total shareholder return) Forfeiture assumptions 33.5 Salary sacrifice share plan Tranche 1 Tranche 2 Tranche 3 4 years $4.04 42.78% 0.67% $0.75 8% p.a. 20% 5 years $4.04 42.78% 0.67% $0.86 8% p.a. 25% 6 years $4.04 42.78% 0.67% $0.94 8% p.a. 30% As part of the 2019 bonus incentive scheme, all employees of the Group were invited to participate in the salary sacrifice share offer which allowed employees to receive up to $5,000 worth of shares in the Company by sacrificing an equivalent amount of their 2019 cash bonus award paid in March 2020. 28,003 shares were issued under the arrangement, priced at $4.0358, being the 5-day volume weighted average price of the Company’s shares on 11 March 2020. The shares are restricted from being sold by employees until at least 1 July 2021 or when the participant is no longer employed by the Group. Balance at the beginning of the year Granted during the year Vested during the year Balance at the end of the year Number of salary sacrifice shares Grant date fair value $’000 – 28,003 (5,328) 22,675 – 113 (22) 91 98 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 34 Key management personnel compensation The aggregate compensation made to both Executive and Non-Executive Directors and other members of Key management personnel (KMP) of the Company and the Group is set out below. There were 9 KMPs in 2020 (2019: 8 KMPs). Short-term employee benefits Share-based payments Long service leave Total Key management personnel compensation 31 Dec 2020 $’000 31 Dec 2019 $’000 5,082 1,987 37 7,106 5,034 1,605 35 6,674 Related party transactions 35 Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below. 35.1 Loans to related parties Loans to employees 439 450 The Group has provided two employees with interest-free loans that are used for investment purposes, primarily for investment in funds managed by the Group. The investments purchased have been designated as restricted and are unable to be sold without the approval of the Group. 51% of distributions received on the investments are allocated against the loan balance. The loans are repayable over a maximum term of five years. 35.2 Transactions with Moelis & Company Moelis & Company Group LP (Moelis & Company) is a global financial institution with subsidiaries and offices in a number of countries. The Group works with Moelis & Company offices to execute cross border transactions with any revenue share based on the roles of the teams involved and billing arrangements of each transaction. No revenue has been cross Company billed in current or prior year. There were also costs allocated from Moelis & Company for global technology and market data expenses. Expenses Main expenses categories include Conferences and Seminars Information services IT infrastructure Net expenses allocated from Moelis & Company 35.3 Transactions with Key Management Personnel The following transactions with KMP took place in 2020. (42) (37) – (79) – (70) (32) (102) • Andrew Pridham and Julian Biggins entered into property management service arrangements with the Group on the same terms as those offered to third party investors in a property managed by the Group. Total management fees payable by Mr Pridham and Mr Biggins for 2020 amounted to $69,542 and $21,342 respectively. Moelis Australia Limited 2020 Annual Report 99 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 35 35.4 Related party transactions (cont.) Transactions with funds managed by the Group The Group is involved in the management of various funds, through it’s role as a trustee, manager, financial advisor and underwriter, and charges fees for doing so. The Group also invests in some of the funds which it manages. Related party investments Infinite Care Group MA Aged Care Fund MA Kincare Fund MA Senior Secured Credit Fund II MKM Capital Redcape Hotel Group KMP 31 Dec 2020 $’000 Group 31 Dec 2020 $’000 KMP 31 Dec 2019 $’000 Group 31 Dec 2019 $’000 – 4,150 400 3,652 – 6,374 14,576 – – 9,037 2,353 5,667 58,232 75,289 – 4,150 400 1,598 – 8,054 14,202 2,774 3,833 8,721 2,275 – 59,348 76,951 The above amounts for KMP are recorded at the entry price paid or committed for the relevant investment in accordance with AASB 124 Related Party Disclosures and have not been adjusted for subsequent valuation changes. Related party fees Trustee and management fees Performance fees Interest on loans receivable Receivables from related parties Current 31 Dec 2020 $’000 31 Dec 2019 $’000 16,396 5,836 144 22,376 20,584 – – 20,584 Accounts receivable and fees receivable from related parties 11,367 5,078 100 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 Parent entity disclosures 36 As at, and throughout, the reporting year ended 31 December 2020 the parent entity of the Group was Moelis Australia Limited. Results of the parent company Profit for the year Other comprehensive income Total comprehensive income for the period Financial position of the parent entity Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Total equity of the parent entity comprising of: Contributed equity Reserves Retained earnings Total equity 31 Dec 2020 Company $’000 31 Dec 2019 Company $’000 15,794 – 15,794 185,409 37,579 222,988 6,619 – 6,619 (642) – (642) 161,522 37,449 198,971 1,968 – 1,968 216,369 197,003 188,621 27,016 732 216,369 174,423 22,877 (297) 197,003 The parent entity had no contingencies at reporting period end other than those already disclosed in the financial statements. Moelis Australia Limited 2020 Annual Report 101 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 37 37.1 Investment in subsidiaries Acquisition and disposal of investments in subsidiaries Acquisitions • On 4 January 2019, the Group acquired the power to exercise control in the MA Master Credit Trust. No gains or losses were incurred from acquisition as it was transacted at arms length. The Group accounts for the entity as a subsidiary from that date onwards. Disposals • On 21 December 2020, the Group disposed of KC Finance Pty Ltd consisting of a loan asset of $25.5 million and redeemable preference shares of $25.5 million. There was no gain or loss recognised on disposal. Refer to note 25 for more details. • On 3 February 2020, the Group disposed of its remaining interest in Golden Corridor Management Pty Ltd. No gain or loss was recognised on disposal. 37.2 Subsidiaries Details of the Group’s material subsidiaries at the end of the financial year are as follows: Name of subsidiary A.C.N. 167 316 109 Pty Ltd Armada Funds Management Pty Ltd Eastern Credit Management Pty Ltd Global Wealth Aged Care Pty Ltd KC Finance Pty Ltd Principal activity Corporate Finance Asset Management Asset Management Asset Management Asset Management Place of incorporation and operation Australia Australia Australia Australia Australia MA Asset Management (Hong Kong) Limited Asset Management Hong Kong MA Asset Management Ltd MA Credit Investments Pty Ltd MA Hotel Management Pty Ltd MA Investment Management Pty Ltd MA Master Credit Trust MA UK Operations Limited Asset Management Asset Management Asset Management Asset Management Asset Management Australia Australia Australia Australia Australia Asset Management United Kingdom MA Visa Fund Manager Pty Ltd Asset Management MAAM Commercial Consulting (Shanghai) Co Ltd Asset Management MAAM GP Pty Ltd MAAM Holdings Pty Ltd MAAM Re Limited MAF Credit Pty Ltd MAKM Holdings Pty Ltd Moelis Australia Advisory Pty Ltd Moelis Australia Finance Pty Ltd Moelis Australia Foundation Pty Ltd Moelis Australia Operations Pty Ltd Moelis Australia Partners Pty Ltd Moelis Australia Securities Pty Ltd Asset Management Asset Management Asset Management Asset Management Asset Management Corporate Finance Administration Entity Administration Entity Administration Entity Asset Management Corporate Finance Australia China Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Proportion of ownership interest and voting power held by the Group 31 Dec 2020 31 Dec 2019 100% 100% 100% 100% – 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% – 100% – 100% 100% 100% – 100% 100% 100% 100% 100% 100% – 100% 100% 100% 100% 100% 100% 102 Moelis Australia Limited 2020 Annual Report Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 37 37.2 Investment in subsidiaries (cont.) Subsidiaries (cont.) Name of subsidiary Moelis Australia Share Plan Pty Ltd Redcape Hotel Group Management Ltd TMASL Finance Pty Ltd Western Funds Management Pty Ltd Principal activity Administration Entity Asset Management Asset Management Asset Management Proportion of ownership interest and voting power held by the Group Place of incorporation and operation Australia Australia Australia Australia 31 Dec 2020 31 Dec 2019 100% 100% 100% 100% 100% 100% 100% 100% A majority of the Group’s wholly owned Australian incorporated and operated subsidiaries are members of the Moelis Australia tax-consolidated group of which Moelis Australia Ltd is the head entity Commitments 38 At 31 December 2020, the Group had undrawn loan commitments of $30.9 million (2019: $40.7 million). Calculations of provision on loan commitments recognised are consistent with the loan receivables. Subsequent to 31 December 2020, $1.8 million of this commitment was either cancelled or drawn upon. At 31 December 2020, the Group has the following capital commitments: • The Group has committed to a 10% co-investment in Class B Units in MCT, a consolidated entity of the Group. At 31 December 2020, $17.3 million (2019: $9.7 million) has been invested by the Group in MCT. Refer to further information in note 24(c). Subsequent events 39 On 8 February 2021 the Group entered into a credit related partnership with a Major Australian bank. The partnership initially involves the Group acquiring a $24 million loan note in a A$300 million portfolio of asset finance loans. $18 million of this investment will be sourced from credit fund managed by Moelis Australia in addition to a $6 million co-investment by the Company. The balance of the funding for the loan portfolio is to be provided via a non-recourse loan facility. On 16 February 2021 the Group agreed to acquire retail property manager RetPro Pty Ltd for an initial cash consideration of $10.5 million. An additional deferred consideration is payable in a combination of cash and shares up to a maximum of $6.75 million dependant on achieving increased revenue hurdles up to 30 June 2022. Moelis Australia Limited 2020 Annual Report 103 Notes to the consolidated financial statements (cont.)for the year ended 31 December 2020 In the Directors’ opinion: (a) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and (b) the financial statements and notes set out on pages 38 to 103 are in accordance with the Corporations Act 2001 (Cth) including: (i) complying with the Australian Accounting Standards, and (ii) giving a true and fair view of the Company’s and the consolidated Group’s financial positions as at 31 December 2020 and their performance for the financial year ended on that date. Note 1 (a) includes a statement that the financial report complies with International Financial Reporting Standards. The Directors have been given declarations by the joint CEO’s and CFO required by section 295A of the Corporations Act 2001 (Cth). This declaration is made in accordance with a resolution of the Directors. Jeffrey Browne Independent Chairman and Non-Executive Director Julian Biggins Director and Joint Chief Executive Officer Sydney 17 February 2021 Sydney 17 February 2021 104 Moelis Australia Limited 2020 Annual Report Directors’ declaration Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW, 2000 Australia Phone: +61 2 9322 7000 www.deloitte.com.au Independent Auditor’s Report to the Members of Moelis Australia Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Moelis Australia Limited (the “Company”) and its subsidiaries (the “Group”) which comprises the consolidated statement of financial position as at 31 December 2020, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and other explanatory information, and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 31 December 2020 and of their financial performance for the year then ended; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional & Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte organisation. Moelis Australia Limited 2020 Annual Report 105 Independent auditor’s reportfor the year ended 31 December 2020 106 Moelis Australia Limited 2020 Annual Report Independent auditor’s report (cont.)for the year ended 31 December 2020 Key Audit Matter How the scope of our audit responded to the Key Audit Matter Investment in Redcape In November 2017, Moelis in conjunction with a number of Moelis managed funds and external investors completed a $677m transaction. The transaction involved Moelis taking a direct 10% investment into Redcape, with total holdings by Moelis and Moelis managed funds of 59%. Moelis determined in FY 17 that Redcape was an associate and was therefore subject to equity accounting method. This equity accounting remained the same when in November 2018 Redcape underwent an IPO. As a result of the share price declining subsequent to IPO, the resultant market capitalisation indicated that Moelis investment in Redcape was valued at $47.8m compared to their share of profits from associate to the amount of $58.2m. Our procedures included, but were not limited to: • Analysing management’s impairment assessment detailing conclusions made on impairment indicators and noted that the carrying value is supported by the Group’s share of net assets of Redcape; • Reconciling the Group’s share of net assets of Redcape to the Group’s investment in Redcape balance; and • Recalculating the valuation of the Group’s share of net assets of Redcape using the Group’s shareholding of Redcape as at year end and applying that to Redcape’s 31 December 2020 financial information; • Reviewing the workpapers of the component auditor for Redcape and their assessment of Redcape’s impairment assessment. We assessed the appropriateness of the disclosures in Note 20 to the financial statements. Investment Banking Revenue Recognition The revenue generated by the Corporate Advisory Segment within the Group is primarily from investment banking transactions. For the year ended 31 December 2020, the advisory segment generated $45.5m in revenue. This revenue stream is recognised by reference to the stage of completion of the transaction at the end of the reporting period as disclosed in Note 1(c) and note 4. Revenue recognition required management judgement in respect of when stages of the transaction were completed and revenue was appropriately recognised. Our procedures included, but were not limited to: • Evaluating management’s relevant controls over the revenue recognition process and testing of design, implementation and operating effectiveness of relevant controls; • Testing on a sample basis, the calculation of the fees recognised to the key milestones as outlined in the client engagement letters; • Reviewing subsequent period documentation to assess whether revenue has been recorded in the correct period; and • Reviewing management reporting, board minutes, market available information and making enquiries of management to support the revenue recognised. Moelis Australia Limited 2020 Annual Report 107 Independent auditor’s report (cont.)for the year ended 31 December 2020 We have also assessed the appropriateness of the disclosures in Note 1(c) and Note 4 to the financial statements. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 31 December 2020, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain 108 Moelis Australia Limited 2020 Annual Report Independent auditor’s report (cont.)for the year ended 31 December 2020 audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors. • Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Moelis Australia Limited 2020 Annual Report 109 Independent auditor’s report (cont.)for the year ended 31 December 2020 Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 28 to 36 of the Directors’ Report for the year ended 31 December 2020. In our opinion, the Remuneration Report of Moelis Australia Limited, for the year ended 31 December 2020, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU Delarey Nell Partner Chartered Accountants Sydney, 17 February 2021 Dividend details Moelis Australia generally pays a dividend on its fully paid ordinary shares once a year following its full-year financial results announcement. The payment date for the dividend following the announcement of the 2020 results is 3 March 2021. Share Registry Details The following information is correct as at 3 February 2021. Registered Holder MOELIS & CO INTERNATIONAL HOLDINGS LLC MAGIC TT PTY LTD MAGIC TT 2 PTY LTD J P MORGAN NOMINEES AUSTRALIA PTY LIMTIED HSBC CUSTODY NOMINEES (AUSTRALIA LIMITED) UBS NOMINEES PTY LTD MOELIS AUSTRALIA SHARE PLANCITICORP NOMINEES PTY LIMITED TOUCHARD PTY LTD MOELIS AUSTRALIA SHARE PLAN BNP PARIBAS NOMINEES PTY LTD BNP PARIBAS NOMS PTY LTD RICHARD GERMAIN AND NINA GERMAIN NATIONAL NOMINEES LIMITED JILL ADORA PTY LTD NETWEALTH INVESTMENTS LIMITED BNP PARIBAS NOMINEES PTY LTD HUB24 CUSTODIAL SERV LTD SENO INVESTMENTS PTY LTD WEI YANG CITICORP NOMINEES PTY LIMITED Number of ordinary shares held % of ordinary shares 29,500,000 26,722,792 14,850,000 10,972,883 9,217,267 5,103,089 4,383,511 3,960,672 3,359,077 3,070,848 2,457,196 1,812,867 1,724,677 1,664,164 1,516,860 985,112 900,891 600,000 525,532 508,782 19.52% 17.68% 9.83% 7.26% 6.10% 3.38% 2.90% 2.62% 2.22% 2.03% 1.63% 1.20% 1.14% 1.10% 1.00% 0.65% 0.60% 0.40% 0.35% 0.34% Distribution of Shareholders Holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Number of shareholders Number of ordinary shares % of ordinary shares 672 1,004 482 501 57 325,421 2,931,427 3,764,958 12,991,497 131,127,767 0.22% 1.94% 2.49% 8.60% 86.76% 110 Moelis Australia Limited 2020 Annual Report Additional information Unmarketable parcels There were 88 shareholders (representing 3,128 shares) who held less than a marketable parcel. Substantial shareholders Name Moelis Australia Limited Moelis & Company Group LP, Moelis & Company International Holdings LLC, Kenneth Moelis Magic TT Pty Limited, Andrew Pridham Magic TT 2 Pty Limited, Christopher Wyke Number of ordinary shares % of ordinary shares 43,885,908 29.04% 29,500,000 26,800,000 14,850,000 19.98% 18.15% 10.06% Voting rights At meetings of members or classes of members, each member may vote in person or by proxy, attorney or (if the member is a body corporate) corporate representative. On a show of hands, every person present who is a member or a proxy, attorney or corporate representative of a member has one vote and on a poll every member present in person or by proxy, attorney or corporate representative has one vote for each fully paid share held by the member. Voting escrow shares As at 10 February 2021, 35,000,000 shares were subject to voluntary escrow. The voluntary escrow period ends on the dates and for the amount of shares set out in the table below: Date of release 10 April 2021 10 April 2022 10 April 2023 Number of shares released from escrow 11,666,666 11,666,667 11,666,667 Share options The table below sets out the number of share options, with each share option carrying the right to acquire one share in the Company at a future date, outstanding as at 10 February 2021: Size of holding 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total Share Options Number of holders Share options – – 6 20 12 38 – – 60,000 886,250 3,295,825 4,242,075 Moelis Australia Limited 2020 Annual Report 111 Additional information (cont.) Term AASB ASX AUM Board Definition Australian Accounting Standards Board Australian Securities Exchange of ASX Limited (ABN 98 008 624 691) and the market operated by ASX Limited. Assets under management The Board of Directors of Moelis Australia Limited Company Moelis Australia Limited (ABN 68 142 008 428), a company limited by shares Corporations Act Corporations Act 2001 (Cth) Directors EBITDA EAD ECL ECM The Directors of the Company as at the date of this Report Earnings before interest, tax, depreciation and amortisation Exposure at default Expected credit loss Equity capital markets Employees Employees of the Group Employee Share Trust Moelis Australia Employee Share Trust established by trust deed dated 15 March 2017 EPS Earnings per share Equity Incentive Plan Moelis Australia Equity Incentive Plan Existing Staff Trusts Trusts established prior to the IPO of the Company, which hold shares on behalf of current and former employees of the Group. FVTOCI FVTPL Group IASB IFRS IPO KMP LGD Fair value through other comprehensive income Fair value through profit or loss The Company and its subsidiaries International Accounting Standards Board International Financial Reporting Standards Initial Public Offering Key management personnel Loss given default Moelis Australia The Company and/or its subsidiaries as the context requires Moelis & Company Moelis & Company Group LP, listed on the New York Stock Exchange NPAT NYSE PD RBA REIT ROU Shareholder Shares Net profit after tax New York Stock Exchange Probability of default Reserve Bank of Australia Real Estate Investment Trust Right-of-use The holder of a share Fully paid ordinary shares in the capital of the Company 112 Moelis Australia Limited 2020 Annual Report Glossary Term Share options Share rights Small Cap Staff Trustee Definition Options over unissued shares Rights to receive shares at some point in the future Any company outside the ASX 100 and measured against the S&P/ASX Small Ordinaries Index Magic TT Pty Ltd (ACN 143 275 138) and Magic TT 2 Pty Ltd (ACN 636 844 356) as trustees of the Existing Staff Trusts Moelis Australia Limited 2020 Annual Report 113 Glossary (cont.) This pages has been intentionally left blank. 114 Moelis Australia Limited 2020 Annual Report Share Registry Boardroom Pty Limited Level 12, Grosvenor Place 255 George Street Sydney NSW 2000 Tel: 1300 737 760 www.boardroomlimited.com.au moelis@boardroomlimited.com.au Auditor Deloitte Touche Tohmatsu Grosvenor Place 225 George Street Sydney NSW 2000 Website www.moelisaustralia.com Corporate directory Directors Jeffrey Browne (Chairman) Andrew Pridham (Group Vice Chairman) Alexandra Goodfellow Kenneth Moelis Kate Pilcher Ciafone Julian Biggins Christopher Wyke Company Secretary Janna Robertson Rebecca Ong Registered Office Principal place of business Level 27, Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 Tel: + 61 2 8288 5555 Registered Office Sydney Level 27, Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 Tel: + 61 2 8288 5555 Melbourne Level 34, 120 Collins Street Melbourne VIC 3000 Tel: +61 3 8650 8650 Shanghai Level 38, Park Place 1601 Nan Jing West Road Jing An District 200040 Shanghai Tel: +86 021 6137 3216 Moelis Australia Limited 2020 Annual Report 115 Sydney Level 27, Governor Phillip Tower 1 Farrer Place Sydney NSW 2000 Phone: +61 2 8288 5555 Melbourne Level 34, 120 Collins Street Melbourne VIC 3000 Phone: +61 3 8650 8650 Shanghai Level 38, Park Place 1601 Nan Jing West Road Jing An District 200040 Shanghai T +86 021 6137 3216 moelisaustralia.com