Annual Report 2014 KNOW THE FEELING Financial Highlights for the year ended 30 June 2014 “In a year that saw some of our best financial results ever, we significantly grew our core business and successfully transitioned into a diversified retail financial services player.” NET PROFIT AFTER TAX (NPAT) TOTAL GROUP LOAN BOOK HOUSING LOAN APPROVALS Net profit after tax on a cash basis was 18.7 million up 18.6% on FY13. Total group loan book (i.e. residential and commercial loans written by Mortgage Choice was up 4.6% at $47.4 billion. $12.2 billion in housing loan approvals were generated by the Group, up on $10.4 billion in FY13. TOTAL DIVIDENDS NPAT SETTLEMENTS A final fully franked dividend of 15.5 cents per share for FY14. NPAT on cash basis including sale of Loankit was Mortgage Choice settlements were $10.4 billion $20.1 million up 27.1% on FY13. up 18.1% on FY13. EARNINGS PER SHARE NPAT TOTAL GROUP REVENUE On an IFRS basis: earnings per share stood at 16.0 CENTS compared to 15.2 cents in FY13. NPAT on an IFRS basis was $18.5 million Total group revenue on a IFRS basis was $178.5 million up 14.8% on FY13. Contents Mortgage Choice Limited ABN 57 009 161 979 Back cover Corporate directory 05 Directors’ report 29 Corporate governance statement Financial report Independent auditor’s report to the members 36 88 Chairman’s Report for the year ended 30 June 2014 Mortgage Choice has delivered an exceptionally strong, above target fi nancial result this year, growing our settlements, approvals, franchise numbers and profi t. We are pleased to pay a total dividend to shareholders for the year of 15.5 cents per share. On behalf of the Board, I am delighted to announce that Mortgage Choice has enjoyed another incredibly strong year, delivering strong results across the board including a lift in settlements, franchisee numbers and overall profi t. Financial results for the year to 30 June 2014 showed a net cash profi t after tax of $18.7 million – up 18.6% on the 2013 fi nancial year. Better yet, our total housing loan approvals reached $12.2 billion – up 18.6 per cent on FY13. In addition, the total loan book for the group grew by 4.6% to reach $47.4 billion. Mortgage Choice’s core mortgage broking business performed incredibly well over the last 12 months, with settlements surging 18.1 per cent on the previous year to hit $10.4 billion. In addition, we also signifi cantly increased our franchise footprint, taking our number of broking franchises to 405. All in all, it was a very successful year for both our core mortgage broking business and Mortgage Choice as a whole. Our fi nancial planning business continues to grow and strengthen. In June, we appointed our 30th adviser and are well on track to achieve our target of 60 advisers by June 2015, with 33 advisers in place as of August 2014. When we launched Mortgage Choice Financial Planning, we modeled the new arm of the business on our successful mortgage broking franchise formula and, given that we have enjoyed incredible growth in this business over the last 12 months, it is clear this is a business model that works. The www.helpmechoose.com.au business made a profi table contribution to the Group this year and is growing in line with expectations. Further, this business continues to add to the diversity of the Group, which forms a key part of our current business strategy. Mortgage Choice’s social responsibility program has far exceeded company expectations and I am pleased to report that since our corporate charity partner was announced in October 2011, our customers, franchise network, staff , lender partners and suppliers have raised in excess of $340,000 in support of Ronald McDonald House Charities. This fi nancial contribution is in addition to the many hours volunteered by the group to help seriously ill children and their families. Michael Russell, the executive team and the broader Mortgage Choice team remain as committed as ever to our three year ACT (Acquire market share, Cross-sell, Transition the business) strategy. Now in our third and fi nal year of the strategy, the team is well down the road of successfully transitioning the business into a fully fl edged fi nancial services business and will continue this successful transition over the months ahead. At Mortgage Choice we believe in helping all Australians live a life of abundance – to have a great standard of living as well as a great standard of life. We believe Australians deserve access to real, relevant and aff ordable advice from a professional they can trust. We’ve been providing that advice on home loans for over 22 years and we can now say, hand on heart, that we can help all Australians with much more - including fi nancial planning advice. We are building a sustainable Mortgage Choice by focusing on what matters most to our customers – honest, trustworthy advice and amazing customer service. We want Mortgage Choice to become a one-stop shop for our customers. We want to be able to help our customers with all of their fi nancial needs and become their trusted partner throughout their entire fi nancial lifecycle. We will do this by delivering a broad range of tailored fi nancial solutions that are right for their unique circumstances, off ering our customers true choice as well as transparent and trustworthy advice. PETER RITCHIE Chairman Chairman’s Report 3 Chief Executive Officer’s Overview for the year ended 30 June 2014 We are transitioning the business into a diversifi ed fi nancial services player to help all of our customers at every stage of their fi nancial lifecycle. What a year it has been. The 2014 fi nancial year had its ups and downs. The Federal Government’s self-labeled “tough budget” had consumers reeling, negatively impacting confi dence. At the end of the fi nancial year, data from the Westpac Melbourne Institute of Consumer Sentiment found confi dence was sitting approximately 10 per cent below the 2013 average. This drop in confi dence negatively impacted the labour markets, causing the unemployment rate to hit its highest level in 10 years. But while consumer confi dence remains slightly below long term averages and the unemployment rate has risen over the past 12 months, there is also plenty of good news coming out of the Australian economy. In August 2013, the Reserve Bank of Australia took the necessary steps to stimulate the local economy, cutting the offi cial cash rate to the historically low level of 2.5 per cent. Since that time, the cash rate has been left untouched, which has allowed business sentiment and property values to improve. According to National Australia Bank’s business surveys, business confi dence improved over the second half of the year and while conditions are still soft, they are now much better than they were at the beginning of the 2014 fi nancial year. Further, property prices continue to climb albeit at a more sustainable rate, with dwelling values across the combined capital cities surging 10.1 per cent over the 2014 fi nancial year. Sydney and Melbourne led the charge, with the capital cities recording dwelling value growth of 15.4 per cent and 9.4 per cent respectively throughout the 2014 fi nancial year. Of course, it is not just values that are enjoying sustainable growth, auction clearance rates have remained strong throughout the entire year and there has been a steady increase in housing fi nance commitments which has led to a spike in home loan approvals. At Mortgage Choice, we have had a great year, with settlements up 18.1% and approvals up 17.3% year on year. Better yet, our productivity levels have improved. As a result, Mortgage Choice is the most productive mortgage broker amongst our peers – a fact we are very proud of. On top of home loan successes, our new fi nancial planning business has also achieved some signifi cant milestones. In June this year, we announced the appointment of our 30th fi nancial adviser – highlighting the ongoing strength and growth of our diversifi ed business. We are now well on track to 4 Chief Executive Offi cer’s Overview meet our target of 60 advisers by June 2015. The ongoing growth of our diversifi ed business falls perfectly into our three year strategic plan – ACT. When we fi rst launched ACT it had three central ingredients: Acquire profi table market share in home loans, Cross-sell home loan customers into our fi nancial planning business, and Transition the business into a broader fi nancial services and wealth solutions business. Now in the third and fi nal year of ACT, we are focused on consolidating the momentum we have generated over the last two years across all areas of the business, including diversifi ed income and fi nancial planning, to make sure we hit our growth targets and successfully transition the brand into a fully fl edged fi nancial services powerhouse. It gives me great pleasure to say we are already half way there, having established a very unique and new generational fi nancial advice business under our own AFSL. Today, our customers are able to access clear and transparent advice that is both aff ordable and relevant. Moving forward, we will continue to successfully transition the business so that we not only off er a full suite of fi nancial services, but our customers know to use Mortgage Choice for all of their fi nancial needs. As part of our transition into a fully fl edged fi nancial services powerhouse, we decided it was prudent to refresh and reposition our brand to refl ect our new business direction, growth and focus. Many of you may have already noticed our fresh new logo which forms just part of our overall new brand strategy and further highlights our transition into a diversifi ed fi nancial services business. While we have enjoyed a very strong and successful year, thanks to the ongoing concerted eff orts of our wonderful franchise owners, their staff and our corporate staff , I know we can build on this base over the coming 12 months. I am excited about the year ahead and know that great things await Mortgage Choice. Everything we do has the customer at the centre and we will do whatever it takes to build long term relationships with our customers and provide them with the solutions, knowledge and choices they need to be able to make informed fi nancial decisions. MICHAEL RUSSELL Chief Executive Offi cer Directors’ Report for the year ended 30 June 2014 Your Directors present their report on the consolidated entity consisting of Mortgage Choice Limited (“the Company”) and the entities it controlled at the end of, or during, the year ended 30 June 2014, hereafter referred to as “Mortgage Choice”, “the Mortgage Choice Group” or “the Group”. Directors The following persons were Directors of Mortgage Choice Limited during the whole of the fi nancial year and up to the date of this report: P D Ritchie S J Clancy P G Higgins R G Higgins S C Jermyn D E Ralston Principal activities During the year the principal continuing activity of the Mortgage Choice Group was mortgage broking. This activity involves: • • • the provision of assistance in determining the borrowing capacities of prospective borrowers; the assessment, at the request of those borrowers, of a wide range of home loan or other products; and the submission of loan applications on behalf of prospective borrowers. Dividends Dividends paid or payable to members during the fi nancial year are as follows: A fi nal ordinary dividend of $8.640 million (7.0 cents per fully paid share) was declared out of profi ts of the Company for the year ended 30 June 2013 on 22 August 2013 and paid on 16 September 2013. An interim ordinary dividend of $9.284 million (7.5 cents per fully paid share) was declared out of profi ts of the Company for the half-year ended 31 December 2013 on 26 February 2014 and paid on 24 March 2014. A fi nal ordinary dividend of $9.910 million (8.0 cents per fully paid share) was declared out of profi ts of the Company for the year ended 30 June 2014 on 21 August 2014 to be paid on 15 September 2014. Review of Operations In a year that saw some of our best fi nancial results ever, we signifi cantly grew our core business and successfully transitioned into a diversifi ed retail fi nancial services player. In this rapidly growing and changing environment, we also maintained high customer satisfaction and franchisee engagement and laid strong foundations for long-term business success and sustainability. Best financial results ever We have embraced the opportunities that this year’s strong market presented us to deliver some of our best fi nancial results to date across the business. Highlights include a strong growth in underlying statutory revenue and profi t, record loan settlements, our highest cash result to date and a new high annual dividend of 15.5 cents. We achieved one of our best underlying statutory results, before the recognition of balance sheet revaluation adjustments to the valuation of the loan book. Underlying statutory revenue and profi t before tax from continuing operations compared to last year was up 17 per cent on revenue and 23 per cent on profi t before tax. Directors’ Report 5 DIRECTORS’ REPORT continued for the year ended 30 June 2014 Underlying Statutory Results Continuing operations Operating revenue Underlying operating revenue Adjustment to valuation of loan book receivable Total operating revenue Profit before tax Underlying result before tax Adjustment to valuation to net loan book receivable Total profit before tax 2014 $’000 2013 $’000 175,055 149,516 3,409 5,883 178,464 155,399 28,434 (1,638) 26,796 23,068 4,325 27,393 However, the realignment of valuation assumptions to reflect changing economic factors resulted in a negative valuation adjustment at the end of the year. Increased run-off was experienced across the industry due in part to customers paying more off their principle in the low interest rate environment. A second factor was the high number of customers who refinanced or upgraded their homes, contributing to Mortgage Choice’s record growth in loan settlements. Increased settlement volumes also led to higher commission payments to Mortgage Choice franchisees, which affected our net margin. The combination of these factors resulted in a write down of 1 per cent of the ending value of the Company’s loan book. The Market and our Settlements reached new levels The market for home loans was buoyant this past year. We achieved the highest settlement figures ever, settling $10.370 million in loans in FY14, 18.1 per cent more than last year. Settlements trend “We achieved the highest settlement figures ever, settling $10.370 million in loans in FY14, 18.1 per cent more than last year.” $m 1,000 950 900 850 800 750 700 650 600 550 500 2 1 ‘ l u J 2 1 ‘ g u A 2 1 ‘ p e S 2 1 ‘ t c O 2 1 ‘ v o N 2 1 ‘ c e D 3 1 ‘ n a J 3 1 ‘ b e F 3 1 ‘ r a M 3 1 ‘ r p A 3 1 ‘ y a M 3 1 ‘ n u J 3 1 ‘ l u J 3 1 ‘ g u A 3 1 ‘ p e S 3 1 ‘ t c O 3 1 ‘ v o N 3 1 ‘ c e D 4 1 ‘ n a J 4 1 ‘ b e F 4 1 ‘ r a M 4 1 ‘ r p A 4 1 ‘ y a M 4 1 ‘ n u J monthly settlements ($m) 6 month average settlements ($m) Upfront bank commission rates increased to an average of 63.3bp for the year, up from 60.8bp, reflecting the increased competition amongst mortgage providers. This naturally provided a boost to Mortgage Choice revenues as well as the entire mortgage broking industry. And this wasn’t the only pleasing news for the industry as a whole. According to data from the Mortgage and Finance Association of Australia, broker market share climbed from an average of 44 per cent in FY13 to 50 per cent by the end of the June 2014 quarter. Mortgage Choice residential loan book ($000) 7 9 1 , 1 1 0 , 7 4 5 6 1 , 1 8 9 4 4 , 6 4 4 , 9 9 2 , 3 4 9 7 8 , 2 6 1 , 1 4 2 4 1 , 6 7 0 9 3 , 5 4 4 , 3 3 0 6 3 , , 0 7 8 8 6 2 , 3 3 1 4 4 , 4 4 6 9 2 , 6 Directors’ Report 0 3 0 6 9 , 6 , 5 2 3 1 9 , 3 9 6 , 1 2 0 1 3 , 8 8 6 , 7 1 8 8 5 , 6 7 0 , 3 1 7 4 8 , 3 2 5 , 9 2 5 4 , 9 3 8 , 6 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Financial year Mortgage Choice TSR compared to S&P/ASX 200 index return n r u t e r r e d l o h e r a h s l a t o T 400% 350% 300% 250% 200% 150% 100% 50% 000 2009 2010 2011 2012 2013 2014 Mortgage Choice S&P /ASX 200 $m 1,000 950 900 850 800 750 700 650 600 550 500 2 1 ‘ l u J Settlements trend 2 1 ‘ g u A 2 1 ‘ 2 1 ‘ 2 1 ‘ 2 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ t c O p e S c e D v o N DIRECTORS’ REPORT continued for the year ended 30 June 2014 y a M y a M v o N r a M r a M g u A c e D p e S r p A r p A b e F b e F n u J n u J t c O n a J n a J 4 1 ‘ 4 1 ‘ 4 1 ‘ 4 1 ‘ 4 1 ‘ 4 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ u J l Mortgage Choice residential loan book ($000) 7 9 1 , 1 1 0 , 7 4 5 6 1 , 1 8 9 4 4 , 6 4 4 , 9 9 2 , 3 4 9 7 8 , 2 6 1 , 1 4 2 4 1 , 6 7 0 9 3 , 5 4 4 , 3 3 0 6 3 , , 0 7 8 8 6 2 , 3 3 1 4 4 , 4 4 6 9 2 , , 0 3 0 6 9 6 , 5 2 3 1 9 , 3 9 6 , 1 2 0 1 3 , 8 8 6 , 7 1 8 8 5 , 6 7 0 , 3 1 7 4 8 , 3 2 5 , 9 “The residential loan book, excluding the LoanKit business, grew 4.6 per cent during the year from $45 billion to $47 billion.” , 2 5 4 9 3 8 6 , 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Financial year Mortgage Choice’s loan book continued to keep pace with the boost in settlements and in spite of the increased rate of run-off. The residential loan book, excluding the LoanKit business, grew 4.6 per cent during the year from $45 billion to $47 billion. Growth in Diversified revenues as well as Cash Profits We experienced strong growth in revenue from diversified sources across Mortgage Choice Financial Planning, Help Me Choose and the sale of other diversified products through our mortgage brokers. Earnings from these business lines grew by approximately 71 per cent from $7.7 million last year to $13.2 million this year. This equates to a 40 per cent increase in their contribution to the overall business – from 5 per cent to 7 per cent of total revenues. Mortgage Choice TSR compared to S&P/ASX 200 index return In addition, we recognised our highest ever cash profit results, increasing by 18 per cent from $15.8 million last year to $18.7 million before the sale of the LoanKit business and a 27 per cent increase including LoanKit. Given the strong financial returns we enjoyed this year, we have again achieved attractive earnings per share, which is reflected in the increase in our dividend from 13 cents to 15.5 cents or 19 per cent increase. 400% 350% 300% 250% 200% Core business grew significantly while maintaining engagement 150% 100% 50% 000 Maintaining customer satisfaction and franchisee engagement has been a strong focus this year. It was particularly gratifying to see franchisees engage in our growth strategy, and not only hire more loan writers and increase productivity, but also actively engage in adding financial planning to their businesses. In response to the buoyant market conditions, we increased our franchise numbers from 395 to 405. We worked closely with existing franchisees to help them see the benefits of growing their core broking businesses. In particular, we supported franchisees that recruited new loan writers through our Plus One initiative by providing a monthly financial incentive for the first nine months of the loan writer’s tenure. This initiative led to a net of 27 new loan writers joining in the second half of FY14, bringing the total from 507 to 534. At the time of writing, our loan writer number had grown again, increasing by 15 and bringing the total number to 549. We expect further growth in these numbers as additional loan writers are added throughout the end of the year. 2010 2014 2013 2012 2011 Mortgage Choice S&P /ASX 200 2009 In that context of significant business growth and change, loan writer productivity grew. There was an average increase of 15.5 per cent or $2.7 million per broker in loans written across the year, from around $17.5 million per broker last year to $20.2 million in FY14. Diversification process accelerated Over the past three years, we have invested in diversifying our offering. This year was pivotal in this regard. We helped customers in more ways than ever before with their asset finance and commercial lending, as well as home, life, and content insurance needs. We expanded our financial planning franchise network and our investment in the Help Me Choose (HMC) business showed growth, moving into profit for the first full year. Financial Planning business is on track We are pleased to report that our investment in Mortgage Choice Financial Planning is tracking better than initially forecast in August 2012. We project that we will spend $2.5 million to move this business to profitability, against an original forecast of $3 million and we still forecast to turn a profit on a monthly basis during the next financial year. Our business plan of 60 advisers on the ground by 30 June 2015 is on target, with 33 in place at time of writing – up from 11 last year. Directors’ Report 7 n r u t e r r e d l o h e r a h s l a t o T DIRECTORS’ REPORT continued Mortgage Choice franchisees added another dimension to their business by either investing in a Mortgage Choice Financial Planning franchise or developing a referral relationship with an adviser located in another franchisee’s office. We have added to the variety of ways we can best serve each customer while assisting our franchisees to build sustainable businesses for the future and add to corporate profits. Help Me Choose is profitable and growing The Help Me Choose (HMC) business is now profitable and growing in line with expectations. HMC has expanded its call centre operations to gain the scale needed to operate effectively in this market, taking our numbers from 12 in June last year to 40 at the time of writing this report. Mortgage Choice is also taking advantage of the larger HMC call centre team to boost our outbound call centre capacity during seasonally quieter times. Laid strong operational foundations for future success We undertook several important initiatives this year to lay the foundations for future success. In particular, we prepared for the July 2014 roll-out of our new brand and initiated a program to transform our core IT platforms (Project One), and refocused our attention with the divestment of LoanKit. Evolved brand reflects the new Mortgage Choice During the year we prepared to launch our evolved brand strategy, the articulation of our purpose internally and how we will reflect it externally. We worked from the inside out to create a holistic brand blueprint and began roll-out in July 2014. The brand blueprint defines our purpose, what we do, why we do it and our customer promise. It reflects our desire to always do the right thing by our customers and to help them live an abundant life – to achieve a great standard of living as well as a great standard of life. The blueprint provides the Mortgage Choice team (staff and franchisees) with a set of service standards to guide them in the delivery of amazing customer experiences. Each individual team member will go through immersion workshops or sales training to deepen their understanding of our service standards. The standards will also form part of our new reward and recognition programs and key performance indicators. Our customer promise will be demonstrated in everything we do and say. Our visual identity and communications strategy is being overhauled, starting with the new logo we launched in July. With the transition of the business well and truly underway, now it is time to transition the brand and communicate to Australians that we do more than what we are traditionally known for. Introduction of new broker software platform We initiated the replacement of our core broker platform with the launch of Project One. Project One will implement an enterprise- wide, trusted, off-the-shelf CRM platform as well as an industry leading broker front end. They will combine to provide our franchisees a web-based platform with functionality to improve their processes as well as the customer experience. We have selected off-the-shelf solutions to reduce the risks and roll-out time. We recognise that large IT projects often deliver late and short of the mark. To combat this problem, we have included professional project managers and change management specialists on our team to ensure the integration is completed on time, on budget and in line with our new service standards. Project One is expected to roll-out in 2016. Divestment of the LoanKit business During the year we divested LoanKit to refocus on our remaining business units. On 30 September 2013, Mortgage Choice sold 100 per cent of the issued shares in Beagle Finance Pty Limited, owner of the LoanKit mortgage brokerage aggregation business. Strategic focus for 2015 All in all, FY14 has been a strong year for our business and pivotal in our transition toward becoming a diversified retail financial services player. During the next year we will continue to focus our energies on growing the business as a whole – focusing on our core mortgage broking business as well as our diversified ventures. We will achieve this by growing our franchise, loan writer and adviser numbers while delivering two foundational projects – the new brand strategy and Project One. Significant changes in the state of affairs Except for the matters disclosed in the Review of Operations section of this annual report, there have been no significant changes in the state of affairs of the Group. 8 Directors’ Report for the year ended 30 June 2014 DIRECTORS’ REPORT continued Matters subsequent to the end of the financial year No matters or circumstances have arisen since 30 June 2014 that have significantly affected, or may significantly affect: (a) the Group’s operations in future financial years, (b) the results of those operations in future financial years, or (c) the Group’s state of affairs in future financial years. Likely developments and expected results of operations Information on likely development in the operations of the Group and the expected results of operations have not been included in this report because the Directors believe it would likely result in unreasonable prejudice to the Group. Environmental regulation The Group is not subject to any significant environmental regulation under a law of the Commonwealth or of a State or Territory in respect of its activities. Information on Directors Peter Ritchie AO, Hon.DBus, BCom, FCPA Independent Non-Executive Chairman Chairman of nomination and remuneration committees Peter is Deputy Chairman of Seven Group Holdings Limited and Chairman of Reverse Corp Limited. He previously served as Managing Director of McDonald’s Australia from 1974 to 1995 and as its Chairman from 1995 to 2001. Peter was a Director of Westpac Banking Corporation from 1993 to 2002 and Solution 6 Holdings from 2000 to 2002. Age 72. Sean Clancy FAICD Independent Non-Executive Director Member of audit and remuneration committees Peter Higgins Non-Executive Director Member of audit committee Rodney Higgins Non-Executive Director Member of nomination and remuneration committees Steve Jermyn FCPA Independent Non-Executive Director Chairman of audit committee With a sales and marketing background across many industries including banking, fast moving consumer goods, liquor, pharmacy, consumer electronics, telecommunications and hardware, Sean brings a diverse range of knowledge and expertise to the Mortgage Choice Board. He is also on the Advisory Board of the Port Adelaide Football Club and a Director and Chief Executive Officer of Transfusion Ltd, Chairman and Non-Executive Director of Metropolis Inc. and Ambassador to Business Events Sydney. Age 54. Peter is co-founder of Mortgage Choice. He also is a Director of Technology Company Power & Data Corporation Pty Ltd, trading as Mainlinepower.com. Having been successfully self-employed for over 30 years, Peter is an investor in a diverse number of industries covering manufacturing, agriculture, technology, property and finance. Age 54. Rodney is co-founder of Mortgage Choice. With a background in residential and commercial property, sales and leasing, he has been a Director of companies involved in manufacturing, wholesaling, importing, retailing and finance. Age 59. Steve joined McDonald’s Australia in 1984 and joined the Board of Directors in 1986. In June 1999, he was appointed Deputy Managing Director. Steve has been involved in all aspects of the development of the McDonald’s restaurant business in Australia and brings with him significant experience in the development of new business and franchising. He retired from McDonald’s Australia in 2005. Steve is also a Director of Reverse Corp Limited. Age 65. Deborah Ralston PhD, FAICD, SFFin, FCPA Independent Non-Executive Director Member of audit committee and Chairman of the Mortgage Choice Financial Planning investment committee Deborah is Executive Director of the Australian Centre for Financial Studies and Professor of Finance at Monash University. She was formerly Pro Vice Chancellor at the University of Canberra and has also been Director of the Centre for Australian Financial Institutions at the University of Southern Queensland. Deborah is a former Director of Heritage Building Society. Age 61. Directors’ Report 9 for the year ended 30 June 2014 DIRECTORS’ REPORT continued The table below sets out the Directors’ interests at 30 June 2014: Director P D Ritchie S J Clancy P G Higgins R G Higgins S C Jermyn D E Ralston Particulars of Directors’ interests in share and options 390,125 ordinary shares 50,000 ordinary shares 652,939 ordinary shares 15,296,215 ordinary shares 2,000,000 ordinary shares 125,000 ordinary shares Company Secretary The Company Secretary is Mr David M Hoskins BCom, CPA, CSA. Mr Hoskins was appointed to the position of Company Secretary in 2000. Before joining Mortgage Choice he had experience in a variety of accounting and company secretarial functions, primarily in the finance and insurance industries. Meetings of Directors The numbers of meetings of the Company’s Board of Directors and of each board committee held during the year ended 30 June 2014, and the numbers of meetings attended by each Director were: Full meetings of Directors Meetings of committees P D Ritchie S J Clancy P G Higgins R G Higgins S C Jermyn D E Ralston A 6 6 7 7 7 7 B 7 7 7 7 7 7 A * 2 3 * 3 3 Audit Nomination Remuneration B * 3 3 * 3 3 A – * * – * * B – * * – * * A 2 2 * 2 * * B 2 2 * 2 * * A = Number of meetings attended B = Number of meetings held * = Not a member of the relevant committee Retirement, election and continuation in the office of Directors In accordance with the Constitution, Rodney Higgins and Deborah Ralston retire by rotation and, being eligible, offer themselves for re-election. Remuneration report The Directors are pleased to present the 2014 remuneration report which sets out remuneration information for the Company’s Non-Executive Directors, Chief Executive Officer and other key management personnel (collectively KMP). The report contains the following sections: a) Chairman’s introduction b) Directors and executive key management personnel disclosed in this report c) Remuneration governance d) Remuneration consultants e) Executive remuneration policy and framework f) Relationship between remuneration and Mortgage Choice Limited’s performance g) Non-Executive Director remuneration policy h) Executive remuneration received during FY14 i) Statutory details of remuneration j) Service agreements k) Details of share-based compensation and bonuses l) Key management personnel equity holdings 10 Directors’ Report for the year ended 30 June 2014 DIRECTORS’ REPORT continued A) Chairman’s introduction As Mortgage Choice continues to evolve, so does our executive remuneration. So, prior to detailing remuneration, this introduction highlights aspects of our executive remuneration that ensures alignment with shareholder interests, and a refinement applied to CEO remuneration in FY14. Base remuneration retains a deferred component, paid in shares. This aligns a part of base remuneration with shareholders, and encourages executive retention. Since the GFC shares have been provided specifically as a retention payment. However, as the company has grown and the benefits of this policy in terms of shareholder alignment have become more proven and tested, we have decided to integrate deferred shares as a permanent part of an executive’s fixed remuneration. In response to shareholder feedback, we reintroduced a performance contingent long-term incentive (LTI) plan in FY12 following the tumultuous financial years of FY10 and FY11 in the midst of the GFC. Performance shares vest based on either relative total shareholder return (TSR) or cash EPS growth performance. The performance range is sufficiently broad to ensure that total remuneration increases in accord with good performance, and reduces if performance does not meet expectations. This has served us well and will be retained in its current form. During FY14, the Board increased the CEO’s remuneration appropriate to the growth in Company value. The increase was both in base remuneration and incentive opportunity. The increase in base remuneration is received almost entirely as deferred shares. The payment in deferred shares is consistent with our previous practice, although this year we specifically recognised it as an integral part of fixed remuneration rather than as a separate element. The increase in the CEO’s incentive opportunity permitted the introduction of additional LTI tranches specifically focused on a scorecard measuring success in the operational rollout of our strategy. The value of dividends is only included to the extent that LTI performance rights vest. Lastly, to ensure that the CEO builds and maintains a sound legacy, there is provision for the LTI to remain on foot, and be tested at the end of the performance period, in the event he leaves the company in good circumstances and by mutual agreement. The remainder of this executive report provides more detail. B) Directors and executive key management personnel disclosed in this report Name Directors Peter D Ritchie Sean J Clancy Peter G Higgins Rodney G Higgins Stephen C Jermyn Deborah E Ralston Other key management personnel Michael I Russell Susan R Mitchell Neill C Rose-Innes Andrew J Russell Melissa J McCarney Position Non-Executive Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Chief Executive Officer Chief Financial Officer General Manager, Operations General Manager, Product and Distribution General Manager, Group Marketing Simon C Dehne (to 31 December 2013) CEO of LoanKit C) Remuneration Governance The Board Remuneration Committee has primary responsibility for remuneration governance. The Committee consists of three Non-Executive Directors – Sean Clancy (independent), Rodney Higgins and Peter Ritchie (independent chair). The Remuneration Committee makes recommendations to the Board on: • Non-Executive Director fees; • • remuneration levels of the Chief Executive Officer; and the over-arching executive remuneration framework and operation of the incentive plan. Directors’ Report 11 for the year ended 30 June 2014 DIRECTORS’ REPORT continued The Committee’s objective is to ensure that remuneration policies and structures are fair, attract and retain executives and directors with the requisite experience and knowledge, and aligned with the long-term interests of the Company. In doing this, the Remuneration Committee seeks advice from independent remuneration consultants (see below). The Corporate Governance Statement provides further information on the role of this committee. D) Remuneration consultants During the year ending 30 June 2014, the Company’s Remuneration Committee employed the services of Guerdon Associates to review its existing remuneration policies, provide market data, advise in respect of short-term and long-term incentive plan design, conduct TSR performance testing, research TSR performance peer constituents, provide independent equity valuation, and assist with incentive plan documentation and implementation. Under the terms of the engagement, Guerdon Associates was paid $43,898 for these services. Guerdon Associates was not engaged to provide any services to management and has confirmed that its services were provided free from undue influence by members of the Group’s key management personnel. The following arrangements were made to ensure that the remuneration recommendations were free from undue influence: • Guerdon Associates was engaged by, and reported directly to, the chair of the Remuneration Committee; • • • The agreement for the provision of remuneration consulting services was executed by the chair of the Remuneration Committee under delegated authority of the Board; The report containing remuneration recommendations was provided by Guerdon Associates directly to the chair of the Remuneration Committee; and Guerdon Associates was permitted to speak to management throughout the engagement to understand company processes, practices and other business issues and obtain management perspectives. As a consequence, the Board is satisfied that the recommendations were made free from undue influence from any members of the key management personnel. E) Executive remuneration policy and framework In determining executive remuneration, the Board aims to ensure that remuneration practices are: • • • • fair and reasonable, enabling the company to attract and retain key skills and experience; aligned to the company’s strategic and business objectives and the creation of shareholder value; transparent, and acceptable to shareholders. The executive remuneration framework has three components: • base remuneration including salary, non-cash benefits, superannuation and deferred shares; • • short-term performance incentive (STI), and long-term incentive (LTI). The proportions of these components, assuming the maximum incentive components are paid in the remuneration mix, are tabulated below. Table 1: Executive KMP remuneration mix Position Chief Executive Officer Other KMP executives Base remuneration Maximum STI Maximum LTI 42% 68% 14% 19% 44% 13% The remuneration policies described below apply to KMP ‘executives’. Base remuneration An executive’s base remuneration comprises a fixed cash salary and superannuation limited to the maximum super contribution base. Executives have an opportunity to salary sacrifice amounts from their fixed salary towards additional superannuation and a series of prescribed benefits plus any associated fringe benefits tax. In addition, executives receive deferred shares that are held in trust and vest in three equal tranches contingent on continued service of 1, 2 and 3 years, respectively. While originally these deferred shares were a retention incentive in the wake of the GFC, conservative levels of salary, company growth, and 12 Directors’ Report for the year ended 30 June 2014 DIRECTORS’ REPORT continued shareholder alignment advantages have permitted them to be retained and integrated into base remuneration. Base remuneration is reviewed annually against external benchmarks to ensure it remains appropriate relative to the market. Although base remuneration adjustments may be made after comparison to external benchmarks, or on promotion, there are no guaranteed base remuneration increases in any executive contracts. Short-term performance incentives Prior to any short-term incentive (STI) payment being considered, the Group must achieve its profit gateway for the year. Should the Group achieve the profit gateway target set by the Board each year, an STI funding pool is made available for allocation during the annual review. Any amounts awarded as STI are payable in cash following the signing of the annual report each year. Requiring a minimum profit hurdle to be achieved before any STI payments are made ensures additional reward is available only when value has been created for shareholders and when this value has been achieved in a manner consistent with the business plan. Each executive position has a maximum level of STI opportunity. Once the required profit gateway is achieved, STI for individual executives is primarily based on an assessment of key performance indicators (“KPIs”). KPIs are related to the accountabilities of the position and its impact on the organisation’s or business unit’s performance. Each executive is accountable for a unique set of KPIs which specify operational targets for the Company to achieve its annual agreed profit target and business strategy. KPIs include such targets as growth in the franchise network, volume of settlements, the number of group office leads as well as the completion of assigned projects. These KPIs are set and assessed annually for the CEO by the Board and for other executives by the CEO. With the exception of the CEO, the executives may also have additional factors, such as their contribution to the targets of others or the achievement of new initiatives introduced during the year, as well as the achievement of their KPIs taken into consideration in determining the final level of their STI award. For executives, the maximum STI opportunity is 52% of cash salary for the CEO and between 25% and 32% of cash salary for other executives. From time to time, bonuses may be paid outside this structure in relation to special projects or in special circumstances. No such special bonuses were paid in the period covered by this report. A summary of the short-term incentive is provided in Table 2, below: Table 2: Short term incentive plan summary Eligibility Performance period Performance assessment finalised Payments made Eligibility requirements for payment CEO and other KMP executives 1 July 2013 – 30 June 2014 Post audit 31 August • In continuous service to 1 July following the end of the financial year unless terminated in the event of death, disability or redundancy • Company meets gateway profit requirement • Individual meets minimum performance requirements on specified key performance indicator (KPI) requirements Financial gate prior to any payment Agreed profit target Individual assessment Financial and operational KPIs KPIs set by reference to budget and strategic plan KPIs vary by individual Payment vehicle Deferral period Maximum opportunity as a proportion of cash salary Cash None CEO: 52% Other executives: 25% to 32% Option for discretion? Yes In FY14 Mortgage Choice recorded its highest cash profit, significantly exceeding the agreed profit target gateway. As a result, the CEO achieved his target and received 100% of his STI payment. In consideration of record profits, strong performance against KPIs and the contribution of the remaining executives to the targets of others, the remaining executives received the maximum STI award this year. Long-term incentive (LTI) This section describes the LTI plan in which the CEO and KMP executives have been eligible to participate from FY14. The LTI plan is a performance contingent payment for achieving specified performance outcomes measured over a three-year performance period. Directors’ Report 13 for the year ended 30 June 2014 DIRECTORS’ REPORT continued Two independent performance measures are used in the LTI plan – total shareholder return (TSR) relative to a comparison group and cash earnings per share (EPS) growth. Each performance measure determines 50% of the LTI reward. TSR is the percentage increase in the Company’s share price plus reinvested dividends, expressed as a percentage of the initial investment, and reflect the increase in value delivered to shareholders over the performance period. The relative TSR comparison group is comprised of companies within the ASX Financials sector with a market capitalisation between $40 million and $1 billion as at 31 August 2013, excluding Real Estate Investment Trusts. Consistent with the Company’s remuneration philosophy, the vesting scale encompasses a performance window that is wider than the performance ranges adopted by other companies, with vesting beginning at 40th percentile relative TSR performance, and maximum vesting occurring at 90th percentile relative TSR performance. Cash EPS growth is based on the cash result as presented to the market and stated in the notes of the Company’s audited statutory accounts and the average number of ordinary shares on issue during the performance period. Cash profits are calculated by adjusting audited statutory profits for trail commission recognised on a net present value basis and performance shares expense. Performance requirements are expressed in terms of a compound annual growth (CAGR) requirement. The cash EPS growth requirement is consistent with our remuneration philosophy and strategic plan, and recognises that growth will be moderate given the Board’s relatively high dividend payout policy. The threshold to maximum performance range for vesting of LTI is 2% to 5% cash EPS growth. The remuneration vesting on attaining threshold performance is 35% of the maximum. This is less than market standards, reflecting our remuneration philosophy and the Board’s requirement that “cliff” vesting of reward be minimised to reduce the prospect of excessive risk taking as the threshold performance level for remuneration vesting is approached. Additional LTI vests on a pro-rata basis as performance increases until 100% is reached at the specified maximum performance level. Payment is made in performance shares under the Performance Share Plan (PSP), which are granted at the beginning of the performance period and vest subject to performance assessment and the vesting criteria at the end of the performance period. Performance shares are held in trust and may be new issue shares or purchased on market. Dividends on unvested performance shares are distributed to participants. The use of performance shares and dividends is intended to align the interests of executives with shareholders. The payment of dividends on unvested shares is considered appropriate given that: dividends vary with profitability, and so enhance executive focus on profit growth; paying dividends is a tax effective form of remuneration, as they include franking credits; and the overall levels of executive remuneration are conservative. Executives will forfeit unvested LTI on cessation of employment with the Company unless the cessation results from death, redundancy, disablement or other exceptional circumstances, in which case, current LTI grants may remain on foot and subject to testing at the end of the performance period at the discretion of the Board. Executives are prohibited from entering into any hedging (or risk reduction) arrangements in relation to LTI plan performance shares or performance rights. CEO Performance Rights LTI Plan In addition to the LTI plan elements described above, the CEO is also eligible to receive performance rights under the Share Rights Plan (SRP) subject to additional three-year performance requirements. FY14 was the first year that these performance rights were granted. A performance right is a right to one Mortgage Choice share, plus the number of shares that would have resulted from reinvestment of dividends during the performance period on the shares acquired on vesting of the rights, or these shares equivalent in cash value at the absolute discretion of the Company. No dividends are paid on unvested rights during the performance period, or on rights that do not vest. The shares required for the CEO’s performance rights LTI plan might be sourced on market, from new issue shares, or from shares held by the trustee of the PSP. Treatment on cessation and hedging rules are the same as for the performance share LTI plan. The performance conditions for the CEO’s performance rights LTI plan are in the form of a balanced scorecard, with four primary objectives that directly reflect the operational application of the strategic plan set and approved by the Board. Achievement is measured against quantitative threshold, target and stretch measures, with a maximum of 25% of the rights vesting in accordance with performance against each independent requirement on a sliding scale. The four primary strategic plan objectives focus the CEO on the transition of Mortgage Choice to a retail diversified financial services provider without sacrificing growth in the core broking business. Diversification objectives include the expansion of the adviser count in the financial planning network as well as targeted growth in diversified revenue. Objectives also target growth in profits of the mortgage broking business and the Group as a whole. Actual requirements remain commercially sensitive during the performance period but will be disclosed in full at the end of the period. 14 Directors’ Report for the year ended 30 June 2014 DIRECTORS’ REPORT continued A summary of FY14 LTI plans is shown in Table 3, below: Table 3: Long term incentive plan summary Eligibility Performance period Frequency of grants CEO and other KMP executives 1 July in year 1 – 30 June in year 3 Annual Performance assessment finalised Post audit Vesting date 1 September Eligibility requirements for vesting 1. In continuous service unless considered a good leaver (i.e. in the event of death, disability, redundancy or other exceptional circumstances) Performance requirements Performance shares (CEO and other KMP executives): 2. Meets minimum performance requirements 1. TSR relative to ASX Financials companies with a market capitalisation between $40 million and $1 billion at 31 August 2013, with specific companies in the peer group being Perpetual Ltd, SFG Australia Ltd, FKP Property Group, Peet Ltd, NIB Holdings Ltd, Magellan Financial Group Ltd, FlexiGroup Ltd, Cedar Woods Properties Ltd, BT Investment Management Ltd, Finbar Group Ltd, United Overseas Australia Ltd, ClearView Wealth Ltd, Austbrokers Holdings Ltd. Euroz Ltd, MyState Ltd, The Trust Co Ltd, Servcorp Ltd, IMF Australia Ltd, Wide Bay Australia Ltd, Bell Financial Group Ltd, Forest Place Group Ltd, Sunland Group Ltd, Countplus Ltd, RHG Ltd, Equity Trustees Ltd, Devine Ltd, K2 Asset Management Holdings Ltd, Hunter Hall International Ltd, AVJennings Ltd, Payce Consolidated Ltd, HFA Holdings Ltd, Treasury Group Ltd, Phileo Australia Ltd, Homeloans Ltd, CIC Australia Ltd, Ozgrowth Ltd, ThinkSmart Ltd, Lifestyle Communities Ltd, InvestorFirst Ltd, Centrepoint Alliance Ltd, ASF Group Ltd, Plan B Group Holdings. The threshold performance is the 40th percentile, and maximum performance is the 90th percentile. 2. Cash EPS growth on a compound annual growth basis with target performance consistent with strategic plan For both tranches: Threshold performance: 35% vests Maximum: 100% vests Prorated vesting between threshold and maximum Performance rights (CEO only): 1. 2. 3. Growth in financial planning network Growth in diversified revenues Profit growth in Mortgage Choice’s core broking business profit 4. Profit growth for the Group Each requirement can result in a maximum of 25% of the rights vesting, with target performance consistent with strategic plan Performance shares (CEO and other KMP executives) are shares inclusive of dividends, held in trust. Performance rights (CEO only) are rights to shares or their cash equivalent, with the number of shares including shares that would have resulted from dividend reinvestment during the vesting period. Performance shares (CEO and other KMP executives) Value of LTI divided by the volume weighted average price of shares over the 5 days prior to the grant. Performance rights (CEO only) number of shares determined by the Remuneration Committee and the Board Payment vehicle Method to determine number of share or rights to grant Hedging of unvested shares or rights Not permitted Maximum opportunity as a proportion of cash salary Performance shares: CEO 50%, Other executives 25 to 30%; Performance rights: (CEO only) number of shares determined by the Remuneration Committee and the Board Option for Board discretion? Yes Directors’ Report 15 for the year ended 30 June 2014 Settlements trend $m 1,000 950 900 850 800 750 DIRECTORS’ REPORT continued 700 650 600 550 500 2 1 ‘ 2 1 ‘ 2 1 ‘ 2 1 ‘ 2 1 ‘ 2 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ 3 1 ‘ l u J Legacy equity grants Legacy equity grants to executives from prior years that are still outstanding as at the end of the financial year, or that have vested or partially vested during the financial year, are described in section (k). y a M y a M v o N v o N r a M r a M g u A g u A c e D c e D p e S p e S r p A r p A b e F b e F n u J n u J t c O t c O n a J n a J u J l 4 1 ‘ 4 1 ‘ 4 1 ‘ 4 1 ‘ 4 1 ‘ 4 1 ‘ F) Relationship between remuneration and Mortgage Choice Limited’s performance Payments made under the STI plan are conditional upon the Company achieving a pre-determined profit target. A component of the grants made under PSP in FY12, FY13 and FY14 is conditional on cash EPS growth. The following table lists Mortgage Choice Limited’s cash earnings per share (EPS): Mortgage Choice residential loan book ($000) Year 2010 2011 2012 2013 2014 Year 2010 2011 2012 2013 2014 7 9 1 , 1 1 0 , 7 4 Cash EPS (cents per share) 6 4 4 , 9 9 2 , 3 4 9 7 8 , 2 6 1 , 1 4 2 4 1 , 6 7 0 9 3 , 5 4 4 , 3 3 0 6 3 , , 0 7 8 8 6 2 , 3 3 5 6 1 , 1 8 9 4 4 12.4 , 13.3 12.5 12.9 16.2 1 4 4 , 4 4 6 9 2 , , 0 3 0 6 9 6 , 5 2 A component of grants made under PSP in FY12, FY13 and FY14 is conditional on the total shareholder return (TSR) of the Company over a three-year period as compared to the TSRs of comparator groups of companies. TSR is the percentage increase in the Company’s share price plus reinvested dividends and reflects the increase in value delivered to shareholders over the period. 3 1 9 , 3 9 6 , 1 2 The following table shows the Company’s TSR expressed as a percentage of the opening value of the investment for each period: 0 1 3 , 8 8 6 , 7 1 8 8 5 , 6 7 0 , 3 1 7 4 8 , 3 2 5 , 9 , 2 5 4 9 3 8 6 , 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Financial year TSR 24% 21% 14% 79% 41% The figure below illustrates and compares the Company’s TSR performance with the ASX 200 index return performance for the five-year period to 30 June 2014. Mortgage Choice TSR compared to S&P/ASX 200 index return n r u t e r r e d l o h e r a h s l a t o T 400% 350% 300% 250% 200% 150% 100% 50% 000 2009 2010 2011 2012 2013 2014 Mortgage Choice S&P /ASX 200 Source: Guerdon Associates 16 Directors’ Report for the year ended 30 June 2014 DIRECTORS’ REPORT continued G) Non-Executive Director remuneration policy Shareholders set the maximum aggregate remuneration of the Board (excluding the Managing Director and any Executive Director) at $750,000 at the General Meeting on 5 April 2004. Fees paid to the Chairman and the Non-Executive Directors take into account the demands made on, and the responsibilities of, the Directors. The Chairman and other Non-Executive Directors do not receive any short-term cash incentives or share-based payments; nor do they receive additional payments for representation on Board committees, other than the chairman of the Mortgage Choice Financial Planning Pty Ltd Investment Committee. Non-Executive Directors do not receive retirement allowances. Superannuation contributions, as required under the Australian superannuation guarantee legislation, are paid on Non-Executive Directors’ remuneration and are included in the fees below. The Board reviews fees periodically. There have been no changes to fee policy since the last disclosure period. The policy based Non-Executive Director fee for the year was $75,000. The policy based chairman base fee was $125,000. The policy based fee for the chair of the Mortgage Choice Financial Planning Pty Ltd Investment committee was $37,500. Mandated superannuation contributions are in addition to these base board fees. H) Executive remuneration received during FY14 The table below shows the ’realised remuneration’ that executives received in relation to FY14. These amounts will differ from the statutory tables beginning on the next page which are prepared in accordance with the Corporations Act and Australian Accounting Standards, and which, as a general principle, value shares based payments based on the value at the time of grant and do not reflect actual vesting outcomes. In the table below, the total cash payments received are made up of base remuneration consisting of cash salary and superannuation. Deferred shares vesting in FY14 include all deferred shares offered from FY12 onwards that vested during the year. STI represents cash STI paid in respect of FY14 and the LTI column represents LTI grants from FY10 and FY11 that vested in FY14. Share based remuneration is stated at the value at the vesting date. Name M I Russell, CEO S R Mitchell N C Rose-Innes A J Russell M J McCarney S C Dehne * (from 1/7/13 to 31/12/13) Cash Salary and Superannuation $ 580,570 314,913 287,775 287,775 237,775 Base Remuneration Deferred Shares vesting FY14 $ 366,047 26,690 23,360 22,875 – STI STI $ 292,653 95,084 86,400 86,400 55,000 LTI Past Awards vesting FY14 $ 383,638 108,447 99,486 – – Total Remuneration $ 1,622,909 545,135 497,021 397,050 292,775 109,250 12,195 – 90,843 212,288 * S C Dehne departed the company due to the sale of the LoanKit business 30 September 2013. As the circumstances of his departure met the criteria of “special circumstances” under the Performance Share Plan rules, the Board exercised its discretion and allowed the vesting of his future tenure based shares, the remaining shares were forfeited. Share based remuneration above is stated at share price at the vesting date. From the date of grant the Mortgage Choice share price has increased markedly increasing executive remuneration in line with the increase in shareholder value over the period. The additional remuneration related to the increase in share price from the date of grant to the vesting date is shown below. Name M I Russell, CEO S R Mitchell N C Rose-Innes A J Russell M J McCarney S C Dehne (from 1/7/13 to 31/12/13) Increase in Remuneration from Share Price Appreciation $ 274,047 65,507 59,510 9,419 – 52,104 Directors’ Report 17 for the year ended 30 June 2014 DIRECTORS’ REPORT continued Details of remuneration The following tables detail remuneration received for the 2013 and 2014 financial years by the Directors and other key management personnel in place during the year ending 30 June 2014. 2014 Name Short-term benefits Non- monetary benefits $ STI $ Cash salary $ Post- employment benefits Long-term benefits Super- annuation $ Long service leave $ Share-based payments Termination benefits $ Performance Shares $ Total $ Non-Executive Directors P D Ritchie Chairman S J Clancy P G Higgins R G Higgins S C Jermyn D E Ralston Chairman of MCFP Investment Committee 125,000 75,000 75,000 75,000 75,000 112,500 Other key management personnel: – – – – – – – – – – – – 578,530 294,645 271,196 271,552 227,653 292,653 26,632 95,084 86,400 86,400 55,000 280 20,243 17,574 280 M I Russell, CEO S R Mitchell N C Rose-Innes A J Russell M J McCarney S C Dehne * (from 1/7/13 to 31/12/13) 11,562 6,938 6,938 6,938 6,938 10,406 17,775 17,775 17,775 17,775 17,775 – – – – – – 9,209 4,962 6,243 2,823 518 – – – – – – – – – – – – – – – – – – 136,562 81,938 81,938 81,938 81,938 122,906 741,021 1,665,820 93,133 82,397 72,742 17,331 513,105 484,254 468,866 318,557 (6,285) 105,802 107,825 – – 8,887 (4,625) * S C Dehne departed the company due to the sale of the LoanKit business 30 September 2013. As the circumstances of his departure met the criteria of “special circumstances” under the Performance Share Plan rules, the Board exercised its discretion and allowed the vesting of his tenure based shares, the remaining shares were forfeited. 18 Directors’ Report for the year ended 30 June 2014 DIRECTORS’ REPORT continued 2013 Short-term benefits Post- employment benefits Long-term benefits Share-based payments Cash salary $ Non- monetary benefits $ STI $ Super- annuation $ Long service leave $ Termination benefits $ Performance Shares $ Total $ Name Non-Executive Directors P D Ritchie Chairman S J Clancy P G Higgins R G Higgins S C Jermyn D E Ralston 125,000 75,000 75,000 75,000 75,000 75,000 – – – – – – Other key management personnel: M I Russell, CEO 553,883 286,915 274,561 245,852 261,433 202,108 93,220 81,600 81,600 49,904 S R Mitchell N C Rose-Innes A J Russell S C Dehne M J McCarney (from 25/3/13 to 30/6/13) – – – – – – 28,638 15,283 289 14,104 – 11,250 6,750 6,750 6,750 6,750 6,750 16,470 16,470 16,470 16,470 16,470 – – – – – – 18,178 10,007 14,458 2,598 4,625 – – – – – – – – – – – – – – – – – – 136,250 81,750 81,750 81,750 81,750 81,750 277,677 1,181,761 84,751 74,725 48,623 37,029 494,302 433,394 424,829 310,136 – 86,199 60,732 20,000 289 5,178 – The relative proportions of remuneration that are linked to fixed remuneration and performance based criteria are as follows: Name Fixed/ service based remuneration At risk/performance based remuneration Salary, super and fringe benefits Share Based Total STI LTI (Equity based) Other key management personnel of Group M I Russell S R Mitchell N C Rose-Innes A J Russell M J McCarney S C Dehne 37% 63% 65% 66% 78% 106% 21% 7% 7% 5% 2% 12% 58% 70% 72% 71% 80% 118% 18% 19% 18% 18% 7% – 24% 11% 10% 11% 3% -18% Total 42% 30% 28% 29% 20% -18% Directors’ Report 19 for the year ended 30 June 2014 DIRECTORS’ REPORT continued I) Details of share-based remuneration The terms and conditions of each offer of performance shares affecting remuneration in this or future reporting periods are as follows: Grant date 9 December 2009 20 September 2010 20 September 2010 16 February 2012 16 February 2012 16 February 2012 16 February 2012 14 September 2012 14 September 2012 14 September 2012 14 September 2012 14 September 2012 23 September 2013 23 September 2013 23 September 2013 23 September 2013 23 September 2013 Vesting date 31 August 2013 3 September 2013 3 September 2014 13 September 2013 12 September 2014 12 September 2014 12 September 2014 13 September 2013 12 September 2014 14 September 2015 14 September 2015 14 September 2015 12 September 2014 14 September 2015 14 September 2016 14 September 2016 14 September 2016 Value per performance share at grant date* $1.24 $1.17 $1.19 $1.26 $1.26 $1.26 $0.78 $1.74 $1.74 $1.74 $1.74 $1.08 $2.77 $2.77 $2.77 $2.77 $1.68 Performance achieved service based service based % Vested 100% 100% service based to be determined service based 100% service based to be determined to be determined to be determined to be determined to be determined service based 100% service based to be determined service based to be determined to be determined to be determined to be determined to be determined service based to be determined service based to be determined service based to be determined to be determined to be determined to be determined to be determined * The value at grant date calculated in accordance with AASB 2 Share-based Payments of shares granted during the year as part of remuneration. The terms and conditions of each offer of share rights affecting remuneration in this or future reporting periods are as follows: Grant date 24 August 2013 24 August 2013 Vesting date 30 June 2014 30 June 2016 Value per share right at grant date* $2.50 $2.50 Performance achieved service based % Vested 100% to be determined to be determined * The value at grant date calculated in accordance with AASB 2 Share-based Payments of shares granted during the year as part of remuneration. 20 Directors’ Report for the year ended 30 June 2014 DIRECTORS’ REPORT continued Details of performance shares in the Company provided as remuneration to other key management personnel are set out below. Further information on the performance shares is set out in note 31 to the financial statements. Number of performance shares granted during the year Value of performance shares at grant date* Number of performance shares vested during the year Number of performance shares lapsed during the year Value at lapse date** Name Other key management personnel M I Russell S R Mitchell N C Rose-Innes A J Russell M J McCarney S C Dehne 116,570 36,930 33,560 33,560 22,780 – 275,750 87,200 79,244 79,244 53,792 – 193,039 55,607 50,564 9,006 – 23,067 – – – – – – – – – – 59,560 170,937 * The value at grant date calculated in accordance with AASB 2 Share-based Payments of shares granted during the year as part of remuneration. ** The value at lapse date of performance shares that lapsed during the year because a vesting condition was not satisfied is calculated assuming the performance conditions were satisfied. Details of share rights provided as remuneration to the CEO are set out below. Further information on the share rights is set out in note 31 to the financial statements. Name M I Russell – initial grant Number of share rights granted during the year Value of share rights at grant date* Number of share rights vested during the year Number of share rights lapsed during the year Value at lapse date 375,000 937,500 93,750 – – * The value at grant date calculated in accordance with AASB 2 Share-based Payments of shares granted during the year as part of remuneration. The assessed fair value at grant date of performance shares granted to individuals is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. The fair value of market based conditions at grant date are independently determined using a Monte Carlo simulation model utilising a lattice-based trinomial valuation method that takes into account the term of the performance shares, the vesting criteria, the exercise price (zero), the expected price volatility of the underlying share, the expected dividend yield (acknowledging that dividends will be paid to participants from the date of grant) and the risk free interest rate for the term of the performance shares. Directors’ Report 21 for the year ended 30 June 2014 DIRECTORS’ REPORT continued Shares provided on vesting of performance share and share right entitlements Details of shares issued by the Company as a result of the vesting of performance share entitlements during the year ended 30 June 2014 are set out below: Name Other key management personnel M I Russell M I Russell M I Russell S R Mitchell S R Mitchell S R Mitchell N C Rose-Innes N C Rose-Innes N C Rose-Innes A J Russell S C Dehne S C Dehne S C Dehne Number of ordinary shares issued on vesting of share rights Value at vesting date* Vesting date 31 August 2013 3 September 2013 13 September 2013 31 August 2013 3 September 2013 13 September 2013 31 August 2013 3 September 2013 13 September 2013 13 September 2013 31 August 2013 3 September 2013 13 September 2013 79,750 79,767 33,522 20,816 24,283 10,508 20,684 20,683 9,197 9,006 9,016 9,250 4,801 192,198 191,441 85,146 50,166 58,279 26,690 49,849 49,639 23,360 22,875 21,728 22,200 12,195 * The value at vesting date of shares that were granted as part of remuneration and vested during the year is the closing market price on the day of vesting. Details of shares issued after the reporting date, but before the date of this report, as a result of the vesting of share rights entitlements during the year ended 30 June 2014 are set out below: Name Vesting date Other key management personnel Number of ordinary shares to be issued on vesting of share rights Value at vesting date* M I Russell 30 June 2014 98,909 280,902 * The value at vesting date of shares that were granted as part of remuneration and vested during the year is the closing market price on the day of vesting Details of remuneration: cash STIs and share based remuneration For each cash STI and grant of share based remuneration in the tables on pages 18 - 19, the percentage of the available grant that was paid, or that vested, in the financial year, and the percentage that was forfeited because the person did not meet the service or performance criteria is set out on the next page. Share based remuneration will not vest if the conditions are not satisfied. Hence the minimum value of the performance shares and options yet to vest is nil. The maximum value of the share based remuneration yet to vest has been determined as the amount of the grant date fair value of the underlying shares that is yet to be expensed. 22 Directors’ Report for the year ended 30 June 2014 DIRECTORS’ REPORT continued STI Share based remuneration Name M I Russell Paid % 100 Forfeited % – S R Mitchell 100 – N C Rose-Innes 100 – A J Russell 100 M J McCarney 100 J) Service agreements – – Financial Year granted 2014 2014 2014 2014 2013 2013 2013 2012 2012 2011 2011 2010 2014 2014 2014 2013 2013 2013 2012 2012 2011 2011 2010 2014 2014 2014 2013 2013 2013 2012 2012 2011 2011 2010 2014 2014 2014 2013 2013 2013 2012 2012 2014 2014 2014 Vested Forfeited % – – – 100 – – 100 – 100 – 100 100 – – – – – 100 – 100 – 100 100 – – – – – 100 – 100 – 100 100 – – – – – 100 – 100 – – – % – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Financial years in which shares may vest 30/6/2017 30/6/2016 30/6/2015 – 30/6/2016 30/6/2015 – 30/6/2015 – 30/6/2015 – – 30/6/2017 30/6/2016 30/6/2015 30/6/2016 30/6/2015 – 30/6/2015 – 30/6/2015 – – 30/6/2017 30/6/2016 30/6/2015 30/6/2016 30/6/2015 – 30/6/2015 – 30/6/2015 – – 30/6/2017 30/6/2016 30/6/2015 30/6/2016 30/6/2015 – 30/6/2015 – 30/6/2017 30/6/2016 30/6/2015 Minimum total value of grant yet to vest $ Nil Nil Nil – Nil Nil – Nil – Nil – – Nil Nil Nil Nil Nil – Nil – Nil – – Nil Nil Nil Nil Nil – Nil – Nil – – Nil Nil Nil Nil Nil – Nil – Nil Nil Nil Maximum total value of grant yet to vest $ 164,449 510,414 5,685 – 95,630 2,994 – 14,769 – 4,309 – – 52,096 5,217 1,803 30,294 954 – 4,581 – 1,312 – – 47,344 4,742 1,634 26,524 838 – 4,014 – 1,133 – – 47,344 4,742 1,634 26,524 838 – 3,849 – 32,131 3,221 1,109 On appointments to the Board after it was listed as a public company, Non–Executive Directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including compensation, relevant to the Director. Remuneration and other terms of employment for the CEO, M I Russell, and other executives are set out in their respective letters of employment. The employment terms do not prescribe the duration of employment for executives except for the CEO, who has a set term of employment ending April 2016. The periods of notice required to terminate employment are set out on the next page: Directors’ Report 23 for the year ended 30 June 2014 DIRECTORS’ REPORT continued • • The employment contract of Mr M I Russell is terminable by either the Company or the executive with six months notice. The employment contracts of all other key management personnel are terminable by either the Company or the executive with three months notice. No provision is made in the contracts for termination payments other than amounts paid in respect of notice of termination. K) Legacy equity grants vesting in FY14 or outstanding at the end of FY14 and granted prior to FY14 Pre FY12 grants Shares offered under the Performance Share Plan (PSP) in FY10, and FY11 vest over a four year period, with one third of each grant vesting two years into the period, one third three years in and the remaining third vesting at year four. The criterion for vesting is continuous service over the period to the vesting date. The final third of the shares granted in FY10 vested in September 2013. One third of the shares granted in FY11 vested in September 2013. Detailed vesting information is shown for each tranche on page 20. Post FY11 grants Shares offered under the Performance Share Plan (PSP) in FY12 and FY13 are divided into three tranches each with its own vesting criteria. The two largest tranches (which comprise 75% of the year’s grant) vest at the end of a three-year period based on performance criteria as described below. Post FY11 grant first tranche Shares offered under the Performance Share Plan (PSP) in the first post FY11 tranche vest over a three year period with a third vesting one year into the period, a third two years in and the remaining third vesting at year three. The criterion for vesting is based on continuous service over the period to the vesting date. Detailed vesting information is shown for each tranche on page 20. Post FY11 grant second tranche The second tranche vests based on achieving a target compound growth in cash EPS. The shares will vest at the end of the three- year performance period if the Company’s annual growth in cash based EPS on a compounded basis for the three-year period exceeds 2%, in accordance with the following vesting scale: Company compound annual growth in Cash EPS Percentage of EPS based performance shares granted Below 2% At 2% At or above 5% 0% 35% 100% For compound EPS growth between 2% and 5%, the percentage of EPS-based performance shares to vest will increase from 35% to 100% on a straight line basis. Post FY11 grant third tranche The third tranche will vest based on a target TSR performance relative to a comparator group at the end of a three year period. Should the Company’s TSR for the three year period exceed the 40th percentile of the TSR of the comparator group, shares vest in accordance with the following vesting scale: Company performance (TSR percentile ranking) Percentage of TSR based performance shares granted Below the 40th percentile At the 40th percentile 90th percentile or above 0% 25% 100% For TSR performance between the 40th percentile and the 90th percentile, the TSR-based performance shares will vest on a straight-line basis. 24 Directors’ Report for the year ended 30 June 2014 DIRECTORS’ REPORT continued The Company’s TSR is compared to that of a comparator group comprised of selected listed companies included within ASX Financials with a market capitalisation of less than $1 billion but more than $40 million at 31 August. The comparator group excludes property related trusts or companies. The comparator group for the PSP offers made in FY13 comprises: Perpetual Ltd, SFG Australia Ltd, FKP Property Group, Peet Ltd, NIB Holdings Ltd/Australia, Magellan Financial Group Ltd, FlexiGroup Ltd/Australia, Cedar Woods Properties Ltd, BT Investment Management Ltd, Finbar Group Ltd, United Overseas Australia Ltd, ClearView Wealth Ltd, Austbrokers Holdings Ltd, Euroz Ltd, MyState Ltd, The Trust Co Ltd, Servcorp Ltd, IMF Australia Ltd, Wide Bay Australia Ltd, Bell Financial Group Ltd, Forest Place Group Ltd, Sunland Group Ltd, Countplus Ltd, RHG Ltd, Equity Trustees Ltd, Devine Ltd, K2 Asset Management Holdings Ltd, Hunter Hall International Ltd, AVJennings Ltd, Payce Consolidated Ltd, HFA Holdings Ltd, Treasury Group Ltd, Phileo Australia Ltd, Homeloans Ltd, CIC Australia Ltd, Ozgrowth Ltd, ThinkSmart Ltd, Lifestyle Communities Ltd, InvestorFirst Ltd, Centrepoint Alliance Ltd, ASF Group Ltd, Plan B Group. The comparator group for the PSP offers made in FY12 comprises: Flexigroup Ltd, NIB Holdings Ltd, FKP Property Group, BT Investment Management Ltd, Magellan Financial Group Ltd, Austbrokers Holdings Ltd, United Overseas Australia Ltd, Servcorp Ltd, Mystate Ltd, Cedar Woods Properties Ltd, Clearview Wealth Ltd, SFG Australia Ltd, Wide Bay Australia Ltd, Peet Ltd, Finbar Group Ltd, Forest Place Group Ltd, Sunland Group Ltd, IMF Australia Ltd, The Trust Co Ltd, RHG Ltd, Countplus Ltd, Euroz Ltd, Bell Financial Group Ltd, Equity Trustees Ltd, Devine Ltd, Payce Consolidated Ltd, Treasury Group Ltd, Hunter Hall International Ltd, HFA Holdings Ltd, AV Jennings Ltd, Homeloans Ltd, K2 Asset Management Holdings Ltd, Phileo Australia Ltd, Villa World Ltd, CIC Australia Ltd, ASF Group Ltd, Ozgrowth Ltd, Lifestyle Communities Ltd, FSA Group Ltd, Yellow Brick Road Holdings Ltd. If any of the companies in the comparator group ceases to exist in its original form for any reason other than its liquidation, or if the Board determines in its discretion that a company should no longer be in the comparator group because of an anomaly, distortion or other event that is not directly related to the financial performance of that company, that company will cease to form part of the comparator group. PSP features applicable to all grants Shares will be acquired for participants following their acceptance of an offer made under the Plan. The shares will be acquired by the plan trustee and held on trust for participants until they are withdrawn from the Plan (after they have vested or are deemed to be vested) or are forfeited, in circumstances outlined below. Shares will be acquired only at times permitted under the Company’s share trading policy. Shares may be acquired by on-market or off-market purchases, by subscribing for new shares to be issued by the Company, or through the reallocation of forfeited shares. The method of acquisition for each share allocation will be determined by the Board. The Company will fund the costs of all share acquisitions under the Plan. Participants will not be required to make any payment for the acquisition of shares under the Plan. A Notice of Withdrawal may be lodged by a participant following the earlier of: • • • • a date ten years from grant date; the participant ceasing to be an employee of the Company; a ‘capital event’ (generally, a successful takeover offer or scheme of arrangement relating to the Company) occurring; or the date upon which the Board gives its written consent to the lodgement of a Notice of Withdrawal by the participant. While shares remain subject to the PSP rules, participants will, in general, enjoy the rights attaching to those shares (such as voting or dividend rights etc.). If a participant resigns from his or her employment with the Company, or otherwise ceases employment in circumstances not involving “special circumstances”, the participant will be required to forfeit any unvested shares held under the Plan on the participant’s behalf, unless the Board otherwise determines. Vested shares will be eligible for withdrawal in accordance with the usual procedure. If a participant ceases to be employed by the Company or retires from office as a result of special circumstances (including death, disability, retirement, redundancy, corporate restructure, or any other circumstances determined by the Board), the Board may in its discretion determine that all or a portion of the participant’s unvested shares are to be treated as vested shares, notwithstanding the fact that the vesting conditions applicable to the shares have not been met because the applicable performance period has not expired. If the Board determines that a participant has acted fraudulently or dishonestly, has committed an act of harassment or discrimination, is in serious breach of any duty to Mortgage Choice, or, in the Board’s reasonable opinion, has brought Mortgage Choice into serious disrepute, any shares to which the participant may have become entitled at the end of the performance period, and any shares held by the participant under the PSP are forfeited by the participant. L) Key management personnel equity holdings Performance shares The number of performance shares held during the financial year by each Director of Mortgage Choice Limited and other key management personnel of the Group, including their personally related parties, are set out on the next page. Directors’ Report 25 for the year ended 30 June 2014 DIRECTORS’ REPORT continued 2014 Name Balance at the start of the year Granted as compensation Vested Forfeited Balance at the end of the year Unvested Key management personnel of the Group M I Russell S R Mitchell N C Rose-Innes A J Russell M J McCarney S C Dehne 2013 Name 623,848 189,975 167,627 103,467 – 82,628 116,570 (193,039) 36,930 33,560 33,560 22,780 (55,607) (50,564) (9,006) – – – – – – – (23,068) (59,560) 547,379 171,298 150,623 128,021 22,780 – 547,379 171,297 150,624 128,021 22,780 – Balance at the start of the year Granted as compensation Vested Forfeited Balance at the end of the year Unvested Key management personnel of the Group M I Russell S R Mitchell N C Rose-Innes A J Russell S C Dehne 610,900 180,333 161,067 55,350 75,883 190,140 60,230 52,730 52,730 27,520 (177,192) (50,588) (46,170) (4,613) (20,775) – – – – – 623,848 189,975 167,627 103,467 82,628 623,848 189,975 167,627 103,467 82,628 Share holdings The number of shares in the Company held during the financial year by each Director of Mortgage Choice Limited and other key management personnel of the Group, including their personally related parties, are set out below. 2014 Name Balance at the start of the year Received during the year on the vesting of shares Other changes during the year Balance at the end of the year Directors of Mortgage Choice Limited P D Ritchie S J Clancy P G Higgins R G Higgins S C Jermyn D E Ralston Key management personnel of the Group M I Russell S R Mitchell N C Rose-Innes A J Russell M J McCarney S C Dehne 350,125 50,000 822,939 15,296,215 2,000,000 125,000 874,916 70,588 90,553 24,613 – 29,792 – – – – – – 286,789 55,607 50,564 9,006 – 23,067 40,000 – (170,000) – – – (450,000) (70,588) (22,000) (8,619) – (52,859) 390,125 50,000 652,939 15,296,215 2,000,000 125,000 617,955 55,607 119,117 25,000 – – 26 Directors’ Report for the year ended 30 June 2014 DIRECTORS’ REPORT continued 2013 Name Balance at the start of the year Received during the year on the vesting of shares Other changes during the year Balance at the end of the year Directors of Mortgage Choice Limited P D Ritchie S J Clancy P G Higgins R G Higgins S C Jermyn D E Ralston Key management personnel of the Group M I Russell S R Mitchell N C Rose-Innes A J Russell S C Dehne 350,125 50,000 822,939 15,226,215 2,000,000 100,000 79,750 40,817 54,383 20,000 9,017 – – – – – – 177,192 50,588 46,170 4,613 20,775 – – – 70,000 – 25,000 617,974 (20,817) (10,000) – – 350,125 50,000 822,939 15,296,215 2,000,000 125,000 874,916 70,588 90,553 24,613 29,792 Shareholdings of Directors and other key management personnel of the Group include those that have been disclosed under representation made to them by the parties. The Directors and other key management personnel have relied upon the representations made as they have no control or influence over the financial affairs of the personally related entities to substantiate the shareholdings declared. Where shareholdings of former staff and their personally related entities have not been obtained, other changes during the year are assumed to be nil. Shares under option There were no unissued ordinary shares of Mortgage Choice Limited under option at the date of this report. Shares provided on exercise of remuneration options No options issued to key management personnel were exercised during the year. Insurance of Directors and Officers Insurance premiums were paid for the year ended 30 June 2014 in respect of Directors’ and Officers’ liability and legal expenses for Directors and Officers of the Company and all controlled entities. The insurance contract prohibits disclosure of the premium paid. The insurance premiums relate to: • Costs and expenses incurred by relevant Directors and Officers in defending any proceedings; and • Other liabilities that may arise from their position, with the exception of conduct involving dishonesty, wrongful acts, or improper use of information or position to gain personal advantage. The Company has entered into deeds of access, insurance and indemnity with the Directors, the Chief Executive Officer, the Chief Financial Officer and Company Secretary. The indemnity is subject to the restrictions prescribed in the Corporations Act. Subject to the terms of the deed, it also gives each executive a right of access to certain documents and requires the Company to maintain insurance cover for the executives. No indemnities were paid to current or former officers or auditors during or since the end of the year. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. Non-audit services The Company may decide to employ the auditor on assignments in addition to their statutory audit duties where the auditor’s expertise and experience with the Company or Group are important. Directors’ Report 27 for the year ended 30 June 2014 DIRECTORS’ REPORT continued for the year ended 30 June 2014 The Board of Directors has considered the position and, in accordance with the advice received from the audit committee, is satisfi ed that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfi ed that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 as none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. Details of the amounts paid or payable to the auditor (Deloitte Touche Tohmatsu) for non-audit services provided during the year are set out below. Non-audit services – 2014 Audit-related services Deloitte Touche Tohmatsu Australian fi rm: Actuarial services Total remuneration for audit-related services Taxation services Deloitte Touche Tohmatsu Australian fi rm: Other tax services Total remuneration for taxation services Total remuneration for non-audit services Non-audit services – 2013 Taxation services PricewaterhouseCoopers Australian fi rm: Tax compliance services Other tax services Total remuneration for taxation services Total remuneration for non-audit services Consolidated $ 75,000 75,000 1,644 1,644 76,644 23,900 18,800 42,700 42,700 Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 35. Rounding The Company is of a kind referred to in Class Order 98/100 issued by the Australian Securities & Investments Commission, relating to the “rounding off ” of amounts in the Directors’ report. Amounts in the Directors’ report have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. Auditor Deloitte Touche Tohmatsu continues in offi ce in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of the Directors. Peter Ritchie Director Sydney 21 August 2014 28 Directors’ Report Corporate Governance Statement for the year ended 30 June 2014 Mortgage Choice Limited has in place corporate governance practices to ensure the Company and the Group are effectively directed and managed, risks are monitored and assessed and appropriate disclosures are made. A statement of the Company’s full corporate governance practices is set out below. The Company considers that it complies with the August 2007 ASX Corporate Governance Principles and Recommendations (including 2010 Amendments to the extent that they apply to the Company’s financial year ended 30 June 2014). Principle 1: Lay solid foundations for management and oversight The Board acts on behalf of shareholders and is accountable to shareholders for the overall direction, management and corporate governance of the Company. The Board is responsible for: • overseeing the Company, including its control and accountability systems; • appointing and removing the Chief Executive Officer; • monitoring the performance of the Chief Executive Officer; • monitoring senior management’s implementation of strategy, and ensuring appropriate resources are available; • reporting to shareholders; • providing strategic advice to management; • approving management’s corporate strategy and performance objectives; • determining and financing dividend payments; • • • • approving and monitoring the progress of major capital expenditure, capital management, acquisitions and divestitures; approving and monitoring financial and other reporting; reviewing and ratifying systems of risk management, internal compliance and control, and legal compliance to ensure appropriate compliance frameworks and controls are in place; reviewing and overseeing the implementation of the Company’s corporate code of conduct and code of conduct for Directors and senior executives; • approving charters of Board committees; • monitoring and ensuring compliance with legal and regulatory requirements and ethical standards and policies; and • monitoring and ensuring compliance with best practice corporate governance requirements. Responsibility for day-to-day management and administration of the Company is delegated by the Board to the Chief Executive Officer and the executive team. Principle 2: Structure the Board to add value The Board comprises two Non-Executive Directors and four independent Non-Executive Directors including the Peter Ritchie Chairman, Steve Jermyn and Deborah Ralston, who were appointed as Non-Executive Directors in the period prior to the Company’s listing on the ASX, and Sean Clancy, who was appointed in May 2009. These individuals bring a long history of public company, operational and franchising experience with them and assist in overseeing the corporate governance of the Company. The Board operates in accordance with the broad principles set out in its Charter which is available in the Shareholders section of the Company’s website at www.MortgageChoice.com.au. Board size, composition and independence The Charter states that: • • there must be a minimum of five Directors and a maximum of seven Directors; the Board must comprise: – a majority of independent Non-Executive Directors; – Directors with an appropriate range of skills, experience and expertise; Corporate Governance Statement 29 CORPORATE GOVERNANCE STATEMENT continued for the year ended 30 June 2014 – Directors who can understand and competently deal with current and emerging business issues; and – Directors who can effectively review and challenge the performance of management and exercise independent judgement; • • the nomination committee is responsible for recommending candidates for appointment to the Board; and each Director is appointed by a formal letter of appointment setting out the key terms and conditions of their appointment to ensure that each Director clearly understands the Company’s expectations of him or her. Directors’ independence The Board Charter sets out specific principles in relation to Directors’ independence. These state that an independent Non- Executive Director is one who is independent of management and: • • • • • • • is not a substantial shareholder of the Company or an officer of, or otherwise associated directly with, a substantial shareholder of the Company; within the last three years has not been employed in an executive capacity by the Company or another Group member, or been a Director after ceasing to hold any such employment; within the last three years has not been a principal of a material professional adviser or a material consultant to the Company or another Group member, or an employee materially associated with the service provided; is not a material supplier or customer of the Company or other Group member, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; has no material contractual relationship with the Company or another Group member other than as a Director of the Company; has not served on the Board for a period which could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of the Company; and is free from any interest in any business or other relationship which could, or could reasonably be perceived to, materially interfere with the Director’s ability to act in the best interests of the Company. All Directors are required to complete an independence questionnaire. Independent professional advice Board committees and individual Directors may seek independent external professional advice for the purposes of proper performance of their duties. Performance assessment The performance of the Board, the Directors and key executives is reviewed annually. The nomination committee is responsible for reviewing: • • • • the Board’s role; the processes of the Board and Board committees; the Board’s performance; and each Director’s performance before the Director stands for re-election. The process for performance evaluation of the Board, its committees and individual Directors, and key executives that has been adopted by the Board is available in the Shareholders section of the Company’s website at www.MortgageChoice.com.au. A review of the Board was conducted by the Chairman of the nomination committee in concert with the Company Secretary during the financial year ended 30 June 2014. Board committees Mortgage Choice has three Board committees comprising the remuneration committee, the audit committee and the nomination committee. These committees serve to support the functions of the Board and will make recommendations to Directors on issues relating to their area of responsibility. The nomination committee The objective of the nomination committee is to help the Board achieve its objective of ensuring the Company has a board of an effective composition, size and commitment to adequately discharge its responsibilities and duties. The nomination committee is responsible for evaluating the Board’s performance. The nomination committee comprises Peter Ritchie and Rodney Higgins. The nomination committee charter is available in the Shareholders section of the Company’s website at www.MortgageChoice.com.au. 30 Corporate Governance Statement CORPORATE GOVERNANCE STATEMENT continued for the year ended 30 June 2014 Principle 3: Promote ethical and responsible decision making Codes of conduct The Company has adopted a corporate code of conduct setting out its legal and other obligations to all legitimate stakeholders including shareholders, franchisees, employees, customers and the community. The Company has also adopted a code of conduct for Directors and senior executives setting out required standards of behaviour, for the benefit of all shareholders. The purpose of this code of conduct is to: • • • • articulate the high standards of honesty, integrity, ethical and law-abiding behaviour expected of Directors and senior executives; encourage the observance of those standards to protect and promote the interests of shareholders and other stakeholders (including franchisees, employees, customers, suppliers and creditors); guide Directors and senior executives as to the practices thought necessary to maintain confidence in the Company’s integrity; and set out the responsibility and accountability of Directors and senior executives to report and investigate any reported violations of this code or unethical or unlawful behaviour. The Company requires that its Directors and senior executives adhere to a share trading policy that restricts the purchase and sale of Company securities to three six-week periods following the release of the half-yearly and annual financial results to the market, and the Annual General Meeting. Copies of the Corporate Code of Conduct, the Code of Conduct for Directors and Senior Executives and the Share Trading Policy are available in the Shareholders section of the Company’s website at www.MortgageChoice.com.au. Diversity policy The Company believes that embracing diversity in its workforce contributes to the achievement of its corporate objectives and enhances its reputation. As a result the Company has developed a diversity policy. It enables the Company to: • • recruit the right people from a diverse pool of talented candidates; make more informed and innovative decisions, drawing on the wide range of ideas, experiences, approaches and perspectives that employees from diverse backgrounds, and with differing skill sets, bring to their roles; and • better represent the diversity of all our stakeholders The Company is committed to achieving the goals of: (a) providing access to equal opportunities at work based on merit; and (b) fostering a corporate culture that embraces and values diversity. We are an equal opportunity employer and welcome people from a diverse set of backgrounds. Mortgage Choice has historically displayed a commitment to gender diversity through policies that encourage participation by women in all levels of the business. Examples of these are: • • • Paid parental leave Flexible work practices including the promotion of part time female employees to senior roles. Awareness in all employees of their rights and responsibilities in regards to fairness, equity and respect for all aspects of diversity. The diversity policy includes requirements for the Board to establish measurable objectives for achieving gender diversity, and for the Board to assess annually both the objectives, and the Company’s progress in achieving them. Corporate Governance Statement 31 CORPORATE GOVERNANCE STATEMENT continued for the year ended 30 June 2014 Measurable objectives for achieving gender diversity and the progress toward those objectives are as follows: • • • • • Appoint an executive responsible for achieving gender diversity. The Head of Human Resources has assumed responsibility for this function. Strive to maintain a fair and balanced level of gender representation in the overall Mortgage Choice workforce. The percentage of women in the Mortgage Choice workforce currently stands at 53% Subject to vacancies and circumstances, strive to maintain a fair and balanced level of gender representation in the Senior Management Team. Currently 43% of the Senior Management Team are women. Subject to vacancies and circumstances, increase female representation on the Board of Directors. Currently one of the six Directors on the Board is a woman. Actively encourage the representation of women in senior executive roles through participation in a Leadership program. Currently 55% of participants in the Leadership program are women. A copy of the Diversity Policy is available in the Shareholders section of the Company’s website at www.MortgageChoice.com.au. Principle 4: Safeguard integrity in financial reporting The audit committee The audit committee provides advice and assistance to the Board in fulfilling the Board’s responsibilities relating to: • financial reporting; • the application of accounting policies; • business policies and practices; • • legal and regulatory compliance; and internal risk control and management systems. The audit committee comprises Steve Jermyn (Chairman), Sean Clancy, Peter Higgins and Deborah Ralston. The objective of the audit committee is to: • maintain and improve the quality, credibility and objectivity of the financial accountability process; and • provide a forum for communication between the Board and senior financial and compliance management. The audit committee charter is available in the Shareholders section of the Company’s website at www.MortgageChoice.com.au. External auditor The Company has adopted procedures for the selection and appointment of the external auditor which are available in the Shareholders section of the Company’s website at www.MortgageChoice.com.au. The audit committee will regularly review the performance of the external auditor and consider any ongoing appointment. The external auditor should rotate the senior audit partner and the audit review partner every five years with suitable succession planning to ensure consistency. The external auditor should not place itself in a position where its objectivity may be impaired or where a reasonable person might conclude that its objectivity has been impaired. This requirement also applies to individual members of an audit team. The credibility and integrity of the financial reporting process is paramount. The Company has adopted guidelines on external auditor independence. These guidelines help to ensure a consistent approach to the appointment and review of external auditors. The Company will not give work to the external auditor likely to give rise to a ‘self review threat’ (as defined in Australian Professional and Ethical Standards APES110, The Institute of Chartered Accountants in Australia and CPA Australia). It is the policy of the external auditors to provide an annual declaration of their independence to the audit committee. The external auditor is requested to attend the Annual General Meeting of the Company. 32 Corporate Governance Statement CORPORATE GOVERNANCE STATEMENT continued for the year ended 30 June 2014 Principle 5: Make timely and balanced disclosure Continuous Disclosure The Company has adopted a market disclosure protocol. The objective of this protocol is to: • • • ensure the Company immediately discloses information that a reasonable person would expect to have a material effect on the price of the Company’s securities to ASX in accordance with the ASX Listing Rules and the Corporations Act 2001 (Cth); ensure officers and employees are aware of the Company’s continuous disclosure obligations; and establish procedures for: – – – – the collection of all potentially price-sensitive information; assessing if information must be disclosed to ASX under the ASX Listing Rules or the Corporations Act 2001 (Cth); releasing to ASX information determined to be price-sensitive information and to require disclosure; and responding to any queries from ASX (particularly queries under Listing Rule 3.1B). The protocol is carried out through a market disclosure committee comprised of management representatives. The market disclosure committee is responsible for: • • ensuring compliance with continuous disclosure obligations; establishing a system to monitor compliance with continuous disclosure obligations and this protocol; • monitoring regulatory requirements so that this protocol continues to conform with those requirements; • monitoring movements in share price and share trading to identify circumstances where a false market may have emerged in company securities; and • making decisions about trading halts. All relevant information provided to ASX will be posted immediately on the Company’s website, www.MortgageChoice.com.au, in compliance with the continuous disclosure requirements of the Corporations Act 2001 (Cth) and ASX Listing Rules. Principle 6: Respect the rights of shareholders Communication to shareholders The Board aims to ensure that shareholders are informed of all major developments affecting the Company’s state of affairs. The Board will: • • communicate effectively with shareholders; give shareholders ready access to balanced and understandable information about the Company and its corporate goals; and • make it easy for shareholders to participate in general meetings. Information is communicated to shareholders through ASX announcements, the Company’s annual report, the Annual General Meeting, half and full year results announcements and the Company’s website, www.MortgageChoice.com.au. The Board has adopted a communications strategy to facilitate and promote effective communication with shareholders and encourage participation at general meetings. Arrangements the Company has to promote communication with shareholders are set out in the Shareholders section of the Company’s website at www.MortgageChoice.com.au. Principle 7: Recognise and manage risk The Company has adopted and endorsed a compliance policy. The policy is a commitment to: • promote a culture of compliance throughout the Company and franchise network; • create an understanding of the relevant laws at all levels; • minimise the possibility of a contravention of the law and manage any legal risk; • • enhance the Company’s corporate image and customer service; and market, promote and sell the Company’s services in a way that is competitive, ethical, honest and fair, and in compliance with the law. Corporate Governance Statement 33 CORPORATE GOVERNANCE STATEMENT continued for the year ended 30 June 2014 The Company has developed and implemented a compliance program. The aim of the program is to promote a culture of compliance through a number of measures including staff and franchise network training, compliance procedures, support systems and the appointment of staff responsible for compliance. The centrepiece of the program is a web based compliance education and evaluation tool. A self paced system, it covers the key legislative and regulatory obligations applicable to the business. Each major regulatory area (Trade Practices, Privacy, Equal Opportunity, Occupational Health and Safety, Technology, Franchising, National Consumer Credit Protection Act) is covered. All staff and the Board are required to complete all modules and must repeat the program at prescribed intervals. The program has also been rolled out to the franchise network. The Company expects its employees, franchisees and representatives to actively support its compliance program. It is each employee, franchisee and representative’s responsibility to make use of the training systems and support offered by the Company. Non-compliance with the law or failure to comply with the compliance program will not be tolerated and could result in disciplinary action. In order to comply with the Australian standard for risk management, the Company has initiated a corporate risk management plan. In fundamental terms, this process involves: • • • • analysing all aspects of the business to determine what operational risks are faced, either on a continuous or isolated basis; having determined these risks, assessing each of them to allocate a rating based upon the likelihood of occurrence and consequence of occurrence; determining what control measures are in place to eliminate or reduce the identified risk – this leads to allocating each risk a rating, all of which is recorded in a risk register; and executive management then make decisions as to how each risk is to be handled i.e. avoided, managed, transferred or accepted. The Risk Register is a dynamic document that changes as business operations vary, resulting in new risks. Management has reported to the Board that risk management and internal control systems effectively manage the Company’s material business risks. Corporate Reporting The Chief Executive Officer and Chief Financial Officer have certified that the Company’s financial reports are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and are in accordance with relevant accounting standards. Principle 8: Remunerate fairly and responsibly The remuneration committee The remuneration committee is responsible for determining and reviewing compensation arrangements for the Directors and senior management team. The remuneration committee comprises Peter Ritchie, Rodney Higgins and Sean Clancy. The objective of the remuneration committee is to help the Board achieve its objective of ensuring the Company: • has coherent remuneration policies and practices to attract and retain executives and Directors who will create value for shareholders; • observes those remuneration policies and practices; and • fairly and responsibly rewards executives and other employees having regard to the performance of the Company, the performance of the executive or employee and the general and specific remuneration environment. Non-Executive Directors are not entitled to retirement benefits with the exception of statutory superannuation. The remuneration committee charter is available in the Shareholders section of the Company’s website at www.MortgageChoice.com.au. 34 Corporate Governance Statement AUDITOR’S INDEPENDENCE DECLARATION for the year ended 30 June 2014 Deloitte Touche Tohmatsu A.B.N. 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au The Board of Directors Mortgage Choice Limited 50 Bridge Street Sydney NSW 2000 21 August 2014 Dear Board Members Mortgage Choice Limited In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Mortgage Choice Limited. As lead audit partner for the audit of the financial statements of Mortgage Choice Limited for the financial year ended 30 June 2014, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Philip Hardy Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Auditor’s Independence Declaration 35 Financial Statements for the year ended 30 June 2014 Contents 37 Consolidated income statement 38 Consolidated statement of comprehensive income 39 Consolidated balance sheet 40 Consolidated statement of changes in equity 41 Consolidated statement of cash flows 42 Notes to the consolidated financial statements 87 Directors’ declaration 88 Independent audit report to members of Mortgage Choice Limited These financial statements are the consolidated financial statements of the consolidated entity consisting of Mortgage Choice Limited and its subsidiaries. The financial statements are presented in the Australian currency. Mortgage Choice Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Mortgage Choice Limited Level 10, 100 Pacific Highway North Sydney NSW 2060 A description of the nature of the consolidated entity’s operations and its principal activities is included in the Directors’ report which is not part of these financial statements. The financial statements were authorised for issue by the Directors on 21 August 2014. The Company has the power to amend and reissue the financial statements. Through the use of the internet, we have ensured that our corporate reporting is timely, complete, and available globally at minimum cost to the Company. All financial statements and other information are available in the Shareholders section of company’s website: www.MortgageChoice.com.au. 36 Financial Statements Consolidated Income Statement for the year ended 30 June 2014 Revenue Origination commission Trailing commission excluding discount unwind Trailing commission discount unwind Diversified products commission Help Me Choose income excluding discount unwind Help Me Choose income discount unwind Financial Planning income Franchise income Interest Other income Direct costs Origination commission Trailing commission excluding discount unwind Trailing commission discount unwind – finance costs Diversified products commission Help Me Choose direct costs Financial Planning commission Gross profit Operating Expenses Sales Technology Marketing Finance Corporate Profit before income tax Income tax expense Profit for the period from continuing operations Discontinued operation Profit/(loss) for the period from discontinued operation Net profit attributable to the owners of Mortgage Choice Limited Earnings per share From continuing and discontinued operations Basic earnings per share Diluted earnings per share From continuing operations Basic earnings per share Diluted earnings per share 2014 $’000 2013 $’000 Notes 6 63,014 74,958 23,577 5,691 4,468 119 2,896 1,522 538 1,681 178,464 (45,777) (47,712) (14,129) (4,483) (1,277) (2,341) 51,965 66,914 25,586 3,777 3,767 58 113 1,192 533 1,494 155,399 (37,375) (37,023) (15,470) (2,944) (1,249) (95) 62,745 61,243 (13,938) (5,185) (8,675) (2,094) (6,057) 26,796 (8,249) 18,547 (12,983) (5,344) (8,060) (2,009) (5,454) 27,393 (8,359) 19,034 1,252 (320) 19,799 18,714 Cents Cents 16.0 16.0 15.0 15.0 15.2 15.2 15.5 15.5 37 7 8 8 9 5 30 30 30 30 The above consolidated income statement should be read in conjunction with the accompanying notes. Consolidated Income Statement Consolidated Statement of Comprehensive Income for the year ended 30 June 2014 Profit for the year Other comprehensive income Total comprehensive income attributable to the owners of Mortgage Choice Limited Notes 2014 $’000 2013 $’000 19,799 18,714 – – 19,799 18,714 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 38 Consolidated Statement of Comprehensive Income Consolidated Balance Sheet for the year ended 30 June 2014 ASSETS Current assets Cash and cash equivalents Trade and other receivables Total current assets Non-current assets Receivables Property, plant and equipment Deferred tax assets Intangible assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Current tax liabilities Provisions Total current liabilities Non-current liabilities Trade and other payables Deferred tax liabilities Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Retained profits Total equity Notes 2014 $’000 2013 $’000 10 11 11 12 13 14 15 16 17 18 16 12,445 98,876 111,321 10,953 95,310 106,263 238,244 227,567 907 – 2,349 692 – 2,287 241,500 230,546 352,821 336,809 66,702 2,418 1,103 70,223 63,118 2,017 993 66,128 142,900 36,605 762 134,938 36,085 526 180,267 171,549 250,490 237,677 102,331 99,132 19 20(a) 20(b) 4,604 2,210 95,517 4,018 1,472 93,642 102,331 99,132 The above consolidated balance sheet should be read in conjunction with the accompanying notes. Consolidated Balance Sheet 39 Consolidated Statement of Changes in Equity for the year ended 30 June 2014 Balance at 30 June 2012 Total comprehensive income for the year as reported in the 2013 financial statements Transactions with equity holders in their capacity as owners: Contributions of equity net of transaction costs Dividends paid Employee share options – value of employee services Balance at 30 June 2013 Total comprehensive income for the year as reported in the 2014 financial statements Transactions with equity holders in their capacity as owners: Contributions of equity net of transaction costs Dividends paid Employee share options – value of employee services Balance at 30 June 2014 Notes Contributed equity $’000 1,558 Reserves $’000 1,260 Retained earnings $’000 Total $’000 90,801 93,619 – – 18,714 18,714 19 21 31 19 21 31 2,460 – – 2,460 4,018 (560) – 772 212 – (15,873) 1,900 (15,873) – 772 (15,873) (13,201) 1,472 93,642 99,132 – – 19,799 19,799 586 – – 586 4,604 (586) – 1,324 738 2,210 – – (17,924) (17,924) – (17,924) 1,324 (16,600) 95,517 102,331 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 40 Consolidated Statement of Changes in Equity Consolidated Statement of Cash flows for the year ended 30 June 2014 Cash flows from operating activities Receipts from customers (inclusive of goods and services tax) Payments to suppliers and employees (inclusive of goods and services tax) 180,722 162,405 (154,018) (139,303) Notes 2014 $’000 2013 $’000 Income taxes paid Net cash inflow from operating activities Cash flows from investing activities Payments for property, plant, equipment and intangibles Proceeds from sale of LoanKit net of selling costs Interest received Net cash inflow/(outflow) from investing activities Cash flows from financing activities Proceeds from sale of shares Dividends paid to company’s shareholders Net cash (outflow) from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year 29 26,704 (7,612) 19,092 (1,909) 1,695 538 324 – (17,924) (17,924) 1,492 10,953 23,102 (7,968) 15,134 (1,406) – 536 (870) 1,900 (15,873) (13,973) 291 10,662 Cash and cash equivalents at the end of year 10 12,445 10,953 The above consolidated statement cash flows should be read in conjunction with the accompanying notes. Consolidated Statement of Cash Flows 41 Notes to the Consolidated Financial Statements for the year ended 30 June 2014 Note 1 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of Mortgage Choice Limited and its subsidiaries. A. Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. The financial statements comprise the consolidated financial statements for the Group. For the purposes of preparing the consolidated financial statements, the Company is a for-profit entity. Compliance with IFRS The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). New and amended standards adopted by the Group In the current year, the Group has applied a number of new and revised AASBs issued by the Australian Accounting Standards Board (AASB) that are mandatorily effective for an accounting period that begins on or after 1 January 2013. AASB 2011-4 Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements. This standard removes the individual key management personnel disclosure requirements in AASB 124 Related Party Disclosures. As a result the Group only discloses the key management personnel compensation in total and for each of the categories required in AASB 124. In the current year the individual key management personnel disclosure previously required by AASB 124 (note 21 in the 30 June 2013 financial statements) is now disclosed in the remuneration report due to an amendment to Corporations Regulations 2001 issued in June 2013. AASB 13 Fair Value Measurement and AASB 2011-8 Amendments to Australian Accounting Standards arising from AASB 13. AASB 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under AASB 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. The fair value of future trailing commissions receivable and payable, as identified in note 2, has not changed due to the adoption of this standard. AASB 10 ‘Consolidated Financial Statements’, AASB 2011- 7 ‘Amendments to Australian Accounting Standards arising from the Consolidation and Joint Arrangements Standards’. The Standard identifies the principles of control, determines how to identify whether an investor controls an investee and therefore must consolidate the investee, and sets out the principles for the preparation of consolidated financial statements. The Standard introduces a single consolidation model for all entities based on control, irrespective of the nature of the investee (i.e. whether an entity is controlled through voting rights of investors or through other contractual arrangements as is common in ‘special purpose entities’). Under AASB 10, control is based on whether an investor has: • • • Power over the investee Exposure, or rights, to variable returns from its involvement with the investee, and The ability to use its power over the investee to affect the amount of the returns. AASB 12 ‘Disclosure of Interests in Other Entities’, AASB 2011-7 ‘Amendments to Australia Accounting Standards arising from the Consolidation and Joint Arrangements Standards’. Requires the extensive disclosure of information that enables users of financial statements to evaluate the nature of, and risks associated with, interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. 42 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 In high-level terms, the required disclosures are grouped into the following broad categories: • • • • Significant judgements and assumptions – such as how control, joint control, significant influence has been determined Interests in subsidiaries – including details of the structure of the Group, risks associated with structured entities, changes in control, and so on Interests in joint arrangements and associates – the nature, extent and financial effects of interests in joint arrangements and associates (including names, details and summarised financial information) Interests in unconsolidated structured entities – information to allow an understanding of the nature and extent of interests in unconsolidated structured entities and to evaluate the nature of, and changes in, the risks associated with its interests in unconsolidated structured entities. AASB 12 lists specific examples and additional disclosures which further expand upon each of these disclosure objectives, and includes other guidance on the extensive disclosures required. AASB 119 ‘Employee Benefits (2011)’, ‘AASB 2011-10 Amendments to Australian Accounting Standards arising from AASB 119 (2011)’. An amended version of AASB 119 ‘Employee Benefits’ with revised requirements for pensions and other post-employment benefits, termination benefits and other changes. The key amendments include: • • • • Requiring the recognition of changes in the net defined benefit liability (asset) including immediate recognition of defined benefit cost, disaggregation of defined benefit cost into components, recognition of remeasurements in other comprehensive income, plan amendments, curtailments and settlements (eliminating the ‘corridor approach’ permitted by the existing AASB 119) Introducing enhanced disclosures about defined benefit plans Modifying accounting for termination benefits, including distinguishing benefits provided in exchange for service and benefits provided in exchange for the termination of employment and affect the recognition and measurement of termination benefits Clarifying various miscellaneous issues, including the classification of employee benefits, current estimates of mortality rates, tax and administration costs and risksharing and conditional indexation features • Incorporating other matters submitted Management have considered the amendments to AASB 10 Consolidated Financial Statements, AASB 12 Disclosure of Interests in Other Entities, and AASB 119 Employee Benefits and determined no material impact for Mortgage Choice. Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of financial assets and liabilities (including derivative instruments) at fair value through profit and loss. Critical accounting estimates The preparation of financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 3. B. Principles of consolidation i/ Subsidiaries The consolidated financial statements incorporate the financial statements of the Company and entities (including structured entities) controlled by the Company and its subsidiaries. Control is achieved when the Company: • has power over the investee; • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affect its returns. The Company reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. The acquisition method of accounting is used to account for business combinations by the Group (refer to note 1(G)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Notes to the Consolidated Financial Statements 43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued ii/ Employee Share Trust The Group has formed a trust to administer the Group’s employee share scheme. This trust is consolidated, as the substance of the relationship is that the trust is controlled by the Group. Shares held by the employee share scheme are disclosed as treasury shares and deducted from contributed equity in both the consolidated and company accounts. C. Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the Chief Executive Officer. D. Revenue recognition Revenue is measured at the fair value of the consideration received or receivable. The Company provides loan origination services through its franchise network and receives origination commission on the settlement of loans. Additionally, the lender will normally pay a trailing commission over the life of the loan. Revenue over the estimated life of loans written is recognised on the settlement of the loans as no additional services are required to receive the entitled funds. Additionally, the Company earns income from the sale of franchises and franchisee services. Other companies in the Group earn service fees by processing commissions for contracted brokers and provide software services. Revenue is recognised as the service is performed. Revenue from sale of services is recognised as follows: i/ Origination commissions arising from mortgage broking activities Origination commissions received by the Company are recognised as revenue on settlement of the loan. Commissions may be “clawed back” by lenders at a later date as per their individual policies. These potential clawbacks are estimated and recognised at the same time as origination commission. ii/ Trailing commissions arising from mortgage broking activities The Company receives trailing commissions from lenders over the life of the settled loans in its loan book based on outstanding balance. The Company makes trailing commission payments to franchisees based on the outstanding loan book balance of the individual franchisees. On initial recognition at settlement, trailing commission revenue and the related receivable are recognised at fair value being the net present value of the expected future trailing commissions to be received. An associated expense and payable to the franchisees are also recognised initially measured at fair value being the net present value of the expected future trailing commission payable to franchisees. Subsequent to initial recognition and measurement, both the trailing commission receivable and payable are measured at amortised cost. The carrying amounts of the receivable and payable are adjusted to reflect actual and revised estimated cash flows by recalculating the net present value of estimated future cash flows at the original effective interest rate. Any resulting adjustment to the carrying value is recognised as income or expense in the income statement. iii/ Franchise fee income Franchise fee income is derived from the sale of franchises by the Company and comprises licence fees and contributions for training, franchise consumables and compliance costs. Licence fees are partially repayable should franchisees terminate their franchise agreement in accordance with a repayment schedule as defined in the agreement. Licence fee income is recognised in accordance with this schedule. Contributions for training, consumables and compliance costs are recognised as revenue on receipt. Licence fees which may be repayable to franchisees at the balance sheet date are included in liabilities. iv/ Health sales income The Group receives origination and trailing commission for health insurance policies sold through its comparison website. The recognition of this revenue is consistent with mortgage origination and trailing commissions arising from mortgage broking activities detailed in (i) and (ii) above. v/ Mortgage lead income The Group sells leads generated by its comparison website to mortgage brokers. This income is recognised at the time the lead is delivered. 44 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 vi/ Financial services revenue Financial services revenue is derived from the provision of financial advice and from commission revenue from insurance products. Revenue from the provision of financial services is recognised at the time the service is provided. vii/ Service fee income The Group provided services to mortgage brokers aggregating through LoanKit by collecting origination and trailing commissions and processing them for the broker in exchange for a fee, as well as providing software and other services. Fees for these services are recognised at the time the service is provided. viii/ Interest income Interest income is recognised using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the instrument, and continues unwinding the discount as interest income. ix/ Other income Other income includes contributions from lenders towards conferences and workshops which are recognised as income in the period the conference or workshop is held. Also included in this category are other non-operating revenues recognised in the period to which the income relates. E. 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 adjusted by changes in deferred tax assets and liabilities attributable to temporary differences. The current income tax charge is calculated on the basis of the tax laws substantively enacted at the end of the reporting period. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction, other than a business combination, that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities 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 offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Mortgage Choice Limited and its wholly-owned controlled entities have elected to consolidate under the tax consolidation legislation. As a consequence, these entities are taxed as a single entity and the deferred tax assets and liabilities of these entities are set off in the consolidated financial statements. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case the tax is also recognised in other comprehensive or directly in equity, respectively. i/ Investment allowances Companies within the Group may be entitled to claim special tax deductions for investments in qualifying assets or in relation to qualifying expenditure (eg the Research and Development Tax Incentive regime in Australia or other investment allowances). The Group accounts for such allowances as tax credits, which means that the allowance reduces income tax payable and current tax expense. A deferred tax asset is recognised for unclaimed tax credits that are carried forward as deferred tax assets. ii/ Tax consolidation legislation Mortgage Choice Limited and its wholly owned Australian controlled entities are members of a consolidated group for income tax purposes. The head entity Mortgage Choice Limited and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. Notes to the Consolidated Financial Statements 45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued In addition to its own current and deferred tax amounts, Mortgage Choice Limited also recognises current tax liabilities or assets, and deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. F. Leases Leases of property, plant and equipment, where the Group as lessee has substantially all the risks and rewards of ownership, are classified as finance leases. Finance leases are capitalised at the lease’s inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other long term payables. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases is depreciated over the shorter of the asset’s useful life and the lease term. Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease. G. Business combinations The acquisition method of accounting is used to account for all business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred for an acquisition comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share in the acquiree’s net identifiable assets. The excess of the consideration transferred and the amount of any non-controlling interest in the acquiree over the fair value of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired and the measurement of all amounts has been reviewed, the difference is recognised directly in profit or loss as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss. H. Impairment of assets Goodwill and intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash generating units). Nonfinancial assets that have suffered impairment are reviewed for possible reversal of that impairment at each reporting date. I. Cash and cash equivalents For cash flow statement presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Overdrafts are shown in borrowings in current liabilities on the balance sheet. 46 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 J. Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables are generally due in 30 days. Collectability of receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short term receivables are not discounted if the effect of discounting is immaterial. The amount of the provision is recognised in the income statement in other expenses. K. Trailing commissions receivable Receivables related to trailing commissions are recognised in accordance with the revenue recognition policy outlined in note 1(D). L. Investments and other financial assets The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its investments at initial recognition and, in the case of assets classified as held to maturity, re-evaluates this designation at each reporting date. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than twelve months after the balance sheet date which are classified as non-current assets. Loans and receivables are included in trade and other receivables in the balance sheet (note 11). M. Property, plant and equipment All property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred. Depreciation on other assets is calculated using the straight line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives or, in the case of leasehold improvements, the shorter lease term as follows: Office equipment Computer equipment Furniture and fittings 5-10 years 3-4 years 5-15 years The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 1(H)). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. N. Intangible assets Software Acquired computer software licences are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. These costs are amortised over their estimated useful lives (three to five years). Costs associated with developing or maintaining computer software programmes are recognised as an expense as incurred. Costs that are directly associated with the production of identifiable and unique software products controlled by the Group, and that will probably generate future economic benefits exceeding costs beyond one year, are recognised as intangible assets. Computer software development costs recognised as assets are amortised over their estimated useful lives. Notes to the Consolidated Financial Statements 47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued O. Trade and other payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. P. Trailing commissions payable Payables related to trailing commissions are recognised in accordance with the revenue recognition policy outlined in note 1(D). Q. Borrowing costs Borrowing costs are recognised as expenses using the effective interest method. R. Provisions Provisions for legal claims and make good obligations are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. S. Employee benefits Short-term obligations Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within twelve months after the end of the period in which the employees render the related service, are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid. The liability for annual leave is included in provisions. The liability for all other short-term employee benefits is included in trade and other payables. Other long-term employee benefit obligations The liability for long service leave and any annual leave, which is not expected to be settled within 12 months after the end of the period in which the employees render the related service, is recognised in the provisions and measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting period on national government bonds with terms and currency that match, as closely as possible, the estimated future cash outflows. The obligations are presented as current liabilities in the balance sheet if the entity 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. Retirement benefit obligations Contributions to the defined contribution fund are recognised as an expense as they become payable. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. Share-based payments Share-based compensation benefits are provided to employees via the Mortgage Choice Executive Performance Option Plan, and the Mortgage Choice Performance Share Plan. Information relating to these schemes is set out in note 31. The fair value of options granted under the Mortgage Choice Executive Performance Option Plan and performance shares granted under the Mortgage Choice Performance Share Plan is recognised as an employee benefit expense with a corresponding increase in equity. The total amount to be expensed is determined by reference to the fair value of the options and performance shares granted, which includes any market performance conditions but excludes the impact of any service and non-market performance vesting conditions and the impact of any non-vesting conditions. Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of options that are expected to vest based on the non-marketing vesting conditions. It recognises the impact of the revision to original estimates, if any, in profit or loss, with a corresponding adjustment to equity. 48 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 The Mortgage Choice Executive Performance Option Plan and performance shares granted under the Mortgage Choice Performance Share Plan are administered by the Mortgage Choice Performance Share Plan Trust; see note 1(B)(ii). Short term incentive plans The Group recognises a liability and an expense where contractually obliged or where there is a past practice that it has created a constructive obligation. Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than twelve months after balance sheet date are discounted to present value. T. Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or option for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration. Where any group company purchases the Company’s equity instruments, for example as the result of a share buy-back or a share-based payment plan, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the owners of Mortgage Choice Limited as treasury shares until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the owners of Mortgage Choice Limited. U. Dividends Provision is made for the amount of any dividend declared, that is approved by the Directors on or before the end of the financial year but not yet paid at the reporting date. V. Earnings per share i/ Basic earnings per share Basic earnings per share is determined by dividing net profit after income tax attributable to members of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. ii/ Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. W. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the balance sheet. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flow. X. Rounding of amounts The Company is of a kind referred to in Class Order 98/100, issued by the Australian Securities & Investments Commission, relating to the “rounding off” of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with that Class Order to the nearest thousand dollars, or in certain cases, to the nearest dollar. Y. New accounting standards and interpretations At the date of authorisation of the financial statements, the Standards and Interpretations listed below were in issue but not yet effective. Notes to the Consolidated Financial Statements 49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES continued Standard/Interpretation AASB 9 ‘Financial Instruments’, and the relevant amending standards AASB 2013-9 ‘Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments’ Z. Parent entity financial information Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1 January 2018 30 June 2019 1 January 2014 30 June 2015 The financial information for the parent entity, Mortgage Choice Limited, disclosed in note 32 has been prepared on the same basis as the consolidated financial statements, except as set out below. Investments in subsidiaries, associates and joint venture entities Investments in subsidiaries, associates and joint venture entities are accounted for at cost in the financial statements of Mortgage Choice Limited. Dividends received from subsidiaries and associates are recognised in the parent entity’s profit or loss when its right to receive the dividend is established. Tax consolidation legislation Mortgage Choice Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. The head entity, Mortgage Choice Limited, and the controlled entities in the tax consolidated group account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred tax amounts, Mortgage Choice Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. The entities have entered into a tax funding agreement under which the wholly-owned entities fully compensate Mortgage Choice Limited for any current tax payable assumed and are compensated by Mortgage Choice Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Mortgage Choice Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. The amounts receivable/payable under the tax funding agreement is due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as current amounts receivable from or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. Financial guarantees Where the parent entity has provided financial guarantees in relation to loans and payables of subsidiaries for no compensation, the fair values of these guarantees are accounted for as contributions and recognised as part of the cost of the investment. Note 2 Financial risk management The Group has limited exposure to financial risks with the exception of credit risk. The Group does not use derivative financial instruments such as foreign exchange contracts, interest rate swaps or other derivative instruments to hedge risk exposures. It does not operate internationally, does not have any debt or significant interest rate exposure and is not exposed to either securities price risk or commodity price risk. Risk management is carried out by the Group’s finance department under policies approved by the Board of Directors. 50 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 The Group holds the following financial instruments: Financial Assets Current Cash and cash equivalents Trade and other receivables* Non-current Receivables * Excludes prepayments Financial Liabilities Current Trade and other payables Non-current Trade and other payables 2014 $’000 2013 $’000 12,445 96,903 10,953 93,388 238,244 347,592 227,567 331,908 2014 $’000 2013 $’000 66,702 63,118 142,900 209,602 134,938 198,056 The Group’s policies in relation to financial risks to which it has exposure are detailed below. A. Market risk Interest rate risk The Group’s main interest rate risk arises from cash and cash equivalents. At 30 June 2014 the weighted average interest rate on its cash balances was 2.50% (2013 2.75%). If interest rates were to increase by 100 basis points, the Group’s after tax result would increase by $144,000 (2013 $121,000). A decrease of 100 basis points would reduce the Group’s after tax result by $144,000 (2013 $121,000). The Group does not have any borrowings and therefore is not exposed to interest rate risk on borrowings. B. Credit risk Credit risk is assessed on a Group basis. It arises from cash and cash equivalents placed with banks as well as credit exposure to financial institutions on the Group’s lender panel from which future trailing commissions are due. The majority of these financial institutions are Authorised Deposit-taking Institutions (ADIs) and therefore regulated by the Australian Prudential Regulation Authority (APRA) and are independently rated. This forms the basis of the Group’s assessment of credit risk. If the lender has not been independently rated, credit risk is assessed taking into account its financial position, past experience and other factors. The table below indicates the Group’s exposure to each ratings category. Notes to the Consolidated Financial Statements 51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 NOTE 2 FINANCIAL RISK MANAGEMENT continued The Group bears the risk of non-payment of future trailing commissions by lenders should they become insolvent but correspondingly, there is no legal requirement to pay out any trailing commissions due to brokers or franchisees that have not been received. The risk profile of the Group is set out in the table below. Standard & Poor’s Credit Rating Cash and cash equivalents Trade and franchisee receivables NPV Future trailing commissions receivable 2014 ADIs Non ADIs 2013 ADIs Non ADIs Total Receivable 12,445 Standard & Poor’s Credit Rating Cash and cash equivalents Trade and franchisee receivables NPV Future trailing commissions receivable AA- A+ A A- BBB+ BBB BBB- Not rated AA- A+ A A- BBB+ Not rated $ 000 12,445 – – – – – – – 12,445 – – – – – – – AA- A+ A A- BBB+ BBB BBB- Not rated AA- A+ A- BBB+ Not rated $ 000 10,953 – – – – – – – 10,953 – – – – – – $ 000 9,021 859 403 1,161 1,153 44 – 231 12,872 95 45 10 162 27 3,948 4,287 17,159 $ 000 232,040 20,915 4,347 28,700 17,873 1,108 – 5,903 310,886 – – – 1,368 – 4,857 6,225 317,111 $ 000 8,204 797 1,205 109 901 13 30 316 11,575 12 15 116 15 2,695 2,853 14,428 $ 000 223,336 20,321 26,982 2,345 16,811 425 916 8,690 299,826 – – 1,317 – 4,789 6,106 305,932 Total Receivable 10,953 52 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 C. Liquidity risk and fair value estimation Prudent liquidity risk management implies maintaining sufficient cash and marketable securities. The Group manages liquidity risk by continuously monitoring forecast and actual cash flows and matching maturity profiles of financial assets and liabilities. Surplus funds are generally only invested in instruments that are tradable in highly liquid markets. The tables below analyse the Group’s financial assets into relevant maturity groupings based on the expected future cashflows. No financial assets are past due or impaired. At 30 June 2014 Non-derivatives Interest bearing Cash and cash equivalents Franchisee receivables Non-interest bearing Cash and cash equivalents Trade receivables Franchisee and other receivables Future trailing commissions receivable Less than 6 months 6 – 12 months Between 1 and 2 years Between 2 and 5 years $’000 $’000 $’000 $’000 Over 5 years $’000 Total cash flows Carrying Amount $’000 $’000 12,442 284 3 14,112 1,349 – 296 – – 6 – 628 – – 23 – 1,395 – 718 12,442 3,321 12,442 2,495 – – 51 – – – 3 14,112 3 14,112 1,429 1,429 42,711 40,477 71,912 145,035 98,362 398,497 317,111 70,901 40,779 72,563 146,481 99,080 429,804 347,592 The fair value of the future trailing commissions receivable is $338,578,000. The fair value of all other assets is the same as their carrying amount. At 30 June 2013 Non-derivatives Interest bearing Cash and cash equivalents Other receivables Non-interest bearing Cash and cash equivalents Trade receivables Franchisee and other receivables Future trailing commissions receivable Less than 6 months 6 – 12 months Between 1 and 2 years Between 2 and 5 years $’000 $’000 $’000 $’000 Over 5 years $’000 Total cash flows Carrying Amount $’000 $’000 10,950 253 3 12,370 693 – 227 – – 22 – 410 – – – – 844 – 1,774 10,950 3,508 10,950 1,938 – – – – – – 3 3 12,370 12,370 715 715 42,892 40,626 72,416 143,276 94,772 393,982 305,932 67,161 40,875 72,826 144,120 96,546 421,528 331,908 The fair value of the future trailing commissions receivable is $333,805,000. The fair value of all other assets is the same as their carrying amount. The tables below analyse the Group’s financial liabilities into relevant maturity groupings based on the expected future cashflows. Notes to the Consolidated Financial Statements 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 NOTE 2 FINANCIAL RISK MANAGEMENT continued Contractual maturities of financial liabilities At 30 June 2014 Non-derivatives Non-interest bearing Trade payables Licence fees and other payables Future trailing commissions payable Less than 6 months 6 – 12 months Between 1 and 2 years Between 2 and 5 years $’000 $’000 $’000 $’000 Over 5 years $’000 Total cash flows Carrying Amount $’000 $’000 12,085 5,817 – 155 – 11 – – – – 12,085 12,085 5,983 5,983 25,894 24,543 43,602 87,979 59,746 241,764 191,534 43,796 24,698 43,613 87,979 59,746 259,832 209,602 The fair value of the future trailing commissions payable is $204,973,000. The fair value of all other liabilities is the same as their carrying amount. Contractual maturities of financial liabilities At 30 June 2013 Non-derivatives Non-interest bearing Trade payables Licence fees and other payables Future trailing commissions payable Less than 6 months 6 – 12 months Between 1 and 2 years Between 2 and 5 years $’000 $’000 $’000 $’000 Over 5 years $’000 Total cash flows Carrying Amount $’000 $’000 10,693 5,078 – 128 – 29 – – – – 10,693 10,693 5,235 5,235 25,373 23,938 43,025 85,768 56,851 234,955 182,128 41,144 24,066 43,054 85,768 56,851 250,883 198,056 The fair value of the future trailing commissions payable is $198,993,000. The fair value of all other liabilities is the same as their carrying amount. 54 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 3 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Trailing commissions The Group receives trailing commissions from lenders on settled loans over the life of the loan based on the loan book balance outstanding. The Group also makes trailing commission payments to franchisees based on their individual loan book balance outstanding. The amortised cost of trailing commissions receivable and the corresponding payable to franchisees is determined by using the discounted cash flow valuation technique, which requires the use of assumptions. The key assumptions to determine the amortised cost at balance sheet date are the future run-off rate of the underlying loan portfolio, the discount rate and the percentage paid to franchisees. The future run-off rate used is actually a series of rates applied to the underlying loans based primarily on their age at the date of valuation. The weighted average life shown below is the result of the series of future run-off rates applied to the specific loan data at the balance sheet date. The determination of the assumptions to be used in the valuation is made by Management based primarily on two factors: an annual assessment, with external actuaries, of the underlying loan portfolio including historical run-off rate analysis and consideration of current and future economic factors. These factors are complex and the determination of assumptions requires a high degree of judgement. The significant assumptions used in the valuation are listed below: Weighted average loan life Average discount rate Percentage paid to franchisees (10 year average) 2014 4.0 years 7.6% 61% 2013 4.0 years 8.4% 60% If the series of run-off rates used in the valuation of trailing commissions receivable and payable were to differ by +/- 10% from Management’s estimates, the impact on the balance sheet would be: • • a decrease in net assets of $5.4 million (made up of decreases in current assets of $0.8 million, non-current assets of $18.9 million, current liabilities of $0.5 million, non-current liabilities of $11.5 million and deferred tax liabilities of $2.3 million) if run- off rates increase by 10%; or an increase in net assets of $6.1 million (made up of increases in current assets of $0.9 million, non-current assets of $21.2 million, current liabilities of $0.5 million, non-current liabilities of $12.9 million and deferred tax liabilities of $2.6 million) if run- off rates decrease by 10%. Changes to the discount rate are likely to occur as a result of changes to the interest rate. However, management does not consider this to have a material impact on the fair value calculation of trailing commissions receivable and the corresponding payable to franchisees. Management does not consider material changes to the percentage paid to franchisees to be reasonably possible. In the current period, the annual review of the underlying loan book found that the run-off rate experienced in 2014 was faster than that assumed in the valuation model and an adjustment to the profit and loss for the year was recognised to reflect the actual experience in the portfolio. In addition the assumptions used in the valuation of future trailing commissions were changed to reflect an extension of the current economic environment for the short to medium term. These changes to the trailing commission model resulted in a $1.1 million negative adjustment after tax to the Group’s profit and loss for FY14 (2013 – $3.0 million positive adjustment). Notes to the Consolidated Financial Statements 55 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 4 Segment information A. Description of segments Management has determined the operating segments based on the reports reviewed by the Chief Executive Officer that are used to make strategic and operating decisions. The Chief Executive Officer considers the business from both a product and cash versus IFRS presentation of the results. Therefore management has identified four reportable product segments, Mortgage Choice franchised mortgage broking (MOC), Help Me Choose health fund and mortgage comparison website (HMC), Mortgage Choice Financial Planning (MCFP) and LoanKit aggregation mortgage broking (LoanKit) (discontinued). The Group operates only in Australia. B. Information provided to the Chief Executive Officer Information provided to the Chief Executive Officer for the year ended 30 June 2014 is as follows: Product Segments 2014 Revenue Gross Profit (IFRS) Gross profit (cash) Depreciation and amortisation Income tax expense NPAT (IFRS) NPAT (cash) NPAT (IFRS) incl sale of LoanKit NPAT (cash) incl sale of LoanKit 2013 Revenue Gross Profit (IFRS) Gross profit (cash) Depreciation and amortisation Income tax expense NPAT (IFRS) NPAT (cash) Total $’000 MOC $’000 178,793 170,841 63,074 61,545 1,603 8,210 18,455 18,708 19,799 20,052 Total $’000 156,534 62,378 57,073 1,760 8,222 18,714 15,774 58,740 57,261 1,392 8,488 19,106 19,342 20,450 20,686 MOC $’000 151,459 58,647 54,031 1,496 8,748 19,944 17,410 HMC $’000 4,646 3,369 3,319 129 92 214 203 214 203 HMC $’000 3,827 2,578 1,889 154 30 69 (402) LoanKit (discontinued) $’000 329 329 329 28 (39) (92) (98) (92) (98) LoanKit $’000 1,135 1,135 1,135 110 (137) (320) (283) MCFP $’000 2,977 636 636 54 (331) (773) (739) (773) (739) MCFP $’000 113 18 18 – (419) (979) (951) 56 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 2014 2013 % change 2014 2013 % change Cash versus IFRS Origination commission income Trailing commission income** Origination commission paid Trailing commission paid** $000 63,014 87,407 Cash* $000 51,965 86,680 150,421 138,645 45,777 52,192 97,969 37,375 51,289 88,664 Net core commissions 52,452 49,981 Diversified products net revenue 1,208 833 HMC, LoanKit and Financial Planning net revenue Other income Gross Profit Operating Expenses Share based remuneration Net profit before tax 4,125 3,760 2,967 3,292 61,545 57,073 35,085 34,670 – – 26,460 22,403 Net profit after tax 18,708 15,774 After tax gain on sale of LoanKit 1,344 – IFRS*** $000 $000 63,014 98,535 161,549 45,777 61,841 107,618 51,965 92,500 144,465 37,375 52,493 89,868 53,931 54,597 1,208 833 4,175 3,760 3,656 3,292 63,074 62,378 35,085 1,324 34,670 772 26,665 26,936 18,455 18,714 1,344 – 21% 7% 12% 22% 18% 20% (1%) 45% 14% 14% 1% 1% 72% (1%) (1%) – 21% 1% 8% 22% 2% 10% 5% 45% 39% 14% 8% 1% 18% 19% – NPAT including gain on sale of LoanKit 20,052 15,774 27% 19,799 18,714 6% * Cash is based on accruals accounting and excludes share based remuneration and the net present value of future trailing commissions receivable and payable. ** Trailing commission income and trailing commission paid include discount unwind as itemised in the consolidated income statement. *** IFRS income and expenses include trading results to 30 September 2013 in the discontinued operation (LoanKit). Refer note 5 for further details. Notes to the Consolidated Financial Statements 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 NOTE 4 SEGMENT INFORMATION continued The following provides additional detail to assist in reconciliation of the above table to the consolidated income statement: Diversified products commissions Diversified products direct costs Diversified products net income Help Me Choose commissions* Help Me Choose direct costs Help Me Choose net income Financial Planning revenue Financial Planning direct costs Financial Planning net revenue LoanKit service fees HMC, LoanKit and Financial Planning net revenue 2014 Cash 2013 % change 2014 IFRS 2013 % change $000 5,691 4,483 1,208 4,537 1,277 3,260 2,896 2,341 555 310 $000 3,777 2,944 833 3,136 1,249 1,887 113 95 18 1,062 51% 52% 45% 45% 2% 73% 2463% 2364% 2983% (71%) $000 5,691 4,483 1,208 4,587 1,277 3,310 2,896 2,341 555 310 $000 3,777 2,944 833 3,825 1,249 2,576 113 95 18 1,062 51% 52% 45% 20% 2% 28% 2463% 2364% 2983% (71%) 4,125 2,967 39% 4,175 3,656 14% Franchise income Interest Other Income Other income 1,522 538 1,700 3,760 1,192 536 1,564 3,292 28% 0% 9% 14% 1,522 538 1,700 3,760 1,192 536 1,564 3,292 28% 0% 9% 14% * Help Me Choose cash income is based on accruals accounting and excludes the net present value of future trailing commissions’ receivable on health policies written during the year. C. Other information i/ Operating income Operating income from the origination of a residential mortgage is comprised of commission paid at the time the loan is originated and a trailing commission which is paid over the life of the loan. Prior to the introduction of IFRS in 2006, trailing commission was recognised as income as it became due over the life of a loan. Under IFRS, the future trailing cash flows to be received over the life of a loan are estimated, discounted to present value and recognised at the time a loan settles. The Chief Executive Officer considers both methods in measuring the Group’s performance. 58 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 ii/ Net profit after tax The cash net profit after tax (as shown on preceding page) reconciles to the IFRS profit after tax as follows: Cash Net profit after tax NPV future trails on new loans originated, net of payout Less net cash from trail previously recognised under IFRS Plus adjustments to loan book assumptions Plus gain on prepayment of trail liability Plus reversal of amortisation of trail liability* NPV future trails on Help Me Choose policies written Less net cash from trail previously recognised under IFRS Less share based payments expense Net IFRS after tax profit for the year 2014 $000’s 20,052 19,934 2013 $000’s 15,774 16,956 (18,134) (16,989) (1,146) 3,027 184 198 413 (378) (1,324) 19,799 40 196 577 (95) (772) 18,714 * Under cash profit, the prepayment of trail liability is spread over the estimated life of the trail book portfolio. iii/ Gross profit and net core commissions The cash gross profit and net core commissions reconcile to their IFRS equivalents as follows: Cash NPV future trails on new loans originated, net of payout Gross Profit Net Core Commissions 2014 $000’s 61,545 28,476 2013 $000’s 57,073 24,222 2014 $000’s 52,452 28,476 2013 $000’s 49,981 24,222 Less net cash from trail previously recognised under IFRS (25,906) (24,270) (25,906) (24,270) Plus adjustments to loan book assumptions Plus gain on prepayment of trail liability Plus reversal of amortisation of trail liability* NPV future trails on Help Me Choose policies written Less net cash from trail previously recognised under IFRS IFRS (1,638) 4,325 (1,638) 264 283 590 (540) 63,074 58 281 825 (136) 62,378 264 283 – – 4,325 58 281 – – 53,931 54,597 * Under cash profit, the prepayment of trail liability is spread over the estimated life of the trail book portfolio. Notes to the Consolidated Financial Statements 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 5 Discontinued operation i/ Description On 30 September 2013 Mortgage Choice sold 100% of the issued shares in Beagle Finance Pty Limited, owner of the LoanKit mortgage brokerage aggregation business, for cash consideration of $1,850,000. The LoanKit division is reported in these financial statements as a discontinued operation. Financial information relating to the discontinued operation for the year is set out below. ii/ Financial performance and cash flow information The financial performance and cash flow information presented are for the years ended 30 June 2014 and 30 June 2013. This includes costs incurred by Mortgage Choice between 1 October 2013 and 30 June 2014. 2014 $’000 310 – 19 329 460 (131) 39 (92) 1,665 (321) 1,344 1,252 2014 $’000 (60) 1,850 1,790 2013 $’000 1,062 3 70 1,135 1,592 (457) 137 (320) – – – (320) 2013 $’000 (47) – (47) Revenue Interest Other income Expenses Loss before income tax Income tax expense Loss after tax of discontinued operation Gain on sale of division before income tax Income tax expense Gain on sale of division after income tax Profit/(loss) from discontinued operation Net cash inflow/(outflow) from operating activities Net cash inflow from investing activities (2013 includes inflow of $1,750,000 from sale of the division) Net increase/(decrease) in cash for discontinued operation 60 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 iii/ Details of the sale of the division Consideration received or receivable: Cash Fair value of contingent consideration Total disposal consideration Selling costs Carrying amount of net assets sold Income tax expense The carrying amounts of the assets and liabilities as at the date of sale (30 September 2013) were: Assets Cash and cash equivalents Trade and other receivables Intangible assets Total assets Liabilities Trade and other payables Total Liabilities Net assets 2014 $’000 2013 $’000 1,750 100 1,850 (155) (30) 1,665 (321) 1,344 – – – – – – – 30 September 2013 $’000 13 6 29 48 18 18 30 Notes to the Consolidated Financial Statements 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 6 Revenue Revenue from continuing operations Sales revenue Services Other revenue Interest earned on deposits and loans Interest in relation to discount unwind Other income Note 7 Other income Conference sponsorships (note (A)) Other A. Conference sponsorships 2014 $’000 2013 $’000 152,549 127,728 538 23,696 1,681 533 25,644 1,494 178,464 155,399 2014 $’000 1,610 71 1,681 2013 $’000 1,491 3 1,494 Lenders sponsor Mortgage Choice’s National Conference, High Flyers’ Conference, quarterly state conferences, and periodic training days and workshops. 62 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 8 Expenses Profit from ordinary activities before income tax includes the following specific expenses: Finance costs Interest and finance charges (note (A)) Net loss on disposal of property, plant and equipment Depreciation Plant and equipment Amortisation Leasehold improvements Computer software Other provisions Employee entitlements Rental expense relating to operating leases Defined contribution superannuation expense Termination benefits A. Interest and finance charges 2014 $’000 2013 $’000 14,129 15,470 – – 354 376 60 1,189 195 1,125 1,259 47 168 1,216 147 1,075 1,146 47 Interest expense comprises the unwinding of the discount in relation to payment of trailing commission to franchisees. Notes to the Consolidated Financial Statements 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 9 Income tax A. Income tax expense Current tax Deferred tax Under (over) provided in prior years Income tax expense is attributable to: Profit from continuing operations Profit from discontinued operations Deferred income tax (revenue) expense including income tax expense comprises: (Increase)/decrease in deferred tax assets (note 13) Increase/(decrease) in deferred tax liabilities (note 18) 2014 $’000 8,011 520 – 8,531 8,249 282 8,531 (3,016) 3,536 520 2013 $’000 7,062 1,172 (12) 8,222 8,359 (137) 8,222 (612) 1,784 1,172 B. Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense 26,796 27,393 Income tax calculated @ 30% (2013 – 30%) Discontinued operations tax expense Tax effect of amounts which are not deductible/(assessable) in calculating taxable income: Under/(over) provision from prior years Income tax expense No part of the deferred tax asset shown above and in note 13 is attributable to tax losses. 8,039 282 210 8,531 – 8,531 8,218 (137) 153 8,234 (12) 8,222 64 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 10 Current Assets – Cash and cash equivalents Cash at bank and on hand Risk exposure 2014 $’000 2013 $’000 12,445 10,953 The Group’s exposure to interest rate risk is discussed in note 2. The maximum exposure to credit risk at the reporting date is the carrying amount of each class of cash and cash equivalents mentioned above. Note 11 Trade and other receivables 2014 2013 Current $’000 Non-current $’000 Total $’000 Current $’000 Non-current $’000 Total $’000 Trade receivables (1) 14,112 – 14,112 12,370 – 12,370 Net present value of future trailing commissions receivable Franchisee receivables Other receivables Prepayments 80,975 236,136 317,111 80,014 225,918 305,932 939 877 1,973 98,876 2,108 – – 3,047 877 1,973 238,244 337,120 409 595 1,922 95,310 1,649 – – 2,058 595 1,922 227,567 322,877 (1) Subject to a limited charge in favour of The Loan Book Security Trust (refer to note 15) A. Other receivables These amounts generally arise from transactions outside the usual operating activities of the consolidated entity. B. Impaired trade receivables As at 30 June 2014 current trade receivables were not impaired (2013 – $22,000). The amount of the provision in 2013 was $15,000. C. Risk exposure Information about the Group’s exposure to credit risk and interest rate risk is provided in note 2. D. Fair values The carrying amounts of trade and other receivables at year end is a reasonable approximation of their fair values with the exception of the net present value of future trailing commissions receivable which are accounted for at amortised cost. Notes to the Consolidated Financial Statements 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 12 Non-Current Assets – Property, plant and equipment Year ended 30 June 2014 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 30 June 2014 Cost Accumulated depreciation Net book amount Year ended 30 June 2013 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 30 June 2013 Cost Accumulated depreciation Net book amount Plant and Equipment $’000 Leasehold Improvements $’000 650 399 – (354) 695 2,416 (1,721) 695 917 109 – (376) 650 2,394 (1,744) 650 42 230 – (60) 212 1,320 (1,108) 212 208 2 – (168) 42 1,096 (1,054) 42 Total $’000 692 629 – (414) 907 3,736 (2,829) 907 1,125 111 – (544) 692 3,490 (2,798) 692 66 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 13 Non-current assets – Deferred tax assets The balance comprises temporary differences attributable to: Net present value of future trailing commissions payable Employee benefits Depreciation and amortisation Accrued expenses Total deferred tax assets Set-off of deferred tax assets pursuant to set-off provisions (note 18) Net deferred tax assets Deferred tax assets to be recovered within 12 months Deferred tax assets to be recovered after more than 12 months Movements At 30 June 2012 Charged/(credited) to the income statement At 30 June 2013 Charged/(credited) to the income statement At 30 June 2014 NPV of future trailing commissions payable Employee benefits Depreciation and amortisation Accrued expenses $’000 $’000 $’000 $’000 54,263 375 54,638 2,821 57,459 747 128 875 70 945 220 44 264 53 317 121 65 186 72 258 Other $’000 – – – – – 2014 $’000 2013 $’000 57,459 54,638 945 317 258 875 264 186 58,979 55,963 (58,979) (55,963) – – 15,677 43,302 58,979 15,034 40,929 55,963 Total $’000 55,351 612 55,963 3,016 58,979 Notes to the Consolidated Financial Statements 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 14 Non-current assets – intangible assets At 30 June 2012 Cost Accumulated amortisation Net book amount Year ended 30 June 2013 Opening net book amount Additions Amortisation charge Closing net book amount At 30 June 2013 Cost Accumulated amortisation Net book amount Year ended 30 June 2014 Opening net book amount Additions Amortisation charge Closing net book amount At 30 June 2014 Cost Accumulated amortisation Net book amount 68 Notes to the Consolidated Financial Statements Computer Software $’000 7,651 (5,443) 2,208 2,208 1,295 (1,216) 2,287 8,946 (6,659) 2,287 2,287 1,251 (1,189) 2,349 9,200 (6,851) 2,349 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 15 Current liabilities – Trade and other payables Trade payables(1) Net present value of future trailing commissions payable Licence fees repayable Other payables (1) Loan Book Security Trust 2014 $’000 12,085 48,645 236 5,736 66,702 2013 $’000 10,693 47,219 226 4,980 63,118 The Loan Book Security Scheme provides security for the trailing commissions payable to certain eligible franchisees based on performance criteria. Mortgage Choice Limited has granted two charges in favour of a trustee on behalf of the eligible franchisees. The independent trustee is AET Structured Finance Services Pty Limited. The first charge is over a specified percentage of the Company’s trailing commission income. The purpose of this charge is to be the first source of funds available to eligible franchisees for the payment of trailing commissions in the event that administration or liquidation occurs. The charge will crystallise and can be enforced by eligible franchisees only in the event of liquidation or administration of Mortgage Choice Limited. As at 30 June 2014, the amount that would be subject to charge resulting from applying the specified percentage to the trailing commission immediately due to be received by Mortgage Choice Limited is $4,137,371 (2013 – $3,939,267). This is included as part of the balance of trade payables at 30 June 2014 and would be subject to charge until disbursed to the eligible franchisees. The amount subject to the charge would vary dependant on trailing commission due to be received by Mortgage Choice Limited from month to month. The second charge is a floating charge over all of the assets of Mortgage Choice Limited. It is limited in the powers it allows the security trustee to exercise prior to liquidation. Its primary purpose is to ensure that the loan book security structure need not be subject to the moratorium arising if an administrator were to be appointed to Mortgage Choice Limited. Only after liquidation does this charge confer comprehensive mortgagee powers on the security trustee. Fair values The carrying amounts of trade and other payables at year end is a reasonable approximation of their fair values with the exception of the net present value of future trailing commissions payable which are accounted for at amortised cost. Notes to the Consolidated Financial Statements 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 16 Current liabilities – Provisions Make good provision (A) Employee entitlements – annual leave Employee entitlements – long service leave A. Make good provision Current $’000 Non-current $’000 85 795 223 1,103 498 – 264 762 2014 Total $’000 583 795 487 1,865 Current $’000 Non-current $’000 28 776 189 993 330 – 196 526 2013 Total $’000 358 776 385 1,519 Mortgage Choice is required to restore the leased premises of its offices to their original condition at the end of the respective lease terms. A provision has been recognised for the present value of the estimated expenditure required to remove any leasehold improvements. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease or the useful life of the assets. Make good costs that are not expected to be settled within twelve months have been included in non-current liabilities. Note 17 Non-current liabilities – Trade and other payables Net present value of future trailing commissions payable Licence fees repayable 2014 $’000 2013 $’000 142,899 134,909 11 29 142,900 134,938 70 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 18 Non-current liabilities – Deferred tax liabilities The balance comprises temporary differences attributable to: NPV of future trailing commissions receivable Intangibles Prepayments and other receivables Setoff of deferred tax assets pursuant to setoff provisions (note 13) Net deferred tax liabilities Deferred tax liabilities to be settled within 12 months Deferred tax liabilities to be settled after more than 12 months Movements – Consolidated At 30 June 2012 Charged to the income statement At 30 June 2013 Charged to the income statement At 30 June 2014 NPV of future trailing commissions payable $’000 89,827 1,953 91,780 3,353 95,133 2014 $’000 2013 $’000 95,133 91,780 404 47 230 38 95,584 92,048 (58,979) (55,963) 36,605 36,085 24,699 70,885 95,584 Intangibles $’000 Prepayments and other receivables $’000 393 (163) 230 174 404 44 (6) 38 9 47 24,043 68,005 92,048 Total $’000 90,264 1,784 92,048 3,536 95,584 Notes to the Consolidated Financial Statements 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 19 Contributed equity A. Share capital Ordinary shares – fully paid 2014 shares ’000 2013 shares ’000 2014 $’000 2013 $’000 122,170 121,709 4,604 4,018 Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. Total contributed equity as at 30 June 2014: Details Total ordinary shares on issue Treasury shares (note (i)) Total ordinary shares held as contributed equity i/ Treasury shares Number of shares 123,780,387 (1,610,491) 122,169,896 Treasury shares are shares in Mortgage Choice Limited that are held by the Mortgage Choice Performance Share Plan Trust for the purpose of issuing shares under the Mortgage Choice Performance Share Plan (PSP) (see note 31 for further information). Date 30 June 2012 31 August 2012 Details Balance Treasury shares issues under the Performance Share Plan to employees 3 September 2012 Treasury shares issues under the Performance Share Plan to employees 14 September 2012 Treasury shares issues under the Performance Share Plan to employees 14 September 2012 Shares issued to the Mortgage Choice Performance Share Plan Trust 30 June 2013 31 August 2013 Balance Treasury shares issues under the Performance Share Plan to employees 3 September 2013 Treasury shares issues under the Performance Share Plan to employees 13 September 2013 Treasury shares issues under the Performance Share Plan to employees 31 October 2013 Shares issued to the Mortgage Choice Performance Share Plan Trust 30 June 2014 Balance Number of shares 1,520,917 (169,333) (189,699) (51,097) 611,710 1,722,498 (169,333) (189,699) (102,080) 349,105 1,610,491 72 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Movements in ordinary share capital: Date Details 30 June 2012 Balance 31 August 2012 Exercise of options 31 August 2012 Treasury shares issues under the Performance Share Plan to employees 3 September 2012 Treasury shares issues under the Performance Share Plan to employees 10 September 2012 Exercise of options 12 September 2012 Exercise of options 19 September 2012 Exercise of options 20 September 2012 Exercise of options 14 September 2012 Treasury shares issues under the Performance Share Plan to employees 14 September 2012 Shares issued to the Mortgage Choice Performance Share Plan Trust 14 September 2012 Held as treasury shares 30 June 2013 Balance 31 August 2013 Treasury shares issues under the Performance Share Plan to employees 3 September 2013 Treasury shares issues under the Performance Share Plan to employees 13 September 2013 Treasury shares issues under the Performance Share Plan to employees 31 October 2013 Shares issued to the Mortgage Choice Performance Share Plan Trust 31 October 2013 Held as treasury shares 30 June 2014 Balance B. Employee share scheme Number of shares 118,798,655 $’000 1,558 650,000 169,333 189,699 250,000 800,000 248,794 551,206 51,097 611,710 (611,710) 514 201 220 197 632 197 435 64 – – 121,708,784 4,018 169,333 189,699 102,080 349,105 (349,105) 210 223 153 – – 122,169,896 4,604 Information relating to the employee share scheme, including details of shares issued under the scheme, is set out in note 31. C. Options Information relating to the Mortgage Choice Executive Performance Option Plan, including details of options issued, exercised and lapsed during the financial year and options outstanding at the end of the financial year is set out in note 31. Notes to the Consolidated Financial Statements 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 20 Reserves and retained profits A. Reserves Share-based payments reserve Movements: Share-based payments reserve Balance 1 July Performance shares expensed/(reversed) Vesting of shares held by the Mortgage Choice Performance Share Plan Trust to employees Balance 30 June B. Retained profits Balance 1 July Net profit for the year Dividends Balance 30 June C. Nature and purpose of reserves i/ Share-based payments reserve 2014 $’000 2,210 1,472 1,324 (586) 2,210 2014 $’000 93,642 19,799 (17,924) 95,517 2013 $’000 1,472 1,260 772 (560) 1,472 2013 $’000 90,801 18,714 (15,873) 93,642 The share-based payments reserve is used to recognise the fair value of options and performance shares granted but not vested. 74 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 21 Dividends A. Ordinary shares Final dividend declared out of profits of the Company for the year ended 30 June 2012 of 7.0 cents per fully paid share paid on 18 September 2012: Fully franked based on tax paid @ 30% 7.0 cents per share Interim dividend declared out of profits of the Company for the half-year ended 31 December 2012 of 6.0 cents per fully paid share paid 19 March 2013: Fully franked based on tax paid @ 30% 6.0 cents per share Final dividend declared out of profits of the Company for the year ended 30 June 2013 of 7.0 cents per fully paid share paid on 16 September 2013: Fully franked based on tax paid @ 30% 7.0 cents per share Interim dividend declared out of profits of the Company for the half-year ended 31 December 2013 of 7.5 cents per fully paid share paid 24 March 2014: Fully franked based on tax paid @ 30% 7.5 cents per share B. Dividends not recognised at year end In addition to the above dividends, since year end the Directors have recommended the payment of a final dividend of 8.0 cents per fully paid ordinary share, (2013 – 7.0 cents) fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 15 September 2014 out of retained profits at 30 June 2014, but not recognised as a liability at year end, is C. Franked dividend The franked portions of the final dividends recommended after 30 June 2013 will be franked out of existing franking credits or out of franking credits arising from the payment of income tax in the year ending 30 June 2013. Franking credits available for subsequent financial years to the equity holders of the parent entity based on a tax rate of 30% (2013 – 30%) The above amounts represent the balance of the franking account as at the end of the financial year, 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. 2014 $’000 2013 $’000 – – 8,640 9,284 17,924 8,467 7,406 – – 15,873 9,910 8,640 2014 $’000 2013 $’000 4,602 4,279 The impact on the franking account of the dividend recommended by the Directors since year end, but not recognised as a liability at year end, will be a reduction in the franking account of $4,247,000 (2013: $3,703,000). Notes to the Consolidated Financial Statements 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 22 Key management personnel disclosures D. Key management personnel compensation Short-term employee benefits Post-employment benefits Long–term benefits Share-based payments Balance 30 June 2014 $ 2013 $ 2,431,947 2,270,421 97,761 19,130 87,528 49,866 1,000,339 522,805 3,549,177 2,930,620 Detailed remuneration disclosures are provided in the Directors’ report on pages 10 – 27 of the remuneration report. 76 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 23 Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the parent entity, its related practices and nonrelated audit firms: 2014 A. Audit services Deloitte Touche Tohmatsu Australian firm: Audit and review of financial reports Total remuneration for audit services B. Non-audit services Non-audit-related services Deloitte Actuaries and Consultants Limited: Actuarial services Total remuneration for non-audit-related services Taxation services Deloitte Touche Tohmatsu Australian firm: Taxation services Total remuneration for taxation services Total remuneration for non-audit services 2013 A. Audit services PricewaterhouseCoopers Australian firm: Audit and review of financial reports Total remuneration for audit services B. Non-audit services Audit-related services PricewaterhouseCoopers Australian firm: Other assurance services Total remuneration for audit-related services Taxation services PricewaterhouseCoopers Australian firm: Tax compliance services Other tax services Total remuneration for taxation services Total remuneration for non-audit services $ 192,500 192,500 75,000 75,000 1,644 1,644 76,644 235,150 235,150 – – 23,900 18,800 42,700 42,700 Notes to the Consolidated Financial Statements 77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 24 Contingencies Contingent liabilities The Group had contingent liabilities at 30 June 2014 in respect of: Guarantees Guarantees given in respect of premises leases $760,459 (2013: $960,826). Contingent claims From time to time disputes occur between the Company and its franchisees in the normal course of operation, a number of which may be unresolved at any point in time. At 30 June 2014 and 30 June 2013, there were no disputes or claims in progress that are expected to have a material financial impact on the Company. No material losses are anticipated in respect of any of the above contingent liabilities. Note 25 Commitments Lease commitments Non-cancellable operating leases The Group leases various offices under noncancellable operating leases expiring within one to six years. The leases have varying terms, escalation clauses and renewal rights. On renewal, the terms of the leases are renegotiated. The Group also leases various pieces of office equipment under non-cancellable operating leases. Operating leases Operating lease expenditure contracted for at the reporting date but not recognised as liabilities payable: Within one year Later than one year but not later than five years Later than five years 2014 $’000 2013 $’000 1,070 3,352 – 4,422 942 3,135 200 4,277 78 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 26 Related party transactions E. Parent entity The ultimate parent entity within the Group is Mortgage Choice Limited. F. Subsidiaries Interests in subsidiaries are set out in note 27. G. Key management personnel Disclosures relating to key management personnel are set out in note 22. Additional disclosures are set out in the Directors’ report in the remuneration report. H. Loans to/from related parties The Group has formed a trust to administer the Group’s employee share scheme. This is funded by the parent entity. This trust is consolidated, as the substance of the relationship is that the trust is controlled by the Group. No provisions for doubtful debts have been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad or doubtful debts due from related parties. Note 27 Subsidiaries Significant investments in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following principal subsidiaries in accordance with the accounting policy described in note 1(B): Name of entity MC Loan Book Security Pty Limited Beagle Finance Pty Limited Help Me Choose Pty Limited Mortgage Choice Financial Planning Pty Limited Country of Incorporation Class of Shares Australia Australia Australia Australia Ordinary Ordinary Ordinary Ordinary Equity holding * 2014 % 100 – 100 100 2013 % 100 100 100 100 These subsidiaries, except Mortgage Choice Financial Planning Pty Limited, have been granted relief from the necessity to prepare financial reports in accordance with Class Order 98/1418 issued by the Australian Securities and Investments Commission. * The proportion of ownership interest is equal to the proportion of voting power held. Notes to the Consolidated Financial Statements 79 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 28 Events occurring after the balance sheet date Dividend payment Subsequent to year end, a final ordinary dividend of $9,910,000 (8.0 cents per fully paid share) was declared out of profits of the Company for the year ended 30 June 2014 on 21 August 2014 to be paid on 15 September 2014. Note 29 Reconciliation of profit after income tax to net cash inflow from operating activities Profit for the year Depreciation and amortisation Change in net present value of future trailing inflows Change in net present value of future trailing outflows Employee expense benefits – share-based payments Interest received Net loss/(gain) on sale of LoanKit Change in operating assets and liabilities: (Increase)/decrease in trade and other receivables (Increase)/decrease in other operating assets Increase/(decrease) in trade payables Increase/(decrease) in other operating liabilities Increase/(decrease) in provision for income taxes payable Increase/(decrease) in deferred tax liabilities Increase/(decrease) in other provisions Net cash inflow from operating activities 2014 $’000 19,799 1,603 (11,177) 9,932 1,324 (538) (1,666) (3,014) (51) 847 766 401 520 346 2013 $’000 18,714 1,760 (6,643) 1,621 772 (536) – (1,371) (379) 293 502 (918) 1,173 146 19,092 15,134 80 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 30 Earnings per share A. Basic earnings per share From continuing operations From discontinued operation Total basic earnings per share B. Diluted earnings per share From continuing operations From discontinued operation Total diluted earnings per share Earnings used in calculating earnings per share Profit from continuing operations Profit from discontinued operations Profit for the year attributable to owners of the Company Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Options Share rights Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share Information concerning the classification of securities A. Options Consolidated 2014 Cents 2013 Cents 15.0 1.0 16.0 15.0 1.0 16.0 15.2 0.3 15.5 15.2 0.3 15.5 $’000 $’000 18,547 1,252 19,034 (320) 19,799 18,714 2014 Number 2013 Number 123,663,700 122,747,895 – 203,385 82,576 – 123,746,276 122,951,280 Options granted to employees under the Mortgage Choice Executive Performance Option Plan are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share. The options have not been included in the determination of basic earnings per share. Details relating to the options are set out in the Remuneration report. B. Performance Share Plan Shares issued to employees under the Mortgage Choice Performance Share Plan are considered to be ordinary shares and have been included in the determination of basic earnings per share. Details relating to the shares are set out in the Remuneration report. C. Share Rights Plan Share rights granted to the CEO under the Mortgage Choice Share Rights Plan that have vested are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share. The share rights have not been included in the determination of basic earnings per share. Details relating to the share rights are set out in the Remuneration report. Notes to the Consolidated Financial Statements 81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 Note 31 Share-based payments A. Executive Performance Option Plan (EPOP) The Executive Performance Option Plan may be offered on an annual basis to eligible executives as determined by the Board. The details of each offer may differ as to the particulars, especially with regard to performance criteria, performance period and service criteria. At the present time this is a legacy plan as options have not been issued under the plan since May 2009. In the year ending 30 June 2013, no options were offered. Under the terms of the EPOP, options are offered over one ordinary share of Mortgage Choice Limited and have an exercise price based on the market value of the Company’s shares at the time of offer. Market value will be the trade-weighted average price of the Company’s shares over the one-week period immediately preceding the date of offer. The rules of the EPOP permit the Company to issue new shares or to purchase shares on-market for the purposes of satisfying the exercise of options. Any options which do not become exercisable following the application of the performance condition and vesting scale will lapse. An option that has become exercisable but is not exercised will lapse on the earlier of: • • ten years after the date of offer; three months, or such other period determined by the Board, after the participant ceases employment for a reason other than a ‘qualifying reason’ (i.e. death, total and permanent disability, redundancy, or any other reason determined by the Board); and • twelve months, or such other period determined by the Board, after the participant ceases employment for a ‘qualifying reason’. When a participant ceases to be employed by the Company prior to the end of the performance period, other than because of a ‘qualifying reason’, any options that have not become exercisable will lapse. However, if there is cessation of employment due to a ‘qualifying reason’, the Board may determine that some or all of the options may vest. In the event of a change of control of the Company, options will vest on a pro-rata basis or in their entirety for certain senior executives. If the Board determines that a participant has acted fraudulently or dishonestly, has committed an act of harassment or discrimination, is in serious breach of any duty to Mortgage Choice, or, in the Board’s reasonable opinion, has brought Mortgage Choice into serious disrepute, any options held by the participant will lapse. The assessed fair value at grant date of options granted to individuals is allocated equally over the period from grant date to vesting date. The fair value of market based conditions at grant date are independently determined using a Monte Carlo simulation model utilising a lattice-based trinomial valuation method that takes into account the exercise price, the term of the option, the vesting and performance criteria, the impact of dilution, the nontradeable nature of the option, the share price at grant date and the expected price volatility of the underlying share, the expected dividend yield and the riskfree interest rate for the term of the option. Details of options over ordinary shares in the Company provided as remuneration to other key management personnel of the Company are set out below. Further information on the options is set out in the Directors’ report remuneration report. Set out below are summaries of options granted under the plan: Exercise price Balance at start of the year Granted during the year Exercised during the year Expired during the year Forfeited during the year Balance at end of the year Exercisable at end of the year Number Number Number Number Number Number Number Grant Date Expiry date 2013 1 May 2009 1 May 2019 $0.76 2,500,000 Weighted average exercise price $0.76 – – (2,500,000) $0.76 – – – – – – – – The weighted average share price at the date of exercise of options exercised during the year ended 30 June 2013 was $1.47. 82 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 B. Performance Share Plan (PSP) The PSP permits eligible employees as identified by the Board to be granted allocated unvested shares from the outset of the applicable performance period, with the shares to be held on trust for the participants by a share plan trustee. The shares granted to those employees are subject to the achievement of performance and service requirements as specified by the Board. The PSP is designed to provide the medium-term to long-term incentive component of remuneration for executives and other designated employees. Participation in the PSP is offered on an annual basis. Eligible employees are granted shares to a value determined by reference to the Company’s reward policy and market practice with regard to share based incentive arrangements provided by peer organisations. The right to receive vested shares will lapse if the performance and service criteria are not met. Shares will be acquired for participants following their acceptance of an offer made under the Plan. The shares will be acquired by the plan trustee and held on trust for participants until they are withdrawn from the Plan (after they have vested or are deemed to be vested) or are forfeited, in circumstances outlined below. Shares will be acquired only at times permitted under the Company’s share trading policy. Shares may be acquired by on-market or off-market purchases, by subscribing for new shares to be issued by the Company, or through the reallocation of forfeited shares. The method of acquisition for each share allocation will be determined by the Board. The costs of all share acquisitions under the Plan will be funded by the Group. Participants will not be required to make any payment for the acquisition of shares under the Plan. A Notice of Withdrawal may be lodged by a participant following the earlier of: • • • • a date ten years from grant date; the participant ceasing to be an employee of the Company; a ‘capital event’ (generally, a successful takeover offer or scheme of arrangement relating to the Company) occurring; or the date upon which the Board gives its written consent to the lodgement of a Notice of Withdrawal by the participant. While shares remain subject to the PSP rules, participants will, in general, enjoy the rights attaching to those shares (such as voting or dividend rights etc). If a participant resigns from his or her employment with the Company, or otherwise ceases employment in circumstances not involving “special circumstances”, the participant will be required to forfeit any unvested shares held under the Plan on the participant’s behalf, unless the Board otherwise determines. Vested shares will be eligible for withdrawal in accordance with the usual procedure. If a participant ceases to be employed by the Company or retires from office as a result of special circumstances (including death, disability, retirement, redundancy, corporate restructure, or any other circumstances determined by the Board), the Board may in its discretion determine that all or a portion of the participant’s unvested shares are to be treated as vested shares, notwithstanding the fact that the vesting conditions applicable to the shares have not been met because the applicable performance period has not expired. If the Board determines that a participant has acted fraudulently or dishonestly, has committed an act of harassment or discrimination, is in serious breach of any duty to Mortgage Choice, or, in the Board’s reasonable opinion, has brought Mortgage Choice into serious disrepute, any shares to which the participant may have become entitled at the end of the performance period, and any shares held by the participant under the PSP are forfeited by the participant. The assessed fair value at grant date of performance shares granted to individuals is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. The fair value of market based conditions at grant date are independently determined using a Monte Carlo simulation model utilising a lattice-based trinomial valuation method that takes into account the term of the performance shares, the vesting criteria, the exercise price (zero), the expected price volatility of the underlying share, the expected dividend yield (acknowledging that dividends will be paid to participants from the date of grant) and the risk-free interest rate for the term of the performance shares. Details of performance shares in the Company provided as remuneration to each Director and other key management personnel are set out below. Further information on the performance shares and the detailed vesting criteria are set out in the remuneration report. C. Share Rights Plan The Share Rights Plan (SRP) permits eligible employees as identified by the Board from time to time to be granted share rights (“rights’) from the outset of the applicable performance period. The rights granted to those employees are subject to the achievement of performance and service requirements as specified by the Board. Eligible employees are granted rights to a value determined by reference to the Company’s reward policy and market practice with regard to share based incentive arrangements provided by peer organisations. The rights lapse if the performance and service criteria are not met. Notes to the Consolidated Financial Statements 83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued for the year ended 30 June 2014 NOTE 31 SHARE-BASED PAYMENTS continued Upon vesting, the Company must acquire or issue the number of shares, or the fraction thereof, into which the rights are convertible under the terms of the specific grant. The method of acquisition for each share allocation will be determined by the Board. The costs of all share acquisitions under the SRP will be funded by the Group. Participants will not be required to make any payment for the acquisition of rights under the SRP. The Board at its discretion may choose to settle the rights as a cash payment at its sole discretion. If a participant ceases to be employed by the Company unvested rights lapse immediately. Notwithstanding this rule if a participant ceases to be an employee for a qualifying reason (including death, disability, retirement, redundancy, corporate restructure, or any other circumstances determined by the Board), the Board may in its discretion determine the treatment of any unvested rights. If the Board determines that a participant has acted fraudulently or dishonestly; is in breach of his or her obligations to the Group; or is knowingly involved in a material misstatement of financial statements, the Board may determine that the conditions attached to the rights may be reset; the rights that have not vested may lapse; allocated or vested shares may be forfeited; or shares that have been sold on vesting must be repaid in part or in full. The Board may in its sole discretion determine whether some or all of the rights vest or lapse or whether unvested rights remain subject to applicable conditions of vesting on the event of a change of control. The assessed fair value at grant date of the rights granted to individuals is allocated equally over the period from grant date to vesting date, and the amount is included in the remuneration tables above. The fair value of market based conditions at grant date are independently determined using a Monte Carlo simulation model utilising a lattice-based trinomial valuation method that takes into account the term of the performance shares, the vesting criteria, the exercise price (zero), the expected price volatility of the underlying share, the expected dividend yield (acknowledging that dividends will be paid to participants from the date of grant) and the risk free interest rate for the term of the rights. Details of rights issued by the Company provided as remuneration are set out below. Further information on the rights and the detailed vesting criteria are set out in the remuneration report. Set out below are summaries of performance shares conditionally issued under the Plan: Balance at start of the year Granted during the year Vested during the year Expired during the year Forfeited during the year Balance at end of the year Number Number Number Number Number Number Offer Date Vesting date Value 2014 9 December 2009 31 August 2013 20 September 2010 3 September 2013 20 September 2010 3 September 2014 16 February 2012 13 September 2013 16 February 2012 12 September 2014 16 February 2012 12 September 2014 14 September 2012 13 September 2013 14 September 2012 12 September 2014 14 September 2012 14 September 2015 14 September 2012 14 September 2015 23 September 2013 12 September 2014 23 September 2013 14 September 2015 23 September 2013 14 September 2016 23 September 2013 14 September 2016 $1.24 $1.17 $1.19 $1.26 $1.26 $0.78 $1.74 $1.74 $1.74 $1.08 $2.77 $2.77 $2.77 $1.68 169,332 189,699 189,702 51,097 281,031 229,925 50,983 50,983 280,364 229,380 – – – – – – – – – – – – – – 32,692 32,692 179,811 147,125 (169,332) (189,699) – (51,097) – – (50,983) – – – – – – – Total 1,722,496 392,320 (461,111) Weighted average price $1.26 $2.36 $1.27 84 Notes to the Consolidated Financial Statements – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 189,702 – 281,031 229,925 – 50,983 280,364 229,380 32,692 32,692 179,811 147,125 1,653,705 $1.52 Balance at start of the year Granted during the year Vested during the year Expired during the year Forfeited during the year Balance at end of the year Number Number Number Number Number Number Offer Date Vesting date Value 2013 9 December 2009 31 August 2012 9 December 2009 31 August 2013 20 September 2010 3 September 2012 20 September 2010 3 September 2013 20 September 2010 3 September 2014 16 February 2012 14 September 2012 16 February 2012 13 September 2013 16 February 2012 12 September 2014 $1.24 $1.24 $1.16 $1.17 $1.19 $1.26 $1.26 $1.26 16 February 2012 12 September 2014 $0.78* 14 September 2012 13 September 2013 14 September 2012 12 September 2014 14 September 2012 14 September 2015 14 September 2012 14 September 2015 $1.26 $1.26 $1.26 $0.63 169,333 169,332 189,699 189,699 189,702 51,097 51,097 281,031 229,925 – – – – – – – – – – – – – 50,983 50,983 280,364 229,380 (169,333) – (189,699) – – (51,097) – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 169,332 – 189,699 189,702 – 51,097 281,031 229,925 50,983 50,983 280,364 229,380 1,722,496 $1.26 Total 1,520,915 611,710 (410,129) Weighted average price $1.15 $1.49 $1.21 * During the 2013 financial year, the value of the TSR based performance shares granted on 16 February 2012 was corrected. The weighted average remaining contractual life of performance shares outstanding at the end of the period was 0.93 years (2013 – 1.22 years). The model inputs for performance shares granted on 23 September 2013 included: a/ performance shares are granted for no consideration and vest over a period of four years; b/ grant date: 23 September 2013 (2013 – 14 September 2012); c/ share price at grant date: $2.77 (2013 – $1.74); d/ expected price volatility of the company’s shares: 27.54% (2013 – 28.26%); e/ expected dividend yield: 0% (2013 – 0%); and f/ risk-free interest rate: 2.83% (2013 – 2.46%). D. Expenses arising from share-based payment transactions Total expenses arising from sharebased payment transactions recognised during the period as part of employee benefit expense were as follows: Shares issued under PSP 2014 $’000 1,324 1,324 2013 $’000 772 772 Notes to the Consolidated Financial Statements 85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continuedfor the year ended 30 June 2014 Note 32 Parent entity financial information A. Summary financial information The individual financial statements for the parent entity show the following aggregate amounts: Balance sheet Current assets Total assets Current liabilities Total liabilities Shareholders’ equity Issued capital Share-based payments reserve Retained profits Profit or loss for the year Total comprehensive income 2014 $’000 2013 $’000 112,548 109,739 353,085 339,343 69,589 65,926 249,856 237,475 4,604 2,210 96,415 103,229 4,018 1,472 96,378 101,868 20,220 19,944 20,220 19,944 B. Guarantees entered into by the parent entity The parent entity has not provided any guarantees on behalf of subsidiaries. The parent entity has provided guarantees in respect of obligations under premises leases of its head office and state offices totalling $760,459 (2013 – $960,826). No liability was recognised by the parent entity or the consolidated entity in relation to these guarantees. C. Contingent liabilities of the parent entity Other than the guarantees mentioned above, the parent entity did not have any contingent liabilities as at 30 June 2014 or 30 June 2013. 86 Notes to the Consolidated Financial Statements NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continuedfor the year ended 30 June 2014 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued Directors’ Declaration for the year ended 30 June 2014 for the year ended 30 June 2014 In the Directors’ opinion: a/ the fi nancial statements and notes set out on pages 36 – 86 are in accordance with the Corporations Act 2001, including: i/ ii/ complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and giving a true and fair view of the consolidated entity’s fi nancial position as at 30 June 2014 and of their performance, for the fi nancial year ended on that date; and b/ Note 1(A) confi rms that the fi nancial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board; and c/ there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations by the Chief Executive Offi cer and the Chief Financial Offi cer required by Section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Peter Ritchie Director Sydney 21 August 2014 Directors’ Declaration 87 87 INDEPENDENT AUDIT REPORT for the year ended 30 June 2014 Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia Tel: +61 2 9322 7000 www.deloitte.com.au Independent Auditor’s Report to the Member’s of Mortgage Choice Limited Report on the Financial Report We have audited the accompanying financial report of Mortgage Choice Limited, which comprises the balance sheet as at 30 June 2014, the income statement, the statement of comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity, comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 37 to 87. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the consolidated 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 that we 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. 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. Liability limited by a scheme approved under Professional Standards Legislation. 88 Member of Deloitte Touche Tohmatsu Limited Independent Audit Report INDEPENDENT AUDIT REPORT for the year ended 30 June 2014 Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001 , which has been given to the directors of Mortgage Choice Limited, would be in the same terms if given to the directors as at the time of this auditor’s report. Opinion In our opinion: (a) the financial report of Mortgage Choice Limited is in accordance with the Corporations Act 2001 , including: (i) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2014 and of its performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001 ; and (b) the consolidated financial statements also comply with International Financial Reporting Standards as disclosed in Note 1 Report on the Remuneration Report We have audited the Remuneration Report included in pages 10 to 27 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. Opinion In our opinion the Remuneration Report of Mortgage Choice Limited for the year ended 30 June 2014, complies with section 300A of the Corporations Act 2001 . DELOITTE TOUCHE TOHMATSU Philip Hardy Partner Chartered Accountants Sydney, 21 August 2014 Independent Audit Report 89 Shareholder Information for the year ended 30 June 2014 The shareholder information set out below was applicable as at 18 August 2014 A. Distribution of equity securities Analysis of numbers of equity security holders by size of holding: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over There were 74 holders of less than a marketable parcel of ordinary shares. B. Equity security holders Twenty largest quoted equity security holders The names of the twenty largest holders of quoted equity securities are listed below: Finconnect (Australia) Pty Ltd J P Morgan Nominees Australia Limited Ochoa Pty Ltd Citicorp Nominees Pty Limited National Nominees Limited HSBC Custody Nominees (Australia) Limited Ochoa Pty LtdR G Higgins Pacific Custodians Pty Ltd SCJ Pty Ltd HSBC Custody Nominees (Australia) Limited BNP Paribas Noms Pty Ltd Mr Ian Edwards & Mrs Josephine Edwards Michael Russell RBC Investor Services Australia Nominees Pty Limited Basscave Pty Limited Mr David Madden Citicorp Nominees Pty Limited RBC Investor Services Australia Nominees Pty Limited Emu Super Fund Pty Ltd 90 Shareholder Information Class of equity security Ordinary Shares 657 1,318 693 717 43 3,428 Ordinary Shares Percentage of issued shares Number held 20,611,785 18,926,338 9,620,000 9,437,159 9,173,771 6,789,787 3,506,989 2,094,226 2,001,466 2,000,000 1,848,333 1,727,846 675,000 617,955 506,593 417,939 400,000 393,103 338,796 315,000 91,402,086 16.65 15.29 7.77 7.62 7.41 5.49 2.83 1.69 1.62 1.62 1.49 1.40 0.55 0.50 0.41 0.34 0.32 0.32 0.27 0.25 73.84 SHAREHOLDER INFORMATION continued for the year ended 30 June 2014 C. Substantial holders Substantial holders in the Company are set out below: Ordinary shares Commonwealth Bank of Australia* R G Higgins and Ochoa Pty Ltd FMR Corp. & Fidelity International Limited INVESCO Australia Limited Number held 26,735,816 15,231,215 15,166,586 9,199,996 * The relevant interests in 5,561,322 shares are/were held by Colonial First State Investments Limited (CFS) as responsible entity of the specified registered managed investment schemes and relate(d) to holdings in connection with the Colonial First State First Choice product range. Decisions to buy/sell those securities and exercise voting rights in relation to those securities are made by external managers (unrelated to the Commonwealth Bank Group) to whom CFS has outsourced those functions. By instrument dated 29 October 2001, the Australian Securities and Investments Commission has granted certain relief to CFS and its related bodies corporate for these holdings from the provisions of Chapter 6 of the Corporations Act in relation to the acquisition of such securities D. Voting rights The voting rights attaching to each class of equity securities are set out below: (a) Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. (b) Options No voting rights Shareholder Information 91 Annual General Meeting The Annual General Meeting of Mortgage Choice Limited will be held at: Mortgage Choice Limited Level 10 100 Pacific Highway North Sydney NSW 10am time 29 October 2014 date Registered Office Level 10, 100 Pacific Highway North Sydney NSW 2060 Share Register Link Market Services Investor Information Line Ph: 1800 054 388 Auditor Deloitte Touche Tohmatsu Chartered Accountants Grosvenor Place 225 George Street Sydney NSW 2000 Solicitors Minter Ellison Aurora Place, 88 Phillip Street Sydney NSW 2000 Bankers ANZ Banking Group Limited 116 Miller Street North Sydney NSW 2060 Stock Exchange Listing Mortgage Choice Limited shares are listed on the Australian Securities Exchange. Website www.MortgageChoice.com.au Directors P D Ritchie Chairman S J Clancy P G Higgins R G Higgins S C Jermyn D E Ralston Chief Executive Officer M I Russell Secretary D M Hoskins Executives S R Mitchell Chief Financial Officer N C Rose-Innes General Manager, Operations A J Russell General Manager, Product and Distribution M J McCarney General Manager Group Marketing