Maximus Annual Report 2014

Plain-text annual report

Annual Report 2014 McMillan Shakespeare Limited CONTENTS DIRECTORS’ REPORT CORPORATE GOVERNANCE STATEMENT 1 17 STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME 21 STATEMENTS OF FINANCIAL POSITION STATEMENTS OF CHANGES IN EQUITY STATEMENTS OF CASH FLOWS NOTES TO THE FINANCIAL STATEMENTS DIRECTORS’ DECLARATION INDEPENDENT AUDIT REPORT AUDITOR’S INDEPENDENCE DECLARATION SHAREHOLDER INFORMATION 22 23 24 25 63 64 66 67 CORPORATE DIRECTORY Inside front cover ANNUAL GENERAL MEETING The Annual General Meeting of the members of McMillan Shakespeare Limited A.B.N. 74 107 233 983 will be held on 29 October 2014 at 10:00 am at the State Library of Victoria, Ground Floor, 328 Swanston Street, Melbourne, Victoria in the Experimedia room. CORPORATE DIRECTORY Directors Ronald Pitcher, AM (Chairman) Michael Kay (Managing Director) John Bennetts Ross Chessari Tim Poole Ian Elliot Registered Office Level 21, 360 Elizabeth Street Melbourne Victoria 3000 Tel: +61 3 9097 3000 Fax: +61 3 9097 3060 Company Secretary Mark Blackburn Auditor Grant Thornton Audit Pty Ltd The Rialto, Level 30, 525 Collins Street Melbourne Victoria 3000 Share Registry Computershare Investor Services Pty Limited Yarra Falls, 452 Johnston Street Abbotsford Victoria 3067 Tel: +61 3 9415 4000 Website www.mmsg.com.au DIRECTORS’ REPORT The directors of McMillan Shakespeare Limited (Company or MMS) present this report on the consolidated entity, consisting of the Company and the entities that it controlled at the end of, and during, the ﬁ nancial year ended 30 June 2014 (Group or Consolidated Group). DIRECTORS The directors during the whole of the ﬁ nancial year and up to the date of this report (Directors) are as follows: Mr Ronald Pitcher AM (independent Chairman) Mr Michael Kay (Managing Director and Chief Executive Ofﬁ cer) Mr John Bennetts (Non-Executive Director) Mr Ross Chessari (Non-Executive Director) The following directors were appointed during the year and continue in ofﬁ ce at the date of this report: Mr Tim Poole (independent Non-Executive Director) appointed on 17 December 2013 Mr Ian Elliot (independent and Non-Executive Director) appointed on 27 May 2014 Mr Michael Kay announced his retirement as Managing Director and Chief Executive Ofﬁ cer and is due to vacate his position on 30 September 2014. The following were directors from the beginning of the ﬁ nancial year until their retirement during the year: Mr Graeme McMahon (independent Non-Executive Director) resigned on 26 November 2013 Graeme McMahon retired as Director of McMillan Shakespeare in late 2013. Graeme made an enormous contribution to the success of McMillan Shakespeare from its listing in 2004. His success and experience as a business leader, together with his strength of character and forthright opinions, saw our business develop its strengths and face up to its challenges with equal energy and determination. Sadly, Graeme passed away in July 2014. Graeme was a memorable ﬁ gure at McMillan Shakespeare and in the community, as President of Essendon football club and CEO of Ansett Airways. He is deeply missed by the McMillan Shakespeare family and all who knew him. Mr Anthony Podesta (Non-Executive Director) resigned on 18 February 2014 Anthony Podesta announced his retirement as a McMillan Shakespeare Director in February 2014. Our company founder, Anthony worked at McMillan Shakespeare since its inception in 1988, transitioning from CEO to Board member in 2008. As well as building the McMillan Shakespeare business, Anthony was instrumental in the creation of the outsourced salary packaging industry in Australia and was named Ernst & Young Australian Entrepreneur of the year in 2012. Anthony’s contribution to the company has been invaluable. He has left behind a vibrant legacy and successful business that bears the hallmarks of his energy and inﬂ uence. Details of the qualiﬁ cations, experience and special responsibilities of the Directors at the date of this Annual Report are set out on pages 4, 5 and 6. The Directors that are noted above as independent Directors, as determined in accordance with the Company’s deﬁ nition of independence, have been independent at all times throughout the period that they held ofﬁ ce during the ﬁ nancial year ended 30 June 2014. DIRECTORS’ MEETINGS The number of meetings held by the board of Directors (Board) (including meetings of committees of the Board) and the number of meetings attended by each of the Directors during the ﬁ nancial year ended 30 June 2014 were as follows: Director Eligible to Attend Attended Eligible to Attend Attended Eligible to Attend Attended Board Meetings Audit Committee Meetings Remuneration Committee Meetings Mr R. Pitcher, AM (Chairman) Mr M. Kay (Managing Director and CEO) Mr J. Bennetts Mr R. Chessari Mr T. Poole Mr I. Elliot Mr G. McMahon Mr A. Podesta 11 11 11 11 6 1 5 7 11 11 11 10 6 1 5 7 3 - 3 - 2 - 1 - 3 - 2 - 2 - 1 - 4 - 4 3 3 1 1 - McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 4 - 3 3 3 1 1 - 1 Financial Highlights NPAT performance1 Revenue performance 60 50 45 40 35 30 25 20 15 10 5 0 s n o i l l i m $ 60.0 50.0 40.0 30.0 s t n e c 20.0 10.0 0.0 Profit recognised on ILA business combination Normalised NPAT last 9 years CAGR of 30% 300 280 260 240 220 200 180 160 140 120 100 80 60 40 20 0 s n o i l l i m $ FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Historical Normalised NPAT Acquisition Gain Revenue Group Remuneration Services Revenue Asset Management Total dividends per share Normalised earnings per share (EPS)2 Dividend 9 year CAGR 33% Basic EPS 9-year CAGR of 28%2 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 s t n e c FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 Basic EPS2 Cash EPS2 McMillan Shakespeare Limited Share price - March 04 to June 14 $20.00 $18.00 $16.00 $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 4 4 0 0 - - r r a a M M 4 4 0 0 - - n n u u J J 4 4 0 0 - - p p e e S S 4 4 0 0 - - c c e e D D 5 0 - - r a M 5 5 0 0 - - n n u u J J 5 5 0 0 - - p p e e S S 5 5 0 0 - - c c e e D D 6 0 - - r a M 6 6 0 0 - - n n u u J J 6 6 0 0 - - p p e e S S 6 6 0 0 - - c c e e D D 7 7 0 0 - - r r a a M M 7 7 0 0 - - n n u u J J 7 7 0 0 - - p e S 7 7 0 0 - - c c e e D D 8 8 0 0 - - r r a a M M 8 8 0 0 - - n n u u J J 8 8 0 0 - - p p e e S S 8 8 0 0 - - c c e e D D 9 9 0 0 - - r r a a M M 9 9 0 0 - - n n u u J J 9 9 0 0 - - p p e e S S 9 9 0 0 - - c c e e D D 0 0 1 1 - - r r a a M M 0 0 1 1 - - n n u u J J 0 0 1 1 - - p p e e S S 0 0 1 1 - - c c e e D D 1 1 1 1 - - r r a a M M 1 1 1 1 - - n n u u J J 1 1 1 1 - - p p e e S S 1 1 1 1 - - c c e e D D 2 2 1 1 - - r r a a M M 2 2 1 1 - - n n u u J J 2 2 1 1 - - p p e e S S 2 2 1 1 - - c c e e D D 3 3 1 1 - - r r a a M M 3 3 1 1 - - n n u u J J 4 1 - r a M 4 1 - n u J NPAT and EPS CAGR is normalised to exclude the proﬁ t recognised on acquisition of Interleasing (Australia) Limited in FY10 ($17M proﬁ t after tax). Normalised EPS excludes the proﬁ t recognised on acquisition of Interleasing (Australia) Limited. Cash EPS includes CAPEX but excludes the investment in Fleet growth. 1 2 2 PRINCIPAL ACTIVITIES The principal activities of the Company and its controlled entities during the course of the ﬁ nancial year ended 30 June 2014 was the provision of remuneration, asset management and ﬁ nance services to public and private organisations predominantly in Australia. In the opinion of the Directors, there were no signiﬁ cant changes in the nature of the activities of the Company and its controlled entities during the course of the ﬁ nancial year ended 30 June 2014 that are not otherwise disclosed in this Annual Report. RESULTS Details of the results for the ﬁ nancial year ended 30 June 2014 are as follows: Results Net proﬁ t after income tax (NPAT) Basic earnings per share Earnings per share on a diluted basis DIVIDENDS 2014 2013 $54,969,799 $62,163,519 73.8 cents 72.7 cents 83.4 cents 81.9 cents Details of dividends declared and/or paid by the Company during the ﬁ nancial year ended 30 June 2014 are as follows: Dividends 2014 $ 2013 $ Final dividend for the ﬁ nancial year ended 30 June 2013 of 18.0 cents (2012: 25.0 cents) per ordinary share paid on 22 November 2013 fully franked at the tax rate of 30% (2012: 30%). 13,414,314 18,630,991 Interim dividend for the ﬁ nancial year ended 30 June 2014 of 21.0 cents (2013: 24.0 cents) per ordinary share paid on 28 March 2014 fully franked at the tax rate of 30% (2013: 30%). Total 15,650,033 17,885,752 29,064,347 36,516,743 Subsequent to the ﬁ nancial year ended 30 June 2014, the Directors declared a ﬁ nal dividend of 31.0 cents per ordinary share (fully franked at the tax rate of 30%) to be paid on 15 October 2014, bringing the total dividend to be paid for the ﬁ nancial year ended 30 June 2014 to 52.0 cents per ordinary share. REVIEW OF OPERATIONS This year’s result was adversely impacted by the Rudd Labor Government’s 16 July 2013 announcement of proposed changes to the treatment of FBT on motor vehicles. Between that date and the September 2013 Federal election, our ability to sell novated leases was signiﬁ cantly curtailed. The change of Government saw a reversal of the proposed policy and we began the task of ramping back to business as usual. The decision by the Board to retain all our staff after the Rudd announcement put pressure on our expense ratio in the ﬁ rst half of FY14, but the support and faith in our people has been well rewarded in the second half. A highly engaged workforce worked hard on the recovery of our business and through this engagement and with IT enhancements, we achieved signiﬁ cant productivity gains. Notwithstanding these headwinds we have produced an excellent result. Key highlights and activities included: • Consolidated Group 2nd half FY14 NPAT was 10% higher than PCP (13% ex interest on the ﬂ oat*). • Group Remuneration Services (GRS) 2nd half FY14 NPAT was 16% higher than PCP (21% ex interest on the ﬂ oat). • Core operating contribution growth in GRS declined 5% on PCP, but 2HFY increased by 18%. (Core operating contribution – proﬁ t before ﬁ nance, tax and depreciation derived directly from salary packages managed and novated leasing excluding one-off costs associated with proposed FBT changes.) Asset Management NPAT was $13.6m, including UK JV losses. The Australian/NZ NPAT excluding remarketing proﬁ ts and new system depreciation grew by 11% on PCP. Remarketing proﬁ ts were below expectations due to customers deciding to extend leases rather than buy new assets which presents a delayed proﬁ t opportunity on eventual asset return. • • • New Australian asset management system successfully delivered in July 2013 (5 year write off period from 1 July 2013; annual depreciation charge of $1.9m). Free cash ﬂ ow of $52m (pre ﬂ eet increase), 94% of NPAT notwithstanding the impact of proposed FBT changes and $8.5m of CAPEX, including systems investment. Assets under ﬁ nance and management continued to grow ($27m or 9% on PCP) despite patchy economic conditions and a very competitive market. • • McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 3 Both segments have a good pipeline of new business opportunities. • • Group funding arrangements were extended to March 2017 on improved terms – our club facility now has three of the four tier 1 Australian banks and provides funds in Australia, NZ and UK. The UK business originated £22m of assets. • CLM (UK) was acquired for A$14m in October 2013 (A$12.4m net of cash acquired). • • UK performing in line with expectations. • Funding of CLM customers commenced January 2014. * Ex interest on the ﬂ oat growth shows the business’s underlying growth after removing the impact of interest earned on non corporate funds which is impacted by changes in interest rates. In summary, our staff proved very resilient in the face of the proposed FBT tax changes. As is evident from the second half performance, the business has returned to its pre-July 16, 2013 condition and is well placed to provide shareholders with proﬁ table growth in FY15. In addition to growth in our core offerings, shareholders can expect to see a contribution from the UK operations and the extension of our core offerings to customers through the launch of new products and services. FY15 is set to be another busy and productive year for MMS. STRATEGY AND PROSPECTS The business has returned to normal and the Directors are focused on expanding the business into new products and geography that will reduce regulatory risk. STATE OF AFFAIRS There were no signiﬁ cant changes in the state of affairs of the Company and its controlled entities that occurred during the ﬁ nancial year ended 30 June 2014 that are not otherwise disclosed in this Annual Report. EVENTS SUBSEQUENT TO BALANCE DATE Subsequent to reporting date, the Company granted the following performance and voluntary options to employees. Option Type Performance options Performance options Voluntary options LIKELY DEVELOPMENTS Number Exercise price 978,417 808,738 23,981 1,811,136 $10.18 $10.18 $10.18 Expiry date 30 September 2019 30 September 2018 30 September 2018 Other than the information otherwise disclosed in this Annual Report, information as to the likely developments in the operations of the Company and its controlled entities and the expected results of those operations in subsequent years has not been included in this Annual Report because the Directors believe, on reasonable grounds, that to include such information would likely result in unreasonable prejudice to the Group. DIRECTORS’ EXPERIENCE & SPECIAL RESPONSIBILITIES Name: Ronald Pitcher AM, FCA, FCPA Appointed: 4 February 2004 Positions: Chairman of the Board Member of the Audit Committee Chairman of the Remuneration Committee Mr Pitcher is a Chartered Accountant with over 45 years experience in the accounting profession and the provision of business advisory services. Mr Pitcher was formerly a director of National Can Industries Limited (since 1994) and is a director of Reece Australia Limited (since 2003). Under the Company’s deﬁ nition of independence, Mr Pitcher is considered to be independent. 4 Name: Michael Kay LLB Appointed: 15 July 2008 Positions: Managing Director and Chief Executive Ofﬁ cer Before joining the Company in May 2008, Mr Kay was the Chief Executive Ofﬁ cer of Australian Associated Motor Insurers Limited (AAMI). Mr Kay joined AAMI in 1993, and before rising to the position of Chief Executive Ofﬁ cer in 2006, he served as General Manager, Southern Region (comprising Victoria, Tasmania and South Australia) and Executive Chairman, Corporate Affairs and then, from 2002, as the Chief Operating Ofﬁ cer. Before joining AAMI, Mr Kay practised for 10 years as a solicitor. Mr Kay is a director of RAC Insurance and a former member of the Commonwealth Consumer Affairs Advisory Council, the Administrative Law Committee of the Law Council of Australia, the Victorian Government Finance Industry Council and the Committee for Melbourne. Mr Kay holds a Bachelor of Laws from the University of Sydney. Name: John Bennetts B Ec, LLB Appointed: 1 December 2003 Positions: Non-Executive Director Member of the Audit Committee Member of the Remuneration Committee Mr Bennetts is an experienced investor and a founder and director of a number of companies, including being a former director of Cellestis Limited and private equity investment ﬁ rm, Mooroolbark Investments Pty Limited (M-Group). He has also provided advisory services to a range of companies in Australia and Asia. Prior to the establishment of the M-Group, he was Group Legal Counsel and Company Secretary of Datacraft Limited. Before joining Datacraft Limited, he practised as a solicitor. Name: Ross Chessari LLB, M Tax Appointed: 1 December 2003 Positions: Non-Executive Director Member of the Remuneration Committee Mr Chessari is a founder and director of the investment manager, SciVentures Investments Pty Limited (SciVentures). Prior to founding SciVentures, Mr Chessari was the Managing Director of ANZ Asset Management and the General Manager of ANZ Trustees. Name: Tim Poole CA, B Com Appointed: 17 December 2013 Positions: Non-Executive Director Chairman of the Audit Committee (appointed 17 December 2013) Member of the Remuneration Committee (appointed 17 December 2013) Mr Poole is currently a non-executive Director of Newcrest Mining Limited, Japara Healthcare and AustralianSuper, and the non-executive Chairman of Lifestyle Communities. Mr Poole is also the non-executive director of several unlisted private companies. He was formerly Managing Director of Hastings Funds Management and non-executive Chairman of Asciano Limited. Mr Poole is considered an independent director under the Company’s deﬁ nition of independence. Name: Ian Elliot Appointed: 27 May 2014 Positions: Non-Executive Director Member of the Remuneration Committee (appointed 27 May 2014) Mr Elliot is currently a non-executive Director of Salmat Limited, a non-executive Director of Hills Industries Limited and a Commissioner of the Australian Rugby League. Mr Elliot was formerly Chairman and CEO at Australia’s largest advertising agency George Patterson Bates. Mr Elliot is considered an independent director under the Company’s deﬁ nition of independence. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 5 Name: Anthony Podesta B Ed (Bus), MTMA, FTIA, MAICD Appointed: 1 December 2003 Retirement: 18 February 2014 Positions: Non-Executive Director Name: Graeme McMahon FCPA, FRAS, FCIT Appointed: 18 March 2004 Retirement: 26 November 2013 Positions: Non Executive Director Chairman of the Audit Committee (until 26 November 2013) Member of the Remuneration Committee (until 26 November 2013) COMPANY SECRETARY Mark Blackburn: Chief Financial Ofﬁ cer and Company Secretary Mark Blackburn, Dip Bus (Acct), CPA, GAICD joined McMillan Shakespeare Group as Chief Financial Ofﬁ cer in October 2011. Mr Blackburn commenced as Company Secretary on 26 October 2011. Mr Blackburn has over 30 years experience in ﬁ nance, working across a broad range of industries for companies such as WMC, Ausdoc, Laminex Industries, AAMI/Promina and Olex Cables. In particular, he has public company experience in ﬁ nancial management and advice, management of ﬁ nancial risks, management of key strategic projects, acquisitions and establishing joint ventures. Prior to his employment with McMillan Shakespeare Group, Mr Blackburn was Chief Financial Ofﬁ cer of AUSDOC Group Ltd, IOOF Holdings Ltd and iSelect Pty Ltd. REMUNERATION REPORT Overview The Group’s remuneration policies and practices are designed to align the interests of staff and shareholders while attracting and retaining staff members who are critical to its growth and success. The Board maintains a Remuneration Committee whose objectives are to oversee the formulation and implementation of remuneration policy and make recommendations to the Board on remuneration policies and packages applicable to the Directors and executives. For further details of the composition and responsibilities of the Remuneration Committee, please refer to the Corporate Governance Statement. Remuneration Structure – Non-Executive Directors The Non-Executive Directors are remunerated for their services from the maximum aggregate amount approved by the shareholders of the Company on 19 October 2010 for that purpose ($600,000 per annum). The Board sets the fees for the Chairman and the other Non-Executive Directors. The Board’s policy is to remunerate the Chairman and the Non-Executive Directors at market rates for comparable companies for the time and commitment involved in meeting their obligations. Neither the Chairman nor the other Non-Executive Directors received or were entitled to any performance related remuneration or options with respect to the ﬁ nancial years ended 30 June 2014 and 30 June 2013. There is no direct link between the remuneration of the Chairman or any other Non-Executive Director and the short term results of the Group because the primary focus of the Board is on the long term strategic direction and performance of the Group. There are no termination payments payable to the Chairman or the other Non-Executive Directors on their retirement from ofﬁ ce other than payments relating to the accrued superannuation entitlements included in their remuneration. Remuneration Structure – Executive Directors and Senior Executives Overview In setting its remuneration arrangements, reference has been made to the current employment market in which the Group operates. The components of remuneration for each executive comprise ﬁ xed remuneration (including superannuation and beneﬁ ts) and long-term equity-linked performance incentives (in the form of options). The Remuneration Committee reviews the ﬁ xed remuneration component of each executive’s remuneration each year (or on promotion). For the ﬁ nancial year commencing July 2014 the Remuneration Committee has reviewed remuneration based on an analysis of the Top 500 Report (Director and Senior Executive Remuneration) 2014, and AON Hewitt The Australian Top Executive Data Service for organisations with Annual Revenue $251-$500 Million. 6 Fixed Remuneration The ﬁ xed remuneration component comprises salary, superannuation and, in some cases, non-cash beneﬁ ts, such as motor vehicle lease payments and car parking beneﬁ ts. Fixed remuneration reﬂ ects the duties, responsibilities and performance levels of the relevant executive, general market conditions and comparable remuneration offered in related industry sectors. No element of the ﬁ xed remuneration component is at risk. Neither the Chief Executive Ofﬁ cer nor the Chief Financial Ofﬁ cer are remunerated separately for acting as an ofﬁ cer of the Company or any of its controlled entities. Short-term Incentives The Company does not generally offer contracted cash bonuses as part of a short term incentive program. No contracted cash based short-term incentives were paid to any executives during the ﬁ nancial year ended June 2014. The Remuneration Committee also has the authority to issue discretionary (as to both award and amount) cash bonuses as a reward for out-performance compared to budgeted targets. Such bonuses were paid to the majority of individual executives in relation to the year ended 30 June 2014 and the ﬁ nancial year ended 30 June 2013, the latter deferred and disbursed in the ﬁ nancial year ended 30 June 2014. Long-term Incentives From time to time the Company issues options to certain executives and employees under the McMillan Shakespeare Limited Employee Option Plan. Two types of options have been granted under this plan, performance options and voluntary options. The Board believes that the use of options is the most appropriate form of long-term equity-based performance incentive to reinforce alignment with shareholder interests. All options issued have an exercise price (or strike price) and only become valuable to the extent that the share price rises above the exercise price. Given that options are issued at or above the prevailing market price at the date that the Board approved the grant (other than as disclosed in this Annual Report), it is implied that increased shareholder wealth is required. Past targets have been based on NPAT on an accumulated basis. Going forward the targets will be based on earnings per share targets. No executive can enter into a transaction that is designed or intended to hedge the executive’s exposure to any unvested option. Executives will be required to provide declarations to the Board on their compliance with this policy from time to time. Performance Options Performance options over unissued ordinary shares in the Company are granted for no consideration and are, other than as disclosed in this Annual Report, granted at or above market prices prevailing when the Board approved the issue. Performance options carry no dividend or voting rights. Once exercised, each option is converted into one fully paid ordinary share in the Company. The Remuneration Committee recommends to the Board the number of performance options to be granted on the basis of the position, duties and responsibilities of the relevant executive. As at 30 June 2014, the Company had made fourteen offers of performance options in March 2004, December 2004, April 2005, August 2005, February 2007, December 2007, July 2008, November 2008, August 2009 and May 2010, August 2011, October 2011, March 2012 and July 2012. Many of the performance options issued have vested or expired prior to the ﬁ nancial year ended 30 June 2012. No options vested during the ﬁ nancial ended 30 June 2014. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 7 Details of total current performance options granted but had not vested at reporting date are as follows. Options & issue date Expiry Conditions 537,634 (May 2010) 1,805,957 (August 2011) and 352,942 (October 2011) and 31,250 (March 2012) The entitlement is subject to the completion of a 36 month contract ending 30 September 2014 and the achievement of predetermined NPAT targets as described below. The options expire four years from the relevant date of issue. The entitlement to exercise these options is subject to continuity of employment and the achievement of predetermined targets, of which 100% is based on NPAT growth targets over three years. The NPAT growth will be based on the actual NPAT achieved for the year ending 30 June 2011 (the ‘Base Year’). The NPAT growth target will be based on compounding growth targets from the Base year. In the event that the NPAT target in any one year is not achieved, at the end of the three year period ending 30 June 2014 the actual compound NPAT over the three year period will be calculated, and if the total exceeds the compound NPAT target for the three year period, then the executives will be entitled to exercise all the options which have not been forfeited. The Board retains the right to adjust the NPAT targets in the event of a change in the capital structure of the Company that impacts earnings per share. Any change to the NPAT targets will be made having regard to the actual NPAT impact of the change to the capital structure. In the event that the executives take unpaid leave for a period exceeding three months during any of the year ending 30 June 2012, 2013 or 2014, the vesting criteria outlined above with respect to the ﬁ nancial performance of the Company and the executives continued employment will be determined on a pro rata basis to reﬂ ect the period of their continuous service during the relevant ﬁ nancial year, unless the Board in its discretion determine otherwise. The performance hurdles are as follows. Vesting details Upon the adoption of this Annual Report, the entire issue qualiﬁ es for vesting on 31 August 2014. Upon the adoption of this Annual Report, the entire issue qualiﬁ es for vesting on 31 August 2014. 121,331 (July 2012) The options expire three years from the relevant date of issue. Performance Hurdles FY2012 NPAT growth not less than 12.5% FY2013 NPAT growth not less than 15.0% FY2014 NPAT growth not less than 15.0% Vesting portion 33.33% 33.33% 33.34% The entitlement to exercise these options is subject to continuity of employment and the achievement of predetermined targets, of which 100% is based on NPAT growth targets over two years. The NPAT growth will be based on the actual NPAT achieved for the year ending 30 June 2012 (the ‘Base Year’). The NPAT growth target will be based on compounding growth targets from the Base year. In the event that the NPAT target in any one year is not achieved, at the end of the two year period ending 30 June 2014 the actual compound NPAT over the two year period will be calculated, and if the total exceeds the compound NPAT target for the two year period, then the executive will be entitled to exercise all the options which have not been forfeited. The Board retains the right to adjust the NPAT targets in the event of a change in the capital structure of the Company that impacts earnings per share. Any change to the NPAT targets will be made having regard to the actual NPAT impact of the change to the capital structure. In the event that the executive take unpaid leave for a period exceeding three months during any of the year ending 30 June 2013 or 2014, the vesting criteria outlined above with respect to the ﬁ nancial performance of the Company and the executive continued employment will be determined on a pro rata basis to reﬂ ect the period of their continuous service during the relevant ﬁ nancial year, unless the Board in its discretion determine otherwise. The performance hurdles are as follows. Performance Hurdles FY2013 NPAT growth not less than 15.0% FY2014 NPAT growth not less than 15.0% Vesting portion 50.0% 50.0% No performance options vested during the ﬁ nancial year ended 30 June 2014. No options from this issue qualify for vesting as a result of not meeting the NPAT targets. 8 Performance options NPAT achievement to targets In respect of the May 2010, August 2011, October 2011 and March 2012 performance options, target NPAT for the three ﬁ nancial years ended 30 June 2012 to 2014 (vesting period) using the ﬁ nancial year ending 30 June 2011 NPAT of $43.5m as the base year and adjusting NPAT target in each of the years for changes in the capital structure of the Company and excluding acquisition related expenses during the vesting period were excluded from the actual NPAT performance. Actual NPAT performance for the ﬁ nancial years ending 30 June 2012 and 2013 have outperformed the respective NPAT targets except for the ﬁ nancial year ending 30 June 2014. However, the actual compound NPAT performance over the three year period out-performed target by 0.5%. The following graph illustrates actual NPAT performance compared to target for each of the ﬁ nancial years and the cumulative compound NPAT for the three year vesting period as they affected the May 2010, August 2011, October 2011 and March 2012 performance options. LTI achievement against performance hurdles 10.0% 9.6% 54.3 49.4 56.9 62.2 64.3 0.5% NPAT target 55.0 NPAT actual Cummulative NPAT performance against target (%) 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% -20.0% -25.0% -30.0% -35.0% 90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 m ’ $ T A P N 2012 2013 2014 On the adoption of the Annual Report for the year ended 30 June 2014, the number of performance options that have met the NPAT targets and qualify for vesting on 31 August 2014 is 2,727,783 with an average option exercise price of $6.73. In respect of the July 2012 performance options issue, actual NPAT under-performed against the annual target for FY13 and FY14 as well as the cumulative compound NPAT target over the two year vesting period and consequently, will not vest. Voluntary Options To provide executives with an additional opportunity to invest in MMS the Board ﬁ rst granted voluntary options in the year ended 30 June 2012 when 314,578 options were issued at $1.32 each and expire on 30 September 2015 (the consideration was set at a 25% discount to the fair value of the options on grant date) up to an investment limit of $50,000 per executive. The maximum discount to any one executive is therefore, limited to $16,666. The entitlement to exercise the voluntary options is not contingent upon continued employment with the Company nor are there performance hurdles. However, if the executive leaves employment before 31 August 2014, the executive will forfeit 25% of their entitlement for $1 (the amount forfeited being equal to the 25% discount to the fair market value that applied to the acquisition price of the option at the date of the conditional offer and acceptance). The vesting date of these options is 31 August 2014. No performance hurdles are attached to these options given that these are purchased options; the executive has paid $50,000 for the purchase of these options (representing 75% of the fair value of the options on grant date). On the adoption of the Annual Report for the year ended 30 June 2014, the number of voluntary options expected to vest on having satisﬁ ed the vesting conditions is 314,578 with an average option exercise price $7.31. Retirement Beneﬁ ts - Executives No contracted retirement beneﬁ ts are in place with any of the Company’s executives. Retirement beneﬁ ts may be provided by the Company to executives (including executive directors) from time to time if approved by shareholders (or otherwise provided in accordance with the Corporations Act 2001 (Cth)). McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 9 Remuneration Details The senior executives speciﬁ ed in the Remuneration Report as key management personnel (as deﬁ ned in AASB124 Related Party disclosures) have, either directly or indirectly, authority and responsibility for planning, directing and controlling the activities of the Group. The Directors do not believe that any other senior employees of the Company or its controlled entities are required to be identiﬁ ed. Details of the remuneration of the Directors and other key management personnel of the Group are set out in the following tables. The key management personnel of the Group are the Directors of McMillan Shakespeare Limited and the executives listed in the table below. Short-term beneﬁ ts Post- employment beneﬁ ts3 Long-term beneﬁ ts Share-based payments Long Service Leave Options4 Total Remuneration Percentage of Remuneration as options $ % Cash salary/ fees1 Cash Bonus FY1311 Cash Bonus FY14 Other Beneﬁ ts2 2014 Non-Executive Directors Mr R. Pitcher, AM (Chairman) Mr J. Bennetts Mr R. Chessari Mr T. Poole (appointed 17 December 2013) Mr I. Elliot (appointed 27 May 2014) Mr G. McMahon (from 1 July 2013 to 26 November 2013) Mr A. Podesta (from 1 July 2013 to 18 February 2014) Executive Director $ 179,200 72,107 72,107 57,196 16,342 16,342 35,666 $ - - - - - - - $ - - - - - - - $ - - - - - - - Super $ 16,576 6,670 6,670 5,291 1,512 27,571 16,674 $ - - - - - - - $ - - - - - - - 195,776 78,777 78,777 62,487 17,854 43,913 52,340 Mr M. Kay (CEO and Managing Director)5 1,039,756 75,000 100,000 8,131 25,000 (82,978) 595,440 1,760,349 Other key management personnel Mr G. Kruyt (Chief Operating Ofﬁ cer)6 Mr P. Lang (Group Executive, Customers and Corporate Affairs)7 Mr M. Blackburn (Group CFO and Company Secretary)10 Mr M. Salisbury (Managing Director, Remuneration Services)8 Mr A. Tomas (Managing Director, Fleet and Financial Products)9 354,728 75,000 75,000 17,162 17,775 12,504 110,005 662,174 289,282 25,000 25,000 (1,257) 17,775 9,383 104,813 469,996 541,406 40,000 40,000 (2,797) 25,000 232 255,108 898,949 278,268 50,000 50,000 30,774 20,886 10,590 22,645 463,163 386,682 40,000 40,000 113,117 25,000 3,748 149,484 758,032 Short-term beneﬁ ts Post-employment beneﬁ ts3 Long-term beneﬁ ts Share-based payments 2013 Non-Executive Directors Mr R. Pitcher, AM (Chairman) Mr J. Bennetts (Non-Executive Director) Mr R. Chessari (Non-Executive Director) Mr G. McMahon (Non-Executive Director) Mr A. Podesta (Non-Executive Director) Executive Director Cash salary/ fees1 $ 175,560 70,642 70,642 83,021 52,000 Mr M. Kay (CEO and Managing Director) 5 1,001,595 Other key management personnel Mr G. Kruyt (Chief Operating Ofﬁ cer)6 Mr P. Lang (Group Executive, Customers and Corporate Affairs)7 Mr M. Blackburn (Group CFO and Company Secretary)10 Mr M. Salisbury (Managing Director, Remuneration Services)8 Mr A. Tomas (Managing Director, Fleet and Financial Products)9 10 377,095 265,743 479,145 278,238 392,863 Cash Bonus Other Beneﬁ ts2 Long Service Leave Options4 $ - - - - - $ - - - - - Super $ 15,800 6,358 6,358 20,979 25,000 Total Remuneration $ 191,360 77,000 77,000 104,000 77,000 $ - - - - - 7,895 25,000 73,972 464,239 1,572,701 4,871 16,470 20,095 85,592 504,123 32,751 16,470 16,130 81,552 412,646 76,336 25,000 292 203,460 784,233 17,492 19,581 21,229 75,830 412,370 88,531 25,000 4,020 91,869 602,283 $ - - - - - - - - - - - - - - - - - - 34% 17% 22% 28% 5% 20% Percentage of Remuneration as options % - - - - - 30% 17% 20% 26% 18% 15% In the case of redundancy, the company Redundancy Policy will apply to the extent that the payment is greater than the payment made to an executive on termination. 1 2 3 4 5 6 7 8 9 The amounts shown for the Non-Executive Directors reﬂ ect directors’ fees only. The amounts shown for the executives reﬂ ect cash salary and annual leave entitlements. Other beneﬁ ts reﬂ ect motor vehicle packaging payments, investment loan repayments, education expenses, travel beneﬁ ts and/or car parking beneﬁ ts. No payments were made in respect of termination of services in FY14. The equity value comprises the value of options issued. No shares were issued to any Director (and no options were granted to any Director) during the ﬁ nancial years ended 30 June 2013 and 30 June 2014. The value of options issued to executives (as disclosed above) are the assessed fair values (less any payments for the options) at the date that the options were granted to the executives, allocated equally over the period from when the services are provided to vesting date. Fair values at grant date are determined using a binomial option pricing model that takes into account the exercise price, the expected term of the option, the share price at grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. No options were granted during the year ended 30 June 2014. The current employment agreement between Mr Kay and the Company commenced on 9 September 2011 and is for a ﬁ xed term ending 31 August 2014 that was extended to 30 September 2014 during the year. The agreement provides for termination of employment by either party without cause on the provision of six months’ written notice (or, with respect to the Company, payment in lieu). The agreement may also be terminated by the Company for cause without notice or any payment. Mr Kay served as an executive at all times during the ﬁ nancial year ended 30 June 2014 and will retire on 30 September 2014. The current employment agreement between Mr Kruyt and the Company commenced on 3 October 2011 and is ongoing. The agreement provides for termination of employment by either party on the provision of six months’ written notice (or, with respect to the Company, payment in lieu). The agreement may, however, be terminated by the Company for cause without notice or any payment. Mr Kruyt served as an executive at all times during the ﬁ nancial year ended 30 June 2014. The current employment agreement between Mr Lang and the Company commenced on 12 September 2011 and is ongoing. The agreement provides for termination of employment by either party on the provision of six months’ written notice (or, with respect to the Company, payment in lieu). The agreement may, however, be terminated by the Company for cause without notice or any payment. Mr Lang served as an executive at all times during the ﬁ nancial year ended 30 June 2014. During the year Mr Salisbury served under an employment agreement with the Company that commenced on 1 July 2008 on an ongoing basis. The agreement provided for termination of employment by either party with 12 weeks’ notice. The agreement could, however, be terminated by the Company for cause without notice or any payment. Mr Salisbury served as an executive at all times during the ﬁ nancial year ended 30 June 2014 under this agreement. On 27 May 2014, Mr Salisbury entered into a new employment agreement with no ﬁ xed term which provides that he will serve as the Company’s Chief Executive Ofﬁ cer commencing 1 October 2014. The agreement provides for termination of employment by either party without cause on the provision of nine months’ written notice (or, with respect to the Company, payment in lieu). The agreement may also be terminated by the Company for cause without notice or any payment. The current employment agreement between Mr Tomas and the Company commenced on 1 June 2014 with no ﬁ xed term. The agreement provides for termination of employment by either party without cause with six month’s notice in writing (in the case of the Company, subject to a termination payment). The agreement may, however, be terminated by the Company for cause without notice or any payment. Mr Tomas served as an executive at all times during the ﬁ nancial year ended 30 June 2014. 10 The current employment agreement between Mr Blackburn and the Company commenced on 1 June 2014 with no ﬁ xed term. The agreement provides for termination of employment by either party without cause on the provision of six months’ written notice (or, with respect to the Company, payment in lieu). The agreement may also be terminated by the Company for cause without notice or any payment. Mr Blackburn served as an executive during the ﬁ nancial year ended 30 June 2014. 11 The bonus in respect of FY13 was declared after the release of the annual report for the year ended 30 June 2013 and paid during the current ﬁ nancial year. Remuneration at risk The relevant proportions of remuneration that are linked to performance and those that are ﬁ xed are as follows: Fixed remuneration At risk - STI At risk - LTI 2014 2013 2014 2013 2014 2013 Executive Directors Mr M. Kay Key management personnel Mr G. Kruyt Mr P. Lang Mr M. Blackburn Mr M. Salisbury Mr A. Tomas 56% 61% 67% 63% 73% 70% 71% 83% 80% 74% 82% 85% 10% 22% 11% 9% 22% 10% 4% 16% 14% 6% 14% 31% 34% 17% 22% 28% 5% 20% McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 29% 17% 20% 26% 18% 15% 11 Consequences of performance on shareholders’ wealth In addition to the links between remuneration and shareholder value discussed above, when reviewing the Group’s performance and beneﬁ ts for shareholder wealth, and the link to the remuneration policy, the following indices are generally considered: Indices 2014 2013 2012 2011 2010 Net proﬁ t attributable to Company members $54,969,799 $62,163,519 $54,305,163 $43,460,470 $44,959,784 NPAT growth (1) Dividends paid Dividend payout ratio (2) Share price as at 30 June Earnings per share -11.6% 14.5% 25.0% 55.7% 36.0% $29,064,347 $36,516,743 $31,422,422 $20,388,246 $13,854,604 52.9% $9.17 58.7% $16.18 57.9% $11.82 46.9% $9.58 49.6% $4.69 73.8 cents 83.4 cents 76.6 cents 64.0 cents 66.5 cents 1 2 NPAT growth in 2011 and 2010 have excluded the gain on acquisition of Interleasing (Australia) Limited in April 2010 of $17,055,000. Dividend payout ratio is calculated based on dividends paid and NPAT for the year. Net proﬁ t is considered as part of the ﬁ nancial performance targets in setting short term incentives. Dividends, changes in share price, return on equity and earnings per share are all taken into account when setting the ‘at risk’ components of executive remuneration. The overall level of executive compensation takes into account the performance of the Group over a number of years. The Group’s proﬁ t from ordinary activities after tax and earnings per share has grown at a compound annual growth rate (CAGR) of 22% per annum over the period from 1 July 2009 until 30 June 2014 (excluding the gain on business combination). Over the same period the average return on equity (RoE) exceeded 36%. Option Details No options were granted to, exercised by or lapsed with respect to Directors during the ﬁ nancial years ended 30 June 2014 or 30 June 2013. The terms and conditions of each grant of options to executives affecting their remuneration in the ﬁ nancial year ended 30 June 2014 and each relevant previous or future ﬁ nancial year are as follows: Grant Date Expiry Date 28 May 2010 1 October 2015 16 August 2011 30 September 2015 16 August 2011(2) 30 September 2015 25 October 2011 30 September 2015 14 March 2012 30 September 2015 24 July 2012 30 September 2015 Share price at valuation date Exercise Price Value per option at grant date1 $3.42 $7.31 $8.54 $8.54 $9.29 $11.42 $3.42 $7.31 $7.31 $8.54 $9.29 $11.42 $0.930 $1.759 $2.310 $1.870 $2.400 $2.555 Date Exercisable 100% after 1 October 2014 100% after 31 August 2014 100% after 31 August 2014 100% after 31 August 2014 100% after 31 August 2014 100% after 31 August 2014 1 2 Reﬂ ects the value at grant date for options granted as part of remuneration calculated in accordance with AASB 2: Share-based Payment. These options were issued to the Managing Director on 16 August 2011 and valued on the day of approval by shareholders at the Annual General Meeting on 25 October 2011. 12 Details of the options over ordinary shares in the Company provided as remuneration to each director and key management personnel of the parent entity and the Group are set out below. When exercisable each option is convertible into one ordinary share of McMillan Shakespeare Limited. Name Executive Directors Mr M. Kay Key Management Personnel Mr G. Kruyt Mr P. Lang Mr M. Blackburn Mr M. Salisbury Mr A. Tomas Year of grant Type of option Number of options granted Value of options granted during the year 1 Number of options vested during year Number of options forfeited/ lapsed during the year 1, 2 Vested % Forfeited or lapsed % Year in which options may vest 2 Maximum value of options yet to vest 3 2012 2012 2012 2012 2012 2012 2012 2013 2012 2010 2012 Performance 682,206 Voluntary 37,900 Performance 159,637 Voluntary 37,901 Performance 151,655 Voluntary 37,901 Performance 352,942 Performance Performance 31,311 85,276 Performance 537,634 Voluntary 37,901 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 2015 2015 $87,565 $2,058 2015 2015 2015 2015 2015 2015 - 2015 2015 $15,386 $913 $14,617 $913 $38,824 $8,219 - $19,608 $913 1 2 3 Reﬂ ects the value at lapse date for options that were granted as part of remuneration and lapsed during the ﬁ nancial year ended 30 June 2014. 25% of the voluntary options will be forfeited for $1 if the executive leaves employment before 31 August 2014. There is no minimum value attached to the options to vesting date. No person holding an option has or had, by virtue of the option, a right to participate in a share issue of any other corporation. Equity instrument details relating to key management personnel The tables below show the number of options over the ordinary shares in the Company and shares in the Company held during the ﬁ nancial year by each Director and each of the Key Management Personnel of the Consolidated Group, including their personally related parties. There were no shares granted during the year as compensation. Balance at the start of the year Shares acquired through option exercise Other changes during the year Balance at the end of the year Share holdings Non-Executive Directors Mr R. Pitcher Mr G. McMahon Mr J. Bennetts Mr R. Chessari Mr T. Poole Mr I. Elliot Mr A. Podesta1 Executive Directors Mr M. Kay 25,100 122,000 3,993,025 6,050,941 - - 7,235,000 811,904 18,237,970 - - - - - - - - - - - - - 8,000 - - - 8,000 25,100 - 3,993,025 6,050,941 8,000 - - 811,904 10,888,970 13 1 No share interests have been recorded at the end of the ﬁ nancial year following the resignation of Messrs A. Podesta and G. McMahon as directors. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES Other key management personnel Mr G. Kruyt Mr P. Lang Mr M. Salisbury Mr M. Blackburn Mr A. Tomas UNISSUED SHARES Balance at the start of the year Shares acquired through option exercise Other changes during the year Balance at the end of the year 73,044 6,452 - 1,250 17,050 97,796 - - - - - - - (6,452) - - - (6,452) 73,044 - - 1,250 17,050 91,344 Since the end of the ﬁ nancial year and on adoption of the Annual Report for the ﬁ nancial year ending 30 June 2014 by the directors, the performance options in respect of May 2010, August 2011, October 2011 and March 2012 were considered to have satisﬁ ed the cumulative NPAT performance target for the three years ended 30 June 2014. Consequently, the options will qualify for vesting on 31 August 2014 in respect of the August 2011, October 2011 and March 2012 issues and 31 October 2014 in respect of the May 2010 issue. The July 2012 options did not satisfy the option conditions and will not vest. All voluntary options will vest on 31 August 2014. At the date of this Annual Report, unissued ordinary shares of the Company under option are: Option class Performance Options Performance Options Voluntary Options Performance Options Performance Options Performance Options1 Performance Options1 Voluntary Options1 No. of unissued ordinary shares Exercise price 537,634 1,805,957 314,578 352,942 31,250 978,417 808,738 23,981 $3.42 $7.31 $7.31 $8.54 $9.29 $10.18 $10.18 $10.18 Expiry date 1 October 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2019 30 September 2018 30 September 2018 1 Performance options granted since the end of the ﬁ nancial year. Unissued shares of Managing Director and KMPS at the date of this report Since the end of the ﬁ nancial year, the number of options that qualify to vest to directors and key management personnel on 31 August 2014 and 31 October 2014 are as follows. Executive Director and key management personnel Mr M. Kay Mr G. Kruyt Mr P. Lang Mr M. Salisbury Mr M. Blackburn Mr A. Tomas 14 Option class Performance Options Voluntary Options Performance options Voluntary Options Performance options Voluntary Options Performance Options Performance Options Performance Options Voluntary Options No. of unissued ordinary shares Exercise price Expiry date 682,206 37,900 159,637 37,901 151,655 37,901 85,276 352,942 537,634 37,901 $7.31 $7.31 $7.31 $7.31 $7.31 $7.31 $7.31 $8.54 $3.42 $7.31 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 30 September 2015 1 October 2015 30 September 2015 Options granted to directors or any of the ﬁ ve highest remunerated ofﬁ cers of the Company since the end of the ﬁ nancial year on 19 August 2014 are as follows. Executive Director and key management personnel Mr M. Salisbury1 Mr G. Kruyt Mr P. Lang Mr M. Blackburn Mr A. Tomas Number granted Exercise price Expiry date 302,158 215,827 105,438 256,248 204,184 $10.18 $10.18 $10.18 $10.18 $10.18 30 September 2019 30 September 2019 30 September 2018 30 September 2019 30 September 2019 1 The options granted to Mr M. Salisbury comprise 105,216 options in his current capacity as Managing Director of Remuneration Services and 196,942 options pursuant to his role as Chief Executive Ofﬁ cer of the Company commencing 1 October 2014. DIRECTORS’ INTERESTS At the date of this Annual Report, the relevant interest of each Director in the securities issued by the Company and its controlled entities, as notiﬁ ed by the Directors to the Australian Stock Exchange Limited (ASX) in accordance with section 205G(1) of the Corporations Act 2001 (Cth), is as follows: Director Mr R. Pitcher, AM (Chairman) Mr M. Kay (Managing Director) Mr J. Bennetts Mr R. Chessari Mr. T Poole Options - 720,106 - - - Ordinary shares 25,100 811,904 3,993,025 6,050,941 8,000 No Director has, during the ﬁ nancial year ended 30 June 2014, become entitled to receive any beneﬁ t (other than a beneﬁ t included in the aggregate amount of remuneration received or due and receivable by the Directors shown in the Remuneration Report or the ﬁ xed salary of a full time employee of the Company) by reason of a contract made by the Company or a controlled entity with the Director or an entity in which the Director has a substantial ﬁ nancial interest or a ﬁ rm in which the Director is a member. ENVIRONMENTAL REGULATIONS The Directors believe that the Company and its controlled entities have adequate systems in place for the management of relevant environmental requirements and are not aware of any breach of those environmental requirements as they apply to the Company and its controlled entities. INDEMNIFICATION AND INSURANCE Under the Company’s Constitution, the Company indemniﬁ es the Directors and ofﬁ cers of the Company and its wholly-owned subsidiaries to the full extent permitted by law against any liability and all legal costs in connection with proceedings incurred by them in their respective capacities. The Company has also entered into a Deed of Access, Indemnity and Insurance with each Director, each Company Secretary, and each responsible manager under the licenses which the Company holds (Deed), which protects individuals acting as ofﬁ ceholders during their term of ofﬁ ce and after their resignation. Under the Deed, the Company also indemniﬁ es each ofﬁ ceholder to the full extent permitted by law. The Company has a Directors & Ofﬁ cers Liability Insurance policy in place for all current and former ofﬁ cers of the Company and its controlled entities. The policy affords cover for loss in respect of liabilities incurred by Directors and ofﬁ cers where the Company is unable to indemnify them and covers the Company for indemnities provided to its Directors and ofﬁ cers. This does not include liabilities that arise from conduct involving dishonesty. The premium paid during the year with respect to this policy was $71,408. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 15 NON-AUDIT SERVICES Details of the amounts paid or payable to the auditor of the Company, Grant Thornton Audit Pty Ltd and its related practices, for non-audit services provided, during the ﬁ nancial year ended 30 June 2014, are disclosed in Note 4 to the Financial Statements. The Company’s policy is that the external auditor is not to provide non-audit services unless the Audit Committee has approved that work in advance, as appropriate. The Audit Committee has reviewed a summary of non-audit services provided during the ﬁ nancial year ended 30 June 2014 by Grant Thornton Audit Pty Ltd. Given that the only non-audit services related to client contract audits and review of banking covenant compliance, the Audit Committee has conﬁ rmed that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001 (Cth). This has been formally advised to the Board. Consequently, the Directors are satisﬁ ed that the provision of non-audit services during the year by the auditor and its related practices did not compromise the auditor independence requirements of the Corporations Act 2001 (Cth). AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration, as required under section 307C of the Corporations Act 2001 (Cth), is set out on page 66 of this Annual Report. CORPORATE GOVERNANCE PRACTICES A Corporate Governance Statement is set out on pages 17 to 20 of this Annual Report. Signed in accordance with a resolution of the Directors. Ronald Pitcher, AM Chairman 29 August 2014 Melbourne, Australia Michael Kay Managing Director 16 CORPORATE GOVERNANCE STATEMENT INTRODUCTION This statement outlines the corporate governance policies and practices formally adopted by the Company. These policies and practices are in accordance with the ASX Corporate Governance Council’s ‘Corporate Governance Principles and Recommendations 2nd edition’ (ASX Principles), unless otherwise stated. ROLE OF THE BOARD The role of the Board is to provide strategic guidance for the Group and effective oversight of management. The Board operates in accordance with the Company’s Constitution, Board Charter and Delegated Authority Matrix, which describe the Board’s composition, functions and responsibilities and designates authority reserved to the Board and that delegated to management. The Board charter can be accessed on the Company’s website (www.mmsg.com.au). COMPOSITION OF THE BOARD As at the date of this Annual Report, the Directors are as follows: Name Mr R. Pitcher, AM Mr M. Kay Mr J. Bennetts Mr R. Chessari Mr T. Poole Mr I. Elliot Position Independent Chairman Managing Director and Chief Executive Ofﬁ cer Non-Executive Director Non-Executive Director Independent Non-Executive Director Independent Non-Executive Director Appointment 4 February 2004 15 July 2008 1 December 2003 1 December 2003 17 December 2013 27 May 2014 Each Director is a senior executive with the skills and experience necessary for the proper supervision and leadership of the Company. As a team, the Board brings together a broad range of qualiﬁ cations and experience in remuneration services, ﬁ nancial services, ﬁ nance, accounting, law, sales and marketing and public company affairs. Details of the Directors, their experience and their special responsibilities with respect to the Company are set out in the Directors’ Report. The Board considers a Director independent if that person is free of management and other business relationships that could materially interfere, or could reasonably be perceived to materially interfere, with the exercise of objective and independent judgement. More information can be obtained from the Group’s Policy on the Independence of Directors which can be accessed on the Company’s website. The Chairman determines the relevant materiality thresholds on a case by case basis with reference to both quantitative and qualitative bases. The ASX Guidelines recommend that a listed company should have a majority of directors who are independent. The Board, as currently composed, does not comply with this recommendation. At the date of this report, the Board comprises an equal number of independent and non-independent directors. This follows from the appointments of Mr T. Poole and Mr I. Elliot and the resignations of Mr. G McMahon and Mr A. Podesta during the year. Mr Chessari and Mr Bennetts currently hold, through their controlled entities, approximately 8.1% and 5.4% respectively of the shares in the Company. These Directors have participated in the growth and development of McMillan Shakespeare and have a signiﬁ cant interest in the Company’s continued success. Given their history and skills, the Board believes that it is appropriate for each of these Directors to be appointed to the Board. The Company believes that the Board, as currently composed, has the necessary skills and motivation to ensure that it continues to perform strongly notwithstanding that its overall composition does not speciﬁ cally meet the ASX Principles. Details of the experience of the Directors is contained in the Directors’ Report. The Chairman is responsible for leading the Board ensuring Directors are properly briefed in all matters relevant to their role and responsibilities, facilitating Board discussions and managing the Board’s relationships with the Company’s senior executives. The Chief Executive Ofﬁ cer is responsible for implementing Group strategies and policies. The Board Charter speciﬁ es that these are separate roles to be undertaken by separate people. BOARD PRACTICES The Board meets regularly to evaluate, control, review and implement the Company’s operations and objectives. The Directors receive monthly reports from the Chief Executive Ofﬁ cer, the Chief Financial Ofﬁ cer and operational managers. A Director, subject to prior approval of the Chairman or, in the absence of that approval, the Board may seek independent professional advice (including legal advice) at the Company’s expense to assist them in carrying out their duties and responsibilities. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 17 PERFORMANCE REVIEW The Board has delegated the responsibility for evaluating the performance of the Board, the Directors and the Board Committees to the Chairman. The performance evaluation includes the examination of the performance of the Board and the individual Directors against the Board Charter. The evaluation may establish goals and objectives for the Board and provide any recommendations for improvement to Board performance as it sees ﬁ t. The Chairman undertook the performance appraisal of the Board, the individual Directors and the Board Committees with respect to the ﬁ nancial year ended 30 June 2014 in July 2014. The Board has delegated the responsibility for evaluating the performance of executive management to the Remuneration Committee and CEO. Given the size of the Company’s operations, the Board has decided against the establishment of a separate nomination committee at this time. As such, the responsibility for the selection and nomination of new Directors remains with the full Board. REMUNERATION COMMITTEE The Board has established a Remuneration Committee, which is structured so that the committee is chaired by an independent director and consists of at least three members all of whom are Non-Executive Directors. Details of names and relevant qualiﬁ cations of the Directors appointed to the Remuneration Committee, the number of meetings of the committee held during the year ended 30 June 2014 and the attendance record for each relevant member can be found in the Directors’ Report. The Remuneration Committee is empowered to investigate any matter brought to its attention and has direct access to any employee or any independent expert and adviser as it considers appropriate in order to ensure that its responsibilities can be carried out effectively. The Remuneration Committee has a documented charter approved by the Board. The charter can be accessed on the Company’s website. The CEO carries out half-yearly performance reviews with each member of the senior executive team, comparing the individual’s performance against their agreed performance targets. This process was completed for the year ended 30 June 2014 with the CEO’s report to the July 2014 meeting of the Remuneration Committee. The Remuneration Committee has evaluated the performance of the Chief Executive Ofﬁ cer for the year ended 30 June 2014, taking account of the performance of the Group and other non-ﬁ nancial outcomes. The ASX Principles recommend that the majority of members of the Remuneration Committee should be independent. The Remuneration Committee, as currently composed, does comply with this recommendation. At present, the Remuneration Committee is comprised of ﬁ ve members, two of whom are not independent. AUDIT COMMITTEE The Board has established an Audit Committee, which is structured so that the committee is chaired by an independent director and consists of at least three members, all of whom are Non-Executive Directors. At the end of the ﬁ nancial year and the date of the Annual Report, the Audit Committee comprised a majority of independent directors. Details of the names and relevant qualiﬁ cations of the Directors appointed to the Audit Committee, the number of meetings of the committee held during the year ended 30 June 2014 and the attendance record for each relevant member can be found in the Directors’ Report. The Audit Committee is empowered to investigate any matter brought to its attention and has direct access to any employee, the independent auditors or any other independent experts and advisers as it considers appropriate in order to ensure that its responsibilities can be performed effectively. The Audit Committee has a documented charter approved by the Board. The charter can be accessed on the Company’s website. The Board believes that during the ﬁ nancial year ended 30 June 2014, the Audit Committee had appropriate ﬁ nancial expertise with all members being ﬁ nancially literate and having a deep understanding of the industry in which the Company operates. The external auditor together with the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer are invited to attend the meetings. The Audit Committee also meets with the external auditor twice a year without management to provide the auditor the opportunity to provide feedback on the conduct of the audit and management. The Company has adopted procedures for the selection and appointment of the external auditor, and the rotation of external audit engagement partners in line with the Corporations Act 2001 (Cth). 18 FINANCIAL REPORTING & RISK MANAGEMENT Given the nature and size of the Company’s operations, the Board has decided against the establishment of a separate Board risk management committee at this time, and risk management remains a direct responsibility of the full Board. As such, the Board has ultimate responsibility for the integrity of the Company’s ﬁ nancial reporting. As part of the Group’s risk management processes, senior management attend a monthly Risk and Compliance Committee, which is supported by internal control processes and an internal audit resource for identifying, evaluating and managing signiﬁ cant ﬁ nancial, operational and compliance risks to the achievement of the Company’s objectives, which are subject to Board oversight from time to time. In addition, an independent external party has been appointed to provide internal audit services as required from time to time. The Company has reviewed its formal Risk Management Policy and Framework during the year, and the Credit Committee and Interest Committee met on a monthly basis during the year. The Risk Management Policy and Framework are accessible to all staff on the Group’s intranet and identify the material risks affecting the Company and the manner in which each of those risks will be managed. A copy of the Company’s Risk Management Policy can be accessed on the Company’s website. Considerable importance is placed on maintaining a strong control environment. There is an organisation structure with clear lines of accountability and delegation of authority. Adherence to the Director and Employee Codes of Conduct is required at all times and the Board actively promotes a culture of quality and integrity. The Directors have received and considered written representations from the Chief Executive Ofﬁ cer and the Chief Financial Ofﬁ cer in accordance with the ASX Principles. The written representations conﬁ rmed that: • • the ﬁ nancial reports are complete and present a true and fair view, in all material respects, of the ﬁ nancial condition and operating results of the Company and its controlled entities and are in accordance with all relevant accounting standards; and the above statement is founded on a sound system of risk management and internal compliance and control that implements the policies adopted by the Board and that compliance and control is operating efﬁ ciently and effectively in all material respects. The Company’s external auditor has been invited to attend the Annual General Meeting and be available to answer questions from the members of the Company about the conduct of the audit and the preparation and content of the Independent Audit Report. REMUNERATION POLICY The Company’s remuneration policy is structured to ensure that the reward for performance is competitive and appropriate for the results delivered. Further, it aims to ensure that remuneration packages properly reﬂ ect the duties and responsibilities and level of performance of the staff member and that the remuneration is competitive in attracting, retaining and motivating people of the highest quality. Non-executive Directors are remunerated by way of fees and do not participate in proﬁ t or incentive schemes and do not generally receive options, incentive payments or retirement beneﬁ ts other than statutory superannuation. Executive remuneration generally comprises the following elements: • • ﬁ xed remuneration, including superannuation and beneﬁ ts, which is set at a level that reﬂ ects the marketplace for each position; long-term equity-linked performance incentives, in the form of share options, which incorporate exercise restrictions based on continuity of employment and the achievement of certain individual and ﬁ nancial performance hurdles. Cash bonuses may also be issued at the discretion of the Board. The Company does not generally offer contracted cash bonuses as part of a short term incentive program, but may do so in special circumstances. Further details of the Company’s remuneration policies and practices in relation to the Directors and executives can be found in the Directors’ Report under the heading ‘Remuneration Report’. COMMUNICATION WITH SHAREHOLDERS AND THE MARKET The Company’s commitment to communicating with its shareholders is embodied in its Shareholder Communication Policy and its Continuous Disclosure Policy, which contain policies and procedures on information and disclosure to facilitate continuous disclosure of any information concerning the Group that a reasonable person would expect to have a material effect on the price of the Company’s securities. The Company’s Continuous Disclosure Policy and the Shareholder Communication Policy can be accessed on the Company’s website. In addition to the distribution of the Annual Report, information is communicated to shareholders via the announcements section of the Company’s website. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 19 ETHICS AND CODES OF CONDUCT The Company has adopted a Director Code of Conduct that applies to the Directors of the Company. The Director Code of Conduct reﬂ ects the commitment of the Company to ethical standards and practices. The Director Code of Conduct can be reviewed on the Company’s website. The Company has also adopted an extensive Employee Code of Conduct that applies to all employees of the Company, which acknowledges the need for, and continued maintenance of, the highest standard of ethics and seeks to ensure that employees act honestly, transparently, diligently and with integrity. A summary of the Employee Code of Conduct can be accessed on the Company’s website. The Company has also implemented a policy on securities trading that binds all of the Group’s ofﬁ cers and employees. In addition to ensuring that all ofﬁ cers and employees are aware of the legal restrictions on trading in the Company’s securities whilst in possession of unpublished price-sensitive information, the policy also places restrictions on when Directors and employees can deal in the Company’s securities and requires the Directors and certain employees to notify the Company Secretary upon dealing in the Company’s securities. The policy can be accessed on the Company’s website. The Company has adopted a Whistleblower Policy, which is designed to ensure that employees of the Group can raise concerns in good faith regarding actual or suspected improper conduct or malpractice in the Group, without fear of reprisal or feeling threatened by doing so. The policy can be accessed on the Company’s website. The Company has an Equal Opportunity & Diversity Policy which assists in conﬁ rming the Company’s commitment to a diverse workforce, ensuring there is ongoing development and implementation of relevant plans, programs and initiatives to recognise and promote diversity, and in establishing the process for appropriate reporting. The policy can be accessed on the Company’s website. The Board encourages and supports the Company’s commitment to ensuring a work environment that provides equal opportunity for all. Equal opportunity protects the principle that every person has the right to be treated fairly. The Company fosters an environment which encourages and values diversity in the workplace. The Company applies merit based policies and practices, and believes that the application of these achieves diversity outcomes. A number of targeted measurable objectives have been approved by the Board in order to assist monitoring and application of the Company’s approved policies. The details of the measureable objectives selected for the ﬁ nancial year ended 30 June 2014 and the report against them is contained below. Objective Report against objective 1. Retain and continue to grow the number of women in • MMSG continues to reﬂ ect gender diversity across leadership and leadership roles, subject to merit against role requirements specialist roles • Executive Management – 15% women • Senior Management / Specialist – 38% women • Other Leadership / Specialist – 53% women 2. Provide development and promotion opportunities • Attendance at leadership development programs – 50% women regardless of gender 3. Ensure at least one woman on interview short-list for Senior and Executive level leadership / specialist roles, subject to merit against role requirements 4. Ensure an annual review by the Board of the EEO & Diversity Policy and the gender diversity measurable objectives • Promotions secured by women - 55% • Talent / Succession management – 45% women • Number of vacancies / opportunities – 6 • Women applicants – 35% • Women on short list – 52% • Women as successful candidates – 67% • The Board conﬁ rms it has undertaken an annual review of the EEO & Diversity Policy, and to the extent it deems necessary or appropriate, changes have been made. • The Board has reviewed the measurable objectives for the ﬁ nancial year ended 30 June 2014 and has determined to maintain the existing measurable objectives for the ﬁ nancial year ending 2015. The new Workplace Gender Equality Agency (WGEA) reporting framework document for 2013-2014 can be accessed on the Company’s website. 20 STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2014 Revenue and other income Employee expenses Depreciation and amortisation expenses and impairment Leasing and vehicle management expenses Consulting expenses Marketing expenses Property and corporate expenses Technology and communication expenses Other expenses Finance costs Share of equity accounted joint venture loss Proﬁ t before income tax Income tax (expense) / beneﬁ t Proﬁ t attributable to members of the parent entity Other comprehensive income Items that may be re-classiﬁ ed subsequently to proﬁ t or loss: Changes in fair value of cash ﬂ ow hedges Exchange differences on translating foreign operations Income tax on other comprehensive income Total other comprehensive proﬁ t for the year Total comprehensive income for the year Note 3 4(a) 4(a) 12 5(a) Consolidated Group Parent Entity 2014 $’000 2013 $’000 347,457 330,064 (81,038) (89,116) (52,692) (3,446) (2,739) (6,869) (8,141) (12,215) (10,872) (1,120) 79,209 (24,239) 54,970 418 489 (142) 765 (74,244) (79,968) (47,396) (2,485) (3,089) (6,470) (7,642) (8,421) (11,042) (410) 88,897 (26,734) 62,163 381 (74) (90) 217 2014 $’000 29,124 (646) - - (358) - (438) - (11) - - 27,671 418 28,089 2013 $’000 39,736 (549) - - (279) - (196) - (26) - - 38,686 274 38,960 - - - - - - 55,735 62,380 28,089 38,960 Basic earnings per share (cents) Diluted earnings per share (cents) 6 6 73.8 72.7 83.4 81.9 The above statements of proﬁ t or loss and other comprehensive income should be read in conjunction with the accompanying notes. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 21 STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE 2014 Current assets Cash and cash equivalents Trade and other receivables Finance lease receivables Inventory Prepayments Total current assets Non current assets Finance lease receivables Other ﬁ nancial assets Investment in joint venture Property, plant and equipment Deferred tax assets Intangible assets Total non current assets TOTAL ASSETS Current liabilities Trade and other payables Derivative ﬁ nancial instruments Current tax liability Other liabilities Provisions Borrowings Total current liabilities Non current liabilities Provisions Deferred tax liabilities Borrowings Total non current liabilities TOTAL LIABILITIES NET ASSETS Equity Issued capital Reserves Retained earnings TOTAL EQUITY Note 8 9 10 10 11 12 13 14 15 16 17 18 19 18 14 19 Consolidated Group Parent Entity 2014 $’000 71,197 29,185 7,969 5,379 6,568 120,298 16,937 1,726 - 313,205 5,832 66,659 404,359 2013 $’000 57,239 18,184 4,195 4,844 4,602 89,064 10,382 427 - 296,751 367 50,232 358,159 2014 $’000 1,005 473 - - 20 1,498 - 123,206 - - 13 - 123,219 2013 $’000 528 403 - - - 931 - 107,000 - - 176 - 107,176 524,657 447,223 124,717 108,107 52,957 639 10,634 14,470 6,137 452 85,289 767 759 213,995 215,521 40,808 1,057 6,487 15,339 5,820 - 69,511 552 - 181,725 182,277 46,737 - 10,283 - - - 57,020 - - - - 34,689 - 6,487 - - - 41,176 - - - - 300,810 251,788 57,020 41,176 223,847 195,435 67,697 66,931 20(a) 56,456 4,817 162,574 56,456 2,311 136,668 56,456 4,848 6,393 56,456 3,107 7,368 223,847 195,435 67,697 66,931 The above statements of ﬁ nancial position should be read in conjunction with the accompanying notes. 22 STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2014 2014 Equity as at beginning of year Proﬁ t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Transactions with owners in their capacity as owners: Option expense Dividends paid Equity as at 30 June 2014 2013 Equity as at beginning of year Proﬁ t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Transactions with owners in their capacity as owners: Option expense Dividends paid Note 20 7 7 Issued capital $’000 56,456 - - - Retained Earnings $’000 136,668 54,970 - 54,970 - - - (29,064) 56,456 162,574 56,456 - - - 111,022 62,163 - 62,163 - - - (36,517) Equity as at 30 June 2013 56,456 136,668 Consolidated Group Cash ﬂ ow Hedge Reserve $’000 (740) - 293 293 Foreign Currency Translation Reserve $’000 (56) - 472 472 Total $’000 195,435 54,970 765 55,735 - - - - 1,741 (29,064) (447) 416 223,847 (1,010) - 270 270 - - (3) - (53) (53) - - 168,051 62,163 217 62,380 1,521 (36,517) (740) (56) 195,435 Option Reserve $’000 3,107 - - - 1,741 - 4,848 1,586 - - - 1,521 - 3,107 Parent Entity 2014 Equity as at beginning of year Proﬁ t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Option expense Dividends paid Equity as at 30 June 2014 2013 Equity as at beginning of year Proﬁ t attributable to members of the parent entity Other comprehensive income after tax Total comprehensive income for the period Transactions with owners in their capacity as owners: Option expense Dividends paid Equity as at 30 June 2013 Note 7 7 Issued capital $’000 56,456 - - - Retained Earnings $’000 7,368 28,089 - 28,089 - - - (29,064) 56,456 6,393 56,456 - - - 4,925 38,960 - 38,960 - - - (36,517) 56,456 7,368 Option Reserve $’000 3,107 - - - Cash ﬂ ow Hedge Reserve $’000 - - - - 1,741 - 4,848 1,586 - - - 1,521 - 3,107 - - - - - - - - - - The above statements of changes in equity should be read in conjunction with the accompanying notes. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES Total $’000 66,931 28,089 - 28,089 1,741 (29,064) 67,697 62,967 38,960 - 38,960 1,521 (36,517) 66,931 23 STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2014 Cash ﬂ ows from operating activities Receipts from customers Payments to suppliers and employees Proceeds from sale of assets under lease Payments for assets under lease Interest received Interest paid Dividends received Income taxes paid Net cash from operating activities Cash ﬂ ows from investing activities Payments for capitalised software Payments for plant and equipment Proceeds from sale of plant and equipment Payments for contract rights Payments for subsidiary (net of cash acquired) and joint venture investments Subsidiaries’ acquisition expenses Payments for joint venture subordinated loans Net cash used in investing activities Cash ﬂ ows from ﬁ nancing activities Dividends paid by parent entity Proceeds from borrowings Repayment of borrowings Payment of borrowing costs Proceeds from / (repayments) to from controlled entities Net cash provided by / (used in) ﬁ nancing activities Effect of exchange changes on cash and cash equivalents Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Consolidated Group Parent Entity Note 2014 $’000 2013 $’000 2014 $’000 2013 $’000 22 15(b) 7 341,286 321,966 - - (155,944) (134,390) (1,453) (1,459) 36,742 46,051 (150,375) (174,434) 2,158 2,674 (10,957) (10,974) - - 60 - - - 138 - - (26,055) 36,855 (5,488) (3,184) - - (12,418) (1,177) (2,419) - 29,064 39,598 (23,367) 27,526 - (1) 27,671 38,276 (8,041) (2,329) 743 (3,446) (337) - (500) - - - - - - - - (14,478) (493) - - - - (24,686) (13,910) (14,478) (493) (29,064) 33,552 (1,723) (993) - 1,772 17 13,958 57,239 (36,517) 26,000 - (280) - (10,797) - 2,819 54,420 (29,064) (36,517) - - - 16,348 (12,716) - 477 528 - - - (8,057) (44,574) - (6,791) 7,319 Cash and cash equivalents at end of year 8 71,197 57,239 1,005 528 The above statements of ﬁ nancial position should be read in conjunction with the accompanying notes. 24 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General information The ﬁ nancial report of McMillan Shakespeare Limited and its subsidiaries for the year ended 30 June 2014 was authorised for issue in accordance with a resolution of the directors on 29 August 2014 and covers McMillan Shakespeare Limited (‘the Company” or the “parent entity”) as an individual entity as well as “the Group”, consisting of McMillan Shakespeare Limited and its subsidiaries (‘the Group”) as required by the Corporations Act 2001. The ﬁ nancial report is presented in Australian dollars, which is the Group’s functional and presentation currency. McMillan Shakespeare Limited is a company limited by shares and domiciled in Australia, whose shares are publicly traded on the Australian Stock Exchange. (b) Basis of preparation The ﬁ nancial report is a general purpose ﬁ nancial report which has been prepared in accordance with Australian Accounting Standards and Interpretations of the Australian Accounting Standards Board (AASB), and Corporations Act 2001. McMillan Shakespeare Limited is a for-proﬁ t entity for the purpose of preparing the ﬁ nancial statements. Material accounting policies adopted in the preparation of these ﬁ nancial statements are presented below and have been applied consistently unless stated otherwise. Except for cash ﬂ ow information, the ﬁ nancial statements have been prepared on an accruals basis and are based on historical costs, modiﬁ ed, where applicable, by the measurement at fair value of selected non-current assets, ﬁ nancial assets and ﬁ nancial liabilities. Compliance with IFRS Australian Accounting Standards incorporate International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board. Compliance with Australian Accounting Standards ensures that the ﬁ nancial statements and notes also comply with IFRSs. (c) Principles of consolidation (i) Subsidiaries The consolidated ﬁ nancial statements comprise the ﬁ nancial statements of the Company and its subsidiaries which are all entities (including structured entities) controlled by the Company as at 30 June each year. Control is achieved when the Group is exposed to, or has rights to, variable returns from its involvement in the entity and has the ability to affect those returns through its power to direct the activities of the entity. In assessing control, the Group considers all relevant facts and circumstances to determine if the Group’s voting rights in an investee are sufﬁ cient to give it power, including the following: • • • • the size of the Group’s voting rights holding relative to the size and dispersion of holdings of the other vote holders; potential voting rights held by the Group and other holders; rights arising from other contractual arrangements; and facts and circumstances that indicate whether the Group has the ability to direct relevant activities at the time decision need to be made. The Group reassess whether the Group has control over an entity when facts and circumstances indicate changes that may affect any of these elements. Subsidiaries are consolidated from the date is transferred to the Group and deconsolidated from the Group from the date that control ceases. The ﬁ nancial statements of subsidiaries are prepared for the same reporting period as the parent entity, using consistent accounting policies. All inter-company balances and transactions, including unrealised proﬁ ts arising from intra-group transactions are eliminated. Unrealised losses are also eliminated unless costs cannot be recovered. Investments in subsidiaries are accounted for at cost in the individual ﬁ nancial statements of the parent entity, including the value of options issued by the Company on behalf of its subsidiaries in relation to employee remuneration. (ii) Joint ventures The Group has an interest in a joint venture, where by contractual agreement, the joint venture partners jointly control the economic activities and key decisions of the joint venture entity. The arrangement requires unanimous consent of the parties for key strategic, ﬁ nancial and operating policies that govern the joint venture. The Group’s interest in the joint venture entity is accounted for using the equity method after initially recognising the investment at cost. Under the equity method, the post-acquisition share of proﬁ ts and losses of the joint venture entity is recognised in proﬁ t and loss, and the share of post-acquisition movements in other comprehensive income is recognised in other comprehensive income. When the Group’s share of losses exceeds its interest in the joint venture entity, the carrying amount of that interest, including any long-term interests that form part thereof, is reduced to zero, and the recognition of further losses is discontinued except to the extent that the Group has an obligation or has made payments on behalf of the joint venture entity. The Group’s share of intra-group balances, transactions and unrealised gains or losses on such transactions between the Group and the joint venture are eliminated. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 25 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (d) Business combinations The acquisition method of accounting is used to account for all business combinations. Cost is measured as the fair value of the assets given, shares issued or liabilities incurred or assumed at the date of exchange. Acquisition related costs are expensed as incurred. Where equity instruments are issued, the value of the equity instruments is their published market price on the date of exchange unless, in rare circumstances, it can be demonstrated that the published price on the date of exchange is an unreliable indicator of fair value and that other evidence and valuation methods provide a more reliable measure of fair value. Transaction costs arising on the issue of equity instruments are recognised directly in equity. Identiﬁ able assets acquired and liabilities and contingent liabilities assumed in business combinations are initially measured at their fair values at acquisition date. The excess of the cost of acquisition over the fair value of the Consolidated Group’s share of the identiﬁ able net assets acquired is recorded as goodwill (refer Note 1(h)(i)). If the cost of acquisition is less than the Consolidated Group’s share of the fair value of the net assets acquired, the gain is recognised in proﬁ t or loss. If the initial accounting for a business combination is incomplete by the time of reporting the period in which the business combination occurred, provisional estimates are used for items for which accounting is incomplete. These provisional estimates are adjusted in a measurement period that is not to exceed one year from the date of acquisition to reﬂ ect the information it was seeking about facts and circumstances that existed at the date of acquisition that had they been known would have affected the amounts recognised at that date. Where settlement of any part of the cash consideration is deferred, the amounts payable in the future are discounted to the present value at the date of the exchange using the entity’s incremental borrowing rate as the discount rate. (e) Income tax (i) Income tax The income tax expense for the period is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the entities in the Group operate and generate taxable income. (ii) Deferred tax Deferred tax assets and liabilities are recognised for all temporary differences between the carrying amounts of assets and liabilities for ﬁ nancial reporting purposes and their respective tax bases, at the tax rates expected to apply when the assets are recovered or liabilities settled, based on those rates which are enacted or substantially enacted. Deferred tax is not recognised if they arise from the initial recognition of goodwill. Deferred tax assets are only recognised for deductible temporary differences and unused tax losses if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amounts and tax bases of investments in subsidiaries where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are not recognised for temporary differences between the carrying amount and tax bases of investments in foreign operations where the company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Current and deferred tax on items that are accounted for in other comprehensive income or equity are recognised in other comprehensive income and equity respectively. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and the deferred taxes relate to the same taxable entity and the same taxing authority. (iii) Tax consolidation The Company and its wholly-owned Australian resident entities are members of a tax consolidated group under Australian taxation law. The Company is the head entity in the tax consolidated group. Entities within the tax consolidated group have entered into a tax funding agreement and a tax-sharing agreement with the head entity. Under the terms of the tax funding arrangement, the Company and each of the entities in the tax consolidated group have agreed to pay a tax equivalent payment to or from the head entity, based on the current tax liability or current tax asset of the head entity. (iv) Investment allowances Companies within the Group may be entitled to claim special tax deductions for investments in qualifying assets (investment allowances) or a tax credit under the Incentive regime in Australia in relation to eligible Research & Development expenditure. The Consolidated Group accounts for such allowances as a reduction in income tax payable and current tax expense. A deferred tax asset is recognised for unclaimed tax credits. 26 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (f) Non-current assets held for sale and discontinued operations Non-current assets are classiﬁ ed as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Non-current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell. The criteria for classiﬁ cation as held for sale is satisﬁ ed when the sale is highly probable, the asset is available for immediate sale in its present condition and management is committed to the sale, is expected to successfully complete the sale within one year from the date of classiﬁ cation. A discontinued operation represents a major line of business or geographical area of operations that has been disposed of or is classiﬁ ed as held for sale, or is part of a single co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. (g) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciation and impairment losses. Cost includes expenditure that is directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. Depreciation on assets is calculated on a straight-line basis over the estimated useful life of the asset as follows: Class of Fixed Asset Plant and equipment Software Motor vehicles under operating lease Depreciation Rate 20% – 40% 20% – 33% 20% – 33% The assets’ residual values and useful lives are reviewed and adjusted, if appropriate, at the end of the reporting period. Motor vehicles no longer held under an operating lease are classiﬁ ed as inventory. (h) Intangible assets (i) Goodwill Goodwill represents the excess of the cost of the business combination over the Group’s share of the net fair value of the identiﬁ able assets, liabilities and contingent liabilities. Goodwill is not amortised but is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired (refer Note 15(c)). Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Any impairment is recognised immediately in the statement of proﬁ t or loss and cannot be subsequently reversed. (ii) Capitalised software development costs Software development costs are capitalised when it is probable that future economic beneﬁ ts attributable to the software will ﬂ ow to the entity through revenue generation and / or cost reduction. Development costs include external direct costs for services, materials and licences and internal labour related costs directly involved in the development of the software. Capitalised software development costs are amortised from the date of commissioning on a straight line basis over three to ﬁ ve years, during which the beneﬁ ts are expected to be realised. (iii) Contract rights Contract rights acquired and amounts paid for contract rights are recognised at the value of consideration paid plus any expenditure directly attributable to the transactions. Contracts are amortised over the life of the contract, and reviewed annually for indicators of impairment in line with the Consolidated Group’s impairment policy (refer Note 1(i). (iv) Intangible assets acquired in a business combination 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 initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. The Group’s customer contracts and relationships are amortised over the life of various contract periods. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 27 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (i) Impairment of assets At each reporting date, the Group reviews the carrying amount of its tangible (including operating lease assets) 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 affected assets are evaluated. An impairment loss is recognised in proﬁ t or loss for the amount that the asset’s carrying value exceeds the recoverable amount. The recoverable amount of an asset is determined as the higher of the asset’s fair value less costs to sell and its value in use. For the purpose of assessing fair value, assets are grouped at the lowest levels for which there are separately identiﬁ able cash inﬂ ows which are largely independent of cash inﬂ ows from other assets (cash-generating units). Where the asset does not generate cash ﬂ ows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. For assets other than goodwill where impairment losses previously recognised no longer exist or have decreased, the amount is reversed to the extent that the asset’s carrying amount does not exceed the recoverable amount, nor the carrying amount that would have been determined had no impairment loss been recognised for the asset in prior years. Goodwill is tested for impairment annually and whenever there is indication that the asset may be impaired. An impairment of goodwill is not subsequently reversed. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash ﬂ ows are discounted to their present value using a pre-tax discount rate that reﬂ ects current market assessments of the time value of money and the risks speciﬁ c to the asset for which the estimates of future cash ﬂ ows have not been adjusted. Operating lease assets are reviewed for impairment on an ongoing basis and at reporting date using both internal and external sources of information. (j) Financial instruments Recognition and de-recognition Regular purchases and sales of ﬁ nancial assets and liabilities are recognised on trade date, the date on which the Group commits to the ﬁ nancial assets or liabilities. Financial assets are derecognised when the rights to receive cash ﬂ ows from the ﬁ nancial assets have expired or have been transferred and the Group has transferred substantially all the risks and rewards of ownership. The Group classiﬁ es ﬁ nancial assets into the following categories depending on the purpose for which the asset was acquired. (i) Cash and cash equivalents For statement of cash ﬂ ow purposes, cash and cash equivalents includes cash on hand, deposits held at call with ﬁ nancial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash which are subject to an insigniﬁ cant risk of changes in value. (ii) Loans and receivables Trade and other receivables All receivables are classiﬁ ed as ‘loans and receivables’ under the requirements of AASB 139 Financial Instruments: Recognition and Measurement and are recognised initially at fair value, and subsequently at amortised cost, less provision for impairment. All trade and other receivables are classiﬁ ed as current as they are due for settlement within the agreed credit terms of settlement which are usually no more than 30 days from the date of recognition. Cash ﬂ ows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Loan receivables Loan receivables are non-derivative ﬁ nancial assets with ﬁ xed or determinable payments that are not quoted on an active market. They are included in current assets, where their maturities are less than 12 months from reporting date and in non-current assets if longer. Loan receivables that have the ability to convert to a speciﬁ ed amount of equity shares of the borrower in restitution for defaulting loan repayments are designated as available-for-sale ﬁ nancial assets. These assets are measured at fair value at inception and subsequently, marked to market at reporting date with the movement taken to reserves. In measuring fair value at reporting date, the net present value of the loan is calculated using market interest rates at reporting date, or if it is probable that the loan receivable will be converted to shares of the borrower, the market value of the underlying shares attributable to the loan receivable is used. (iii) Separate Financial Statements Investments in subsidiaries are carried at cost and adjusted for any share based payments in the separate ﬁ nancial statements of the Company, under AASB 127: Separate Financial Statements. 28 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (iv) Available-for-sale ﬁ nancial assets Available-for-sale ﬁ nancial assets are non-derivative assets that are designated as available-for-sale or are not classiﬁ ed in any other category of ﬁ nancial assets. They include investments and debt instruments such as subordinated loans that may be convertible to equity. Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the investments and subordinated loan reserve, with the exception of impairment losses which is recognised in proﬁ t or loss. Available-for-sale ﬁ nancial assets are included in non-current assets unless the investment matures or is intended to be disposed of within twelve months of the end of the reporting period. (v) Other ﬁ nancial liabilities Trade and other payables Trade and other payables, including accruals, and borrowings are recorded initially at fair value, and subsequently at amortised cost using the effective interest rate method, with interest expense recognised on an effective yield basis. The effective interest rate method is a method of calculating the amortised cost of a ﬁ nancial liability and that allocates interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future payments through the expected life of the ﬁ nancial liability to the net carrying amount on initial recognition. Trade and other payables are non-interest bearing. Financial liabilities are derecognised when the Group’s obligations are discharged, cancelled or expire pursuant to its commitments. The difference between its carrying amount of the ﬁ nancial liability derecognised and the consideration paid and payable is recognised in proﬁ t or loss. (vi) Impairment of ﬁ nancial assets Financial assets are assessed for indicators of impairment at the end of each reporting period. Impairment conditions are objective evidence of one or more events occurring after the initial recognition of the ﬁ nancial asset that affects estimated future cash ﬂ ows of the investment. (vii) Impairment of trade and other receivables The collectability of receivables is reviewed on an ongoing basis and debts that are determined as not collectable are written off and expensed. An allowance for impairment is provided for when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. The provision consists of allowances for speciﬁ c doubtful amounts. The allowance account for receivables is used to record impairment losses unless the Group is satisﬁ ed that there is no possible recovery of the amount, at which point it is written off directly against the amount owing. The impairment loss and any subsequent reversal thereof, is recognised in the Statement of Proﬁ t or Loss within other expenses. There have been no amounts recorded for impairment for the parent entity. (viii) Impairment of available for sale equity securities In respect of available for sale equity securities, impairment losses previously recognised in proﬁ t or loss are not reversed through proﬁ t or loss. Any increase in fair value subsequent to an impairment loss is recognised in other comprehensive income and accumulated in investment revaluation reserve within equity. In respect of available for sale debt securities, impairment losses are subsequently reversed through proﬁ t or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss. (k) Employee beneﬁ ts (i) Salaries and wages, annual leave and long service leave Short term liabilities for employee beneﬁts arising from services rendered by employees to reporting date which are expected to be settled within twelve months after the end of the reporting date have been recognised and are measured at the amounts expected to be paid when the liabilities are settled. Long service leave and annual leave liabilities and other employee beneﬁts that are not expected to be settled wholly within one year have been measured at the present value of the estimated future cash outﬂ ows to be made for those beneﬁts. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using interest rates attaching to national government guaranteed securities with terms to maturity that match, as closely as possible, the estimated future cash outﬂ ows. Employee leave liabilities and other obligations are presented as current liabilities in the balance sheet if the Group does not have an unconditional right to defer settlement for at least twelve months after the reporting date, regardless of when the actual settlement is expected to occur. Annual leave and long service leave liabilities are included in provisions and other employee liabilities are included in other payables. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 29 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (ii) Superannuation The amount charged to the Statement of Comprehensive Income in respect of superannuation represents the contributions made by the Group to superannuation funds. (iii) Bonuses A liability for employee beneﬁts in the form of bonuses is recognised in employee beneﬁts. This liability is based upon pre-determined plans tailored for each participating employee and is measured on an ongoing basis during the ﬁ nancial period. The amount of bonuses is dependent on the outcomes for each participating employee. An additional amount is included where the Board has decided to pay discretionary bonuses for exceptional performance. (l) Revenue Revenue is recognised at the fair value of consideration received or receivable to the extent that it is probable that the economic beneﬁ ts will ﬂ ow to the Group and can be reliably measured. Amounts disclosed as revenue are shown net of returns, trade allowances and duties, amortisation of pre-paid fee discounts included in deferred contract establishment costs and taxes paid. The following speciﬁc criteria must also be met before revenue is recognised: (i) Rendering of services Revenue from services provided is recognised when the service is provided to the customer. (ii) Interest Revenue from interest is recognised as interest accrues using the effective interest rate method. The effective interest rate method uses the rate that exactly discounts the estimated future cash ﬂows over the expected life of the ﬁ nancial asset. (iii) Dividends Revenue from dividends is recognised when the Group’s right to receive payment is established. (iv) Lease revenue (property, plant and equipment) Operating lease rental revenue is made up of operating lease interest and the principal that forms the net investment in the leased asset. Interest included in operating lease instalments is calculated on a straight-line basis for each customer contract based on the effective rate method using the interest rate in the lease contract, the net investment value of the leased asset and the residual value. The principal portion upon receipt reduces the net investment in the leased asset. (v) Sale of leased assets Revenue includes the proceeds from the routine sale of motor vehicles previously leased and included within property, plant and equipment following the cessation of the rental of these assets by a customer. (vi) Vehicle maintenance services Revenues from maintenance service contracts are recognised for services rendered when it is probable that economic beneﬁ ts from the transaction will ﬂ ow to the Group. When the amounts are uncollectable or recovery is not considered probable, an expense is recognised immediately. Revenue is recognised for each reporting period by reference to the stage of completion when the outcome of the service contracts can be estimated reliably. The stage of completion of service contracts is based on the proportion that costs incurred to date bear to total estimated costs. When the outcome cannot be measured reliably, revenue is deferred and recognised 60 days after the contract terminates. (m) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Taxation Ofﬁ ce (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of expense. Receivables and payables in the Statement of Financial Position are shown inclusive of GST. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or liability in the Statement of Financial Position. 30 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (n) Leasing Leases are classiﬁed as ﬁ nance leases whenever the terms of the contract transfers substantially all the risk and rewards of ownership to the lessee. All other contracts are classiﬁed as operating leases. (i) Finance lease receivable portfolio Lease contracts with customers are recognised as ﬁ nance lease receivables at the Group’s net investment in the lease which equals the net present value of the future minimum lease payments. Finance lease income is recognised as income in the period to reﬂ ect a constant periodic rate of return on the Consolidated Group’s remaining net investment in respect of the lease. (ii) Operating lease portfolio – the Group as lessor Lease contracts with customers other than ﬁ nance leases are recognised as operating leases. The Group’s initial investment in the lease is added as a cost to the carrying value of the leased assets and recognised as lease income on a straight line basis over the term of the lease. Operating lease assets are amortised as an expense on a straight line over the term of the lease based on the cost less residual value of the lease. (iii) Operating leases – the Group as lessee Operating lease payments are recognised as an expense on a straight-line basis over the lease term except where another systematic basis is more representative of the time pattern in which economic beneﬁ ts from the lease asset are consumed. Where incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate beneﬁ t of incentives is recognised as a reduction of lease expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic beneﬁ ts from the lease asset are consumed. (o) Share-based payments The fair values of options granted are recognised as an employee beneﬁt expense with a corresponding increase in equity (share option reserve). The fair value is measured at grant date and recognised over the period during which the employees become unconditionally entitled to the options. Fair value is determined using a binomial option pricing model. In determining fair value, no account is taken of any performance conditions other than those related to the share price of the Company (“market conditions”). The cumulative expense recognised between grant date and vesting date is adjusted to reﬂ ect the Directors’ best estimate of the number of options that will ultimately vest because of internal conditions attached to the options, such as the employees having to remain with the Consolidated Group until vesting date, or such that employees are required to meet internal targets. No expense is recognised for options that do not ultimately vest because internal conditions were not met. An expense is still recognised for options that do not ultimately vest because a market condition was not met. (p) Issued capital Ordinary shares and premium received on issue of options are classiﬁ ed as issued capital within equity. Costs directly attributable to the issue of new shares or options are shown as a deduction from the equity proceeds, net of any income tax beneﬁt. Costs directly attributable to the issue of new shares or options associated with the acquisition of a business are included as part of the business combination. (q) Dividends Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the Group, on or before the end of the ﬁ nancial year but not distributed at balance date. (r) Earnings per share (i) Basic earnings per share Basic earnings per share is calculated by dividing the proﬁt attributable to members of the Company by the weighted average number of ordinary shares outstanding during the ﬁ nancial year, adjusted for bonus elements in ordinary shares during the year. (ii) Diluted earnings per share Earnings and the weighted average number of shares used in calculating basic earnings per share is adjusted for the following to calculate diluted earnings per share: • • the after-tax effect of interest and any other ﬁ nancing costs associated with dilutive potential ordinary shares; and the weighted average number of additional shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 31 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (s) Segment reporting Operating segments are reported in a manner consistent with internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing the performance of the operating segments, has been identiﬁ ed as the Chief Executive Ofﬁ cer. (t) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and where it is probable that the Group is required to settle the obligation, and the obligation can be reliably estimated. Provisions are measured at the present value of expenditure expected at settlement. The discount rate used to determine the present value reﬂ ects the current pre-tax market rate of the time value of money and the risks speciﬁ c to the liability. The increase in the provision due to the passage of time is recognised as interest expense. Restructurings A restructuring provision is recognised when the Group has developed a plan for the restructuring and has communicated with those affected that it will carry out the plan. The provision is measured based on the direct cost arising from and necessary to undertake the restructuring plan and not with the ongoing activities of the Group. (u) Inventories The inventory of motor vehicles is stated at the lower of cost and net realisable value. Following termination of the lease or rental contract the relevant assets are transferred from Assets under Operating Lease to Inventories at their carrying amount. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs to make the sale. (v) Operating cash ﬂ ow All cash ﬂ ows other than investing or ﬁ nancing cash ﬂ ows are classiﬁed as operating cash ﬂ ows. As the asset management segment provides operating and ﬁ nance leases for motor vehicles and equipment, the cash outﬂ ows to acquire the lease assets are classiﬁed as operating cash outﬂ ows. Similarly, interest received and interest paid in respect of the asset management segment are classiﬁed as operating cash ﬂ ows. (w) Borrowings Borrowings are initially recorded at fair value, net of transaction costs and subsequently measured at amortised cost using the effective interest rate method. The effective interest rate method exactly discounts the estimated cash ﬂows through the expected life of the borrowing. Transaction costs comprise fees paid for the establishment of loan facilities and are amortised over the term of the borrowing facilities. (x) Derivative ﬁ nancial instruments The Group uses derivative ﬁ nancial instruments to manage its interest rate exposure to interest rate volatility and its impact on leasing product margins. The process to mitigate against the exposure seeks to have more control in balancing the spread between interest rates charged to lease contracts and interest rates and the level of borrowings assumed in its ﬁ nancing as required. In accordance with the Group’s treasury policy, derivative interest rate products that can be entered into include interest rate swaps, forward rate agreements and options as cash ﬂ ow hedges to mitigate both current and future interest rate volatility that may arise from changes in the fair value of its borrowings. Derivative ﬁ nancial instruments are recognised at fair value at the date of inception and subsequently re-measured at fair value at reporting date. The resulting gain or loss is recognised in proﬁ t or loss unless the derivative or amount thereof is designated and effective as a hedging instrument, in which case the gain or loss is taken to other comprehensive income in the cash ﬂ ow hedging reserve that forms part of equity. Amounts recognised in other comprehensive income are transferred to proﬁ t or loss and subsequently recognised in proﬁ t or loss to match the timing and relationship with the amount that the derivative instrument was intended to hedge. (i) Hedge accounting At the inception of the hedging instrument, the Group documents the relationship between the instrument and the item it is designated to hedge. The Group also documents its assessment at the inception of the hedging instrument and on an ongoing basis, whether the hedging instruments that are used have been and will continue to be highly effective in offsetting changes in the cash ﬂ ows of the hedged items. (ii) Embedded derivatives Derivatives embedded in non-derivative host contracts are treated as separate derivatives when they meet the deﬁ nition of a derivative, their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value through proﬁ t or loss. 32 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (iii) Non-trading derivatives Non-trading derivative ﬁ nancial instruments include the Group’s irrevocable option to purchase all of the shares owned by the partner in the joint venture entity. The ﬁ nancial instruments are measured at fair value initially and in future reporting dates. Fair value changes are recognised in proﬁ t or loss. (y) Foreign currency translation The consolidated ﬁ nancial statements of the Group are presented in Australian dollars which is the functional and presentation currency. The ﬁ nancial statements of each entity in the Group are measured using the currency of the primary economic environment in which the entity operates (“functional currency”). (i) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Differences resulting at settlement of such transactions and from the translation of monetary assets and liabilities at reporting date are recognised in proﬁ t or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. Translation differences are recognised as part of the fair value change of the non-monetary item. (ii) Group companies On consolidation of the ﬁ nancial results and affairs of foreign operations, assets and liabilities are translated at prevailing exchange rates at reporting date and income and expenses for the year at average exchange rates. The resulting exchange differences from consolidation are recognised in other comprehensive income and accumulated in equity. On disposal of a foreign operation, the component of other comprehensive income relating to that particular foreign operation is recognised in proﬁ t or loss. (z) Critical judgements and signiﬁ cant accounting estimates The preparation of ﬁ nancial statements requires the Board to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. All signiﬁ cant judgements, estimates and assumptions made during the year have been considered for signiﬁ cance. Key assumptions used for value-in-use calculations to determine the recoverable amount of assets in impairment tests are discussed in Note 15(d). Estimates of signiﬁ cance are used in determining the residual values of operating lease and rental assets at the end of the contract date and income from maintenance services, which is recognised on a percentage stage of completion. In determining residual values, critical judgements include the future value of the asset lease portfolio at the time of sale, economic and vehicle market conditions and dynamics. For income from maintenance contracts, judgement is made in relation to expected realisable margins. The estimates and underlying assumptions are reviewed on an ongoing basis. No other judgements, estimates or assumptions are considered signiﬁ cant. (aa) New accounting standards and interpretations The Group has applied the following standards and amendments that are mandatory for the ﬁ rst time for the ﬁ nancial year beginning 1 July 2013. None of these standards and amendments materially affected any of the amounts recognised in the current period or any prior period. Some standards, in particular AASB 13, commonly affects the disclosures in the notes to the ﬁ nancial statements but has a lesser impact on the proﬁ t or loss. (i) AASB 10 Consolidated Financial Statements, AASB 11 Joint Arrangements, AASB 12 Disclosure of Interests in Other Entities, AASB 128 Investments in Associates and Joint Ventures, AASB 127 Separate Financial Statements and AASB 2011-7 Amendments to Australian Accounting Standard arising from the Consolidation and Joint Arrangements Standards. (ii) AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13. (iii) AASB 119 Employee Beneﬁ ts, AASB 2011-10 Amendments to Australian Accounting Standards arising from AASB 119 (iv) AASB 2011-4 Amendments to Australian Accounting Standards to remove Individual Key Management Personnel Disclosure Requirements. (v) AASB 2012-4 Amendments to Australian Accounting Standards – Government Loans. (vi) AASB 2012-5 Amendments to Australian Accounting Standards arising from Annual Improvements 2009-2011 Cycle, and (vii) AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 33 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 The following new accounting standards, amendments to standards and interpretations (Standards) have been issued and are effective for annual reporting periods beginning after 30 June 2014, but have not been applied in preparing this ﬁ nancial report. None of these are expected to have a signiﬁ cant effect on the ﬁ nancial report of the Consolidated Group unless otherwise noted in the Standards below. The Consolidated Group has not or does not plan to adopt these Standards early and the extent of their impact has not been fully determined unless otherwise noted below. (i) AASB 9 Financial Instruments (effective for annual reporting periods on or after 1 January 2018) AASB 9 introduces new requirements for the classiﬁ cation and measurement and de-recognition of ﬁ nancial assets and ﬁ nancial liabilities. It aims to replace AASB 139 Financial Instruments: Recognition and Measurement in its entirety. The new standard also sets out new rules for hedge accounting and introduces expanded disclosure requirements and changes in presentation. The Group has not yet assessed how its own hedging arrangements would be affected by the new rules. The other changes in AASB 9 are not expected to materially affect the Group’s accounting for ﬁ nancial assets and ﬁ nancial liabilities, as none have been designated at fair value through proﬁ t or loss where the changes might have had an impact. The Group will adopt the new standard at the operative date and accordingly, its ﬁ rst application will be in the ﬁ nancial statements for the annual reporting period ending 30 June 2019. (ii) AASB 2013-3 Recoverable Amount Disclosures for Non-Financial Assets (effective for annual reporting periods on or after 1 January 2014) The amendments to this standard seek to clarify the original intention of the IASB that the scope of the applicable disclosures is limited to the recoverable amount of impaired assets that is based on fair value less costs of disposal. AASB 2013-3 makes the equivalent amendments to AASB 136 Impairment of Assets. The amendments in this standard is not expected to have any signiﬁ cant impact on the Group given that they are largely of the nature of clariﬁ cation of existing requirements. (iii) AASB 2013-4 Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting (effective for annual reporting periods on or after 1 January 2014) AASB 2013-4 makes amendments to AASB 139 Financial Instruments: Recognition & Measurement to permit the continuation of hedge accounting in circumstances where a derivative, which has been designated as a hedging instrument, is novated from one counterparty to a central counterparty as a consequence of laws or regulations. When these amendments are ﬁ rst adopted for the year ending 30 June 2015, they are unlikely to have any signiﬁ cant impact on the entity. (iv) AASB 2013-9 Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments (effective for annual reporting periods on or after 1 January 2015) These amendments are planned to address the “own credit” issue that were already included in AASB9 to be applied in isolation without the need to change any other accounting for ﬁ nancial instruments. The Group has not yet assessed the full impact of these amendments. (v) IFRS 15 Revenue from Contracts with Customers (effective for annual reporting periods on or after 1 January 2017) The revenue-related interpretations in IFRS 15 will include the establishing of a new control-based revenue recognition model, changing the basis for deciding whether revenue is to be recognised over time or at a point in time, the provision of new and more detailed guidance on speciﬁ c topics (eg multiple element arrangements, variable pricing, rights of return, warranties, licensing). The new standard will also expand and improve disclosures about revenue. The Australian Accounting Standards Board (AASB) is expected to issue the equivalent Australian Standard (AASB 15 Revenue from Contracts with Customers). The Group has not yet assessed the full impact of this standard. There are no other standards that are not yet effective and that are expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. (bb) Changes in accounting policies In the current year, the Group has adopted all of the new and revised Standards and Interpretations issues by the Australian Accounting Standards Board that are relevant to its operations and effective for the current annual reporting period. There have been no signiﬁ cant effects on current, prior or future periods arising from the ﬁrst time application of the standards in respect of presentation, recognition and measurement in the current year ﬁ nancial statements. (ab) Parent entity accounts In accordance with Class order CO10/654 the Group will continue to include parent entity ﬁnancial statements in the ﬁ nancial report. 34 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (ac) Rounding of amounts The Company is of a kind referred to in Class order CO98/100, issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in the ﬁ nancial report. Amounts in the ﬁ nancial report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, the nearest dollar. 2 FINANCIAL RISK MANAGEMENT The Group’s activities expose it to a variety of ﬁ nancial risks: market risk (including currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management approach is to identify the risk exposures and implement safeguards which seek to manage these exposures and minimise potential adverse effects on the ﬁ nancial performance of the Group. The Board is responsible for monitoring and managing the ﬁ nancial risks of the Group. The Board monitors these risks through monthly board meetings, via regular reports from the Risk and Compliance Committee and ad hoc discussions with senior management, should the need arise. A top 20 risk report is presented to the Board monthly and the full risk register at least quarterly. The Credit and Treasury reports are provided to the Interest Committee and Credit Committee respectively, by the Group Treasurer and Credit Manager, including sensitivity analysis in the case of interest rate risk and aging / exposure reports for credit risk. These committee reports are discussed at Board meetings monthly, along with management accounts. All exposures to risk and management strategies are consistent with prior year, other than as noted below. (a) Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its ﬁ nancial obligations as they fall due. Liquidity management strategy The Asset Management business and the resultant borrowings exposes the Group to potential mismatches between the reﬁ nancing of its assets and liabilities. The Group’s objective is to maintain continuity and ﬂ exibility of funding through the use of committed revolving bank club facilities based on common terms, asset subordination and surplus cash as appropriate to match asset and liability requirements. The Group’s policy is to ensure that there is sufﬁ cient liquidity through access to committed available funds to meet at least twelve months of average net asset funding requirements. This level is expected to cover any short term ﬁ nancial market constraint for funds. The Group monitors monthly positive operating cash ﬂ ows and forecasts cash ﬂ ows for twelve month period. Signiﬁ cant cash deposits have been maintained which enable the Group to settle obligations as they fall due without the need for short term ﬁ nancing facilities. The Chief Financial Ofﬁ cer and the Group Treasurer monitor the cash position of the Group daily. Financing arrangements During the year the Group increased its committed borrowing facilities for the Asset Management segment to ﬁ nance its ﬂ eet management portfolio as follows. Secured bank borrowings Maturity dates AUD’000 AUD’000 GBP’000 Total borrowings (AUD) 31/03/2017(1) 03/04/2017(1) 03/04/2017 (1) Includes facility to be drawn in NZD10m Facility 285,000 15,000 25,000 345,167 2014 Used 193,420 - 12,250 215,100 Unused 91,580 15,000 12,750 130,067 Facility 270,000 - - 270,000 2013 Used 182,000 - - 182,000 Unused 88,000 - - 88,000 The increased facilities have been provided by the formation of a ﬁ nancing club of three major Australian banks operating common terms and conditions. The Group believes that this initiative has improved liquidity, provides funding diversiﬁ cation and has achieved a lower cost. The bank loans are sourced in local currency of the principal geographical markets to minimise foreign currency exposure. The maturity date for these facilities have been extended to 31 March 2017 and the new facilities have a maturity date on 3 April 2017. In addition to the borrowing facilities to ﬁ nance Asset Management’s lease portfolio, the Group has a GBP6 million facility that was fully drawn down for the acquisition of CLM Fleet Management plc during the year. This borrowing is an amortising facility that matures on 31 August 2018. The level and type of funding will be reviewed on an on-going basis to ensure they meet the Group’s on-going requirements in the principal geographical market operated in. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 35 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 Maturities of ﬁ nancial liabilities The table below analyses the Group’s and the parent entity’s ﬁ nancial liabilities into relevant maturity groupings based on their contractual maturities and based on the remaining period to the expected settlement date. The amounts disclosed in the table are the contractual undiscounted cash ﬂ ows. Balances due within 12 months equal their carrying value as the impact of discounting is not signiﬁ cant. Consolidated Group – at 30 June 2014: Contractual maturities of ﬁ nancial liabilities Less than 6 mths $’000 6-12 mths $’000 1-2 years $’000 2-5 years $’000 Over 5 years $’000 Trade payables Other creditors and liabilities Borrowings 16,222 39,712 4,477 60,411 - - 4,848 4,848 - - - - 10,121 10,121 220,820 220,820 - - - - Consolidated Group – at 30 June 2013: Contractual maturities of ﬁ nancial liabilities Less than 6 mths $’000 6-12 mths $’000 1-2 years $’000 2-5 years $’000 Over 5 years $’000 Trade payables Other creditors and liabilities Borrowings 12,043 45,161 3,070 60,274 - - 2,735 2,735 - - 5,039 5,039 - - 182,819 182,819 - - - - Parent – at 30 June 2014: Contractual maturities of ﬁ nancial liabilities Total contractual cash ﬂ ows $’000 Carrying Amount (assets)/liabilities $’000 16,222 16,222 39,712 240,266 296,200 39,712 214,447 270,381 Total contractual cash ﬂ ows $’000 Carrying Amount (assets)/liabilities $’000 12,043 12,043 45,161 193,663 250,867 45,161 181,725 238,929 Less than 6 mths $’000 6-12 mths $’000 1-2 years $’000 2-5 years $’000 Over 5 years $’000 Total contractual cash ﬂ ows $’000 Carrying Amount (assets)/liabilities $’000 Amounts payable to wholly owned entities Financial guarantee contracts 46,540 - - - 4,477 51,017 4,848 4,848 10,121 10,121 220,820 220,820 - - - 46,540 46,540 240,266 286,806 - 46,540 Parent – at 30 June 2013: Contractual maturities of ﬁ nancial liabilities Less than 6 mths $’000 6-12 mths $’000 1-2 years $’000 2-5 years $’000 Over 5 years $’000 Total contractual cash ﬂ ows $’000 Carrying Amount (assets)/liabilities $’000 34,643 - - - 3,070 37,713 2,735 2,735 5,039 5,039 182,819 182,819 - - - 34,643 34,643 193,663 228,306 - 34,643 Amounts payable to wholly owned entities Financial guarantee contracts 36 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (b) Credit risk Credit risk is the risk of ﬁnancial loss to the Group if a customer or counter-party to a ﬁnancial instrument fails to meet its contractual obligations. The Company and Group have exposure to credit risk through the receivables’ balances, customer leasing commitments and deposits with banks. The following carrying amount of ﬁ nancial assets represents the maximum credit exposure at reporting date. Trade and other receivables Deposits with banks Finance lease & CHP receivables Operating lease assets Consolidated Group Parent Entity 2014 $’000 29,185 71,197 24,906 303,408 428,696 2013 $’000 18,184 57,236 14,577 287,749 377,746 2014 $’000 - 1,005 - - 1,005 2013 $’000 87 528 - - 615 Lease assets of the Asset Management business represents future lease rentals that have yet to be invoiced. Such assets are secured against underlying assets. Credit risk management strategy Credit risk arises from cash and cash equivalents and deposits with banks as well as exposure from outstanding receivables and unbilled future rentals for leased vehicles and counterparty risks associated with interest rate and currency swaps. For deposits with banks, only independently rated institutions with upper investment-grade ratings are used, in accordance with the Board approved Investment Policy. Credit risk relating to the leasing of assets is managed pursuant to the Board approved Credit Policy by the Group CFO and the Group Treasurer and Head of Credit. The policy is reviewed annually and prescribes minimum criteria in the credit assessment process that includes credit risk of the customer, concentration risk parameters, type and intended use of the asset under lease and the value of the exposure. A two tiered Credit Committee structure is in place to stratify credit applications for assessment; a Local Credit Committee and an Executive Credit Committee reviewing applications based on volume, nature and value of the application. All minutes of the Credit Committee meetings are reported to the Board. The Board receives a monthly report from the Credit Committee and periodically reviews concentration limits that effectively spread the risks as widely as possible across asset classes, client base, industries and asset manufacturer. There is a broad spread of concentration of credit risk through the Group’s exposure to individual customers, industry sectors, asset manufacturers or regions. Where customers are independently rated, these ratings are taken into account. If there is no independent ofﬁ cial rating, management assesses the credit quality of the customer using the Group’s internal risk rating, taking into account information from an independent national credit bureau, its ﬁnancial position, business segment, past experience and other factors using an application scorecard or other risk-assessment tools. Collateral is also obtained where appropriate, as a means of mitigating risk of ﬁ nancial loss from defaults. The overall debtor aging position is reviewed monthly by the Board, as is the provision for any impairment in the trade receivables balance. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 37 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (c) Market risk (i) Interest rate risk The Group’s strong cash ﬂ ow from operations and borrowings exposes the Group to movements in interest rates where movements could directly affect the margins from existing contracts and the pricing of new contracts for assets leased and income earned from surplus cash. Exposure to interest rate volatility is managed via the Group’s Treasury and pricing policies. The policies aim to minimise mismatches between the amortised value of lease contracts and the sources of ﬁnancing to mitigate repricing and basis risk. Mismatch and funding graphs including sensitivity analysis, which are reported monthly to the Board along with the minutes of the monthly Interest Committee meetings. Interest rate risk arises where movements in interest rates affect the net margins on existing contracts for assets leased. As the Group carries signiﬁ cant cash and borrowings, movements in interest rates can affect net income to the Group, particularly for the Group Remuneration Services segment. Borrowings issued at variable rates expose the Group to repricing interest rate risk. As at the end of the reporting period, the Group had the following variable rate borrowings under long-term revolving facilities attributable to the Asset Management business and no borrowings for other Group requirements. AUD’000 GBP’000 Total (AUD) 2014 2013 Borrowings ‘000 Weighted average interest rate % 193,420 12,250 215,100 3.51 1.95 3.35 Borrowings ‘000 182,000 - 182,000 Weighted average interest rate % 4.06 - 4.06 The weighted average interest rate of each borrowing is used as an input to asset repricing decisions for the geographical markets operated in. An analysis of maturities is provided in note 2(a). To mitigate the cash ﬂ ow volatility arising from interest rate movements, the Group has entered into interest rate swaps with counterparties rated as AA- by Standard & Poors, to exchange, at speciﬁ ed periods, the difference between ﬁ xed and variable rate interest amounts calculated on contracted notional principal amounts. The contracts require settlement of net interest receivable or payable on a quarterly basis. These swaps are designated to hedge underlying borrowing obligations and match the interest-repricing proﬁ le of the lease portfolio in order to preserve the contracted net interest margin. At 30 June 2014, the Group’s borrowings for the Asset Management business of $215,100,000 (2013: $182,000,000) were covered by interest rate swaps at a ﬁ xed rate of interest of 4.29% (2013: 4.72%). The Group’s interest rate risk also arises from cash at bank and deposits, which are at ﬂoating interest rates. At reporting date, the Group had the following variable rate ﬁ nancial assets and liabilities outstanding: Cash and deposits Bank loans (Asset Management segment) Interest rate swaps (notional amounts) Net exposure to cash ﬂ ow interest rate risk Sensitivity analysis – ﬂoating interest rates: Consolidated Group 2014 Balance $’000 71,197 2013 Balance $’000 57,239 (215,100) (182,000) 211,679 67,776 192,000 67,239 At 30 June 2014, the Group’s and parent entity’s cash and cash equivalents give rise to credit and interest rate risk. If the Australian interest rate weakened or strengthened by 100 basis points, being the Group’s view of possible ﬂ uctuation, and all other variables were held constant, the Group’s post-tax proﬁt for the year would have been $451,000 (2013: $365,673) higher or lower and the parent entity $471,000 (2013: $3,700) higher or lower, depending on which way the interest rates moved based on the cash and cash equivalents and borrowings balances at reporting date. 38 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (ii) Foreign currency risk The Group’s exposure to foreign currency risk arises when ﬁ nancial instruments that are denominated in a currency other than the functional currency in which they are measured. This includes the Group’s inter-company receivables and payables which do not form part of the net investment in the UK and New Zealand entities. The Group’s exposure to translation related risks from ﬁ nancial and non-ﬁ nancial items of the UK and New Zealand entities do not form part of the Group’s risk exposure given that these entities are part of longer term investments and consequently, their sensitivity to foreign currency movements are not measured. The Group’s transactions are pre-dominantly denominated Australian dollars which is the functional and presentation currency. (iii) Other market price risk The Consolidated Group does not engage in any transactions that give rise to any other market risks. (d) Asset risk The Group’s exposure to asset risk is mainly from the residual value of assets under lease and the maintenance and tyre obligations to meet claims for these services sold to customers. Residual value is an estimate of the value of an asset at the end of the lease. This estimate, which is formed at the inception of the lease and any subsequent impairment, exposes the Group to potential loss from resale if the market price is lower than the value as recorded in the books. The risk relating to maintenance and tyre services arises where the costs to meet customer claims over the contracted period exceed estimates made at inception. The Group continuously reviews the portfolio’s residual values via a Residual Value Committee comprising experienced senior staff with a balance of disciplines and responsibilities, who measure and report all matters of risk that could potentially affect residual values and maintenance costs and matters that can mitigate the Group from these exposures. The asset risk policy sets out a framework to measure and factor into their assessment such critical variables as used car market dynamics, economic conditions, government policies, the credit market and the condition of assets under lease. At reporting date, the portfolio of motor vehicles under operating lease of $303,408,000 (2013: $287,749,000) included a residual value provision of $2,018,000 (2013: $2,018,000). (e) Fair value measurements The fair value of ﬁ nancial assets and ﬁ nancial liabilities is estimated for recognition and measurement for disclosure purposes. The following table is an analysis of ﬁ nancial instruments that are measured at fair value on a recurring basis subsequent to initial recognition, grouped into three levels based on the degree to which the fair value is observable. • • Level 1: derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: derived from inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). • Level 3: derived from inputs for the asset or liability that are not based on observable market data (unobservable inputs). Financial asset/ (ﬁ nancial liability) Interest rate swaps – cash ﬂ ow hedge Fair value at 2014 $000 (639) 2013 $000 (1,057) Fair value hierarchy Valuation technique and key input 2 Discounted cash ﬂ ow using estimated future cash ﬂ ows based on forward interest rates (from observable yield curves at the end of the reporting period) and contract interest rates, discounted to reﬂ ect the credit risk of various counterparties. Except as detailed in the following table, the carrying amounts of ﬁ nancial assets and ﬁ nancial liabilities recognised in the consolidated ﬁ nancial statements approximate their fair values. The fair value of borrowings is not materially different to their carrying amounts since the interest payable is close to market rates. The carrying amount of cash, trade and other receivables, trade and other payables are assumed to be the same as their fair values, due to their short term nature. Finance lease receivables – non-current Consolidated Group 2014 Carrying amount 16,937 Fair value 18,110 2013 Carrying amount 10,382 Fair value 9,998 Current ﬁ nance lease receivables are short term and their carrying amount is considered to equal their fair value. The fair value of non-current ﬁ nance lease receivables were calculated based on cash ﬂ ows discounted using an average of current lending rates appropriate for the geographical markets the leases operate of 5.50% (2013: 7.75%). They are classiﬁ ed as level 3 fair values in the fair values hierarchy due to the inclusion of unobservable inputs. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 39 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 3 REVENUE Revenue from continuing operations Remuneration services1 Lease rental services Proceeds from sale of leased assets Dividends received Interest – other persons Total revenue Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 157,247 154,732 33,320 - 2,158 347,457 155,855 129,753 41,782 - 2,674 330,064 - - - 29,064 60 29,124 - - - 39,598 138 39,736 1 Included in remuneration services revenue is interest income derived from the holding of trust funds 9,844 11,291 4 EXPENSES (a) Proﬁ t before income tax includes the following speciﬁ c expenses Finance costs Interest – ﬁ nancial institutions 10,872 11,042 Depreciation and amortisation expenses and impairment Amortisation of software development Amortisation of contract rights acquired Depreciation of assets under operating lease Depreciation of plant and equipment Residual value impairment loss Amortisation of intangibles Rental expense on operating leases Minimum lease payments Superannuation 3,501 976 81,475 2,913 - 251 1,570 928 74,618 2,741 111 - 89,116 79,968 5,784 5,092 Deﬁ ned contribution superannuation expense 5,260 4,740 (b) Auditor’s remuneration Remuneration of the auditor (Grant Thornton Audit Pty Ltd) of the parent entity for: Audit or review of the ﬁ nancial statements Other compliance Agreed upon procedures: $ $ 179,000 53,400 167,000 42,200 - review of borrowing covenant and compliance 2,000 1,900 Remuneration of a network ﬁ rm of the parent entity auditor: Audit or review of the ﬁ nancial statements (UK) Other compliance 86,420 17,646 - - 40 - - - - - - - - - - - $ - - - - - - - - - - - - - - - - $ - - - - - NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 30,342 (323) (5,780) 24,239 79,209 23,763 522 540 (346) 12 71 (323) 24,239 - 24,239 23,558 (129) 3,305 26,734 88,897 26,669 457 347 (630) 20 - (129) 26,734 - 26,734 5 INCOME TAX EXPENSE / (BENEFIT) (a) Components of tax expense / (beneﬁ t) Current tax expense/(beneﬁ t) Adjustments for current tax of prior years Deferred tax Income tax expense / (beneﬁ t) (b) The prima facie tax payable on proﬁ t before income tax is reconciled to the income tax expense / (beneﬁ t) as follows: Proﬁ t before income tax Prima facie tax payable on proﬁ t before income tax at 30% (2013: 30%) Add tax effect of: - share based payments - non-deductible costs - research & development - overseas tax rate differential of subsidiaries - current year losses not brought to account - over-provision for tax from prior year Less tax effect of: - dividends received Income tax expense/(beneﬁ t) 6 EARNINGS PER SHARE Basic earnings per share Basic EPS – cents per share Net proﬁ t after tax Weighted average number of ordinary shares outstanding during the year used in the calculation of basic EPS Diluted earnings per share Diluted EPS – cents per share Earnings used to calculate basic earnings per share (EPS) (418) - - (418) (260) (14) - (274) 27,671 8,301 38,686 11,606 - - - - - - 8,301 (8,719) (418) - 13 - - - (14) 11,605 (11,879) (274) Consolidated Group 2014 ’000 2013 ’000 73.8 $54,970 74,524 83.4 $62,163 74,524 72.7 81.9 $54,970 $62,163 Weighted average number of ordinary shares outstanding during the year used in the calculation of basic EPS Weighted average number of options on issue outstanding Weighted average number of ordinary shares outstanding during the year used in the calculation of diluted EPS 74,524 1,136 75,660 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 74,524 1,406 75,930 41 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 7 DIVIDENDS Final fully franked ordinary dividend for the year ended 30 June 2013 of $0.18 (2012: $0.25) per share franked at the tax rate of 30% (2012: 30%) Interim fully franked ordinary dividend for the year ended 30 June 2014 of $0.21 (2013: $0.24) per share franked at the tax rate of 30% (2013: 30%) Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 13,414 18,631 13,414 18,631 15,650 29,064 17,886 36,517 15,650 29,064 17,886 36,517 Franking credits available for subsequent ﬁ nancial years based on a tax rate of 30% (2013 – 30%) 61,992 48,994 61,992 48,994 The above amounts represent the balance of the franking account at the end of the ﬁ nancial year end adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax; (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. The consolidated amounts include franking credits that would be available to the parent entity if distributable proﬁ ts of subsidiaries were paid as dividends. 8 CASH AND CASH EQUIVALENTS Cash on hand Bank balances Short term deposits Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 1 18,361 52,835 71,197 3 17,868 39,368 57,239 - 964 41 1,005 - 488 40 528 Cash and cash equivalents are subject to interest rate risk as they earn interest at ﬂ oating rates. Cash at bank is invested at ﬂ oating rates. In 2014, the ﬂ oating interest rates for the Group and parent entity were between 0.6% and 3.53% (2013: 1.50% and 4.74%). The short term deposits are also subject to ﬂ oating rates, which in 2014 were between 2.50% and 3.64% (2013: 3.78% and 4.77%). These deposits have an average maturity of 90 days (2013: 90 days) and are highly liquid. 9 TRADE AND OTHER RECEIVABLES Current Trade receivables Other receivables Amounts receivable from wholly owned entities Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 14,836 14,349 - 29,185 9,335 8,849 - 18,184 - - 473 473 - 87 316 403 The carrying amount of all current receivables are equal to their fair value as they are short term and fully recoverable. 42 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (a) Ageing and impairment losses The ageing of trade receivables for the Group at reporting date was: Consolidated Group Not past due Past due 30 days Past due 31-60 days Past due 61-90 days Past due >90 days Total (b) Concentration of risk 2014 Amount impaired $’000 - (11) (41) (12) (427) (491) Amount not impaired $’000 10,981 2,357 758 614 126 14,836 Total $’000 10,981 2,368 799 626 553 15,327 2013 Amount impaired $’000 - (116) (9) (11) (262) (398) Amount not impaired $’000 8,836 220 240 30 9 9,335 Total $’000 8,836 336 249 41 271 9,733 The Group’s maximum exposure to credit risk at reporting date by geographic region is predominantly in Australia based on the location of originating transactions and economic activity. (c) Other receivables These amounts generally arise from transactions outside the usual operating activities of the Group. None of the other current receivables are impaired or past due. (d) Doubtful debts policy Refer Note 1(i). 10 FINANCE LEASE RECEIVABLES Current ﬁ nance lease receivables Non-current ﬁ nance lease receivables Amounts receivable under ﬁ nance lease receivables. Amounts receivable under ﬁ nance lease receivables Within one year Later than one but not more than ﬁ ve years Less: unearned ﬁ nance income Present value of minimum lease payments Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 7,969 16,937 24,906 4,195 10,382 14,577 - - - - - - Consolidated Group Minimum lease payments 2014 $’000 Present value of lease payments 2014 $’000 Minimum lease payments 2013 $’000 Present value of lease payments 2013 $’000 9,187 19,741 28,928 4,022 24,906 7,969 16,937 24,906 - 24,906 5,132 12,375 17,507 2,930 14,577 4,195 10,382 14,577 - 14,577 There were no unguaranteed residual values of assets leased under ﬁ nance leases at reporting date (2013: nil) McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 43 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 11 OTHER FINANCIAL ASSETS (a) Investment in subsidiaries Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 Shares in subsidiaries at cost 107,000 The consolidated ﬁ nancial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described in Note 1(c). 123,206 - - Name Parent entity McMillan Shakespeare Limited Subsidiaries in Group Maxxia Pty Limited 1 Remuneration Services (Qld) Pty Limited 1 Easilease Pty Limited Interleasing (Australia) Ltd 1 CARILA Pty Ltd 1 TVPR Pty Ltd 1 Maxxia Limited (NZ) Maxxia Fleet Limited Maxxia (UK) Limited Maxxia Finance Limited CLM Fleet Management plc Country of Incorporation Percentage Owned 2014 Percentage Owned 2013 Principal activities Australia Australia Australia Australia Australia Australia Australia New Zealand New Zealand United Kingdom United Kingdom United Kingdom 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% Remuneration services provider 100% Remuneration services provider 100% Remuneration services provider 100% Asset management and services 100% Dormant 100% Asset management and services 100% Dormant 100% Asset management and services 100% Investment holding 100% Asset management - Fleet management services 1 These subsidiaries have been granted relief from the necessity to prepare ﬁ nancial reports in accordance with Class Order 98/1418 issued by the Australian Securities and Investments Commission. For further information refer to Note 28. (b) Loan receivable Loan receivable Other expense receivable Share of losses of equity accounted joint venture FX Carrying value at end of the ﬁ nancial year Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 2,126 861 (1,193) (68) 1,726 500 - (73) - 427 - - - - - - - - - The loan and expense receivable is made up of advances to the joint venture entity as part of the working capital facility provided pursuant to the Group’s investment arrangement and forms part of the net investment in the joint venture. Its carrying value includes the share of the joint venture’s loss of $1,120,000 (2013: $73,000) recognised under the equity method that is in excess of the Company’s fully written down carrying value of its investment (2013:$337,000 - refer note 12). Risk exposure The maximum facility under the arrangement is GBP1.3 million together with other expenses agreed between the JV parties incurred to accelerate growth are repayable no later than 31 January 2017. Under certain conditions of default on the repayments, the Group has an option to convert a portion of the amount outstanding to increase the Group’s interest in the joint venture from 50% to 60%. The loan accrues interest at commercial rates and the balance at reporting date approximates to fair value. At reporting date, the fair value of the option was not material. 44 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 12 INVESTMENT IN JOINT VENTURE Acquired Share of losses after income tax Carrying value at end of the ﬁ nancial year Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 337 (337) - 337 (337) - - - - - - A subsidiary has a 50% interest in Maxxia Limited (UK), a company resident in the UK and the principal activity of which is provider of ﬁ nancing solutions and associated management services on motor vehicles. By contractual agreement, the Group together with the joint venture partner jointly control the economic activities and key decisions of the joint venture entity. The arrangement requires unanimous consent of the parties for key strategic, ﬁ nancial and operating policies that govern the joint venture. By agreement, the Group assumes responsibility for key decisions of the joint venture entity when its interest is greater than 75%. The Group has an option to acquire the residual interest in the joint venture entity from the joint venture partner after ﬁ ve years from acquisition and the joint venture partner has an option to sell its interest to the Group during the same period. At reporting date, the fair value of the option is not materially different to the carrying value. The interest in Maxxia Limited is equity accounted in the ﬁ nancial statements. Information relating to the joint venture investment is set out below. Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net liabilities The net liabilities of Maxxia Limited (UK) is reconciled to the carrying amount of the Group’s interest is as follows. Net liabilities of JV Group ownership interest (50%) Carrying amount Cumulative losses of JV equity accounted The Group’s share of the JV losses is limited to its carrying value. Share of joint venture ﬁ nancial results Revenues Expenses Loss before income tax Income tax Loss after income tax 2014 $’000 2,205 727 2,932 2,003 3,715 5,718 (2,786) (2,786) (1,393) - (1,530) 1,001 (3,801) (2,800) 560 (2,240) 2013 $’000 372 10 382 554 498 1,052 (670) (670) (335) - (410) 76 (1,152) (1,076) 256 (820) Share of joint venture capital commitments - - McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 45 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 13 PROPERTY, PLANT AND EQUIPMENT (a) Plant and equipment At cost Less accumulated depreciation Assets under operating lease At cost Less accumulated depreciation Total plant and equipment (b) Movements in cost and accumulated depreciation Year ended 30 June 2014 Balance at the beginning of year Additions(1) Acquisitions through business combination Disposals / transfers to assets held for sale Depreciation expense FX Balance at 30 June Year ended 30 June 2013 Balance at the beginning of year Additions(1) Disposals / transfers to assets held for sale Impairment loss Depreciation expense FX Balance at 30 June Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 25,990 (16,193) 9,797 22,961 (13,959) 9,002 458,969 423,321 (155,561) (135,572) 303,408 313,205 287,749 296,751 - - - - - - Consolidated Group Plant and equipment Assets under operating lease(2) $’000 $’000 9,002 2,548 746 348 (2,913) 66 9,797 8,943 3,755 (955) - (2,741) - 9,002 287,749 131,967 1,897 (36,985) (81,475) 255 303,408 244,023 152,992 (34,694) (111) (74,618) 157 287,749 - - - - - - Total $’000 296,751 134,515 2,643 (36,637) (84,388) 321 313,205 252,966 156,747 (35,649) (111) (77,359) 157 296,751 (1) (2) Included in 2013 additions of $3,755,000 were reimbursements by the lessor of $1,426,000. Accumulated provision for impairment loss at reporting date is $2,018,000 (2013: $2,018,000). (c) Security The above assets form part of the security supporting the ﬁ xed and ﬂ oating charge pledged to the Group’s ﬁ nanciers. (d) Property, plant and equipment held for sale Property, plant and equipment no longer held under operating leases are classiﬁ ed as inventory. 46 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 14 DEFERRED TAX ASSETS / (LIABILITIES) (a) Asset / (Liability) The balance comprises temporary differences and tax losses attributed for: Amounts recognised in proﬁ t or loss Doubtful debts Provisions Property, plant and equipment Accrued expenses Other receivables/prepayments Other Losses Contract rights Customer list and relationships Derivatives Closing balance at 30 June Recognised as: Deferred tax asset Deferred tax liability (b) Movement Opening balance at 1 July Charged to proﬁ t or loss Charged to other comprehensive income Acquired at acquisition Closing balance at 30 June Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 147 4,208 (1,584) 2,311 (764) 922 405 - (764) 192 5,073 5,832 (759) 5,073 367 5,780 (142) (932) 5,073 120 5,148 (7,336) 2,474 (343) 6 253 (272) - 317 367 367 - 367 1,683 (1,226) (90) - 367 - - - 6 - 7 - - - - 13 13 - 13 176 (163) - - 13 - 101 - 6 - 69 - - - - 176 176 - 176 160 16 - - 176 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 47 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 15 INTANGIBLE ASSETS (a) Carrying values Goodwill Cost Impairment loss Net carrying value Software development costs Cost(i) Accumulated amortisation Net carrying value Contract rights Cost Accumulated amortisation Net carrying value Customer list and relationships Cost Accumulated amortisation Net carrying value Total Intangibles (i) Software includes capitalised internal costs (b) Reconciliation of net book amount 2014 Net book amount Balance beginning of year Additions Acquisition through business combination Amortisation FX Closing balance 2013 Net book amount Balance beginning of year Additions Amortisation Closing balance 48 46,423 (36) 46,387 25,900 (11,245) 14,655 12,605 (9,555) 3,050 2,818 (251) 2,567 66,659 33,328 (36) 33,292 20,412 (7,744) 12,668 12,605 (8,333) 4,272 - - - 50,232 - - - - - - - - - - - - - Consolidated Group Software development costs $’000 Contract rights $’000 Customer list and relationships $’000 Goodwill $’000 33,292 - 12,254 - 841 12,668 5,488 - (3,501) - 46,387 14,655 33,292 - - 33,292 6,197 8,041 (1,570) 12,668 4,272 - - (1,222) - 3,050 2,960 3,133 (1,821) 4,272 - - 2,637 (251) 181 2,567 - - - - - - - - - - - - - - - - - Total $’000 50,232 5,488 14,891 (4,974) 1,022 66,659 42,449 11,174 (3,391) 50,232 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (c) Impairment test for goodwill Goodwill is allocated to the Group’s cash-generating units (CGUs) identiﬁ ed arising from the acquisitions of subsidiaries. The carrying amount of goodwill allocated to each CGU: Maxxia Pty Limited Remuneration Services (Qld) Pty Limited CLM Fleet Management plc Consolidated Group 2014 $’000 24,190 9,102 13,095 46,387 2013 $’000 24,190 9,102 - 33,292 The recoverable amount of each CGU above is determined based on value-in-use calculations. These calculations use the present value of cash ﬂ ow projections based on ﬁ nancial budgets approved by management covering a ﬁ ve-year period. (d) Key assumptions used for value-in-use calculations Maxxia Pty Limited Remuneration Services (Qld) Pty Limited Discount rate 2014 % 15.88 15.88 2013 % 17.76 17.76 The budgets use historical average growth rates to project revenue. Costs are determined taking into account historical margins and estimated cost increases. The average growth rates used in the ﬁ ve year projection is 10%. Cash ﬂ ows beyond the ﬁ ve-year period are extrapolated using a zero growth rate for conservatism. The growth rate does not exceed the long-term average growth rate for the business in which the CGU operates. In performing the value-in-use calculations for each CGU, the Group has applied pre-tax discount rates to discount the forecast future attributable pre-tax cash ﬂ ows. The pre-tax discount rates are disclosed above. The discount rates used reﬂ ect speciﬁ c risks relating to the relevant business each subsidiary is operating in. These assumptions have been used for the analysis of each CGU within each subsidiary. The recoverable amounts of the CGUs exceed the carrying amounts by substantial margins. Consequently, a sensitivity analysis of possible changes in key assumptions is not considered necessary. Goodwill acquired with CLM Fleet Management plc during the year was determined from fair value variables. There were no impairment indicators since acquisition to reporting date. 16 TRADE AND OTHER PAYABLES Unsecured liabilities Trade payables GST payable Sundry creditors and accruals Receivables in advance Amounts payable to wholly owned entities Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 16,222 1,594 31,543 3,598 - 12,043 1,073 24,609 3,083 - 52,957 40,808 - - 197 - 46,540 46,737 - - 46 - 34,643 34,689 Trade and other payables are non-interest bearing. These are short-term liabilities and the carrying value is representative of the fair value. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 49 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 17 OTHER LIABILITIES Maintenance instalments received in advance Unearned property incentives Unearned income 18 PROVISIONS Current Employee beneﬁ ts Non current Employee beneﬁ ts Aggregate employee beneﬁ ts liability 19 BORROWINGS Current Bank loans – at amortised cost Non-current Bank loans – at amortised cost (a) Security Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 7,529 6,816 125 7,626 7,463 250 14,470 15,339 6,137 5,820 767 6,904 552 6,372 452 - 213,995 181,725 - - - - - - - - - - - - - - - - - - The parent entity guarantees all bank loans of subsidiaries in the Group, totalling $215,100,000 (2013: $182,000,000). Fixed and ﬂ oating charges are provided by the Group in respect to ﬁ nancing facilities provided to it by its club of ﬁ nanciers. The Group’s loans are also secured by the following ﬁ nancial undertakings from all the entities in the Group. (i) Group bank loans excluding cash assets, is not to exceed 80% of the sum of the Group’s aggregate of the written down value of net operating lease assets, ﬁ nance lease receivables and commercial hire purchase receivables. (ii) Group shareholder’s funds of is not less than $145,000,000 at all times. (iii) Group ratio of consolidated earnings before interest and tax to consolidated interest expense is not less than 3:1. The following are other undertakings that have been provided by entities in the Group receiving the loans. (i) Negative pledge that imposes certain covenants including a restriction to provide other security over its assets, a cap on its maximum ﬁ nance debt, do not acquire assets which are non-core business to the Group, disposal of a substantial part of its business and reduction of its capital. (ii) Maintenance of certain ﬁ nancial thresholds for shareholders’ equity, gearing ratio and ﬂ eet asset portfolio performance. (iii) The business exposures of the Interleasing Group and CLM Fleet Management plc satisfy various business parameters. At all times throughout the year, the Group operated with signiﬁ cant headroom against all of its borrowing covenants. (b) Fair value disclosures The fair value of ﬁ nancial liabilities for disclosure purposes is estimated by discounting the future contractual cash ﬂ ows at the current market interest rate that is available to the Group for similar ﬁ nancial instruments. The fair value of current borrowings approximates the carrying amount, as the impact of discounting is not signiﬁ cant. (c) Risk exposures Details of the Group’s exposure to risks arising from current and non-current borrowings are set out in Note 2. 50 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 20 ISSUED CAPITAL (a) Share capital 74,523,965 (2013: 74,523,965) fully paid ordinary shares 56,456 56,456 56,456 56,456 (b) Reconciliation of movement in issued capital Balance at 1 July 2013 No shares were issued nor options exercised during the year Balance at 30 June 2014 Balance at 1 July 2012 No shares were issued nor options exercised during the year Balance at 30 June 2013 Issue price $ Number of shares 74,523,965 74,523,965 74,523,965 74,523,965 Ordinary shares 56,456 56,456 56,456 56,456 Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of members’ shares held. At members’ meetings, each fully paid ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands. (c) Options At 30 June 2014, there were 3,163,692 (2013: 3,189,275) unissued ordinary shares for which options were outstanding. Details relating to options issued, exercised and lapsed during the year and options outstanding at the end of the reporting period is set out in Note 27 on page 56. (d) Capital management strategy The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and beneﬁ ts for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as long and short term borrowings (excluding derivatives and ﬁ nancial guarantees) less cash and cash equivalents. Total capital is calculated as equity as shown in the statement of ﬁ nancial position plus net debt. The Groups’ gearing ratio was 39% (2013: 39%) calculated as net debt of $143,250,000 (2013: $124,486,000) divided by total debt and equity of $367,097,000 (2013: $319,921,000). The Group’s Risk and Compliance Committee reviews the capital structure of the Group on an on-going basis. As part of this review the committee considers the cost of capital and the risks associated with each class of capital. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 51 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 21 RESERVES (a) Option reserve Movements in the reserve are detailed in the Statements of Changes in Equity. The reserve records amounts for the fair value of options granted and recognised as an employee beneﬁ ts expense but not exercised. (b) Cash ﬂ ow hedge reserve Consolidated Group Parent Entity Revaluation - gross Deferred tax Balance at the end of the ﬁ nancial year 2014 $’000 (639) 192 (447) 2013 $’000 (1,057) 317 (740) 2014 $’000 2013 $’000 - - - - - - The hedging reserve is used to record gains and losses on interest rate swaps that are designed and qualify as cash ﬂ ow hedges and that are recognised in other comprehensive income. (c) Foreign currency translation reserve Consolidated Group Parent Entity Balance at the end of the ﬁ nancial year 2014 $’000 416 2013 $’000 (56) 2014 $’000 - 2013 $’000 - The foreign translation reserve account accumulates exchange differences arising on translation of foreign controlled entities which are recognised in other comprehensive income. The carrying amount is reclassiﬁ ed to proﬁ t or loss when the net investment is disposed of. Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 54,970 62,163 28,089 38,960 4,728 - 84,388 1,741 1,120 2,498 111 77,359 1,521 410 (150,375) (174,434) 26,002 1,177 31,512 - (12,549) 25,635 3,872 (4,386) 532 36,855 (634) 22,423 2,164 1,316 1,117 27,526 - - - - - - - - (90) (4,287) 3,796 163 - - - - - - - - - (15) (395) (258) (16) - 27,671 38,276 22 CASH FLOW INFORMATION Reconciliation of cash ﬂ ow from operations with proﬁ t from operating activities after income tax Proﬁ t for the year Non cash ﬂ ows in proﬁ t from operating activities Amortisation Impairment loss Depreciation Option expense Share of equity accounted joint venture loss Purchase of assets under lease Written down value of assets sold Acquisition expenses Changes in assets and liabilities, net of the effects of purchase of subsidiaries (Increase) / decrease in trade receivables and other assets Increase / (decrease) in trade payables and accruals Increase / (decrease) in income taxes payable (Decrease) / increase in deferred taxes Increase in provisions Net cash from operating activities 52 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 23 COMMITMENTS (a) Operating lease commitments Non cancellable operating leases contracted for but not capitalised in the ﬁ nancial statements: Payable minimum lease payments - Not later than 12 months - Between 12 months and 5 years - Greater than 5 years Consolidated Group Parent Entity 2014 $’000 2013 $’000 2014 $’000 2013 $’000 5,584 21,339 8,852 35,775 6,539 21,006 13,142 40,687 - - - - - - - - The property leases are non cancellable leases with varying terms, with rent payable monthly in advance. Individual rental agreements specify each rental adjustment. The equipment leases are non cancellable leases with varying terms, with rent payable quarterly in arrears. 24 SEGMENT REPORTING Reportable segments (a) Description of Segments The Group has identiﬁ ed its operating segments based on the internal reports reviewed and used by the Group’s chief decision maker (the CEO) to determine business performance and resource allocation. Operating segments have been identiﬁ ed after considering the nature of the products and services, nature of the production processes, type of customer and distribution methods. Two reportable segments have been identiﬁ ed “Group Remuneration Services” and “Asset Management”, in accordance with AASB 8 “Operating Segments” based on aggregating operating segments taking into account the nature of the business services and products sold and the associated business and ﬁ nancial risks and how they affect the pricing and rates of return. Group Remuneration Services - This segment provides administrative services in respect of salary packaging and facilitates the settlement of motor vehicle novated leases for customers, but does not provide ﬁ nancing. The segment also provides ancillary services associated with motor vehicle novated lease products. Asset Management - This segment provides ﬁ nancing and ancillary management services associated with motor vehicles, commercial vehicles and equipment. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 53 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (b) Segment information provided to the Chief Decision Maker The following is an analysis of the Group’s revenue and results from operations by reportable segment. Segment revenue Segment proﬁ t after tax Group Remuneration Services Asset Management Segment operations Corporate administration and directors’ fees Acquisition expenses Net interest income Tax on unallocated items Proﬁ t after tax from continuing operations for the year (c) Other segment information (i) Segment revenue Segment revenue is reconciled to the Statement of Proﬁ t or Loss as follows: Total segment revenue Interest revenue Total revenue per Consolidated Statement of Proﬁ t or Loss 2014 $’000 157,247 188,069 345,316 2013 $’000 155,855 171,962 327,817 2014 $’000 41,988 13,557 55,545 (1,436) (1,177) 1,978 60 54,970 2013 $’000 46,793 14,633 61,426 (1,008) (158) 2,247 (344) 62,163 2014 $’000 345,316 2,141 347,457 2013 $’000 327,817 2,247 330,064 Segment revenue above represents sales to external customers and excludes inter-segment sales, consistent with the basis by which the ﬁ nancial information is presented to the Chief Decision Maker. The accounting policies of the reportable segments are the same as the Group’s policies. Segment proﬁ t includes the segment’s share of centralised general management and operational support services which are shared across segments based on the lowest unit of measurement available to allocate shared costs that reasonably measure each segment’s service level requirements and consumption. Segment proﬁ t does not include corporate costs of the parent entity, including listing and company fees, director’s fees and ﬁ nance costs relating to borrowings not speciﬁ cally sourced for segment operations, costs directly incurred in relation to the acquisition of speciﬁ c acquisition and strategic investment targets or interest revenue not directly attributable to a segment. Included in the revenue for the Group Remuneration Services segment are revenues of $58,583,000 (2013: $59,159,000) from the Group’s largest customer. The Group’s operations and its customers are located predominantly in Australia. (ii) Segment result The following items are included in the segment results. Segment depreciation and amortisation Group Remuneration Services Asset Management Share of loss from joint venture Group Remuneration Services Asset Management 54 2014 $’000 4,655 84,461 89,116 - 1,120 1,120 2013 $’000 4,412 75,556 79,968 - 410 410 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (iii) Segment assets and liabilities The segment information with respect to total assets is measured in a consistent manner with that of the ﬁ nancial statements. These assets are allocated based on the operations of the segment and the physical location of the asset. The parent entity’s borrowings are not considered to be segment liabilities. The reportable segments’ assets and liabilities are reconciled to total assets as follows: Segment assets Group Remuneration Services Asset Management Segment assets Non-segment assets Unallocated assets (1) Consolidated assets per statement of ﬁ nancial position Segment liabilities Group Remuneration Services Asset Management Consolidated liabilities per statement of ﬁ nancial position 2014 $’000 2013 $’000 66,417 393,737 460,154 64,503 524,657 32,332 268,478 300,810 70,132 322,879 393,011 54,212 447,223 31,627 220,161 251,788 All assets and liabilities are located predominantly in Australia. (1) Unallocated assets comprise cash and bank balances of Group Remuneration Services that is maintained as part of the centralised treasury and funding function of the Group Additions to non-current assets Group Remuneration Services Asset Management (d) Geographical segment information 2014 $’000 2013 $’000 2,172 155,365 157,537 9,345 158,576 167,921 The Group’s revenue from continuing operations from external customers by location of operations and information about its non-current assets by location of assets are detailed below. Australia United Kingdom New Zealand Revenue from external customers Non-current assets 2014 $’000 2013 $’000 336,420 329,693 9,962 1,075 - 371 347,457 330,064 2014 $’000 376,296 14,251 6,257 396,804 2013 $’000 355,204 - 2,588 357,792 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 55 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 25 CONTINGENT LIABILITIES Estimates of the potential ﬁ nancial effect of contingent liabilities that may become payable: Guarantee provided for the performance of a contractual obligation not supported by term deposit. Guarantees provided in respect of property leases. 26 RELATED PARTY TRANSACTIONS (a) Wholly owned group Consolidated Group Parent Entity 2014 $’000 10,351 4,840 15,191 2013 $’000 10,658 4,553 15,211 2014 $’000 50 - 50 2013 $’000 50 - 50 Transactions between the Company and other entities within the wholly owned group during the years ended 30 June 2014 and 2013 consisted of: (a) loans advanced to the Company; and (b) the payment of dividends to the Company. Aggregate amounts included in the determination of proﬁ t from ordinary activities before income tax that resulted from transactions with entities in the wholly owned group: Dividend revenue Aggregate amounts payable to entities within the wholly owned group at balance date: Current payables (b) Key management personnel compensation Compensation Short-term employment beneﬁ ts Post-employment beneﬁ ts Long-term employment beneﬁ ts Share-based payments 27 SHARE-BASED PAYMENTS Consolidated Group Parent Entity 2014 $ 2013 $ 2014 $ 2013 $ - - $ - - $ 29,064,347 39,597,743 46,540,031 34,643,905 $ $ 4,139,212 3,474,420 2,290,456 2,016,836 212,400 (46,521) 1,237,496 5,542,587 202,016 135,738 1,002,542 4,814,716 130,964 (82,746) 850,548 124,495 74,264 667,699 3,189,222 2,883,294 The Company issued options to certain executives and employees under the McMillan Shakespeare Limited Employee Option Plan. Two types of options have been granted under this plan, performance options and voluntary options. No executive can enter into a transaction that is designed or intended to hedge the executive’s exposure to any unvested option. Executives will be required to provide declarations to the Board on their compliance with this policy from time to time. Performance Options Performance options over unissued ordinary shares in the Company are granted for no consideration and are, other than as disclosed in this Annual Report, granted at or above market prices prevailing when the Board approved the issue. Performance options carry no dividend or voting rights. Once exercised, each option is converted into one fully paid ordinary share in the Company. The Remuneration Committee recommends to the Board the number of performance options to be granted on the basis of the position, duties and responsibilities of the relevant executive. As at 30 June 2013, the Company had made fourteen offers of performance options in March 2004, December 2004, April 2005, August 2005, February 2007, December 2007, July 2008, November 2008, August 2009 and May 2010, August 2011, October 2011, March 2012 and July 2012. Many of the performance options issued have vested or expired prior to the ﬁ nancial year ended 30 June 2013. 56 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 Voluntary Options Voluntary options were ﬁ rst granted during the 2012 ﬁ nancial year when 314,578 options were issued at $1.32 each and expire on 30 September 2015 (the consideration was set at a 25% discount to the fair value of the options on grant date) up to an investment limit of $50,000 per executive. The maximum discount to any one executive is therefore, limited to $16,666. The entitlement to exercise the voluntary options is not contingent upon continued employment with the Company nor are there performance hurdles. However, if the executive leaves employment before 31 August 2014, the executive will forfeit 25% of their entitlement for $1 (the amount forfeited being equal to the 25% discount to the fair market value that applied to the acquisition price of the option at the date of the conditional offer and acceptance). The vesting date of these options is 31 August 2014. No performance hurdles are attached to these options given that these are purchased options; the executive has paid $50,000 for the purchase of these options (representing 75% of the fair value of the options on grant date). Vested Upon the adoption of this Annual Report the entire issue qualiﬁ es for vesting on 31 August 2014. Upon the adoption of this Annual Report the entire issue qualiﬁ es for vesting on 31 August 2014. Details for current performance options Options & issue date Expiry Conditions 537,634 (May 2010) 1,805,957 (August 2011) and 352,942 (October 2011) and 31,250 (March 2012) The entitlement is subject to the completion of a 36 month contract ending 30 September 2014 and the achievement of predetermined NPAT targets as described below. The options expire four years from the relevant date of issue. The entitlement to exercise these options is subject to continuity of employment and the achievement of predetermined targets, of which 100% is based on NPAT growth targets over three years. The NPAT growth will be based on the actual NPAT achieved for the year ended 30 June 2011 (the ‘Base Year’). The NPAT growth target will be based on compounding growth targets from the Base year. In the event that the NPAT target in any one year is not achieved, at the end of the three year period ending 30 June 2014 the actual compound NPAT over the three year period will be calculated, and if the total exceeds the compound NPAT target for the three year period, then the executives will be entitled to exercise all the options which have not been forfeited. The Board retains the right to adjust the NPAT targets in the event of a change in the capital structure of the Company that impacts earnings per share. Any change to the NPAT targets will be made having regard to the actual NPAT impact of the change to the capital structure. In the event that the executives take unpaid leave for a period exceeding three months during any of the years ending 30 June 2012, 2013 or 2014, the vesting criteria outlined above with respect to the ﬁ nancial performance of the Company and the executives continued employment will be determined on a pro rata basis to reﬂ ect the period of his continuous service during the relevant ﬁ nancial year, unless the Board in its discretion determine otherwise. The performance hurdles are as follows. Performance Hurdles FY2012 NPAT growth not less than 12.5% FY2013 NPAT growth not less than 15.0% FY2014 NPAT growth not less than 15.0% Vesting portion 33.33% 33.33% 33.34% 121,331 (July 2012) The options expire three years from the relevant date of issue. The entitlement to exercise these options is subject to continuity of employment and the achievement of predetermined targets, of which 100% is based on NPAT growth targets over two years. The NPAT growth will be based on the actual NPAT achieved for the year ending 30 June 2012 (the ‘Base Year’). The NPAT growth target will be based on compounding growth targets from the Base year. No options from this issue qualify for vesting for not meeting the NPAT targets In the event that the NPAT target in any one year is not achieved, at the end of the two year period ending 30 June 2014 the actual compound NPAT over the two year period will be calculated, and if the total exceeds the compound NPAT target for the two year period, then the executive will be entitled to exercise all the options which have not been forfeited. The Board retains the right to adjust the NPAT targets in the event of a change in the capital structure of the Company that impacts earnings per share. Any change to the NPAT targets will be made having regard to the actual NPAT impact of the change to the capital structure. In the event that the executive take unpaid leave for a period exceeding three months during any of the year ending 30 June 2013 or 2014, the vesting criteria outlined above with respect to the ﬁ nancial performance of the Company and the executive continued employment will be determined on a pro rata basis to reﬂ ect the period of their continuous service during the relevant ﬁ nancial year, unless the Board in its discretion determine otherwise. The performance hurdles are as follows. Performance Hurdles FY2013 NPAT growth not less than 15.0% FY2014 NPAT growth not less than 15.0% Vesting portion 50.0% 50.0% McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 57 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 Set out below are summaries of options granted under the plans: Consolidated Group and parent entity - 2014 Grant date Expiry date 28 May 2010 1 October 2015 16 August 2011(1) 30 September 2015 16 August 2011(2) 30 September 2015 25 October 2011 30 September 2015 14 March 2012 30 September 2015 Exercise price $3.42 $7.31 $7.31 $8.54 $9.29 Balance at start of the year 537,634 1,831,540 314,578 352,942 31,250 24 July 2013 30 September 2015 $11.42 121,331 Weighted average exercise price Consolidated Group and parent entity - 2013 Grant date Expiry date 28 May 2010 1 October 2015 16 August 2011(1) 30 September 2015 16 August 2011(2) 30 September 2015 25 October 2011 30 September 2015 14 March 2012 30 September 2015 Exercise price $3.42 $7.31 $7.31 $8.54 $9.29 24 July 2013 30 September 2015 $11.42 Granted during the year Exercised or sold during the year Forfeited during the year Balance at end of the year Exercisable at end of the year - - - - - - - - - - - - - - - - - 537,634 (25,583) 1,805,957 - - - - 314,578 352,942 31,250 121,331 (25,583) 3,163,692 $7.31 $6.96 - - - - - - - - Granted during the year Exercised or sold during the year Forfeited during the year Balance at end of the year Exercisable at end of the year - - - - - 121,331 121,331 $11.42 - - - - - - - - - 537,634 (27,289) 1,831,540 - - - - 314,578 352,942 31,250 121,331 (27,289) 3,189,275 $7.31 $6.97 - - - - - - - - 3,189,275 $6.97 Balance at start of the year 537,634 1,858,829 314,578 352,942 31,250 - 3,095,233 $6.79 Weighted average exercise price (1) Performance options including 682,206 options granted to the Managing Director following approval by shareholders at the Annual General Meeting on 25 October 2011. (2) Voluntary options including 37,900 options granted to the Managing Director following approval by shareholders at the Annual General Meeting on 25 October 2011. None of the forfeited options represented expired options (2013: Nil). The weighted average remaining contractual life of options outstanding at the end of the year was 0.25 years (2013: 1.25 years). Fair value of options granted No options were granted during the year. The assessed fair value at grant date of options granted in the previous year is disclosed in the table below. The fair value at grant date is determined using a binomial option pricing model that takes into account the exercise price, the term of the option, the share price at the grant date, the expected price volatility of the underlying share, the expected dividend yield and the risk-free interest rate for the term of the option. Model input Consideration payable upon grant Exercise price Grant date Expected life Share price at grant date Expected price volatility Expected dividend yield Risk-free interest rate 58 Year ended 30 June 2013 August 2012 Nil $11.42 24 July 2012 2.2 years $11.42 40% 4% 2.2% NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 The expected price volatility is based on historic volatility (based on the remaining life of the options), adjusted for any expected changes to future volatility due to publicly available information. Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the year as part of employee and Director beneﬁ ts expense were as follows: Options expense recognised under the Employee Option Plan 1,741,480 1,520,547 2014 $ 2013 $ 2014 $ - 2013 $ - Consolidated Group Parent Entity 28 BUSINESS COMBINATION (a) Subsidiaries acquired The Group acquired 100% of CLM Fleet Management plc and its subsidiaries on 22 October 2013, a company incorporated in the UK that provides ﬂ eet management services in the UK market. The acquisition was made to facilitate the expansion of the Group’s business in integrated asset ﬁ nance and asset management in the UK. There were no other acquisitions during the year. (b) Consideration transferred Consideration for the acquisition was $14,276,000 less cash assumed of $1,858,000, funded wholly by cash and borrowings. The assets and liabilities acquired have been fair valued in accordance with AASB 3 “Business Combinations”, and has resulted in goodwill of $12,254,000. Acquisition-related expenses of $1,082,000 were incurred and expensed on consolidation and included in the “Other expenses” line in the Statement of Consolidated Proﬁ t or Loss and Other Comprehensive Income for the year. Purchase consideration – cash outﬂ ow Cash paid for shares Cash acquired with CLM Net cash outﬂ ow for consideration transferred $’000 14,276 (1,858) 12,418 $1,350,000 of the consideration was deferred for settlement twelve months from acquisition date pending the ﬁ nalisation of conditions warranted in the sale and purchase agreement. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 59 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (c) Assets acquired and liabilities assumed at the date of acquisition Assets acquired and liabilities assumed at the date of acquisition Cash Lease assets Property, plant & equipment Trade and other receivables Assets acquired Trade payables and accrued expenses Lease liabilities Tax provision Deferred tax liabilities Liabilities assumed Identiﬁ able net liabilities acquired Customer list and relationships Goodwill Consideration Fair Value at acquisition date $’000 1,858 1,897 746 4,753 9,254 7,000 1,723 273 873 9,869 (615) 2,637 12,254 14,276 Trade and ﬁ nance receivables of $2,325,000 acquired with the business have resulted from trade sales with customers and are considered fair value and their collection and conversion to cash are expected in full pursuant to customer terms. Goodwill arising on acquisition is attributable to the proﬁ tability, quality client base, operating software and competent skill base of the acquired CLM business and the growth potential when combined with MMSG’s other business for a unique offering of a fully integrated asset management business and employee beneﬁ ts service. None of the goodwill is expected to be tax deductible. (d) Impact of acquisition on the results of the Group The Consolidated Statement of Comprehensive Income for the year includes sales revenue of $7,965,000 and net proﬁ t after tax of $729,000, as a result of the acquisition of CLM. Had the acquisition occurred effective 1 July 2013, the respective “proforma” revenue and proﬁ t for the year of $14,489,000 and $941,000 would have been included in the Statement of Comprehensive Income. In determining the proforma revenue and result of CLM, adjustments have been made to differences in the accounting policies between the Group and CLM and the recognition of the amortisation of customer list and relationship on the assumption that this asset was acquired at 1 July 2013 at its fair value. 29 DEED OF CROSS GUARANTEE McMillan Shakespeare Limited, Maxxia Pty Ltd and Remuneration Services (Qld) Pty Ltd are parties to a deed of cross guarantee entered into during the year ended 30 June 2009 and Interleasing (Australia) Ltd, CARILA Pty Ltd and TVPR Pty Ltd (Interleasing Group) entered into deeds of cross guarantee in the year ended 30 June 2010. Under the deeds, each company guarantees the debts of the others and is relieved from the requirement to prepare a ﬁ nancial report and directors’ report under Class Order 98/1418 (as amended) issued by the Australian Securities and Investments Commission. The above companies represent a ‘Closed Group’ for the purposes of the Class Order, and as there are no other parties to the Deed of Cross Guarantee that are controlled by McMillan Shakespeare Limited, they also represent the ‘Extended Closed Group’. Set out below is a statement of comprehensive income, statement of ﬁ nancial position and a summary of movements in consolidated retained proﬁ ts for the year ended 30 June 2014 of the Closed group consisting of McMillan Shakespeare Limited, Maxxia Pty Ltd and Remuneration Services (Qld) Pty Ltd, Interleasing (Australia) Ltd, CARILA Pty Ltd and TVPR Pty Ltd. 60 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (a) Consolidated Statement of Comprehensive Income and summary of movements in consolidated retained proﬁ ts Statement of Comprehensive Income Revenue and other income Employee and director beneﬁ ts expenses Depreciation and amortisation expenses and impairment Leasing and vehicle management expenses Consulting cost expenses Marketing expenses Property and corporate expenses Technology and communication expenses Finance costs Other expenses Proﬁ t before income tax Income tax expense Proﬁ t attributable to members of the parent entity Other comprehensive income Other comprehensive income/(loss) for the year after tax Total comprehensive income for the year Movements in consolidated retained earnings Retained earnings at the beginning of the ﬁ nancial year Proﬁ ts for the year Dividends paid Retained earnings at the end of the ﬁ nancial year 2014 $’000 2013 $’000 336,422 329,687 (79,826) (88,042) (47,160) (3,420) (2,584) (6,724) (7,692) (10,370) (9,602) 81,002 (24,242) 56,760 (73,837) (79,783) (47,307) (2,413) (3,076) (6,441) (7,561) (11,042) (8,218) 90,009 (26,912) 63,097 (2,076) 54,684 1,752 64,849 138,060 56,760 (29,064) 165,756 111,480 63,097 (36,517) 138,060 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 61 NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2014 (b) Consolidated Statement of Financial Position Current assets Cash and cash equivalents Trade and other receivables Finance lease receivables Inventory Total current assets Non current assets Property, plant and equipment Intangible assets Deferred tax asset Finance lease receivables Other ﬁ nancial assets Total non current assets TOTAL ASSETS Current liabilities Trade and other payables Current tax liability Provisions Total current liabilities Non current liabilities Provisions Borrowings Total non current liabilities TOTAL LIABILITIES NET ASSETS EQUITY Issued capital Reserves Retained earnings TOTAL EQUITY 2014 $’000 65,034 32,830 4,630 5,294 107,788 303,427 50,997 5,766 8,458 17,715 386,363 494,151 59,560 10,527 6,135 76,222 767 190,549 191,316 267,538 226,613 56,456 4,401 165,756 226,613 2013 $’000 56,876 23,432 4,195 4,909 89,412 294,165 50,233 365 10,382 3,250 358,395 447,807 56,210 6,661 5,818 68,689 552 181,725 182,277 250,966 196,841 56,456 2,325 138,060 196,841 30 SUBSEQUENT EVENTS On 19 August 2014, the Company granted the following performance and voluntary options to employees. Option Type Performance options Performance options Voluntary options Number Exercise price 978,417 808,738 23,981 1,811,136 $10.18 $10.18 $10.18 Expiry date 30 September 2019 30 September 2018 30 September 2018 Subsequent to reporting date, a total of 2,727,783 performance options that satisﬁ ed the NPAT growth targets qualiﬁ ed for vesting. Consequently, 2,190,149 performance options will qualify for vesting on 31 August 2014 and 537,634 options on 31 October 2014, both subject to the continuity of employment to that date. A total 314,578 voluntary options have qualiﬁ ed for vesting on 31 August 2014. 62 DIRECTORS’ DECLARATION The Directors are of the opinion that: 1. the ﬁ nancial statements and notes on pages 21 to 62 are in accordance with the Corporations Act 2001(Cth), including: (a) compliance with Accounting Standards, the Corporations Regulations 2001 (Cth) and other mandatory professional reporting requirements; and (b) giving a true and fair view of the consolidated entity’s ﬁ nancial position as at 30 June 2014 and ﬁ nancial performance for the ﬁ nancial year ended on that date; and 2. 3. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group identiﬁ ed in Note 29 will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in Note 29. Note 1(b) conﬁ rms that the ﬁ nancial statements also comply with International Financial Reporting Standards as disclosed as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Ofﬁ cer and Chief Financial Ofﬁ cer required by section 295A of the Corporations Act 2001 (Cth). This declaration is made in accordance with a resolution of the Directors. Ronald Pitcher, AM Chairman 29 August 2014 Melbourne, Australia Michael Kay Managing Director McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 63 INDEPENDENT AUDIT REPORT AS AT 30 JUNE 2014 The Rialto, Level 30 525 Collins St Melbourne Victoria 3000 Correspondence to: GPO Box 4736 Melbourne Victoria 3001 T +61 3 8320 2222 F +61 3 8320 2200 E info.vic@au.gt.com W www.grantthornton.com.au Independent Auditor’s Report To the Members of McMillan Shakespeare Limited Report on the financial report We have audited the accompanying financial report of McMillan Shakespeare Limited (the “Company”), which comprises the statement of financial position as at 30 June 2014, the statement of profit or loss and other comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, notes comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the company the consolidated entity comprising the Company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report 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. The Directors’ responsibility also includes 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. The Directors also state, in the notes to the financial report, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, the financial statements comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require us to comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. Liability is limited in those States where a current scheme applies. 64 INDEPENDENT AUDIT REPORT AS AT 30 JUNE 2014 In making those risk assessments, the auditor considers internal control relevant to the Company’s preparation of the financial report that gives a true and fair view 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 Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: a b the financial report of McMillan Shakespeare Limited is in accordance with the Corporations Act 2001, including: i ii giving a true and fair view of the Company’s and consolidated entity’s financial position as at 30 June 2014 and of their performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001; and the financial report also complies with International Financial Reporting Standards as disclosed in the notes to the financial statements. Report on the remuneration report We have audited the remuneration report included in pages 6 to 13 of the directors’ report for the year ended 30 June 2014. 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. Auditor’s opinion on the remuneration report In our opinion, the remuneration report of McMillan Shakespeare Limited for the year ended 30 June 2014, complies with section 300A of the Corporations Act 2001. GRANT THORNTON AUDIT PTY LTD Chartered Accountants B.A. Mackenzie Partner - Audit & Assurance Melbourne, 29 August 2014 McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 65 AUDITOR’S INDEPENDENCE DECLARATION AS AT 30 JUNE 2014 The Rialto, Level 30 525 Collins St Melbourne Victoria 3000 Correspondence to: GPO Box 4736 Melbourne Victoria 3001 T +61 3 8320 2222 F +61 3 8320 2200 E info.vic@au.gt.com W www.grantthornton.com.au Auditor’s Independence Declaration To the Directors of McMillan Shakespeare Limited In accordance with the requirements of section 307C of the Corporations Act 2001, as lead auditor for the audit of McMillan Shakespeare Limited for the year ended 30 June 2014, I declare that, to the best of my knowledge and belief, there have been: a b no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. GRANT THORNTON AUDIT PTY LTD Chartered Accountants B.A. Mackenzie Partner - Audit & Assurance Melbourne, 29 August 2014 Grant Thornton Audit Pty Ltd ACN 130 913 594 a subsidiary or related entity of Grant Thornton Australia Ltd ABN 41 127 556 389 ‘Grant Thornton’ refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton Australia Ltd is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL does not provide services to clients. GTIL and its member firms are not agents of, and do not obligate one another and are not liable for one another’s acts or omissions. In the Australian context only, the use of the term ‘Grant Thornton’ may refer to Grant Thornton Australia Limited ABN 41 127 556 389 and its Australian subsidiaries and related entities. GTIL is not an Australian related entity to Grant Thornton Australia Limited. Liability limited by a scheme approved under Professional Standards Legislation. Liability is limited in those States where a current scheme applies. 66 SHAREHOLDER INFORMATION Additional information required by the ASX Listing Rules and not disclosed elsewhere in this Annual Report is set out below: SUBSTANTIAL SHAREHOLDINGS As at 12 August 2014, the number of shares held by substantial shareholders and their associates is as follows: Shareholder J P Morgan Nominees Australia Limited HSBC Custody Nominees (Aust) Ltd Meddiscope Pty Limited National Nominees Limited Chessari Holdings Pty Limited(2) Asia Pac Technology Pty Limited(3) Number of Ordinary Shares Percentage of Ordinary Shares1 8,626,465 7,463,824 7,235,000 7,025,317 6,050,941 3,993,025 1 2 3 As at 12 August 2014, 74,523,965 fully paid ordinary shares have been issued by the Company. Chessari Holdings Pty Limited is a company associated with Mr Ross Chessari, a Non-Executive Director. Asia Pac Technology Pty Limited is a company associated with Mr John Bennetts, a Non-Executive Director. NUMBER OF SHARE & OPTION HOLDERS As at 12 August 2014, the number of holders of ordinary shares and options in the Company was as follows: Class of Security Fully paid ordinary shares Options exercisable at $3.42 and expiring on 1 October 2015 Options exercisable at $7.31 and expiring on 30 September 2015 Options exercisable at $8.54 and expiring on 30 September 2015 Options exercisable at $9.29 and expiring on 30 September 2015 Options exercisable at $11.42 and expiring on 30 September 2015 VOTING RIGHTS 11.58 10.02 9.71 9.43 8.12 5.36 Number of Holders 8,400 1 17 1 1 3 In accordance with the Constitution of the Company and the Corporations Act 2001 (Cth), every member present in person or by proxy at a general meeting of the members of the Company has: • • on a vote taken by a show of hands, one vote; and on a vote taken by a poll, one vote for every fully paid ordinary share held in the Company. A poll may be demanded at a general meeting of the members of the Company in the manner permitted by the Corporations Act 2001 (Cth). DISTRIBUTION OF SHARE & OPTION HOLDERS As at 12 August 2014, the distribution of share and option holders in the Company was as follows: Distribution of Shares & Options Number of Holders of Ordinary Shares 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,000+ As at 12 August 2014 there were 208 shareholders who held less than a marketable parcel of 53 fully paid ordinary shares in the Company. McMILLAN SHAKESPEARE LIMITED AND ITS CONTROLLED ENTITIES 4,600 2,984 466 319 31 67 TOP 20 SHAREHOLDERS As at 12 August 2014, the details of the top 20 shareholders in the Company are as follows: No. Name Number of Ordinary Shares Percentage of Ordinary Shares1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 J P Morgan Nominees Australia Limited HSBC Custody Nominees (Aust) Ltd National Nominees Limited Meddiscope Pty Limited Chessari Holdings Pty Limited(2) Asia Pac Technology Pty Limited(3) Citicorp Nominees Pty Limited RBC Investor Services Australia Nominees Pty Ltd BNP Paribas Noms Pty Ltd < DRP> UBS Nominees Pty Ltd Ann Leslie Ryan COBAX Pty Ltd AMP Life Limited Citicorp Nominees Pty Limited MAP Capital Pty Ltd MOHL Invest Pty Ltd Catholic Church Insurance Limited Sandhurst Trustees Ltd RBC Investor Services Australia Nominees Pty Ltd Michael Gordon Kay Investments Pty Ltd Totals: Top 20 holders of issued Capital Total Remaining Holders .Balance 1 2 3 As at 12 August 2014, 74,523,965 fully paid ordinary shares have been issued by the Company. Chessari Holdings Pty Limited is a company associated with Mr Ross Chessari, a Non-Executive Director. Asia Pac Technology Pty Limited is a company associated with Mr John Bennetts, a Non-Executive Director. 8,626,465 7,463,824 7,025,317 6,590,000 6,050,941 3,993,025 3,024,952 2,141,000 2,058,298 1,457,591 1,008,418 645,000 614,956 405,882 325,000 310,000 250,200 211,276 202,704 201,936 52,606,785 21,917,180 11.58 10.02 9.43 8.84 8.12 5.36 4.06 2.87 2.76 1.96 1.35 0.87 0.83 0.54 0.44 0.42 0.34 0.28 0.27 0.27 70.59 29.41 RESTRICTED SECURITIES As at the date of this Annual Report, there are no securities in the Company subject to voluntary escrow or any other restrictions. UNQUOTED SECURITIES As at the date of this Annual Report, the details of unquoted securities in the Company are as follows: Class Number of Securities Number of Holders Options exercisable at $3.42 and expiring on 1 October 2015 Options exercisable at $7.31 and expiring on 30 September 2015 Options exercisable at $8.54 and expiring on 30 September 2015 Options exercisable at $9.29 and expiring on 30 September 2015 Options exercisable at $11.24 and expiring on 30 September 2015 Options exercisable at $10.18 and expiring on 30 September 2019 Options exercisable at $10.18 and expiring on 30 September 2018 Options do not carry a right to vote ON-MARKET BUY BACK The Company does not have a current on-market buy-back. 68 537,634 2,120,535 352,942 31,250 121,331 978,417 832,719 1 17 1 1 3 4 18 McMillan Shakespeare Limited A.B.N. 74 107 233 983 A.F.S.L. No. 299054 Level 21, 360 Elizabeth Street Melbourne, Victoria 3000 www.mmsg.com.au

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