Mortgage Choice Limited
Annual Report 2019

Plain-text annual report

2019 Annual Report A Contents 01 2019 Performance 03 Chairman’s Report 05 CEO Overview 09 Mortgage Choice’s Innovative Technology 11 Directors’ Report 37 Auditor’s Independence  Declaration 38 2019 Financial Report 90 Shareholder Information 92 Corporate Directory Our commitment to help more Australians make better choices for a better life drives everything we do. 27.5k+ home loans written in FY19 FY2019 was a landmark year for Mortgage Choice, making substantial leaps forward in how we equip our franchisee network to best serve their customers. 23.4 22.6 20.5 18.6 $14.0m Against the backdrop of a challenging property and mortgage market and significant regulatory scrutiny, the Company made considerable improvements to its mortgage broker and financial adviser offerings to build a platform for long-term sustainable growth. These investments have given the Company a competitive advantage, strengthening the overall customer experience and advocacy for the brand. 15 16 17 18 2019 NPAT Cash $m Across 28 lenders Mortgage Choice Annual Report 2019 B Mortgage Choice Annual Report 2019 WITH YOU EVERY STEP OF THE WAYOthers 2% Financial Planning 6% Diversified products 3% Broking 89% $54.3bn Loan book in FY19 Gross revenue by division $9.4bn $54.3bn 6c $29.65m 12.2 12.3 11.5 11.5 54.6 53.4 18.0 17.5 16.5 15.5 51.7 49.5 Funds under advice 1,000 Premiums in force 35 27.829 24.182 19.196 15.034 800 600 400 200 0 30 25 20 15 10 5 0 15 16 17 18 2019 15 16 17 18 2019 15 16 17 18 2019 15 16 17 18 19 Total settlements $bn Loan book $bn Total dividends Cents Funds under advice and Premiums in force $m 02 WITH YOU EVERY STEP OF THE WAYChairmans Report Nov 2015 Government announces ASIC Review into Mortgage Broker Remuneration Mar 2017 APRA introduces Macro- Prudential controls including caps on interest-only lending Feb 2018 Royal Commission commences Mar 2017 ASIC releases findings and recommendations with focus on changes to broker remuneration structure Jan 2018 FINANCIAL PLANNING INDUSTRY ONLY Life Insurance Remuneration Reforms commence May 2018 APRA directed lender credit policy tightening 03 Mortgage Choice Annual Report 2019 03 Mortgage Choice Annual Report 2019 “ A thriving professional broker channel is essential so that all Australian consumers can continue to experience real choice and access to credit.”Vicki Allen, ChairmanThe past year was one dominated by scrutiny of the financial services sector by government, regulators and the media. In addition, the broking sector was impacted by tightened lending policies and a slowing property market across Australia. Uncertain business environment The past year was one dominated by scrutiny of the financial services sector by government, regulators and the media. In addition, the broking sector was impacted by tightened lending policies and a slowing property market across Australia. The scrutiny prevailed through the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission). The Royal Commission recommended significant changes to broker remuneration structures, which created much uncertainty for the broking sector. However, both sides of parliament acknowledged the important role mortgage brokers play in driving competition in the home lending market. Consequently, the current remuneration model, which delivers brokers an upfront and trail commission on settled residential mortgages, will be retained for the next three years. Treasury will then review the broker remuneration structure. We will continue to work with regulators, industry and government to ensure Mortgage Choice brokers and financial advisers provide professional support and advice for our customers within a sound governance framework. Important role of mortgage brokers Over the past year a record share of Australians turned to a mortgage broker. In uncertain times, borrowers value the choice and support of a professional broker. We are committed to enabling competition in the home lending market. A thriving professional broker channel is essential so that all Australian consumers can continue to experience real choice and access to credit. Strong leadership Last year we welcomed Susan Mitchell as the Chief Executive Officer of Mortgage Choice. In her first full year, Susan delivered a new online broker platform as well as enhanced software for our financial advisers. Both were designed to provide a better customer, broker and adviser experience, as well as deal with the increasing compliance requirements for both lending and advice through more efficient tools and processes. She remains highly committed to evolve and strengthen the business within the new lending landscape. Board Renewal Our ongoing board renewal continued this year and in February 2019 Dharmendra (Dharma) Chandran was appointed to the Mortgage Choice Board. Dharma is an experienced non-executive director and brings a deep understanding of the financial services industry and franchising, as well as a track record in transformational business and cultural change. Steve Jermyn retired as a director of the Company in June 2019. Steve joined the Mortgage Choice Board in May 2004 and made a significant contribution to Mortgage Choice during that time. Steve chaired the Audit Committee for most of his tenure and his financial nous and franchising experience was invaluable. On behalf of my fellow Board members, I would like to thank Steve for his commitment to the success of Mortgage Choice over the last 15 years. We wish him well for the future. Dividends The Board has resolved to pay a final ordinary dividend of 3 cents per share. This results in a total ordinary dividend payment for the year ended 30 June 2019 of 6 cents per share. On behalf of the board, I would like to thank our staff and franchisees for their commitment and efforts over the past year and thank our shareholders for your continued support. Vicki Allen Chairman Jun 2018 Productivity Commission releases final report on Competition in the Australian Financial System, which is consistent with findings and recommendations in ASIC Report Dec 2018 APRA softens Macro Prudential controls including those on interest-only lending Feb 2019 Royal Commission releases final report and findings May 2019 Australian Federation Election Sep 2018 Royal Commission releases Interim Report Jan 2019 FINANCIAL PLANNING INDUSTRY ONLY Higher educational requirements commence under FASEA for new financial advisers Feb 2019 Industry rolls out consumer campaign to highlight importance of brokers to competition 04 CEO Overview Susan Mitchell, Chief Executive Officer 05 Mortgage Choice Annual Report 2019 05 Mortgage Choice Annual Report 2019 “Looking to the financial year ahead, in FY2020 Mortgage Choice will continue to implement its strategic change program to build a platform for growth over the long term.”The most pleasing outcome of this difficult year is the undisputed value of the mortgage broker industry, which received the strongest vote of confidence yet from borrowers, lenders and the Australian Government. Following a tumultuous year for the financial services industry, Mortgage Choice continued to excel in helping Australians with their evolving financial needs by delivering a range of financial choices teamed with trusted expert advice. The most pleasing outcome of this difficult year is the undisputed value of the mortgage broker industry, which received the strongest vote of confidence yet from borrowers, lenders and the Australian Government. Before I discuss Company performance and achievements over the past 12 months and look ahead to the goals for the coming year, I’d first like to review the challenging economic and regulatory environment the business faced in FY2019. Tightened lending environment and falling property prices Over the course of the year lenders tightened their lending policies and increased the level of information required on home loan applications in response to heightened scrutiny by APRA in parallel with the Royal Commission inquiry. As a result, in FY2019, home loan applications took longer to complete and people borrowed less money. This had a flow-on effect on prices and lending volumes, with lending volumes reaching their lowest point in 5 years. Impact of Royal Commission At the half-year, ABS housing and finance approval volumes were impacted by the slowing property and home loan markets with a 9.7% decline in approvals in comparison to the same period in the previous year (1H2018) 1. These volumes were further impacted in the second half by a significant level of uncertainty regarding the impact of the Banking Royal Commission recommendations. In the second half we saw a further 8.9% drop on the first half, resulting in a full year reduction of 12.9%. 1. ABS Data 5601 Table 01 Total Lending to Households; Value of Commitments 2. Comparator Quarterly Report commissioned by MFAA, Jan-March 2019 quarter 3. Deloitte, The Value of Mortgage Broking July 2018 Impact of election result The election result in May 2019 has shifted the economic outlook for property. Proposed tax changes affecting property, specifically to negative gearing and capital gains tax, are now off the table. Interest rates have moved to further historical lows and the trajectory of the fall in property prices in both Melbourne and Sydney has levelled out. The signs all point to a recovery in lending volumes. It remains to be seen how these early signals are translated into strong market statistics. Royal Commission – impact on remuneration As part of this inquiry, broker remuneration and conduct was scrutinised and the Commissioner made two key recommendations. The first related to changes to trail commission structures which post-election will not be implemented by the Government. The current structures are to be retained with a review to be undertaken by Treasury in three years time. The second recommendation related to the introduction of new governance frameworks ensuring customer’s best interests are at the forefront of brokers’ minds in each transaction. We have over 25 years of doing the right thing by our customers. In a period where conflicted remuneration is subject to the scrutiny of regulators and a Royal Commission, Mortgage Choice’s history of its ‘paid the same’ commission structure gives customers confidence that our brokers are putting their clients’ interests ahead of their own. There were also a number of recommendations by the Royal Commission related to Financial Planning, including ceasing Grandfathered commissions (by January 2021). Due to the fundamentals underlying the existing Mortgage Choice Financial Planning model, these recommendations will have minimal impact on the business. As CEO of Mortgage Choice I am happy to support any inquiry that strives to strengthen the industry and improve outcomes for the customer. I remain committed to working collaboratively with the industry to implement these changes whilst retaining competition within the home lending market. Brokers fight for competition As the broker industry was called into the spotlight, Mortgage Choice joined forces with the Mortgage and Finance Association of Australia (MFAA) and other industry participants to execute an advertising and lobbying campaign to the consumer public. I am so very proud of our network and brokers who stood together under the Mortgage Choice banner to lobby their local members of Parliament, and take every opportunity available to influence opinion by sharing their customer success stories, while the Company engaged in activity at a national level. The high impact campaign raised awareness of issues impacting mortgage brokers and created a deeper understanding of their role, and stronger reputation for trust and customer care by communicating the benefits brokers bring to borrowers and the wider economy. This coordinated approach demonstrated the strength in a unified voice of the industry and the collective ability to work together and achieve a positive result for both brokers and their customers. 59.7% share of residential home loan market originated through the broker channel 2 90% of customers are satisfied with services provided by a mortgage broker 3 06 CEO Overview 51.9% 53.7% 53.6% 55.3% 59.7% 60 58 56 54 52 50 48 46 44 Sep 14 Dec 14 Mar 15 Jun 15 Sep 15 Dec 15 Jun 16 Sep 16 Mar 17 Mar Sep Dec 16 17 16 Broker usage, MFAA 1 % Jun 17 Dec 17 Mar 18 Jun 18 Sep 18 Dec 18 Mar 19 Growth in broker market share As housing affordability and the increasing complexity of the lending environment continued to challenge investors and home buyers in FY2019, mortgage brokers achieved the highest ever residential home loan market share at 59.7% 1 and 90% of customers are satisfied with services provided by a mortgage broker 2. This is a testament to the choice of products that cater to wider financial needs and professional service brokers provide, which make mortgage applications proceed more smoothly to settlement. With six out of ten Australian borrowers choosing the services of a broker to secure their property finance, Mortgage Choice’s reach into local communities across Australia deepens our relationship with lenders. Property market outlook 3 Over the last year, Mortgage Choice brokers faced challenging conditions in the Australian property market, which continued its correction. National dwelling values recorded an annual decline of 6.9% in the 12 months to June 2019, Led by Sydney (-9.9%), Darwin (-9.3%), Melbourne (-9.2%) and Perth (-9.1%), followed by Brisbane (-2.6%) and Adelaide (-0.3%). Hobart and Canberra were the only cities to record dwelling value growth, rising 2.9% and 1.4% respectively. Across the regional markets, values were down 3.1% for the financial year. The decline in the property market was due in part to tightening credit policy from lenders whose forensic scrutiny of home loan applications significantly delayed loan approvals and reduced the borrowing power of many applicants. Since the federal election the decline in property prices has lost its momentum and we have seen more stability in house prices. In July the RBA cut the official interest rate to a historic low of 1% which many lenders have passed on, reducing the cost of borrowing for investors and Australian families. This, added to APRA’s serviceability changes, will enable people to borrow more, which could put some positive motion back in to Australia’s property cycle. As the spring buying season approaches, these factors provide an improved backdrop for better business flows. As lenders continue to forensically assess home loan applications against borrower debt to income ratios and living expenses, brokers remain to be borrowers’ preferred method for securing home finance in an increasingly complex lending environment. 1. Comparator Quarterly Report commissioned by MFAA, Jan-March 2019 quarter 2. Deloitte, The Value of Mortgage Broking July 2018 3. CoreLogic Hedonic Home Value Index July 2019 07 Mortgage Choice Annual Report 2019 Broker remuneration As FY2019 began, the Company undertook a program of change to introduce a new broker remuneration framework and drive operational efficiencies. The Company acknowledges the impact this measure has had on shareholders and believes this was a necessary step to ensure Mortgage Choice is better placed in the mortgage broking industry to attract franchisees thus supporting the long term viability of the business. Network regeneration The uncertainties overshadowing the broker industry in FY2019 created a difficult set of circumstances in which to recruit. Looking ahead, improved conditions should help Mortgage Choice drive the regeneration of its franchise network, by attracting new business owners who are motivated to partner with the experience and expertise our national brand provides. Financial Planning There has been a significant restructuring of wealth businesses across a number of Australia’s financial institutions in FY2019. Following the delivery of the Royal Commission recommendations, the financial planning industry continues to experience an intense period of disruption. Due to the fundamentals underlying the existing Mortgage Choice Financial Planning model, many of the Royal Commission recommendations will have little impact on Mortgage Choice, which has a fee for service advice model and is not reliant on Grandfathered commissions. Mortgage Choice Financial Planning continues to perform with Premiums In Force growing by 7% and Funds Under Advice rising 30%. Overall the financial planning arm achieved $10.5m in gross revenue in FY2019 to deliver a loss of $0.1m. These results reflect a new remuneration model for the Financial Planning business introduced on 1 October 2018. The Company continues to capitalise on the disruption in the financial planning industry by seeking out high quality advisers who are considering changing licensees and take advantage of the opportunity to build strong referral relationships within the Mortgage Choice network. Despite the challenging operating environment in FY2019 the Company has performed well against its profit guidance given in 1H2019, to deliver Net Profit After Tax at $14.0 million. Business priorities for FY2020 Looking to the financial year ahead, in FY2020 Mortgage Choice will continue to implement its strategic change program to build a platform for growth and long term sustainability. This entails: Attracting brokers and advisers – Attract new brokers to regenerate our existing network, as longer tenure franchisees look to sell their businesses to franchise owners who can take the business to the next level. Additionally, attract new business owners into the network who are motivated to partner with the experience and expertise our national brand provides. – Capitalise on the disruption in the financial planning industry by attracting talented advisers who are considering changing licensees to Mortgage Choice Financial Planning. Attracting customers – Mortgage Choice will focus on attracting and retaining more customers by continuing to invest in the Mortgage Choice brand. Structuring the business for success – Ensure the majority of the Company’s resources are focused on revenue generating activities while maintaining a program of operational efficiencies to reduce costs. Maintaining our investment in IT – Continue IT investment to enhance our broker and adviser platforms, while enabling back office automation and an improved digital customer experience. Susan Mitchell Chief Executive Officer Innovative Technology Mortgage Choice has proven its skill in building, delivering and maintaining technology that provides the Company and its franchise network with a competitive edge. Our new Broker Platform was built to meet the specific requirements of Mortgage Choice brokers and enables them to operate more efficiently and achieve higher business performance outcomes. As technology advancements continue unabated, our technology team is well placed to incorporate new features to futureproof the Company for tomorrow’s business needs and customer requirements. In late FY2019, Mortgage Choice incorporated its new File Management feature, which is a workflow engine with a set of standard tasks that can be set and managed at a franchise level. This technology will be a key driver of efficiency in our franchisees businesses and will support consistent process management of loans from application to settlement. Our continued investment in best of breed technology was extended to the financial planning business in FY2019 to enable our advisers to improve the efficiency and success of their businesses. Business Outcomes In our last annual report, I shared the Company’s four priorities for the year. They were: – Embed the new broker and adviser remuneration models. – Undertake a program of operational efficiencies. – Build brand awareness and improve customer experience. – Position Mortgage Choice as an aggregator of choice for potential franchisees. 08 BUILDING A STRONGER REPUTATION FOR TRUST & CUSTOMER CAREMortgage Choice’s Innovative Technology Mortgage Choice Technology strives to deliver state of the art digital services and solutions that connect people and information, enabling insights and understanding to build loyalty and brand advocacy. In FY2019, the business focussed its IT investment on uplifting the broker and adviser systems to build a strong foundation for the future and enable efficiency improvements for Group Office and the franchise network. Broker Platform The Mortgage Choice broking network has been using the Broker Platform to process customer loan applications since its release in October 2018. The system was specifically designed to transform the loan-processing experience for our broker network whilst providing an interface that is equally engaging for customers. The Broker Platform is now Mortgage Choice’s core system, enabling the network to work more efficiently whilst supporting future growth and increased productivity. Some of the ways in which the Broker Platform benefits franchisees include: – Single data entry and one source of truth for all customer home loan related data; – A more user-friendly tool that can be accessed online in realtime from any tablet or laptop; – Improvement in broker productivity in the loan submission process by up to 30% as compared to the previous technology system; and – Improved system reliability and availability, with the system in operation over 99.99% of the time, including real time platform upgrades. The introduction of this new system has also created some productivity improvements in Group Office, with a 50% reduction in loan submission system support costs including reduced call volumes into the IT HelpDesk and a reduction in the level of system maintenance and network training required. With all franchisees now operating on this new robust, dynamic, reliable and feature-rich platform, the business is positioned for faster and easier updates and enhancements going forward. Mortgage Choice is now also a step closer to providing its network with a one-platform user experience. 09 Mortgage Choice Annual Report 2019 “ The new Broker Platform has delivered substantial business productivity benefits including consolidation of several previous systems into one platform, easier access to lender product and rate information, and a very impressive loan comparison tool called the Home Loan Doctor, allowing us to more effectively recommend the right lending solution for clients. A key benefit has been the way in which we present lending solutions to clients in a more visually effective manner that helps reinforce and engage clients in the lender selection decision. In terms of benefit realisation, we estimate a 15% improvement in productivity and a stronger client engagement in lender choice decisions” Paul Williams, Mortgage Choice Franchise Owner, South Melbourne, Victoria “ I am really enjoying using the Broker Platform. I find the new platform has more data fields so it allows me to build a complete picture of my client’s financial position in minimal time, that data also flows directly into ApplyOnline so there’s less double handling of data. I’m a big fan of the reporting functionality too – I can run reports quickly and easily so I can track and analyse my monthly activity, conversion and loan book balance as part of my regular business operations. It’s the best place to go to take the pulse of your business” Jo Duncan, Mortgage Choice Franchise Owner, Inner South West Brisbane, Queensland File Management The delivery of the Broker Platform is one part of our journey to delivering an exceptional digital home-buying experience for mortgage brokers and customers. It is the fundamental building block on which further developments will be built to help us achieve the desired outcome and grow our business. The second phase of this journey – the delivery of a File Management solution, focuses on building on the platform’s foundation to enable a one-platform user experience. In FY2019, Mortgage Choice developed a standardised, best practice file management process and built this into File Management software. This software delivers efficient workflow management to our broking franchises enabling more consistent business processes when it comes to managing loan application pipelines. As this solution has been fully integrated with the Broker Platform, it also provides greater efficiencies for our network and delivers a more consistent customer experience for those engaging the services of a Mortgage Choice broker. In essence, the File Management workflow engine: – Enables improved productivity of mortgage brokers, with less switching between systems and prompting of subsequent tasks for loan application management; – Reduces training requirements for loan processors and new recruits due to its intuitive system capability; and – Enables Mortgage Choice to move towards a standardised ‘best practice’ approach across the network so the process is ‘one-way, same-way’ improving operational governance. Mortgage Choice took the new software into pilot with a group of franchisees at the close of FY2019. The solutions are being released to the wider network in the first quarter of FY2020. In time, Mortgage Choice has the opportunity to expand the workflow management capabilities of File Management into Group Office driving further efficiencies, and to leverage the system for future growth opportunities. This leading edge technology helps us to deliver a great client experience now and into the future, and positions our business more competitively for adviser recruitment. “It took some time to learn the new software but now that we’ve done that we can see it’s a good solution which provides efficiencies in running the business. CommPay makes it easy to lodge and then track & reconcile expected revenue to effectively manage cash flow. The workflows are more streamlined with an easier flow, supporting the processes the business needs. Both the insurance and super research tools provide a quicker and more comprehensive way to input client data, do the comparative research and make recommendations for clients than the process with the previous software. ” Matthew La Rocca, Mortgage Choice Financial Adviser Hoppers Crossing, Victoria HelpCentre The delivery of the new Mortgage Choice HelpCentre at the end of June 2019 forms the basis of our new service model to the franchise network. The HelpCentre has transformed the way we support our network, enabling users to self-serve information and lodge requests or enquiries to Group Office in the one portal. By bringing all network interactions into one dynamic interface, it enables the business to better manage requests from the network and be more productive, while providing the network an easier, faster and more efficient way of obtaining information. Our phone based support team is also freed up to focus on the more complex queries. “ We have been using File Management during the pilot phase and while we understand there are still some enhancements to be made prior to final release, the improvement that has occurred already is fantastic. We see the end result of this system as a time effective and user-friendly loan tracking and communications tool that will save an immense amount of time throughout the loan process and enable us to communicate effectively with our clients” Scott Bament, Mortgage Choice Franchise Owner Morphett Vale, South Australia XPLAN The development of the Broker Platform sets the foundation for future integration of client data across all Mortgage Choice businesses. In FY2019 our focus has been on driving the enhancements and process efficiencies required across our financial planning business to ensure advisers can provide advice in a cost-efficient manner. This also prepares both sides of the business for the closer integration of client data. We have transitioned the adviser network to new financial planning software, market-leading XPLAN, and in doing so delivered the network a more robust solution, whilst helping to reduce the cost to provide advice into the future. Operating on this new platform will: – Significantly reduce the time required to manage client files, enabling our advisers to work with more clients over time without increasing resources and costs; – Allow advisers to produce more advice in-house, reducing the need to use external paraplanning providers; and – Provide better tracking and reporting on the delivery of ongoing regulatory requirements. All advisers are now operating on the new system, with regular training available and continued system improvements and functionality enhancements being delivered on an ongoing basis to ensure the experience is continually optimised. In addition, the benefits of the HelpCentre to the network include: – Quick and easy search functionality with an intuitive search engine; and – Ability to submit and track enquiries and view any previous requests. Additional benefits for Group Office include: – Analytics and insights on the type of questions and issues being raised by the network to help improve processes and/or network knowledge and training; and – Improved governance through a consistent content management process. Our aim is to now build on the HelpCentre functionality to continue to transform the way we service our network, bringing about further improvements in the service experience while seeking additional operational efficiencies for the business. “ The delivery of the HelpCentre is the first step in transforming our service experience for our network of brokers, advisers and staff. The new platform brings all network support interactions together so we can respond more effectively and obtain insights that will assist in identifying further opportunities for efficiency and innovation. We’ve been receiving great feedback since its launch and I’m excited about the additional functionality that we can add in the future that will further enhance the network’s experience.” Dan O’Malley, HelpCentre Manager 10 Directors’ Report For the year ended 30 June 2019 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 2019, hereafter referred to as “Mortgage Choice”, or “the Mortgage Choice Group” or “the Group”. Directors The following persons were the Directors of Mortgage Choice Limited during the financial year and up to the date of this report: V L Allen S J Brennan D Chandran (appointed 20 February 2019) S J Clancy A C Gale P G Higgins R G Higgins S C Jermyn (retired 19 June 2019) Principal activities Mortgage Choice is a full financial services organisation helping Australians with their financial needs by delivering a range of financial choices teamed with trusted expert advice. The Group’s principal activities include: Mortgage Broking – The provision of assistance in determining the borrowing capacities of intending residential mortgage borrowers; – The assessment, at the request of those borrowers, of a wide range of home loan products; and – The submission of loan applications on behalf of intending borrowers. Loans & Other Credit Services – The provision of assistance with credit services, for example car loans, equipment finance, general insurance and personal loans to support personal and home pursuits and/or consolidate debts. Financial Planning – The provision of assistance in determining superannuation and wealth management strategies; – Coaching and active management of the above mentioned strategies; – The assessment of the customer’s protection insurance needs; – The submission of insurance policy applications on the customer’s behalf; and – Budgeting and cash flow management advice. 11 Mortgage Choice Annual Report 2019 Dividends Dividends paid or payable to members during the financial year are as follows: A final ordinary dividend of $11.250 million (9.0 cents per fully paid share) was declared for the year ended 30 June 2018 on 20 August 2018 and paid on 10 October 2018. An interim ordinary dividend of $3.750 million (3.0 cents per fully paid share) was declared for the half-year ended 31 December 2018 on 20 February 2019 and paid on 15 April 2019. A final ordinary dividend of $3.750 million (3.0 cents per fully paid share) was declared for the year ended 30 June 2019 on 21 August 2019 to be paid on 15 October 2019. Corporate Governance Statement The Company’s Corporate Governance Statement can be found at http://www.mortgagechoice.com.au/about-us/shareholder-centre/ corporate-governance Review of Operations A review of the Group’s operations is set out in the Operating and Financial Review below. Operating and Financial Highlights The FY2019 results were driven by three significant factors. Firstly, we made a considered strategic decision to change our broker remuneration model to competitively position Mortgage Choice to attract high quality new franchisees now and into the future. During the year, we saw a substantial fall in settlements unrelated to the change in the model, but linked to the external lending environment. Tightening credit conditions, easing of property markets and economic uncertainty surrounding the Royal Commission and Federal Election had a combined effect to slow settlement activity across the business. We also saw the withdrawal of our white label home loans partner mid-year. Mortgage Choice’s IFRS NPAT of $13.7m reflected the change in the broker payout as well as a fall in annual settlements of 18%. It is not comparable to the prior year which included a one-off adjustment to reflect the retroactive nature of the change in the broker payout of more than $28m. The cash NPAT fell significantly to $14.0m for the year, or down 40% on FY2018 primarily as a result of the change in broker payout introduced from 1 August 2018. During the year, Mortgage Choice rolled out several significant IT projects. It invested $3.4 million in its new Broker Platform in FY2019 to enable our brokers to write loans faster while improving the overall customer experience. Further investments were made within the Financial Planning business. It refreshed its technology platform by transitioning its advice software to XPLAN and revised its remuneration structure to encourage growth in the business. The new financial planning adviser remuneration model, which was introduced in October 2018, is reflected in the result for Mortgage Choice Financial Planning (MCFP). Directors’ Report For the year ended 30 June 2019 Mortgage Choice focussed on reducing operating expenses by 10% in FY2019 as compared to FY2018. The actual result achieved for the year exceeded our target for a total reduction in operating expenses of 17%. This further reduction was achieved due to the non-payment of employee performance incentives in a challenging economic environment. We do, however, expect this to reset next year as the lending environment improves. Following the broker remuneration model review a number of smaller franchisees and/or offices were rationalised through the merging by owners of multiple franchises and the buyback of a number of very small books. New franchise recruitment was impacted by the uncertainties resulting from the Royal Commission leading up to the Federal Election. Together these influences led to a one-off reduction in overall franchise numbers. Operating Review Regulation FY2019 was dominated by the highest form of public inquiry, the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. Despite the range of issues identified by the Commission across the financial services industry, there was no evidence of systemic misconduct in the mortgage broking industry introduced. Further, the Australian Financial Complaints Authority (AFCA) revealed that of 35,263 complaints against financial service providers, 107 related to mortgage brokers in the six month period from 1 November 2018 to 30 April 2019. This is 0.3% of reported complaints. As an active participant of the Combined Industry Forum (CIF), Mortgage Choice is committed to the implementation of the recommendations developed by the CIF, in response to ASIC’s 2017 Review of Mortgage Broker Remuneration. In the face of regulatory pressure, the Board is confident that the valued service our mortgage brokers and financial advisers have provided will continue to deliver positive outcomes for consumers. New Remuneration Models Mortgage Choice underwent a program of companywide change in FY2019 which included the implementation of a new broker remuneration model to drive sustainable growth. The revised model coupled with the support services the Company provides franchisees is expected to attract new, motivated individuals with a business-owner mindset to our organisation over the coming years. In a similar vein, a new remuneration model was rolled out to the MCFP network. It recognises growth sooner and faster to encourage MCFP franchise owners to invest in growing their businesses and improves the competitiveness of the model. Investment in innovative technology In FY2019 Mortgage Choice has delivered best in class technology that provides our brokers with the platform to operate more efficiently and achieve higher business performance outcomes. We have achieved this by ensuring the reliability and 99.99% availability of our new Broker Platform. In achieving the ‘four nines’ of high availability, Mortgage Choice has proven its undisputed skills in building, delivering and maintaining technology that provides the Company and its franchise network with a competitive edge. As technology advancements continue to be rolled out, our technology team are well placed to incorporate new features to futureproof the Company for tomorrow’s business needs and customer requirements. Our key technology achievements in FY2019 New Broker Platform In FY2018, Mortgage Choice invested $3.4 million on the new Broker Platform. Our core IT stack was built to meet the specific requirements of Mortgage Choice brokers and reduces data entry across multiple systems to enable a quicker, smoother loan submission. By building the new Broker Platform on microservices based architecture and exposing capability based APIs, the Company has futureproofed this core platform for the technological needs of tomorrow. In FY2019, technology continued to be an important enabler at Mortgage Choice, with activity focussed on delivering powerful new features that allow our brokers to increase efficiencies and better serve their clientele. – Within the heart of the new Broker Platform, the Product Catalogue enables brokers to quickly and simply show customers suitable home loan products from thousands of product options. – Through our Home Loan Doctor brokers can compare home loan products and show customers useful graphs and loan payment schedules to assist them in making informed purchasing decisions. – Driving efficiencies in processing files whilst delivering a consistent customer experience across our franchise network has been enabled through the establishment of File Management software, a rules-based workflow engine with a simple interface and a standard set of tasks that brokers can add to and customise for their franchise business. – We have built a secure online Customer Portal where the customer can interact with the broker through a document repository and by sharing personal finance information such as salary slips, bank statements and tax returns, so our brokers can accurately model scenarios. – With security at the forefront, the Company adopted next generation firewall products and further protects customer data with leading identity and access management platforms. HelpCentre The new Mortgage Choice HelpCentre is an online self-service resource that is designed to assist franchisees across our network easily locate information and submit requests to Group Office. The new tool provides a range of operational efficiencies for Group Office, while providing a fast and user-friendly experience to the franchise network due to its functional design and enhanced search capability. 12 Directors’ Report For the year ended 30 June 2019 Advisers XPLAN migration To further increase practice efficiency, in FY2019 Mortgage Choice Financial Planning rolled out a fully configured version of the industry-leading technology platform XPLAN. The new system provides many enhanced features and functionality that will enable our advisers to improve efficiency and strengthen compliance processes, all of which are critically important in the current environment. Mortgage Choice successfully migrated our advice franchises to the integrated financial planning software and provided each adviser and staff member with face-to-face training. The new software will be both a powerful and practical tool to help advisers provide clients with quality, goal-oriented advice as enhancements continue to roll out over the next six months. Technology roadmap In the fiercely competitive mortgage broker market, companies that choose to innovate through technology have a higher propensity to drive financial performance. To reflect this, we have ambitious plans for our FY2020 roadmap, where the focus will shift to enabling back office automation and an improved digital customer experience. Diversification Mortgage Choice continues to develop its product offering in line with increasing customer expectations and our objective to build on our full financial services proposition. Products to meet customer needs To provide our customers with increased choice, Mortgage Choice added eight new business partners to its product panel in FY2019. The broadening of our panel ensures we can offer a greater breadth of tailored solutions across mortgages, insurances, personal loans and commercial finance. This enables our brokers to navigate increased complexities in lending policies to better meet the evolving needs of our customers. We expect to further expand our panel across multiple products throughout FY2020. Financial Planning Mortgage Choice Financial Planning continues to perform with Premiums In Force growing by 7% and Funds Under Advice rising 30%. Overall the financial planning arm achieved $10.5m in gross revenue in FY2019 to deliver an IFRS loss of $88,000. In a watershed year for the advice industry, which saw the restructuring of wealth businesses across a number of Australia’s financial institutions. Mortgage Choice is active in attracting quality advisers seeking the backing of a national brand and the opportunity to build referral relationships within the Mortgage Choice broker network. Brand Presence For over 27 years, Mortgage Choice has been helping Australians with their financial needs by delivering a range of financial choices teamed with trusted expert advice. Effective brand marketing is key to customer acquisition and retention and our marketing communications strategy continues to drive awareness of how our wide range of products and services can help. By connecting with customers in a meaningful way, via a range of traditional and digital channels, we have driven engagement and preference for Mortgage Choice in FY2019. 13 Mortgage Choice Annual Report 2019 Boot Camp In the current lending environment borrowers need to be financially fit to get a home loan. In response to borrowers’ increasing need for financial education, we launched our first Mortgage Choice Home Loan Boot Camp in FY2019. Based around a core digital content program including interactive quizzes and educational videos, Boot Camp was spearheaded by a national advertising campaign and supported by providing brokers with local area marketing materials. The successful collaboration enabled us to increase our brand awareness to drive over 6,000+ webpage views and an additional 250,000 views through our paid partnership with realestate.com.au. Customer communications program In FY2019 we have continued to have success in reaching our customers via our flagship customer communications program, MC Connect. This centralised program sends curated emails that are relevant to a customer’s stage in the home loan journey, which are personalised with local broker’s details. Our Lead Nurture and Trigger based communication programs create further opportunities to provide information and cross sell opportunities. Social Media In FY2019 we have enabled more brokers to connect with customers through social media via our custom-built Metigy platform. This platform gives brokers access to a range of quality content created by the Mortgage Choice Marketing team, to post across a range of their social platforms such as Facebook, Instagram, Twitter and LinkedIn. Corporate Affairs The Corporate Affairs team drives our strategic communications outreach to position Mortgage Choice as a pioneer of opinion and thought leadership with key business, trade, consumer and political media. This year, the Mortgage Choice Corporate Affairs team have been successful in securing regular broadcast media segments for CEO, Susan Mitchell to provide market updates and discuss current industry issues. This gave the Company a presence in Canberra and enabled Mortgage Choice to show case the value of mortgage brokers with decision makers, in this most important of years. The Mortgage Choice press office is prolific in its creation of national media opportunities through the provision of customer case studies; independent commissioned research and whitepapers, which support the Company’s advertising campaigns; and provide a broader narrative on the Mortgage Choice value proposition. The Company’s renewed focus on entering Industry Awards helps solidify brand reputation and market positioning as we look to regenerate the franchise network. Directors’ Report For the year ended 30 June 2019 Distribution Mortgage Choice is active in driving the regeneration of its broker network through recruitment. We are selling new franchise areas with existing marketing databases, which enable new entrants to kickstart their business, with opportunities to service clients and build a sales pipeline from day one. Where franchise owners are seeking a transition of their business by recruiting for future growth, or transitioning out of the business, Mortgage Choice assists with succession planning to introduce new talent into the network. It should be noted that FY2019 was a challenging period for new business owners and brokers across the industry due to the ongoing Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. With this major inquiry behind us and clear support from government and consumers, Mortgage Choice continues to attract new business owners who are keen to partner with the experience and expertise our brand provides. Financial Review Our statutory IFRS profit increased by 224% to $13.7 million as the prior comparable period included a one-off adjustment of $28m to reflect the retroactive nature of the remuneration model change introduced as of 1 August 2018, as discussed earlier. Our cash profit decreased by 40% to $14.0m, also reflecting the strategic change in the broker remuneration model. Settlements for the year were $9.4 billion, down 18% on FY18. 1,200 1,100 900 800 700 600 500 Jul 14 Dec 14 Jun 15 Dec 15 Jun 16 Dec 16 Jun 17 Dec 17 Jun 18 Dec 18 Jun 19 Settlement Trends $m As at 30 June, Mortgage Choice’s total loan book (including residential and commercial loans) was $54.3 billion – down from $54.6 billion in FY18. 54.35bn 53.37 54.62 51.74 49.54 45.29 43.57 47.36 41.43 39.30 36.23 33.27 29.64 25.70 21.69 17.69 13.08 9.52 6.84 01 02 03 04 05 06 07 08 11 09 10 Loanbook $bn 12 13 14 15 16 17 18 19 As in prior years, an actuarial review was conducted on the residential loan book. The review found the run-off rate of the loan book was slower than the assumptions used in the valuation at 30 June 2018. Management determined that this required a positive balance sheet adjustment of $2.7m at year end to bring the valuation in line with the actual loan book position and assumed future run-off profile. The underlying operating revenue before adjustment, is down 15.8% year on year due to the fall in settlements. The table below shows the movement in the underlying statutory results year on year. 14 Directors’ Report For the year ended 30 June 2019 Underlying Statutory Results Operating Revenue Underlying operating revenue Adjustment to NPV receivable (contract asset) for changes in run-off and other assumptions Total operating revenue Profit after tax Underlying result after tax Adjustment to net NPV receivable (contract asset) for changes in run-off and other assumptions Adjustment to valuation of loan book payable due to model changes Total profit after tax 2019 $’000 2018 $’000 163,711 13,644 177,355 194,439 23,369 217,808 11,058 2,666 25,651 7,055 — (28,468) 13,724 4,238 Cash results decreased 40% to $14.0 million for the year. This fall in cash results was due to a reduction in settlements combined with an increase in payout offset by a 17% reduction in operating expenses. Focus areas for FY2020 Mortgage Choice will continue to implement its strategic change program to build a platform for growth and long term sustainability. Attracting brokers and advisers The remuneration and system changes delivered in FY2019 strengthen both the broking and financial advice recruitment propositions and with the dissipation of the uncertainty surrounding the Royal Commission, Mortgage Choice is now in a strong position to attract new franchise owners. The recruitment efforts for mortgage broking will be focused on regenerating the existing network as longer tenure franchisees look to turn over their businesses to new franchise owners set to take the business to the next level. The recruitment efforts for MCFP will focus on growing the scale of the financial planning network. Due to the amount of change occurring in the advice industry, advisers are considering changing licensees in unprecedented numbers. Many are leaving the large institutions in favour of self-licencing or smaller, established licensees. There is an opportunity for Mortgage Choice to capture a share of this market. Attracting customers Mortgage Choice will continue to invest in ensuring Mortgage Choice is a strong, well known brand that creates value for the Company and its franchisees by attracting and retaining more customers. Structuring the business for success The business will continue to challenge the current operating model in order to reduce costs whilst maintaining the service support for brokers and advisers. Processes will be re-engineered, automated or outsourced to improve efficiencies and to ensure the majority of the Company’s resources are focused on revenue generating activities. Maintaining our investment in IT Our future success is dependent on continued investment in IT. We will continue to enhance the broker and adviser platforms with an added focus of enabling back office automation and an improved digital customer experience. 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. Matters subsequent to the end of the financial year No matters or circumstances have arisen since 30 June 2019 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 developments 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 be likely to 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 to its activities. Information on Directors Mortgage Choice made two changes to its Board of Directors in FY2019. In June 2019 we announced the retirement of Steve Jermyn as a Director of the Company. Steve joined the Mortgage Choice Board in May 2004 and has provided invaluable guidance and leadership through his extensive franchising experience. Mortgage Choice continues to attract highly experienced board members who can leverage the fresh skills and knowledge needed to effectively steer the company to future success. In February 2019 the Company announced the appointment of Dharmendra (Dharma) Chandran to the Mortgage Choice Board of Directors. 15 Mortgage Choice Annual Report 2019 Directors’ Report For the year ended 30 June 2019 Board of Directors Vicki Allen BBus, MBA, FAICD – Independent Non-Executive Chairman – Chairman of nomination committee and member of remuneration committee – Director since 19 June 2017 Vicki was appointed the Independent Non-Executive Chairman in July 2017. Vicki has over thirty years of senior executive and board experience across the financial services and property sectors. During her executive career she held various senior roles at The Trust Company, National Australia Bank, MLC and Lend Lease Corporation. She has held a number of non-executive director roles in recent years and is currently a non-executive director of Bennelong Funds Management Limited, Bennelong Funds Management Group Pty Ltd and Chairman of the BT Funds board. She is a member of the Audit and Risk Committee of the NSW Ombudsman. Vicki is a Fellow of the Australian Institute of Company Directors and a Trustee Fellow of The Association of Superannuation Funds of Australia. Age 57. Sarah Brennan FFPA, GAICD – Independent Non-Executive Director – Member of remuneration committee and Chairman of the Mortgage Choice Financial Planning investment committee – Director since 21 March 2018 Sean Clancy Dip Mkt, FAICD – Independent Non-Executive Director – Chairman of remuneration committee and member of audit and risk committee – Director since 18 May 2009 Andrew Gale BA (actuarial major), MBA, FAICD, FIAA – Independent Non-Executive Director – Chairman of audit and risk committee and member of nomination committee – Director since 21 March 2018 Sarah Brennan is an entrepreneur with over 25 years’ experience in the financial services industry at an Executive, Consultant and Board level. She brings with her an extensive background in the areas of strategy, innovation, professionalism and regulatory and corporate governance. Sarah founded Comparator, the leading provider of benchmarking to the Australian financial services market, which she then sold to CoreLogic. She has held senior roles at Citibank, MLC, Deutsche Bank and has provided consulting services across financial services and wealth management to both domestic and international clients. Age 52. 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 a Director and Chief Executive Officer of Transfusion Ltd, Chairman of Metropolis Inc., Campaign Express, Non-Executive Director of Gowing Brothers and of Whitecoat and Ambassador to Business Events Sydney. Age 59. Andrew Gale is a qualified actuary with extensive knowledge of the financial services sector. He has had a deep involvement in financial services regulatory issues in a range of capacities and brings expertise in general management, M&A, corporate strategy, marketing, distribution and risk management. He has over 35 years’ experience in the industry, including roles as Executive Director with Chase Corporate Advisory, CEO and Managing Director for Count Financial Ltd, Managing Partner for Deloitte Actuaries and Consultants, and various senior executive roles at MLC and AMP. Andrew has over 25 years’ experience as a board director. He is a non-executive director (NED) for the NAB Advice & Licences Board, NULIS Nominees (Aust) Limited (trustee for MLC’s superannuation entities), and Harper Bernays Limited. He was a NED of the SMSF Association Limited for 6 years to June 2018, and its Chairman for 2 years. Andrew is a past President of the Institute of Actuaries of Australia. Age 62. Peter Higgins – Non-Executive Director – Member of audit and risk committee – Director since 30 November 1989 Peter is co-founder of Mortgage Choice. He is also Executive Chairman of Technology Company Power & Data Corporation Pty Ltd, trading as Mainlinepower.com and a Director of Argosy Agricultural Group Pty Ltd and a Member of the Hawkesbury Valley Economic Advisory Committee. Peter is also an Ambassador of the International Federation of Polo. 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 59. Rodney Higgins – Non-Executive Director – Member of nomination and remuneration committees – Director since 30 January 1986 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 64. Dharmendra Chandran MCom, LLB, BCom – Independent Non-Executive Director – Member of audit and risk committee – Director since 20 February 2019 Dharma is a highly respected corporate strategy and human resources executive with a track record in business transformation and cultural change. Dharma developed a deep understanding of the financial services industry throughout his time in various consulting roles and his five years at Westpac. He has held various Board roles for private companies and government related organisations, more recently, as a Non-Executive Director and Chair of the Board People Committee for 7-Eleven. Age 55. Steve Jermyn FCPA – Independent Non-Executive Director, resigned 19 June 2019 – Director since 24 May 2004 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 Chairman of Half the Sky Foundation Australia Ltd, Director of Guzman Y Gomez (Holdings) Pty Ltd and Director of Ronald McDonald House Charities. Age 70. 16 Directors’ Report For the year ended 30 June 2019 Directors’ interests The table below sets out the DIrectors’ interests at 30 June 2019: Director V L Allen S J Brennan D Chandran S J Clancy A C Gale P G Higgins R G Higgins Particulars of Director’s interests in shares Ordinary shares 60,000 — — 120,000 — 259,253 15,380,212 Company Secretary The Company Secretary is Mr Ian Parkes BEc, MBA, CA who is also the Company’s Chief Financial Officer. 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 2019, and the number of meetings attended by each Director were: Full meetings of Directors Audit Nomination Remuneration Meetings of committees A 10 10 2 9 10 9 6 9 B 10 10 2 10 10 10 10 10 A * * * 3 3 3 * 3 B * * * 3 3 3 * 3 A 4 * * * 4 * 2 * B 4 * * * 4 * 4 * A 3 3 * 3 * * 2 * B 3 3 * 3 * * 3 * V L Allen S J Brennan D Chandran S J Clancy A C Gale P G Higgins R G Higgins S C Jermyn A = Number of meetings attended B = Number of meetings held * = Not a member of the relevant committee 17 Mortgage Choice Annual Report 2019 Directors’ Report For the year ended 30 June 2019 Remuneration Report This Remuneration Report sets out the FY 2019 remuneration information for the Company’s Non-executive Directors, Chief Executive Officer (“CEO”) and other key management personnel (collectively “KMP”) as defined in the Glossary at the end of this report. The report contains the following sections: a) Chairman’s introduction b) KMP included in this report c) Remuneration governance d) Executive remuneration policy and framework e) Executive remuneration for FY 2019 f) Relationship between remuneration and Mortgage Choice Limited’s performance g) Non-executive Director remuneration h) Statutory disclosures i) Glossary a) Chairman’s introduction Dear Shareholders On behalf of the Board, I am pleased to present the FY 2019 Remuneration Report to you. The Board is committed to a transparent remuneration approach linked to company strategy and performance which balances the long term interests of shareholders and the need to attract and retain talented professionals who can deliver on the company goals and business objectives. Despite the achievement of a number of key strategic initiatives during the year, and the achievement of a range of individual KPI’s, the KMP did not achieve the cash profit target gateway set by the Board and accordingly for FY2019, there were no executive KMP STI payments. In addition, the performance hurdles for the 2016 Long Term Incentive were only partially met and as a result 50% of the 2016 LTI vested and 50% of the 2016 LTI lapsed. Looking ahead, we will continue to monitor and adjust our remuneration policies and processes to ensure we create the best environment to achieve our strategic goals. Sean Clancy Chair of the Remuneration Committee b) KMP included in this report Table A: KMP during FY 2019 Name Non-executive Directors Vicki L Allen Sarah J Brennan Sean J Clancy Andrew C Gale Peter G Higgins Rodney G Higgins Dharmendra Chandran 1 Stephen C Jermyn 2 Executive KMP Susan R Mitchell Ian J Parkes 3 Neill C Rose-Innes Position Non-Executive Chairman Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Chief Executive Officer Chief Financial Officer General Manager – Distribution Melissa J McCarney General Manager – Group Marketing Emma A Dupont-Brown Tania J Milnes Marie J Pitton General Manager – Product and Corporate Communications General Manager – Financial Planning General Manager – Human Resources Vincent C ten Krooden Head of IT 1 Mr Chandran was appointed as a Director on 20 February 2019. 2 Mr Jermyn retired from the Board on 19 June 2019. 3 Mr Parkes commenced in the role of Chief Financial Officer on 15 October 2018. 18 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued c) Remuneration governance The diagram below provides an overview of the Company’s remuneration governance framework. Remuneration Governance Framework Board Remuneration Consultants Responsible for overseeing the Company’s remuneration structure and ensuring it is appropriate for the Company’s circumstances, performance, and aligned with the long-term interests of the Company and its shareholders. Oversee  & delegate Recommend & inform Remuneration Committee Holds primary responsibility for remuneration governance. Makes recommendations to the Board on: – Non-executive Director fees; – Executive remuneration; and – Operation of the incentive plan. Seeks advice from independent remuneration consultants. The Corporate Governance Statement located on the Mortgage Choice website provides information on the role and composition of the Remuneration Committee. www.mortgagechoice.com.au/about-us/ shareholder-centre/corporate-governance.aspx Remuneration consultants and other independent advisors are engaged by the Remuneration Committee from time to time to advise on various issues, including structuring of remuneration, benchmarking data and market practice of other listed companies. During FY2018, the Company’s Remuneration Committee engaged the services of AON Hewitt to review and provide guidance on the Executive Team’s remuneration framework. This formed the basis for the remuneration framework applied in FY 2019. The following arrangements were made to ensure that the remuneration recommendations were free from undue influence: – AON Hewitt was engaged by and reported directly to the Chair of the Board and Remuneration Committee; – The agreement for the provision of remuneration consulting services was executed by the Chair of the Board and the Remuneration Committee under delegated authority of all Board members; – The report containing remuneration recommendations was provided by AON Hewitt directly to the Chair of the Board and the Remuneration Committee; and – AON Hewitt were 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. Engage Advise 19 Mortgage Choice Annual Report 2019 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued d) Executive remuneration policy and framework The following diagram shows the remuneration policy and framework that the Board, as advised by the Remuneration Committee, applies in setting executive remuneration. Executive Remuneration Policy & Framework Remuneration policy Aim 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. Fixed Performance based Fixed Remuneration Short Term Incentive (“STI”) Long Term Incentive (“LTI”) – Fixed remuneration consists of base – Designed to reward short – Designed to reward longer cash salary and superannuation. term performance. term performance. – Base salary is reviewed annually against – STI awards are awarded based on – LTI awards are delivered as performance external benchmarks to ensure it remains within market parameters. – Superannuation is paid up to the maximum super contribution base. performance against a balanced scorecard. – Scorecards are structured as a combination of financial, strategic and operational KPIs. – CEO’s STI is delivered 50% in cash and 50% in deferred performance rights. The performance rights vest in 2 tranches (50% after 1 year and 50% after 2 years), subject to continued employment. – Other executive KMP receive cash STI. share rights with vesting subject to performance hurdles. – 40% of the award is subject to a relative Total Shareholder Return (“TSR”) performance hurdle and the remaining 60% subject to cash EPS growth hurdles. Total remuneration = Fixed Remuneration + STI + LTI 20 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued CEO Remuneration The Company appointed the CEO, Susan Mitchell, in April 2018. Her remuneration is as follows: – Base Salary: $550,000 – Maximum STI: $440,000 (50% at target to a maximum STI of 80% at stretch performance) – Maximum LTI: $275,000 – Maximum Total Remuneration: $1,265,000 (plus Superannuation in accordance with the superannuation guarantee legislation). In accordance with Susan’s employment agreement, she received a special one-off grant of 90,000 performance rights which vest in two equal tranches in April 2019 and April 2020 subject to achievement of performance criteria set by the Board. The performance criteria for the April 2019 tranche were associated with the implementation of the new broker and adviser remuneration structures. These rights vested during the year. The second tranche, due to vest in April 2020, has performance criteria relating to network engagement measures and continued service. The CEO’s remuneration mix (excluding the one-off share rights grant) is below. Table B: CEO remuneration mix Position CEO Fixed Performance Based Base remuneration Maximum STI opportunity Maximum LTI opportunity 45% 34% 21% e) Executive remuneration for FY 2019 Fixed remuneration An executive’s fixed remuneration comprises a base cash salary plus superannuation limited to the maximum super contribution base. Executives have an opportunity to salary sacrifice amounts from their base salary towards additional superannuation as well as a series of prescribed benefits including any associated fringe benefits tax. Fixed remuneration is reviewed annually by the Remuneration Committee against external benchmarks, to ensure it remains appropriate relative to the market. Although fixed remuneration adjustments may be made after comparison to external benchmarks, or on promotion, there are no guaranteed fixed remuneration increases in any executive contracts. Short-term incentives A summary of the Company’s STI arrangements are set out in the table below: Table C: Summary of FY 2019 STI arrangements What is the STI plan? The STI plan is an incentive plan under which participants are eligible to receive an annual award if they satisfy pre-determined performance criteria. The criteria are designed as a balanced scorecard to deliver against the Company’s strategic and financial goals as well as motivate and reward high performance. This aligns the executives’ interests with the Company’s performance. Who can participate? What is the maximum opportunity for executives? Is there a gateway performance requirement before any incentive is paid? What is the performance period? The CEO and other executive KMP are eligible to participate in the STI plan. The maximum STI opportunity is: – CEO – 80% of fixed remuneration. – Other executive KMP – between 24% and 42% of fixed remuneration. The maximum STI opportunity for exceptional performance against the KPIs is set at 120% of target. Yes, the Board will not authorise the payment of STI to any executive KMP unless a minimum cash NPAT gateway has been achieved. Individual executive KMP cannot receive an STI unless they have met a minimum conduct gateway. The performance period is 1 year and aligns with the financial year. For FY 2019, the performance period was 1 July 2018 – 30 June 2019. 21 Mortgage Choice Annual Report 2019 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued What are the conditions for an STI award to be made? STI awards are paid to participants where: – the executive has been continuously employed until the end of the relevant financial year; – the executive has satisfied his or her individual KPIs to at least a minimum standard; – the executive has met the conduct gateway; and – the Company has achieved the NPAT gateway. How does the STI Pool Group Modifier work? What are the performance conditions for the CEO? The Group Modifier adjusts the STI pool in line with the Group’s profit result. This means that STI payments will vary with the Company’s capacity to pay. If the Group does not meet the gateway level of cash NPAT performance, as set by the Board, the modifier is zero and the STI outcome is $0 regardless of the performance by individual executive KMP in accomplishing their Individual and Business KPIs. The Group Modifier for FY2019 was set at zero and no STI payments were awarded. The CEO was assessed against the following three areas of strategic focus in support of the Group’s business objectives for FY 2019 to drive profitability for the benefit of our franchise network and shareholders: – Operational Efficiencies (including key IT projects); – Recruitment/Distribution Growth; and – Network Engagement. The CEO’s individual goals/KPIs that were linked to the above objectives were broken down to: Scorecard Category Weighting Measurement Achievement Cash NPAT Gateway Cash NPAT target as set by board Operational efficiencies Recruitment / Distribution Growth Engagement 20% 20% 20% 10% 30% Delivery of IT Projects to schedule and agreed budget Identify & implement efficiency opportunities Achievement of growth targets set for new franchisees & loan writers Achievement of growth targets set for new financial advisers Franchisee Engagement Survey Score As the cash NPAT KPI gateway was not met in FY 2019, the STI outcome for the CEO was nil regardless of the successful outcomes achieved against the majority of her individual KPIs. Key: Percentage of achievement against targets set: Exceed expectations: 105.1%+ All objectives met: 95.01–105% Most objectives met: 75.01–95% Several objectives met: 55.01–75% Few objectives met: 35.01–55% Not met: <35% 22 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued What are the performance conditions for other executive KMP? The executive KMP were assessed against the following four areas of strategic focus in support of the Group’s business objectives for FY 2019 to drive profitability for the benefit of our franchise network and shareholders: – Sustainable Growth; – Operational Efficiencies; – Recruitment / Distribution growth; and – Franchisee engagement. KMP individual goals/KPIs that were linked to the above objectives were broken down to: Scorecard Category Weighting Measurement Achievement Cash NPAT Gateway Cash NPAT target as set by Board Sustainable Growth Brand awareness 10–25% Achievement of target to increase Diversified Revenue Operational Efficiencies Delivery of IT Projects to schedule and agreed budget Recruitment / Distribution Growth 10–25% Identify & implement departmental efficiency opportunities 15–45% Achievement of growth targets for new franchisees and loan writers Achievement of growth targets set for new financial advisers Engagement 10–35% Franchisee Engagement Survey Score Staff Engagement Survey As the cash NPAT KPI gateway was not met in 2019, the STI outcome for executive KMP was Nil regardless of the outcomes delivered against individual KPIs. Key: Percentage of achievement against targets set: Exceed expectations: 105.1%+ All objectives met: 95.01–105% Most objectives met: 75.01–95% Several objectives met: 55.01–75% Few objectives met: 35.01–55% Not met: <35% How is performance assessed? The Remuneration Committee assesses the CEO’s performance against KPIs and determines the CEO’s STI award (if any). For other executive KMP, this assessment is completed by the CEO and approved by the Remuneration Committee. Performance against the performance measures is assessed annually as part of the broader performance review process for each member of Executive KMP. Both financial and non-financial conditions are assessed quantitatively against predetermined benchmarks where appropriate. For the purposes of testing the financial hurdles, financial results are extracted by reference to the Company’s audited financial statements. Where quantitative assessment is not practicable, qualitative performance appraisals are undertaken. These methods of assessing performance were chosen because they are, as far as practicable, objective and fair. The use of financial statements ensures the integrity of the measure and alignment with the true financial performance of the Company. How is the STI pool calculated? STI awards are paid out of a defined STI pool. The STI pool is based on the combined value of the STI participants’ target STI (an agreed percentage of the individual’s base salary) and is funded from the NPAT result delivered for the year. The actual cash NPAT result operates as a modifier to the final STI pool value. i.e. as cash NPAT increases or decreases so does the STI pool and in turn the individual’s potential STI payment for the year. As the cash NPAT threshold for FY2019 was not delivered the Group Modifier for FY 2019 was set at zero and the STI pool for FY 2019 was reduced to $0. 23 Mortgage Choice Annual Report 2019 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued How is reward delivered under the STI Plan? CEO: If an STI award is made, the STI award is delivered 50% in cash and 50% in performance rights. Vesting of performance rights is deferred for up to two years. Further details regarding the deferred component of the CEO’s STI award are set out below. Other executive KMP: If an STI award is made, the STI outcome is paid 100% in cash. STI cash payments (if any) are made following board approval of the Annual Report. Is there discretion to adjust STI awards? Individual STI awards are not formulaic and the Board may adjust awards up or down where circumstances warrant e.g. positive franchisee outcomes and engagement or where the risk tolerance is breached. Deferred STI arrangements for the CEO How do the deferred STI arrangements work? If an STI award is made to the CEO, 50% of the award is deferred in the form of performance rights granted under the Company’s Share Rights Plan. The number of performance rights granted is determined by dividing 50% of any STI awarded to the CEO by the volume weighted average price (VWAP) of shares in the Company traded on the ASX over the 5 trading days prior to the grant date. Performance rights are offered at no cost to the CEO. Subject to the vesting conditions being met (see below), the CEO will be allocated one share for every performance right that vests, plus the number of shares that would have resulted from dividend reinvestment during the vesting period. Shares may be sourced on-market, from a new issue of shares or from shares held by the trustee of the Company’s employee share plan trust. In certain circumstances the Board has the discretion to pay a cash equivalent amount in lieu of an allocation of shares. Performance rights are subject to both a continuous service condition and clawback provisions. No other performance conditions are applicable on the basis that challenging performance conditions relating to the STI award were met before any performance rights were granted. Vesting of performance rights occurs as follows: – 50% 12 months after the end of the STI performance period; and – 50% 2 years after the end of the STI performance period. No performance rights have been or will be granted in relation to FY 2019 STI. Performance rights do not carry any voting or dividend rights, however shares allocated upon vesting of performance rights will carry the same rights as other ordinary shares. Performance rights may be forfeited if a material financial misstatement is uncovered relating to the year of the original STI award. If the Board determines that the CEO has acted fraudulently or dishonestly; has breached her obligations to the Group; or is knowingly involved in a material misstatement of financial statements; any shares to which she may have become entitled at the end of the performance period, and any rights held by the CEO under the Performance Rights Plan are forfeited. What are the vesting conditions applicable to the STI performance rights? What rights are attached to the performance rights? Does the Board have discretion to clawback the award? What happens if the CEO ceases employment? The CEO will forfeit unvested performance rights on cessation of employment with the Company unless cessation results from death, total and permanent disability, retirement or redundancy as determined by the Board in its absolute discretion. In these circumstances the Board may, in its discretion, determine the treatment of any unvested performance rights. What restrictions apply? The CEO is prohibited from entering into any hedging (or risk reduction) arrangements in relation to unvested performance rights. In addition, all shares allocated on vesting can only be dealt with in accordance with the Company’s Share Trading Policy. 24 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued Long-term incentives A summary of the Company’s LTI arrangements is set out in the table below. Table D: Summary of FY 2019 LTI arrangements What is the LTI Plan? The LTI plan awards executives for achieving specified performance conditions which underpin sustainable long-term growth. Who can participate? What is the maximum opportunity for executive KMP? How is reward delivered under the LTI Plan? What is the performance period? What are the vesting conditions for an LTI award? The Company believes that granting performance based equity to its executives under the LTI plan is an effective way of aligning the interests of executives with shareholders. The CEO and other executive KMP are eligible to participate in the LTI plan. Subject to the Board’s discretion, grants are made annually to executives. The maximum LTI opportunity is: CEO: 50% of base salary face value at the grant date. Other executive KMP: between 20% and 35% of base salary face value at the grant date. LTI awards are delivered in the form of performance rights granted under the Company’s Share Rights Plan. The number of performance rights granted to an executive is determined by dividing the executive’s maximum LTI opportunity by the volume weighted average price of shares in the Company traded on the ASX over the 5 trading days prior to the grant date. Shares allocated on the vesting of performance rights may be sourced on-market or from a new issue of shares. The number of performance rights that will vest will be determined by the % vesting outcome applied to each tranche as detailed below. Subject to these vesting conditions being met, executives will be allocated one share for every performance right that vests, plus the number of shares that would have resulted from dividend reinvestment during the vesting period. Performance rights are offered at no cost to the executives. Performance is measured over a 3 year performance period. Following testing, vesting of performance rights (if any) occurs in September of each year. In order for an LTI award to vest: – the executive must be continuously employed by the Group until the vesting date (unless service ends due to death, disability, redundancy or other exceptional circumstances); and – the performance conditions must be met (see below). 25 Mortgage Choice Annual Report 2019 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued What are the performance conditions? Performance rights are divided into two tranches: – 40% of the performance rights are subject to a relative TSR performance hurdle (the “TSR component”); and – 60% of the performance rights are subject to a performance hurdle based on cash earnings per share(“EPS”) growth on a compound annual growth basis with target performance consistent with the Company’s strategic plan (the “EPS Component”). Further details about each performance hurdle are set out below. Relative TSR hurdle TSR is the percentage increase in the Company’s share price plus reinvested dividends, expressed as a percentage of the initial investment, and reflects 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 $2 billion as at 31 August 2018, excluding illiquid stocks. The performance period is 1 September 2018 – 31 August 2021. Vesting (if any) will occur in September 2021. The specific Comparator Group for the FY 2019 LTI award is detailed in the Glossary at the end of this Remuneration Report. The following vesting schedule shows the proportion of the TSR component that will vest for various performance levels. TSR ranking relative to the Comparator Group over the performance period % of TSR component that vests Below the 50th percentile At the 50th percentile Between 50th and 75th percentiles Between 75th and 90th percentiles At or above the 90th percentile. Nil 50% Pro rata vesting between 50% and 100% Pro rata vesting between 100% and 125% 125% Cash EPS growth hurdle Cash EPS growth is based on cash profits 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. Growth is measured using the compound annual growth rate (CAGR). The Performance Period is 1 July 2018 to 30 June 2021 with the budget approved by the Board for the financial year ended 30 June 2019 to be used as the base. Vesting (if any) will occur in September 2021. Cash profits are calculated by adjusting audited statutory profits for trail commission recognised on a net present value basis and excluding non-cash share based remuneration expense. The following vesting schedule shows the proportion of the EPS component that will vest for various performance levels. CAGR of cash EPS over the performance period % of EPS component that vests Below 3% At 3% Between 3% and 8% At or above 8%. Nil 25% Pro rata vesting between 25% and 100% 100% 26 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued What happens if an executive ceases employment? What restrictions apply? Executives will forfeit unvested performance rights on cessation of employment with the Company unless the cessation results from death, redundancy, disablement, retirement or other special circumstances, in which case, unvested performance rights may vest at the Board’s discretion. Executives are prohibited from entering into any hedging (or risk reduction) arrangements in relation to unvested performance rights. In addition, on vesting allocated shares can only be dealt with in accordance with the Company’s Share Trading Policy. Is there discretion to adjust awards? As per the Performance Rights Rules, the Board has absolute and unfettered discretion in exercising any power or discretion concerning the Share Rights Plan. If the Board determines that a participant has acted fraudulently or dishonestly; has breached his or her obligations to the Group; or is knowingly involved in a material misstatement of financial statements; any shares to which the participant may have become entitled at the end of the performance period, and any rights held by the participant under the Performance Rights Plan are forfeited by the participant. As per the Performance Rights Rules, the Board has absolute and unfettered discretion in exercising its power to either lapse or vest some or all unvested performance rights as appropriate to the context of the event. What happens if there is a change in control? f) Relationship between remuneration and Mortgage Choice Limited’s performance The CEO and other executive KMP have a significant proportion of their remuneration structured to be dependent on achieving performance based criteria aligned to the Company’s financial and strategic objectives. Awards made under the STI and LTI programs all have minimum thresholds that must be achieved to receive any award at all thus ensuring KMP are not rewarded unless value in the enterprise has been enhanced. The KPIs established as performance criteria for STI and LTI programs are focused primarily on growth in sustainable net profit that directly leads to increased value for shareholders whether distributed as dividends or increasing shareholder value. The STI performance criteria tend to be more short term and operational in nature but designed to push profits forward for the period. LTI performance criteria are strategically focussed on long term value creation with 60% subject to sustained long term cash profit creation (tranche 1), which is a direct component of value creation, and 40% subject to the relative shareholder value created over the performance period (tranche 2). Further information on the LTI performance criteria is set out below. Tranche 1: EPS Component LTI grants made under the Performance Share Plan (PSP) from FY2014 to FY2017 and the Performance Rights Plan (PRP) since FY2018 have been subject to cash EPS growth hurdle. The following table shows the Company’s cash EPS results in FY2019 and the previous four financial years: Table E: Cash EPS for FY 2015 – FY 2019 Financial year 2015 2016 2017 2018 2019 Cash EPS (cents per share) 15.0 16.5 18.1 18.7 11.2 The cash EPS growth hurdle is consistent with the Company’s remuneration philosophy and strategic plan, and recognises that increasing cash results is important to our shareholders. 27 Mortgage Choice Annual Report 2019 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued Tranche 2: TSR Component LTI grants made under the PSP from FY 2014 to FY 2017 and the PRP since FY2018 have also been subject to a relative TSR performance hurdle which compares the Company’s TSR against 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. The following table shows the Company’s TSR expressed as a percentage of the opening share price for each period. The table also shows the opening and closing share price and dividends paid in FY 2019 and the previous four financial years: Table F: Share price movements, dividends and TSR for FY 2015 – FY 2019 Financial year 2015 2016 2017 2018 2019 Opening share price $ Closing share price $ Dividends paid during year ¢ 2.85 2.30 1.95 2.15 1.42 2.30 1.95 2.15 1.42 1.09 15.5 16.0 17.0 18.0 12.0 TSR -14% -8% 19% -26% -15% 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 2019. Mortgage Choice TSR compared to S&P / ASX 200 Index TSR Total Shareholder Return 80% 60 40 20 0 -20 -40 -60 -80 S&P/ASX 200 Mortgage Choice Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 Jun 19 Source: Guerdon Associates g) Non-executive Director remuneration Remuneration Policy The Company’s remuneration policy for Non-executive Directors aims to ensure it can attract and retain suitably qualified and experienced Directors having regard to: – the level of fees paid to Non-executive Directors of other major Australian companies; – the size and complexity of the Company; and – the role and responsibilities of Directors. Non-executive Directors do not receive any short-term cash incentives or share-based payments. The chairmen of the Audit Committee, the Remuneration Committee and the Mortgage Choice Financial Planning Pty Ltd Investment Committee receive an additional payment for their role on these committees. No element of Non-executive Director remuneration is performance-based to preserve the independence and impartiality of Directors. Fee levels and fee pool Shareholders set the maximum aggregate fee pool for the Non-executive Directors of the Board at $1,000,000 per annum at the 2016 Annual General Meeting. 28 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued The following table shows the annual fees payable to the Chairman and Non-executive Directors as at 30 June 2019: Table G: Non-executive Director fees Role Chairman Non-executive Director Fees for Chairman of the Audit and Risk Committee Fees for Chairman of the Remuneration Committee Fees for Chairman of Mortgage Choice Financial Planning Pty Ltd Investment Committee Fees $145,000 $95,000 $10,000 $10,000 $20,000 The Board reviews fees paid to Non-executive Directors periodically. There were no changes to the level of Directors fees in FY 2019. Non-executive Directors do not receive retirement allowances. Superannuation contributions, are paid on Non-executive Directors’ remuneration in addition to the fees above as required under the Australian superannuation guarantee legislation, unless there is a specific individual exemption. h) Statutory disclosures The following table sets out the statutory disclosures required under the Corporations Act 2001 (Cth) for the 2018 and 2019 financial years for KMP and has been prepared in accordance with the Australian Accounting Standards. Table H: Statutory remuneration table Short-term benefits Post- employment benefits Long-term benefits Share-based payments Cash Salary and Fees $ Employee Entitlements $ STI $ Name Non- monetary Benefits $ Super- annuation $ Long Service Leave $ Deferred   STI and Other $ Performance Shares and Rights $ Total $ Non-Executive Directors V L Allen, Chairman FY2019 FY2018 145,000 148,123 S J Brennan 1 FY2019 FY2018 S J Clancy 2 FY2019 FY2018 115,000 29,149 105,000 96,295 — — — — — — — — — — — — D Chandran (from 20 February 2019 to 30 June 2019) FY2019 34,224 A C Gale 3 FY2019 FY2018 P G Higgins FY2019 FY2018 R G Higgins FY2019 FY2018 113,150 29,082 95,000 95,000 95,000 95,000 — — — — — — — S C Jermyn (from 1 July 2018 to 19 June 2019) 4 FY2019 FY2018 96,667 96,295 — — 29 Mortgage Choice Annual Report 2019 — — — — — — — — — — — — — — — — — — — — — — — — 13,775 14,072 10,925 2,769 9,975 9,148 3,251 — — 9,025 9,025 9,025 9,025 9,183 9,148 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 158,775 162,195 125,925 31,918 114,975 105,443 37,475 113,150 29,082 104,025 104,025 104,025 104,025 105,850 105,443 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued Table H: Statutory remuneration table continued Short-term benefits Post- employment benefits Long-term benefits Share-based payments Cash Salary and Fees $ Employee Entitlements $ STI $ Name Non- monetary Benefits $ Super- annuation $ Long Service Leave $ Deferred STI & Other $ Performance Shares & Rights $ Total $ Other key management personnel S R Mitchell 5 FY2019 FY2018 550,000 — 375,077 127,653 — 5,635 4,928 5,066 20,531 20,049 15,615 49,846 99,658 4,379 62,355 33,004 753,087 620,709 I J Parkes (from 15 October 2018 to 30 June 2019) FY2019 220,417 — 8,167 2,091 15,399 — N C Rose-Innes 6 FY2019 FY2018 337,346 327,230 — (16,566) 75,624 13,681 M J McCarney 6 FY2019 FY2018 260,991 240,975 — 58,548 E A Dupont-Brown 6 228,426 219,103 — 47,632 227,154 209,223 — 44,929 FY2019 FY2018 T J Milnes 6 FY2019 FY2018 M J Pitton 6 FY2019 FY2018 4,928 5,186 4,928 4,211 4,907 — — — 20,531 20,049 20,531 20,049 20,531 20,049 5,959 9,145 5,473 5,076 2,290 837 20,531 20,049 (5,550) 8,663 2,353 (574) 3,414 5,626 254 5,528 177,794 158,643 — 5,242 27,477 (8,261) 4,426 4,869 19,002 18,840 V C ten Krooden FY2019 FY2018 Totals FY2019 FY2018 195,000 173,567 — 4,542 38,173 (1,433) — — 20,531 19,532 2,996,169 — 7,406 26,208 222,746 2,292,762 420,036 20,202 19,332 191,804 3,204 2,827 3,183 1,177 30,174 77,571 — — — — — — — — — — — — — 14,029 260,103 35,656 30,152 387,854 481,067 27,026 20,802 321,302 349,087 19,207 12,147 278,775 305,394 19,330 14,304 261,719 302,696 12,667 222,335 9,092 213,487 5,611 228,867 — 231,016 99,658 195,881 3,578,242 4,379 119,501 3,145,587 1 Ms S J Brennan is the Chairman of the Mortgage Choice Financial Planning Investment Committee and receives fees in addition to her base Non-executive Director fees for this role – see section g) for further details. 2 Mr S J Clancy is the Chairman of the Remuneration Committee and receives fees in addition to his base Non-executive Director fees for this role – see section g) for further details. 3 Mr A C Gale was appointed Chairman of the Audit Committee on 20 August 2018 and receives fees in addition to his base Non-executive Director fees for this role – see section g) for further details. Mr Gale has reached his maximum superannuation contribution and has requested he receives his SGC as additional salary. 4 Mr S C Jermyn resigned as Chairman of the Audit Committee on 20 August 2018 and received fees in addition to his base Non-executive Director fees for this role – see section g) for further details. 5 Share based payments (Deferred STI and other) relating to Ms S R Mitchell include 2 components: a) 90,000 performance rights granted to the CEO to focus on critical medium term strategic objectives necessary for successful transition from the prior broker remuneration model. The grant vests in two equal tranches in April 2019 and April 2020. The performance criteria for the April 2019 tranche was the implementation of the new broker and adviser remuneration structures. These right vested during the year. The second tranche, due to vest in April 2020, has performance criteria relating to network engagement measures and continued service. b) Deferred STI of $33,151 in relation to FY 2018 being 50% of the total STI granted or to be granted as share rights with 50% due to vest in 12 months and 50% to vest in 24 months. The terms of the performance rights are described in section d). 6 Cash salary includes a one-off payment to compensate KMPs for changes to the LTI Plan. 30 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued The following table shows the relative proportion of remuneration that each executive received during FY 2019 and whether it is fixed remuneration or performance based remuneration. Table I: Remuneration mix Fixed/service based remuneration Performance based remuneration Name S R Mitchell I J Parkes N C Rose-Innes M J McCarney E A Dupont-Brown T J Milnes M J Pitton V C ten Krooden Fixed remuneration % Share based % Commencement share rights 1 % 78% 95% 91% 92% 93% 93% 94% 98% — — — — — — — — 11% — — — — — — — 1 Footnote 5a) in Table H describes the terms of this grant. Total % 89% 95% 91% 92% 93% 93% 94% 98% Cash ST % I Share based % — — — — — — — — 11% 5% 9% 8% 7% 7% 6% 2% Total % 11% 5% 9% 8% 7% 7% 6% 2% Details of share-based remuneration The key terms of performance shares granted as LTI awards to executive KMP that were tested during, or remain on foot at the end of, FY 2019 are set out in the following table. The table also explains the vesting outcome of awards that were tested during the year: Table J: Performance shares on foot or tested during FY 2019 % Vested 100 0 % Vested 100 Grant date FY 2016 LTI grants 17 September 2015 17 September 2015 FY 2017 LTI grants 25 October 2016 25 October 2016 Vesting date Value per performance share at grant date 1 14 September 2018 14 September 2018 14 September 2019 14 September 2019 $2.01 $1.19 $2.28 $1.30 1 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 key terms of performance rights granted that were tested during, or remain on foot at the end of, FY 2019 are set out in the following table. The table also explains the vesting outcome of awards that were tested during the year. Table K: Performance rights on foot or tested during FY 2019 Grant date Commencement grant 5 November 2018 5 November 2018 FY 2018 deferred STI award 7 September 2018 7 September 2018 FY 2018 performance rights 6 October 2017 6 October 2017 FY 2019 performance rights 28 November 2018 28 November 2018 Vesting date Value per performance right at grant date 1 3 April 2019 3 April 2020 14 September 2019 14 September 2020 14 September 2020 14 September 2020 14 September 2021 14 September 2021 $1.26 $1.26 $1.50 $1.50 $1.78 $1.40 $1.23 $0.81 1 The value at grant date calculated in accordance with AASB 2 Share-based Payments of shares granted during the year as part of remuneration. 31 Mortgage Choice Annual Report 2019 Financial year granted Vested % Forfeited % Financial years in which shares or rights may vest Minimum total value of grant yet to vest $ Maximum total value of grant yet to vest 1 $ Directors’ Report For the year ended 30 June 2019 Remuneration Report continued Details of remuneration paid, vested or forfeited during FY 2019 The percentage of the available grant that was paid, vested or forfeited in FY 2019 is set out below. Table L: Remuneration forfeited and vested during FY 2019 and outstanding at 30 June 2019 Cash STI LTI (Performance shares or rights) Potential FY 2019 bonus paid % — — — — — — — — — — — — — — — — — — — — — — — — — — — — — Potential FY 2019 bonus forfeited % 100 — — — — — — 100 100 — — — 100 — — — 100 — — — 100 — — — 100 — — — 100 Name S R Mitchell I J Parkes N C Rose-Innes M J McCarney E A Dupont-Brown T J Milnes M J Pitton V C ten Krooden 2019 2019 2019 2018 2018 2017 2016 2019 2019 2018 2017 2016 2019 2018 2017 2016 2019 2018 2017 2016 2019 2018 2017 2016 2019 2018 2017 2016 2019 — — 100 — — — 50 — — — — 50 — — — 50 — — — 50 — — — 50 — — — 50 — — — — — — — 50 — — — — 50 — — — 50 — — — 50 — — — 50 — — — 50 — 30/6/22 30/6/20 — 30/6/21 30/6/20 30/6/20 — 30/6/22 30/6/22 30/6/21 30/6/20 — 30/6/22 30/6/21 30/6/20 — 30/6/22 30/6/21 30/6/20 — 30/6/22 30/6/21 30/6/20 — 30/6/22 30/6/21 30/6/20 — 30/6/22 1 The maximum value is based on the fair value at grant date using a Monte Carlo simulation model utilising a lattice-based trinomial valuation method. nil nil — nil nil nil — nil nil nil nil — nil nil nil — nil nil nil — nil nil nil — nil nil nil — nil 188,080 56,475 — 101,487 33,200 76,408 — 66,683 66,248 65,944 73,787 — 51,275 50,559 56,575 — 36,601 36,428 40,995 — 37,497 35,803 40,289 — 24,065 23,948 27,104 — 26,673 32 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued Legacy performance awards Full details of prior year equity awards are set out in the Remuneration Report for the year in which the award was granted. Service agreements Non-executive Directors appointed to the Board 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, Susan Mitchell, and other executives are set out in their respective letters of employment and employment contracts. The employment terms do not prescribe the duration of employment for executives. The periods of notice required to terminate employment are set out below: a) The employment contract of Susan Mitchell is terminable by either the Company with 12 months’ notice or the executive with 6 months’ notice. b) The employment contracts of all other executive KMP are terminable by either the Company or the executive with one or three months’ notice. No provision is made in the contracts for termination payments other than amounts paid in respect of notice of termination. KMP equity holdings a) Performance shares The movements in performance shares held by executive KMP and their related parties are set out below. Table M: Movements in performance shares during FY 2019 Balance at the start of the year Granted as compensation Value granted $ Value at vesting date $ Vested Balance at the end of the year Forfeited 89,053 — 83,355 60,214 41,676 42,066 27,478 — — — — — — — — — — — — — — — — — (23,184) 33,849 (23,184) 42,685 — (21,066) (14,304) (9,287) (9,779) (6,168) — — 30,756 20,884 13,559 14,277 9,005 — — (21,066) (14,304) (9,287) (9,779) (6,168) — — 41,223 31,606 23,102 22,508 15,142 — Executive KMP Susan Mitchell Ian Parkes Neill Rose-Innes Melissa McCarney Emma Dupont-Brown Tania Milnes Marie Pitton Vincent ten Krooden b) Performance rights The movements in performance rights held by executive KMP and their related parties are set out below. Table N: Movements in performance rights during FY 2019 Balance at the start of the year Granted as compensation Value granted 1 $ Value at vesting date $ Vested Forfeited S R Mitchell (Commencement) — 90,000 112,950 (45,000) 44,223 S R Mitchell (deferred STI) 19,052 — — Share rights plan S R Mitchell I J Parkes N C Rose-Innes M J McCarney E A Dupont-Brown T J Milnes M J Pitton V C ten Krooden 41,946 177,100 188,080 — 40,506 31,056 22,376 21,992 14,710 — 62,790 62,380 48,282 34,464 35,308 22,660 25,116 66,683 66,247 51,275 36,600 37,497 24,065 26,674 — — — — — — — — — — — — — — — — — — — — — — — — — — — — Balance at the end of the year 45,000 19,052 219,046 62,790 102,886 79,338 56,840 57,300 37,370 25,116 1 The value of commencement performance rights granted to Susan Mitchell during the year was $1.255 each. The unit value of performance rights subject to EPS hurdles granted during the year under the share rights plan was $1.23. The unit value of performance rights subject to TSR hurdles granted during the year under the share rights plan was $0.81. 33 Mortgage Choice Annual Report 2019 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued c) Share holdings The number of shares in the Company held during the financial year by each KMP, including their close family members and their controlled entities, are set out below. Table O: Movements in KMP shareholdings during FY 2019 Name Non-executive Directors Vicki Allen Sarah Brennan Sean Clancy Andrew Gale Peter Higgins Rod Higgins Dharmendra Chandran Steve Jermyn 2 Executive KMP Susan Mitchell Ian Parkes Neill Rose-Innes Melissa McCarney Emma Dupont-Brown Tania Milnes Marie Pitton Vincent ten Krooden Received during the year on the vesting of performance rights 1 Received during the year on the vesting of performance shares Balance at the start of the year Purchases/sales during the year Balance at the end of the year 60,000 — 120,000 — 259,253 15,380,212 — 2,500,000 112,208 — 63,341 — — 124,072 1,558 — — — — — — — — — 48,068 — — — — — — — — — — — — — — — 23,184 — 21,066 14,304 9,287 9,779 6,168 — — — — — — — — — — — — — — — — — 60,000 — 120,000 — 259,253 15,380,212 — N/A 183,460 — 84,407 14,304 9,287 133,851 7,726 — 1 Shares issued on vesting of 45,000 performance rights. Additional shares represent the value of dividends over the vesting period. 2 For S Jermyn, the shareholdings disclosed are for the period for which he was a Non-executive Director of the Company. 34 Directors’ Report For the year ended 30 June 2019 Remuneration Report continued i) Glossary The following table defines terms used throughout this Remuneration Report: Table P: Glossary of terms used Term Definition Comparator group KMP KPI LTI Pinnace Investment Management Group Ltd, Genworth Mortgage Insurance Australia Ltd, Credit Corp Group Ltd, Navigator Global Investments Ltd, Moelis Australia Ltd, AUB Group Ltd, Eclipx Group Ltd, HUB24 Ltd, FlexiGroup Australia Ltd, ClearView Wealth Australia Ltd, Scottish Pacific Group Ltd, OFX Group Ltd, EQT Holdings Ltd, Evans Dixon Ltd, IMF Bentham Ltd, MyState Ltd, Centuria Capital Ltd, Money3 Corp Ltd, Australian Finance Group Ltd, Zip Co Ltd, Pacific Current Group Ltd, Bell Financial Group Ltd, Credible Labs Inc, Auswide Bank Ltd, Onevue Holdings Ltd, Pioneer Credit Ltd, Euroz Ltd, Australian Ethical Investment Ltd, FSA Group Ltd, Kina Securities Ltd, Fiducian Group Ltd, APN Property Group Ltd, Blue Sky Alternative Investments Ltd, Axsesstoday Ltd, Mainstream Group Holdings Ltd, Managed Accounts Holdings Ltd, Raiz Invest Ltd, Freedom Insurance Group Ltd. Key management personnel, being those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any directors. KMP includes the Executives and Non-executive Directors as detailed on page 18. Key Performance Indicator Long Term Incentive Performance right A performance right is a right to one Mortgage Choice share, plus the number of shares that would have resulted from reinvestment of dividends paid during the vesting period on the shares acquired on vesting of the rights. In certain circumstances the Board has a discretion to pay a cash equivalent amount in lieu of an allocation of shares. Performance rights are used to deliver the CEO’s deferred STI awards and LTI awards to executive KMP. Prior to FY2019, KMP LTI awards only entitled the holder to one share per performance right. Performance share Performance shares are shares in Mortgage Choice that are held in an employee share plan trust. From: 2017, LTI awards to executive KMP are delivered using performance rights. PSP PRP STI VWAP Prior to 2017, the Performance Share Plan was used to make LTI awards to executives. The Performance Rights Plan is used to make LTI awards to executives. Short Term Incentive Volume weighted average price 35 Mortgage Choice Annual Report 2019 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 37. Rounding The Company is a company of the kind referred to in ASIC Corporations (Rounding in Financials/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the directors’ report and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. Auditor Deloitte Touche Tohmatsu continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of the Directors. Vicki Allen Chairman Sydney 21 August 2019 Directors’ Report For the year ended 30 June 2019 Insurance of Directors and Officers Insurance premiums were paid for the year ended 30 June 2019 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 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. Details of the amounts paid or payable to the auditor (Deloitte Touche Tohmatsu) for non-audit services provided during the year are set out in Note 19. The Board of Directors has considered the position and, in accordance with the advice received from the audit committee, is satisfied 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 satisfied that the provision of non-audit services by the auditor, as set out below in Note 19, 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. 36 Auditors Independence Declaration For the year ended 30 June 2019 Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW, 2000 Australia Phone: +61 2 9322 7000 www.deloitte.com.au The Board of Directors Mortgage Choice Limited Level 10,100 Pacific Highway North Sydney NSW 2060 21 August 2019 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 2019, 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 Heather Baister Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte Network. 37 Mortgage Choice Annual Report 2019 Annual Financial Report — 30 June 2019 Contents Financial Statements Consolidated Income Statement Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Directors’ Declaration Independent Audit Report to members of Mortgage Choice Limited 39 40 41 42 43 44 84 85 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 2019. 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. 38 Consolidated Income Statement For the year ended 30 June 2019 Revenue Origination commission Trailing commission excluding discount unwind Trailing commission discount unwind Diversified products commission Insurance trailing commission exc. discount unwind Insurance trailing commission discount unwind Financial Planning income Franchise income Interest Sponsorship and other income Direct costs Origination commission Trailing commission excluding discount unwind Trailing commission discount unwind – finance costs Diversified products commission Insurance trailing commission exc. discount unwind Insurance trailing commission discount unwind Financial Planning commission Gross profit Operating Expenses Sales Technology Marketing Corporate Profit before income tax Income tax expense Profit for the period from continuing operations Net profit attributable to the owners of Mortgage Choice Limited Earnings per share From continuing operations Basic earnings per share Diluted earnings per share 2019 $’000 2018 $’000 Notes 5 57,858 82,642 17,663 4,677 2,480 913 7,087 1,054 600 2,381 70,015 106,840 17,905 7,265 — — 11,290 921 577 2,995 177,355 217,808 (44,380) (58,682) (12,639) (3,400) (2,048) (770) (5,944) 49,492 (9,591) (5,234) (6,403) (8,331) 19,933 (6,209) 13,724 13,724 Cents 11.0 10.9 (48,839) (102,668) (11,048) (5,513) — — (9,063) 40,677 (12,458) (4,992) (8,675) (8,705) 5,847 (1,609) 4,238 4,238 Cents 3.4 3.4 6 26 26 The above consolidated income statement should be read in conjunction with the accompanying notes. 39 Mortgage Choice Annual Report 2019 Consolidated Statement of Comprehensive Income For the year ended 30 June 2019 Profit for the year Other comprehensive income Total comprehensive income attributable to the owners of Mortgage Choice Limited 2019 $’000 13,724 — 13,724 2018 $’000 4,238 — 4,238 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 40 Consolidated Balance Sheet For the year ended 30 June 2019 Assets Current assets Cash and cash equivalents Trade and other receivables Contract assets Current tax assets Total current assets Non-current assets Receivables Contract assets Property, plant and equipment Intangible assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables External borrowings 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 2019 $’000 2018 $’000 7 7 7 7 8 10 11 2 12 13 14 12 15 16(a) 16(b) 1,927 13,750 98,519 — 3,353 104,038 — 112 114,196 107,503 4,220 277,949 717 10,132 293,018 275,685 — 686 8,562 284,933 407,214 392,436 82,043 2,500 510 1,339 86,392 201,396 32,168 774 234,338 320,730 86,484 8,097 1,379 77,008 86,484 77,211 — — 1,258 78,469 196,711 30,913 691 228,315 306,784 85,652 7,764 1,309 76,579 85,652 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 41 Mortgage Choice Annual Report 2019 Consolidated Statement of Changes in Equity For the year ended 30 June 2019 Balance at 30 June 2017 7,277 2,075 94,836 104,188 Contributed equity $’000 Notes Reserves $’000 Retained earnings $’000 Total $’000 Total comprehensive income for the year as reported in the 2018 financial statements Transactions with equity holders in their capacity as owners: Contributions of equity net of transaction costs Dividends paid Employee share plans – value of employee services Balance at 30 June 2018 Adjustment for adoption of AASB15 Balance as at 1 July 2018 Total comprehensive income for the year as reported in the 2019 financial statements Contributions of equity net of transaction costs Dividends paid Employee share plans – value of employee services — — 4,238 4,238 487 — — 487 7,764 — 7,764 — 333 — — 333 (487) — (279) (766) 1,309 — 1,309 — — (22,495) (22,495) — (279) (22,495) (22,774) 76,579 1,705 78,284 85,652 1,705 87,357 — 13,724 13,724 (333) — 403 70 — — (15,000) (15,000) — 403 (15,000) (14,597) 15 17 27 1 15 17 27 Balance at 30 June 2019 8,097 1,379 77,008 86,484 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 42 Consolidated Statement of Cash Flows For the year ended 30 June 2019 Notes 2019 $’000 2018 $’000 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) Income taxes paid Net cash inflow from operating activities 25 Cash flows from investing activities Payments for property, plant, equipment and intangibles Loans to franchisees net of repayments Proceeds from sale of property, plant and equipment Interest received Net cash (outflow) from investing activities Cash flows from financing activities External borrowings Interest paid 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 Cash and cash equivalents at the end of year 195,400 (176,201) 19,199 (5,064) 14,135 (3,755) 150 — 600 211,084 (178,702) 32,382 (10,155) 22,227 (4,137) (1,502) 37 577 (3,005) (5,025) 2,500 (56) (15,000) (12,556) (1,426) 3,353 1,927 — — (22,495) (22,495) (5,293) 8,646 3,353 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 43 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 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 the Corporations Act 2001, Accounting Standards and other authoritative pronouncements issued by the Australian Accounting Standards Board (AASB), and comply with other requirements of the law. 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 Compliance with Australian Accounting Standards ensures that the financial statements and notes of the Group comply with International Financial Reporting Standards (‘IFRS’) as issued by the International Accounting Standards Board (IASB). Consequently, this financial report has been prepared in accordance with and complies with IFRS as issued by the IASB. Consequently, this financial report has been prepared in accordance with and complies with IFRS as issued by the IASB. Amendments to Accounting Standards and new Interpretations that are mandatorily effective for the current reporting period. The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to their operations and effective for the accounting period that begins on or after 1 July 2018. New and revised Standards and amendments thereof and Interpretations effective for the current year that are relevant to the Group include: – AASB 9 Financial Instruments and related amending Standards – AASB 15 Revenue from Contracts with Customers and related amending Standards – AASB 2016-5 Amendments to Australian Accounting Standards – Classification and Measurement of Share-based Payment Transactions. Impact of the application of AASB 9 Financial Instruments and related amending Standards AASB 9 introduced new requirements for: – the classification and measurement of financial assets and financial liabilities; – impairment of financial assets; and – general hedge accounting. Details of these new requirements as well as their impact on the Group’s consolidated financial statements are described below. Classification and measurement of financial assets and financial liabilities Under AASB 9, on initial recognition, a financial asset is classified and measured at: – amortised cost; – fair value through other comprehensive income (FVTOCI) – debt instrument – fair value through other comprehensive income (FVTOCI) – equity instrument – fair value through profit or loss (FVTPL). The new standard eliminates the previous AASB 139 financial asset categories. All recognised financial assets that are within the scope of AASB 9 are required to be subsequently measured at amortised cost or fair value on the basis of the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial assets. On 1 July 2018 (the date of initial application of AASB 9), the Group’s management assessed which business models apply to the financial assets held by the Group and the contractual cash flow characteristics of the financial assets and has classified its financial instruments into the appropriate AASB 9 categories as identified in the table below. Financial assets at amortised cost The amortised cost of a financial asset is: – the amount at which the financial asset is measured at initial recognition; – minus the principal repayments; – plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount; and – adjusted for any loss allowance. 44 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued The following accounting policies apply to recognition and subsequent measurement of financial assets and liabilities on adoption of AASB 9 prior to the application off the new credit loss model: Financial assets Original classification under AASB 139 New classification under AASB 9 Cash and cash equivalents Amortised cost Amortised cost Trade receivables Net present value of future mortgage trailing commissions receivable Franchisee receivables Other receivables Financial liabilities Loans and receivables Loans and receivables Loans and receivables Loans and receivables Amortised cost a Contract asset under AASB 15 carried at expected value b Carrying amount under AASB 139 as at 30 June 2018 $’000 Carrying amount under AASB 9 as at 1 July 2018 $’000 $3,353 $11,751 $3,353 $11,751 $360,913 b Amortised cost a $6,384 $6,384 Amortised cost a $97 $97 Net present value of future mortgage trailing commissions payable Amortised cost Amortised cost $260,521 $260,521 Net present value of future insurance trailing commissions payable Nil amount as at 30 June 2018 Amortised cost Nil $13,370(c) a) When these cash flows consist solely of payments of principal and interest on the principal amount outstanding, the Group has classified and measured them at amortised cost. b) The future mortgage trailing commission receivable is now classified as a contract asset under AASB 15. The value of net present value of future mortgage trailing commission receivable is unchanged on transition at $360,913,000. c) Future insurance trailing commissions payable have been recognised as a result of adoption of AASB 15. Refer to impact of AASB 15 section of this note. Impairment AASB 9 replaces the ‘incurred loss’ model in AASB 139 with an ‘expected credit loss’ (ECL) model. This applies to financial assets measured at amortised cost and debt investments at fair value through other comprehensive income (FVTOCI). The Group does not hold any debt or equity investments at FVTOCI. AASB 9 also provides a simplified approach for measuring the loss allowance at an amount equal to lifetime ECL for trade receivables, contract assets and lease receivables in certain circumstances. Specifically, AASB 9 requires the Group to recognise a loss allowance for expected credit losses on: – debt investments measured subsequently at amortised cost ECLs are a probability-weighted estimate of credit losses. Credit losses are measured as the present value of all cash shortfalls and consists of three components: 1) Probability of default (PD): represents the possibility of a default over the next 12 months and remaining lifetime of the financial asset; 2) A loss given default (LGD): expected loss if a default occurs, taking into consideration the mitigating effect of collateral assets and time value of money; 3) Exposure at default (EAD): the expected loss when a default takes place. AASB 9 requires the Group to measure the loss allowance for a financial instrument at an amount equal to the lifetime ECL if the credit risk on that financial instrument has increased significantly since initial recognition, or if the financial instrument has not increased significantly since initial recognition (except for a purchase or originated credit-impaired financial asset), the Group is required to measure the loss allowance for that financial instrument at an amount equal to a 12 month ECL. or at FVTOCI, – lease receivables, – trade receivables and contract assets, and – financial guarantee contracts to which the impairment requirements of AASB 9 apply. The Group has applied a three stage model to determine the loss allowances for any change in risk since initial recognition: Stage 1: 12 month ECL – At initial recognition a collective assessment is done for classes of financial assets with the same credit risk based on the PD within the next 12 months and the LGD’s with consideration to forward looking economic indicators. Stage 2: Lifetime ECL – When there has been a significant change in credit risk since initial recognition, a lifetime ECL is recognised taking into account the cash flows for the remaining life of the asset. Stage 3: Lifetime ECL – When a financial asset is credit impaired a lifetime ECL is recognised as a collective or specific provision with interest calculated on the amortised cost instead of the carrying amount. 45 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued Mortgage Choice has the following major financial asset classes that need to be considered. Asset Cash Commissions receivable Future Trail commission receivable Franchisee loans Assessment As all cash is held with major financial institutions (ADI)’s and there has been no history of loss, it has been determined that ECL would not be material and consequently has not been recognised. Upfront and current trail commission receivables are due from a combination of highly rated major lenders and smaller banks and non-bank lenders. There has been no historical instances where a loss has been incurred, including through the GFC. ECL would not be material and consequently has not been recognised. Future trail commission receivables are due from a combination of highly rated major lenders and smaller banks, non-bank lenders and insurance companies. There has been no historical instances where a loss has been incurred, including through the GFC. ECL would not be material and consequently has not been recognised. As at 30 June 2019, the group has outstanding loan receivables from various franchisees totalling $6.1m ($6.3m at 30 June 2018). All the loans are secured against the franchisees trail book. There have not been any material historical defaults on these loans. The Group has assessed that there is sufficient collateral for each of the loans such that any loss given default would be insignificant. Therefore, ECL would not be material and consequently has not been recognised. The Group often enters into transactions that will give rise to different streams of fees, for example, financial advice and placement of life insurance. In all cases, the total transaction price for a contract is allocated amongst the various performance obligations based on their relative stand-alone selling prices. The transaction price for a contract excludes any amounts collected on behalf of third parties. The Group recognises contract liabilities for consideration received in respect of unsatisfied performance obligations and reports these amounts as other liabilities in the statement of financial position. Similarly, if the Group satisfies a performance obligation before it receives the consideration, the Group recognises either a contract asset or a receivable in its statement of financial position, depending on whether something other than the passage of time is required before the consideration is due. Under AASB 15, revenue is recognised when the Group satisfies performance obligations by transferring the promised services to its customers. Determining the timing of the transfer of control – at a point in time or over time – requires judgement. Below is a summary of the major services provided and the Group’s accounting policy on recognition as a result of adopting AASB 15. Transition The Group has taken the exemption to not restate comparative information for prior periods with respect to classification and measurement (including impairment) requirements. Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of AASB 9 are recognised in retained earnings and reserves as at 1 July 2018. Accordingly, the information presented for FY 2018 does not generally reflect the requirements of AASB 9 but rather those of AASB 139. Impact of the application of AASB 15 Revenue from Contracts with Customers The Group has adopted AASB 15 Revenue from Contracts with Customers from 1 July 2018 which resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. The Group has adopted AASB 15 using the cumulative effect method (without practical expedients), with the effect of initially applying this standard recognised at the date of initial application (i.e. 1 July 2018). Therefore, comparative periods have not been restated. AASB 15 uses the terms ‘contract asset’ and ‘contract liability’ to describe what might more commonly be known as ‘accrued revenue’ and ‘deferred revenue’, however the Standard does not prohibit an entity from using alternative descriptions in the statement of financial position. Revenue to the Group arises mainly from mortgage broking, financial planning advice and placement of life insurance. To determine whether to recognise revenue, the Group follows a 5 step process: 1) Identifying the contract with a customer 2) Identifying the performance obligations 3) Determining the transaction price 4) Allocating the transaction price to the performance obligations 5) Recognising revenue when or as performance obligations are satisfied 46 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued Revenue recognition policy under AASB 118 Revenue recognition policy under AASB 15 Summary of changes in accounting policy Origination commissions received by the Group are recognised as revenue on settlement of the loan, net of estimated clawbacks. Revenue item Origination commission Nature and timing of satisfaction of performance obligations The performance obligation for the Group is to introduce successful applicants to the lender. The performance obligations are satisfied at the point in time the loan is advanced by the lender. Cash is received in the month following settlement of the loan. Commissions on loans that are discharged within two years will be subject to clawback in full or part. Trailing commission The performance obligation for the Group is to introduce successful applicants to the lender. Trailing commission revenue has historically been recognised under AASB 139. The performance obligations are satisfied at the point in time the loan is advanced by the lender. The Group has no further performance obligations after this. Cash is received each month based on the loan balance of the previous month. Trail ceases once the loan is discharged. 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. 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. 47 Mortgage Choice Annual Report 2019 AASB 15 did not have a significant impact on the Group’s accounting policies. With the introduction of AASB 15, trailing commission is now accounted for under the revenue standard, instead of the financial instruments standard. However, no material change occurs from AASB 139 to AASB 15 as the approach to estimating the expected value of the trailing commission is in line with the approach under AASB 139. Once the Group has referred a successful loan application to the lender, its performance obligations have been met. As such, the Group recognises this revenue at a point in time, being when the loan is settled with the lender. The transaction price is adjusted for any expected clawbacks using the expected value method. The transaction price is a percentage of the settlement value of the loan. Once the Group has referred a successful loan application to the lender, its performance obligations have been met. As such, the Group recognises this revenue at a point in time, being when the loan is settled with the lender. On initial recognition a contract asset is recognised, representing management’s estimate of the variable consideration to be received from the completion of this performance obligation. The Group uses the ‘expected value’ method of estimating the variable consideration. A significant financing component is also involved when determining this variable consideration. As such, the contract asset is adjusted by recalculating the net present value of estimated future cash flows at the original effective interest rate. The transaction price is a percentage of the expected outstanding balance of the loan. Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued Revenue item Diversified commission Financial planning income – advice Financial planning income – ongoing service Nature and timing of satisfaction of performance obligations Diversified commissions represent origination and trailing commission on non-mortgage products including general insurance and product referral commissions. The Group’s performance obligations are to refer successful applications to the lender or provider. The performance obligations are satisfied at the point in time the application is accepted by the lender or provider. Cash for upfront revenue is received in the month following settlement of the loan or writing of the insurance product. Cash for trail revenue is received each month based on the loan balance of the previous month. Trail ceases once the loan is discharged. The performance obligations for the Group are to provide initial advice through the preparation and provision of a Statement of Advice (SOA). As such, performance obligations have been satisfied at a point in time, being when the SOA has been provided. Each ongoing service package that the Group offers contains a list of distinct services to be provided over an annual period. However, these services have the same pattern of transfer and each performance obligation will be recognised over time. As such, these services will be recognised as a bundle of services over time. Cash is received either annually in advance or monthly. Revenue recognition policy under AASB 118 Revenue recognition policy under AASB 15 Summary of changes in accounting policy Revenue is recognised when the commissions are received or receivable. Trailing commission revenue has historically been recognised under AASB 139. 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. 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. Revenue from the provision of financial services is recognised at the time the service is provided. Revenue from the provision of financial services is recognised over time. AASB 15 did not have a significant impact on the Group’s accounting policies. Once the Group has referred a successful application to the lender or provider, its performance obligations have been met. As such, the Group recognises this revenue at a point in time. The transaction price is a percentage of the settlement value of the loan or policy value of the insurance product or expected outstanding balance of the loan or policy value of the insurance product. Revenue is recognised at a point in time the advice is delivered to the customer. AASB 15 did not have a significant impact on the Group’s accounting policies. AASB 15 did not have a significant impact on the Group’s accounting policies. Annual ongoing service revenue is recognised over a period of time. A time elapsed method is used to measure progress towards completion. On average the entity provides services to customers evenly throughout the year and therefore recognises revenue accordingly. The transaction price is based on the service package provided and is paid annually or monthly. 48 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued Revenue item Financial Planning income – life insurance upfront commission Insurance trailing commission Nature and timing of satisfaction of performance obligations The Group’s performance obligations are to introduce or refer successful insurance policy applications. The performance obligations are therefore satisfied at the point in time the policy is placed by the provider. Cash is received in the month the policy is written or the following month. The Group’s performance obligations are to introduce or refer successful insurance policy applications. The performance obligations are therefore satisfied at the point in time the policy is placed by the provider. Cash is received each month based on the premium paid by the client in the previous month. Trail ceases once the policy is terminated. Revenue recognition policy under AASB 118 Revenue recognition policy under AASB 15 Summary of changes in accounting policy Revenue is recognised at the point in time the policy is placed by the provider. Revenue is recognised when the life insurance trailing commissions are received or receivable AASB 15 did not have a significant impact on the Group’s accounting policies. Under AASB 118 revenue was recognised on receipt whereas under AASB 15, due to performance obligations being satisfied at a point in time, the net present value of all future revenue is estimated and recognised when the policy is placed by the provider. Once the Group has referred a successful insurance application to the provider, its performance obligations have been met. As such, the Group recognises this revenue at a point in time, being when the policy is placed by the provider. The transaction price is a percentage of the policy value of the insurance product. Once the Group has referred a successful insurance application to the insurance provider, its performance obligations have been met. As such, the Group recognises this revenue at a point in time, being when the policy is placed by the provider. On initial recognition a contract asset is recognised, representing management’s estimate of the variable consideration to be received from the completion of this performance obligation. The Group uses the ‘expected value’ method of estimating the variable consideration. A significant financing component is also involved when determining this variable consideration. As such, the contract asset is adjusted by recalculating the net present value of estimated future cash flows at the original effective interest rate. The transaction price is a percentage of the expected policy value of the insurance product. 49 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued Revenue recognition policy under AASB 118 Revenue recognition policy under AASB 15 Summary of changes in accounting policy Revenue is recognised at a point in time the conference or workshop is delivered. AASB 15 did not have a significant impact on the Group’s accounting policies. Other income includes contributions from lenders towards conferences and workshops which are recognised as income at a point in time in the period the conference or workshop is held. Revenue item Sponsorship and other income Nature and timing of satisfaction of performance obligations Each sponsorship package offered by the Group contains a list of distinct services to be provided over an annual period. The key services to be provided relate to conference and workshops held by the Company. Once the relevant conference or workshop has been held, the performance obligation is satisfied. Cash is received in the form of an annual package, paid upfront. The impact of these changes on the Group’s retained earnings is as follows: Opening balance under AASB 139 and AASB 118 Increase for initial recognition of insurance trail receivable Decrease for initial recognition of insurance trail payable Impact of first time adoption of AASB 9 Impact before tax effect Tax effect Total impact Opening balance under AASB 9 and AASB 15 Effect on Retained Earnings $’000 76,579 15,806 (13,370) — 2,436 (731) 1,705 78,284 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 and at each reporting date. 50 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued 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. A significant financing component is also involved when determining this variable consideration. As such, the contract asset is adjusted by recalculating the net present value of estimated future cash flows at the original effective interest rate. ii) Employee Share Trust The Group has formed two trusts to administer the Group’s employee share scheme. These trusts are consolidated as the substance of the relationship is that the trusts are 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 based on the consideration to which the Group expects to be entitled in a contract with a customer and excludes amounts collected on behalf of third parties. 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. Revenue from sale of services is recognised as follows: i) Origination commissions arising from mortgage broking activities Once the Group has referred a successful loan application to the lender, its performance obligations have been met. As such, the Group recognises this revenue at a point in time, being when the loan is settled with the lender. The transaction price is adjusted for any expected clawbacks using the expected value method. The transaction price is a percentage of the settlement value of the loan. ii) Trailing commissions arising from mortgage broking activities Once the Group has referred a successful loan application to the lender, its performance obligations have been met. As such, the Group recognises this revenue at a point in time, being when the loan is settled with the lender. On initial recognition a contract asset is recognised, representing management’s estimate of the variable consideration to be received from the completion of this performance obligation. The Group uses the ‘expected value’ method of estimating the variable consideration. The transaction price is a percentage of the expected outstanding balance of the loan. iii) Diversified commissions Once the Group has referred a successful application to the lender or provider, its performance obligations have been met. As such, the Group recognises this revenue at a point in time. The transaction price is a percentage of the settlement value of the loan or policy value of the insurance product or expected outstanding balance of the loan or policy value of the insurance product. iv) Financial planning revenue a) Advice fees Revenue is recognised at a point in time the advice is delivered to the customer. Annual ongoing service revenue is recognised over a period of time. A time elapsed method is used to measure progress towards completion. On average the entity provides services to customers evenly throughout the year and therefore recognises revenue accordingly. The transaction price is based on the service package provided and is paid annually or monthly. b) Life insurance commission Once the Group has referred a successful insurance application to the provider, its performance obligations have been met. As such, the Group recognises this upfront commission revenue at a point in time, being when the policy is placed by the provider. Group recognises trailing commission revenue at a point in time, being when the policy is placed by the provider. On initial recognition a contract asset is recognised, representing management’s estimate of the variable consideration to be received from the completion of this performance obligation. The Group uses the ‘expected value’ method of estimating the variable consideration. A significant financing component is also involved when determining this variable consideration. As such, the contract asset is adjusted by recalculating the net present value of estimated future cash flows at the original effective interest rate. The transaction price is a percentage of the policy value of the insurance product for upfront commissions or expected policy value for trailing commissions. v) Franchise income Franchise income is predominantly the recovery of costs of meeting regulatory requirements and is charged to franchisees on a monthly basis. This revenue is recognised as the performance obligation relating to these requirements are performed. 51 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued vi) 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. 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. vii) Sponsorship and other income Other income includes contributions from lenders towards conferences and workshops which are recognised as income at a point in time 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. 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 income or directly in equity, respectively. 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. 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. 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. 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. 52 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued 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. I) Trade receivables Trade receivables are recognised at amortised cost using the effective interest method, less expected credit losses (ECL). Trade receivables are generally due in 30 days. 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. 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) Impairment of tangible and intangible assets At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs of disposal and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. H) 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. The Group recognises lifetime ECL for trade receivables. The expected credit losses are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate. J) Contract assets Contract assets recognised are primarily related to trailing commission arising from mortgage broking activities. Any amount previously recognised as a contract asset is reclassified to trade receivables at the point in which the right becomes unconditional. K) Financial assets On initial recognition, a financial asset is classified and measured at: – Amortised cost; • Fair value through other comprehensive income (FVTOCI) – debt instrument • Fair value through other comprehensive income (FVTOCI) – equity instrument • Fair value through profit or loss (FVTPL) Debt instruments that meet the following conditions are measured subsequently at amortised cost: – the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and – the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. The amortised cost of a financial asset is the amount at which the financial asset is measured at initial recognition minus the principal repayments, plus the cumulative amortisation using the effective interest method of any difference between that initial amount and the maturity amount, adjusted for any loss allowance. The gross carrying amount of a financial asset is the amortised cost of a financial asset before adjusting for any loss allowance. Impairment of financial assets The Group recognises a loss allowance for expected credit losses on investments in debt instruments that are measured at amortised cost or at FVTOCI, lease receivables, trade receivables and contract assets, as well as on financial guarantee contracts. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument. 53 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued The Group recognises lifetime ECL for trade receivables, contract assets and lease receivables. The expected credit losses on these financial assets are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate. M) 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 seven years). For all other financial instruments, the Group recognises lifetime ECL when there has been a significant increase in credit risk since initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the Group measures the loss allowance for that financial instrument at an amount equal to 12 month ECL. Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial instrument. In contrast, 12 month ECL represents the portion of lifetime ECL that is expected to result from default events on a financial instrument that are possible within 12 months after the reporting date. Costs associated with developing or maintaining computer software programs 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. N) Trade and other payables These amounts represent liabilities for goods and services provided to the Group 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. L) 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. O) Trailing commissions payable Payables related to trailing commissions are recognised in accordance with the revenue recognition policy outlined in Note 1D. 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. P) Borrowing costs Borrowing costs are recognised as expenses using the effective interest method. Q) External borrowings All borrowings are initially recognised at fair value of the consideration received less directly attributable transaction costs. 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: After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method other than those which are measured at fair value through profit or loss (FVTPL). Office equipment Computer equipment Furniture and fittings 5-10 years 3-4 years 5-15 years Amortised cost is calculated by taking into account any fees paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs, and all other premiums or discounts on acquisition, over the period to maturity. 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 1G). Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in the income statement. 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. 54 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued 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 high quality corporate 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, the Mortgage Choice Performance Share Plan and the Mortgage Choice Share Rights Plan. Information relating to these schemes is set out in Note 27. The fair value of performance shares granted under the Mortgage Choice Performance Share Plan and share rights granted under the Mortgage Choice Share Rights 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 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 shares 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 shares 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. 55 Mortgage Choice Annual Report 2019 The Mortgage Choice Performance Share Plan and the Mortgage Choice Share Rights Plan are administered by the Mortgage Choice Performance Share Plan Trust and the Mortgage Choice Employee Incentive 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 options 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. Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued W) Rounding of amounts The Company is a company of the kind referred to in ASIC Corporations (Rounding in Financials/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the directors’ report and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. X) 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. Standard/Interpretation Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending AASB 16 ‘Leases’ 1 January 2019 30 June 2020 AASB 2018-1 Amendments to Australian Accounting Standards – Annual Improvements 2015–2017 Cycle 1 January 2019 30 June 2020 From the above table, the potential effect of the revised Standards/Interpretations on the Group’s financial statements is discussed for the most impactful Standards below: AASB 16 Leases AASB 16 will replace AASB 117 Leases, Interpretation 4 Determining whether an Arrangement contains a Lease, Interpretation 115 Operating Leases – Incentives and Interpretation 127 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The Standard will provide a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors. Key requirements of AASB 16: AASB 16 distinguishes leases and service contacts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting, and is replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees (i.e. all on balance sheet) except for short-term leases or leases of low value assets. The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others. Furthermore, the classification of cash flows will also be affected as operating lease payments under AASB 117 are presented as operating cash flows; whereas under the AASB 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively. In contrast to lessee accounting, AASB 16 substantially carries forward the lessor accounting requirements in AASB 117, and continues to require a lessor to classify a lease either as an operating lease or a finance lease. Furthermore, extensive disclosures are required by AASB 16. AASB 16 applies to annual period beginning on or after 1 January 2019. The Group anticipates that the application of AASB 16 in the future may have a material impact on amounts reported in respect of the Group’s financial assets and financial liabilities. Based on the Group’s assessment of the leases the Group has as at 30 June 2018 on the basis of the facts and circumstances that exist as at that date, the changes to AASB 16 Leases will result in the inclusion of a lease liability and a right of use asset on the balance sheet. There will also be changes to the profile of the expense. Rather than being a straight line rental expense, there will be more expensed in early years and less in later years. In addition, the nature of expenses related to those leases will now change because the new standard replaces the straightline operating lease expense with a depreciation charge for right-of- use assets and interest expense on lease liabilities. As a result, there will be an increase in cash inflow from operations arising from the depreciation charge, and an increase in cash outflow from financing activities from the interest expense. This will also increase metrics such as EBITDA as rather than an operating rental expense there will be a movement of expenses below the EBITDA line. The Group has lease commitments of $4.753m (refer note 21). The amount disclosed does not include any lease extension options and is not discounted as the Group is still in the process of determining its incremental borrowing rate, and as such is not able to determine the impact on the statement of financial position and statement of comprehensive income at this stage. As a lessee, the Group can either apply the standard using the retrospective approach or modified retrospective approach with optional practical expedients. The lessee applies the election consistently to all of its leases. The standard is mandatory for first interim periods within annual reporting periods beginning on or after 1 January 2019. The Group plans to apply the accounting standard initially on 1 July 2019, using a modified retrospective approach. Therefore, the cumulative effect of adopting AASB 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 July 2019, with no restatement of comparative information. The Group has not yet decided whether it will use the optional exemptions. AASB 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. AASB 16 distinguishes between leases and service contracts on the basis of whether an identified asset is controlled by a customer. AASB 16 eliminates the distinction between operating leases (off balance sheet) and finance leases (on balance sheet) for lessee accounting and replaces it with a lease model where a right-of-use asset and a corresponding lease liability will be recognised for all leases (i.e. all on balance sheet) except for short-term leases and leases of low value assets. 56 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 1 Summary of significant accounting policies continued As at 30 June 2018, the Group currently has various non-cancellable operating lease commitments in place. A preliminary assessment indicates that these arrangements will meet the definition of a lease under AASB 16, and hence the Group will recognise a right-of-use asset and a corresponding liability in respect of all these leases unless they qualify for low value or short-term leases upon the application of AASB 16. The new requirement to recognise a right-of-use asset and a related lease liability is expected to have an impact on the amounts recognised in the Group’s consolidated financial statements and the directors are currently assessing the extent of the potential impact. As such, it is not currently practicable to provide an estimate of the financial effect until the directors complete the review. Y) Parent entity financial information The financial information for the parent entity, Mortgage Choice Limited, disclosed in Note 28 has been prepared on the same basis as the consolidated financial statements, except as set out below. Investments in subsidiaries Investments in subsidiaries are accounted for at cost in the financial statements of Mortgage Choice Limited. Dividends received from subsidiaries are recognised in the parent entity’s profit or loss when its right to receive the dividend is established. 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. 57 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 2 Financial risk management The Group has limited exposure to financial risks with the exception of credit risk, liquidity risk and prepayment 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 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. The Group holds the following financial instruments: Financial Assets Current Cash and cash equivalents Trade and other receivables a,b Contract assets Non—current Receivables b Contract assets a) Excludes prepayments. b) FY2018 includes receivables treated as Contract assets under AASB 15 in FY2019. Financial Liabilities Current Trade and other payables External borrowings Non—current Trade and other payables 2019 $’000 2018 $’000 1,927 13,146 98,519 4,220 277,949 395,761 3,353 103,460 — 275,685 — 382,498 2019 $’000 2018 $’000 82,043 2,500 201,396 285,939 77,211 — 196,711 273,922 The Group’s policies in relation to financial risks to which it has exposure are detailed below. I) Market risk Interest rate risk The Group’s main interest rate risk arises from cash, cash equivalents and external borrowings. At 30 June 2019 the weighted average interest rate on its cash balances was 1.25% (2018 1.5%). If interest rates were to increase by 100 basis points, the Group’s after tax result would increase by $57,000 (2018 $83,000). A decrease of 100 basis points would reduce the Group’s after tax result by $57,000 (2018 $83,000). At 30 June 2019 the interest rate on the Group’s external borrowings was 1.27%. If interest rates were to increase by 100 basis points, the Group’s after tax result would reduce by $17,000. A decrease of 100 basis points would increase the Group’s after tax result by $17,000. II) 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. 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 franchisees trailing commissions that have not been received. The Group judges there to be an increase in credit risk if the receivable becomes 30 days past due. The Group’s expected credit losses has been determined to be not material due to the Group’s history of no historical losses and the risk profile of the Group’s lender panel. Refer to the table below. 58 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 2 Financial risk management continued 2019 ADI's Non ADI's Provision for Lender clawbacks Total Receivable 2018 ADI's Non ADI's Provision for Lender clawbacks Total Receivable 59 Mortgage Choice Annual Report 2019 Standard & Poor's Credit Rating AA– A+ A A– BBB+ BBB BBB– Not rated AA– A+ A A– BBB+ BBB BBB– Not rated Standard & Poor's Credit Rating AA– A+ A A– BBB+ BBB BBB– Not rated AA– A+ A A– BBB+ BBB BBB– Not rated Cash $’000 1,927 Trade and Franchisee Receivables $’000 7,789 1,504 1,330 158 120 1,162 — 205 Contract Assets $’000 237,058 25,561 41,185 4,734 3,082 33,875 — 5,609 1,927 12,269 351,104 54 213 — — 7 — 125 7,917 8,317 (3,220) 17,366 Trade and Franchisee Receivables $’000 8,654 1,172 1,678 0 236 1,723 — 156 — 13,431 — — — — 2,910 9,023 25,364 376,468 Contract Assets $’000 243,407 21,458 46,171 — 2,839 31,432 — 5,347 — 1,927 Cash $’000 3,353 3,353 13,619 350,654 60 307 — — 1 — 128 8,218 8,714 (4,198) 18,135 — — — — — — 2,666 7,593 10,259 360,913 — 3,353 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 2 Financial risk management continued III) 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. Less than 6 months $’000 6 – 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total cash flows $’000 Carrying Amount $’000 At 30 June 2019 Non—derivatives Interest bearing Cash and cash equivalents Franchisee receivables Non—interest bearing Cash and cash equivalents Trade receivable Franchisee and other receivables Contract assets — 1,113 — 1,909 — 2,356 — — 0 — — 0 1,925 1,263 2 11,015 263 50,291 64,759 — — 0 45,816 46,929 — 131 — — 0 1,925 6,771 2 11,015 263 1,925 6,088 2 11,015 263 78,886 151,613 116,137 442,742 376,468 80,795 153,969 116,268 462,719 395,761 The fair value of the contract assets is $385,436,000. The fair value of all other assets is the same as their carrying amount. The fair value of the contract assets would be classified as Level 3 in the fair value hierarchy. It has been determined in accordance with generally accepted pricing models using a discounted cash flow valuation technique, which requires the use of management assumptions as disclosed in Note 3 with the exception of the discount rate for which management has applied a discount rate of 2.91% for residential trailing commissions and 4.8% for insurance products. There has been no change to the valuation technique during the year. At 30 June 2018 Non—derivatives Interest bearing Cash and cash equivalents Franchisee receivables Non—interest bearing Cash and cash equivalents Trade receivable Franchisee and other receivables Future trailing commissions receivable Less than 6 months $’000 6 – 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total cash flows $’000 Carrying Amount $’000 3,351 1,190 2 11,751 308 — 1,119 — 1,970 — 3,238 — — 25 — — 10 — — 11 — 419 — — 0 3,351 7,936 2 11,751 354 3,351 6,238 2 11,751 354 48,078 43,938 76,009 148,241 114,368 430,634 360,913 64,680 45,082 77,989 151,490 114,787 454,028 382,609 The fair value of the future trailing commissions receivable is $370,131,000. 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. 60 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 2 Financial risk management continued Contractual maturities Between of financial liabilities 1 and 2 years at 30 June 2019 $’000 Less than 6 months $’000 6 – 12 months $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total cash flows $’000 Carrying Amount $’000 Non—derivatives Interest bearing External borrowing Trade payables Non—interest bearing Trade payables Licence fees and other payables 1,500 279 10,796 — Future trailing commissions payable 36,168 48,743 1,000 — — — 33,002 34,002 — — — — — — — — — — — — 2,500 279 2,500 279 10,796 10,796 — — 56,923 109,470 83,928 319,491 272,363 56,923 109,470 83,928 333,066 285,938 The Group’s most significant financial liability is related to the net present value of future trailing commissions payable. Due to the structure of the Group’s commission arrangements, the total future trailing commissions payable is limited only to the total trailing commissions that are actually received and as a result naturally limits the liquidity risk of the Group. The fair value of the future trailing commissions payable is $279,350,000. The fair value of all other liabilities is the same as their carrying amount. External borrowings During the year, the Group obtained a new loan facility to the amount of $4,500,000. As at 30 June 2019, the outstanding amount is $2,500,000. The loan bears interest at variable market rates and is repayable in April 2020. In accordance with the terms of the Group’s corporate debt facilities, the Group is required to comply with certain covenants. During the period and as at 30 June 2019, the Group was compliant with these covenants. The loan facility is secured against the assets of the Group. Less than 6 months $’000 6 – 12 months $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Total cash flows $’000 Carrying Amount $’000 Future trailing commissions payable 33,625 47,026 13,401 — — — 31,609 31,609 — — — — — — 13,401 13,401 — — 54,747 107,011 83,202 310,194 260,521 54,747 107,011 83,202 323,595 273,922 The fair value of the future trailing commissions payable is $266,301,000. The fair value of all other liabilities is the same as their carrying amount. IV) Prepayment risk Prepayment risk has been assessed through the sensitivity analysis of run-off rates, refer to Note 3. 61 Mortgage Choice Annual Report 2019 Contractual maturities of financial liabilities at 30 June 2018 Non—derivatives Non—interest bearing Trade payables Licence fees and other payables Notes to Consolidated Financial Statements For the year ended 30 June 2019 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 subject to the loan continuing to perform. The Group also makes trailing commission payments to franchisees based on their individual loan book balance outstanding. The contract assets and the corresponding payable to franchisees are 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 a variety of contributing factors including: an annual assessment 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 2019 2018 4.0 years 4.0 years 4.9% 72% 5.4% 72% 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 $5.0 million (made up of decreases in current assets of $6.6 million, non-current assets of $19.0 million, current liabilities of $4.7 million, non-current liabilities of $13.8 million and deferred tax liabilities of $2.1 million) if run-off rates increase by 10%; or – an increase in net assets of $5.6 million (made up of a decreases in current assets of $4.3 million and current liabilities of $3.1 million, increases in non-current assets of $33.2 million, non-current liabilities of $23.9 million and deferred tax liabilities of $2.5 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 value of trailing commissions receivable and payable as they are calculated using amortised cost rather than fair value. During FY 2018 the Group revised the broker remuneration framework resulting in an increase to the percentage paid to franchisees. Management does not consider further material changes to the percentage paid to franchisees to be likely. 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 $2.67 million positive adjustment after tax to the Group’s profit and loss for FY 2019 (2018 – $8.67 million positive adjustment). Changes to the model assumptions to reflect the new broker remuneration framework resulted in a $28.47 million negative adjustment after tax to the Group’s profit and loss for FY 2018, refer Note 4 (c) (ii). The impact is detailed in the table below: Increase/(decrease) in receivables Increase/(decrease) in payables Net adjustment before tax Tax effect Adjustment after tax Change in model assumptions to reflect the new broker remuneration framework Total after tax adjustment 2019 $’000 13,644 9,835 3,809 1,143 2,666 — 2,666 2018 $’000 28,045 15,659 12,386 3,716 8,670 (28,468) (19,798) 62 Notes to Consolidated Financial Statements For the year ended 30 June 2019 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 including the allocation of resources. The Chief Executive Officer considers the business from both a product and cash versus IFRS presentation of the results. Therefore management has identified two reportable product segments, Mortgage Choice franchised mortgage broking (MOC) and Mortgage Choice Financial Planning (MCFP). MCFP includes revenue from wealth products, including investment advice as well as all risk insurance products written across the Group. Operating expenses presented in MCFP represent the expenses solely attributable to that business segment. Help Me Choose health fund and mortgage comparison website (HMC) ceased operations in 2015 and continued to receive trailing commissions until August 2018. 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 2019 is as follows: Total $’000 MOC $’000 MCFP $’000 HMC $’000 177,355 166,818 10,537 49,492 49,352 2,143 29,157 6,209 13,724 14,028 47,798 47,464 2,143 27,287 6,247 13,812 14,007 1,774 1,888 — 1,870 (38) (88) 21 — — — — — — — — Total $’000 MOC $’000 MCFP $’000 HMC $’000 217,808 206,357 11,322 40,677 68,422 1,587 35,110 1,609 4,238 23,382 38,289 65,807 1,587 33,389 1,415 3,786 22,750 2,259 2,259 — 1,721 155 362 383 129 129 356 — — 39 90 249 Product Segments 2019 Revenue Gross Profit (IFRS) Gross profit (cash) Depreciation and amortisation OPEX (excl SBP 1) Income tax expense NPAT (IFRS) NPAT (cash) 1 Share based remuneration 2018 Revenue Gross Profit (IFRS) Gross profit (cash) Depreciation and amortisation OPEX (excl SBP 1) Income tax expense NPAT (IFRS) NPAT (cash) 1 Share based remuneration 63 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 4 Segment information continued Cash versus IFRS Origination commission Trailing commission Origination commission paid Trailing commission paid 2 IFRS Cash 1 2019 $’000 57,858 100,305 158,163 44,380 71,321 2018 $’000 70,015 124,745 194,760 48,839 73,048 115,701 121,887 % change (17%) (20%) (19%) (9%) (2%) (5%) 2019 $’000 57,858 99,827 2018 $’000 70,015 98,459 157,685 168,474 44,380 71,129 48,839 59,911 115,509 108,750 % change (17%) 1% (6%) (9%) 19% 6% Net core commission 42,462 72,873 (42%) 42,176 59,724 (29%) Diversified products net revenue Financial Planning net revenue Other income Gross profit Operating expenses Share based remuneration Net profit before tax Balance sheet adjustment – NPV Future trail payable 3 1,239 1,756 4,035 49,492 29,157 402 19,933 1,752 2,227 4,493 (29%) (21%) (10%) 81,345 (39%) 35,110 (279) (17%) (244%) 46,514 (57%) (40,668) 1,266 1,875 4,035 49,352 29,157 — 20,195 1,752 2,227 4,720 68,423 35,110 — (28%) (16%) (15%) (28%) (17%) 33,313 (39%) Net profit after tax 13,724 4,238 224% 14,028 23,382 (40%) 1 Cash is based on accruals accounting and excludes share based remuneration and the net present value of future trailing commissions receivable and payable. 2 Trailing commission income and trailing commission paid include discount unwind as itemised in the consolidated income statement 3 The NPV of future trail payable was adjusted at 30 June 2018 to reflect the change in the broker remuneration structure. The following provides additional detail to assist in reconciliation of the above table to the consolidated income statement: Diversified products commissions Diversified products commissions paid Diversified products net revenue IFRS Cash 2019 $’000 2018 $’000 % change 2019 $’000 2018 $’000 % change 4,511 7,265 (38%) 4,642 7,265 (36%) 3,272 5,513 (41%) 3,376 5,513 (39%) 1,239 1,752 (29%) 1,266 1,752 (28%) Financial Planning revenue 10,646 11,290 (6%) 11,245 11,290 (0%) Financial Planning commissions paid Financial Planning net revenue Franchise Income Interest Help Me Choose commissions Other income Other income 8,890 1,756 1,054 600 2,381 4,035 9,063 2,227 921 577 129 2,866 4,493 (2%) (21%) 14% 4% (100%) (17%) (10%) 9,370 1,875 1,054 600 2,381 4,035 9,063 2,227 921 577 356 2,866 4,720 3% (16%) 14% 4% (100%) (17%) (15%) 64 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 4 Segment information continued Diversified life insurance products are reallocated to Financial Planning for segment reporting. The following table shows the reconciliation from the Consolidated Income Statement to this statement. Consolidated Income statement Revenue Diversified products commission Insurance trailing commission excluding discount unwind Insurance trailing commission discount unwind Financial Planning income Direct costs Diversified products commission Insurance trailing commission excluding discount unwind Insurance trailing commission discount unwind Financial Planning commission c) Other information Total Diversified Products Financial Planning 4,677 2,480 913 7,087 3,400 2,049 770 5,944 4,511 166 2,480 913 7,087 4,511 10,646 3,272 3,272 128 2,049 770 5,944 8,891 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. Under IFRS, the expected value method is used to the estimate the future trailing cash flows to be received over the life of a loan and is recognised at the time a loan settles. The Chief Executive Officer considers both this and the cash NPAT when measuring the Group’s performance. ii) Net profit after tax The cash net profit after tax (as shown above) 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 NPV future trails on new insurance policies, net of payout Less net cash trail from insurance policies previously recognised under IFRS Plus adjustments to loan book assumptions Gain/(loss) on prepayment/(establishment) of trail liability Plus reversal of amortisation of trail liability 1 NPV future trails adjustment Help Me Choose policies Less net cash from trail previously recognised under IFRS Less share based payments expense IFRS before adjustment to NPV Trail Payable Less Balance Sheet adjustment to NPV Trail payable IFRS 1 Under cash profit, the prepayment of trail liability is spread over the estimated life of the trail book portfolio. 65 Mortgage Choice Annual Report 2019 2019 $’000 14,028 11,012 2018 $’000 23,382 20,996 (16,211) (20,445) 238 (338) 2,666 2,040 691 — — (402) 13,724 — — 8,680 (183) 156 20 (179) 279 32,706 (28,468) 4,238 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 4 Segment information continued iii) Gross profit and net core commissions The cash gross profit and net core commissions reconcile to their IFRS equivalents as follows: Gross Profit Net Core Commissons Cash NPV future trails on new loans originated, net of payout Less net cash from trail previously recognised under IFRS NPV future trails on new insurance policies, net of payout Less net cash trail from insurance policies previously recognised under IFRS Plus adjustments to loan book assumptions Gain/(loss) on prepayment/(establishment) of trail liability Plus reversal of amortisation of trail liability 1 NPV future trails on Help Me Choose policies written Less net cash from trail previously recognised under IFRS IFRS before adjustment to NPV Trail Payable Less Balance Sheet adjustment to NPV Trail payable IFRS 2019 $’000 49,352 15,731 (23,158) 338 (483) 3,809 2,915 988 — — 49,492 — 49,492 2018 $’000 68,423 29,995 (29,206) — — 12,400 (261) 221 29 (256) 81,345 (40,668) 40,677 1 Under cash profit, the prepayment of trail liability is spread over the estimated life of the trail book portfolio. iv) Timing of revenue recognition Performance obligations met at a point in time MOC Origination commission Trailing commission Diversified products commissions Franchise Income Other income MCFP Financial planning revenue Other income Total Point in time revenue Performance obligations met over time MCFP Financial planning revenue Other income Total Point over time revenue 2019 $’000 42,176 15,731 (23,158) — — 3,809 2,915 988 — — 42,461 — 42,461 2018 $’000 59,724 29,995 (29,206) — — 12,400 (261) 221 — — 72,873 (40,668) 32,205 2019 $’000 2018 $’000 57,858 100,305 4,511 1,054 2,368 70,015 124,745 6,976 921 2,834 166,096 205,491 7,571 16 7,587 8,367 14 8,381 173,684 213,872 3,075 (4) 3,071 2,923 18 2,941 66 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 5 Revenue Revenue from continuing operations Sales revenue Services Other revenue Interest earned on deposits and loans Interest in relation to discount unwind Sponsorship and other income – point in time Sponsorship and other income – over time Note 6 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 Deferred income tax (revenue) expense including income tax expense comprises: (Increase)/decrease in deferred tax assets (Note 9) Increase/(decrease) in deferred tax liabilities (Note 14) b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax expense Income tax calculated @ 30% (2018 – 30%) Tax effect of amounts which are not deductible/(assessable) in calculating taxable income Research and Development Tax Incentive Under/(over) provision from prior years Income tax expense No part of the deferred tax asset shown above and in Note 9 is attributable to tax losses. 67 Mortgage Choice Annual Report 2019 2019 $’000 2018 $’000 155,796 196,450 600 18,578 2,385 (4) 577 17,915 2,848 18 177,355 217,808 2019 $’000 4,958 1,255 (4) 6,209 6,209 6,209 (2,880) 4,135 1,255 2019 $’000 19,933 5,980 233 - 6,213 (4) 6,209 2018 $’000 8,601 (6,986) (6) 1,609 1,609 1,609 (15,678) 8,692 (6,986) 2018 $’000 5,847 1,754 166 (305) 1,615 (6) 1,609 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 7 Trade and other receivables 2019 Trade receivables 1 Contract assets Net present value of future trailing commissions receivable Franchisee receivables Other receivables Prepayments Current $’000 Non-current $’000 11,016 98,519 — 1,897 233 604 — 277,949 — 4,220 — — Total $’000 11,016 376,468 — 6,117 233 604 2018 Current $’000 Non-current $’000 11,751 — — — Total $’000 11,751 — 89,640 271,273 360,913 1,972 97 578 4,412 — — 6,384 97 578 112,269 282,169 394,438 104,038 275,685 379,723 1 Subject to a limited charge in favour of The Loan Book Security Trust (refer to Note 11) 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 2019 current trade receivables were not impaired (2018 – nil). 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 contract assets (future trailing commissions receivable) which are accounted for at amortised cost. The fair values of the net present value of contract assets are presented in Note 2. 68 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 8 Non-Current Assets – Property, plant and equipment Plant and Equipment $’000 Leasehold Improvements $’000 Year ended 30 June 2018 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 30 June 2018 Cost Accumulated depreciation Net book amount Year ended 30 June 2019 Opening net book amount Additions Disposals Depreciation charge Closing net book amount At 30 June 2019 Cost Accumulated depreciation Net book amount 419 164 (41) (196) 346 1,977 (1,631) 346 346 151 — (186) 311 2,033 (1,722) 311 239 204 — (103) 340 1,444 (1,104) 340 340 199 (41) (92) 406 1,517 (1,111) 406 Total $’000 658 368 (41) (299) 686 3,421 (2,735) 686 686 350 (41) (278) 717 3,550 (2,833) 717 Note 9 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 14) Net deferred tax assets Deferred tax assets to be recovered within 12 months Deferred tax assets to be recovered after more than 12 months 2019 $’000 2018 $’000 81,709 78,156 485 (11) 320 82,503 (82,503) — 24,881 57,622 82,503 750 74 643 79,623 (79,623) — 20,454 59,169 79,623 69 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 9 Non-current assets – Deferred tax assets continued Movements At 30 June 2017 Charged/(credited) to the income statement At 30 June 2018 Charged/(credited) to the income statement At 30 June 2019 NPV of future trailing commissions payable $’000 62,276 15,880 78,156 3,553 81,709 Employee benefits $’000 Depreciation and amortisation $’000 Accrued expenses $’000 843 (93) 750 (265) 485 142 (68) 74 (85) (11) 684 (41) 643 (323) 320 Other $’000 — — — — — Note 10 Non-current assets – intangible assets Year ended 30 June 2018 Opening net book amount Additions Amortisation charge Disposals Closing net book amount At 30 June 2018 Cost Accumulated amortisation Net book amount Year ended 30 June 2019 Opening net book amount Additions Amortisation charge Disposals Closing net book amount At 30 June 2019 Cost Accumulated amortisation Net book amount Total $’000 63,945 15,678 79,623 2,880 82,503 Computer Software $’000 6,081 3,769 (1,288) — 8,562 19,859 (11,297) 8,562 8,562 3,406 (1,836) — 10,132 23,265 (13,133) 10,132 70 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 11 Current liabilities – Trade and other payables Trade payables a Net present value of future trailing commissions payable Deferred revenue b Other payables 2019 $’000 9,469 70,967 347 1,260 82,043 2018 $’000 10,052 63,810 156 3,193 77,211 a) Loan Book Security Trust 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 Sargon CT 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 2019, 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 $5,597,900 (2018 – $4,691,001). This is included as part of the balance of trade payables at 30 June 2019 and would be subject to charge until disbursed to the eligible franchisees. The amount subject to the charge would vary dependent 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. b) Deferred revenue Mortgage Choice Financial Planning charges ongoing service fees annually. This reflects the value of performance obligations not yet performed as at 30 June 2019. 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. The fair values of the net present value of future trailing commission payable are presented in Note 2. Note 12 Provisions Make good provision a Employee entitlements – annual leave Employee entitlements – long service leave 2019 2018 Current $’000 Non-current $’000 58 784 497 1,339 439 — 335 774 Total $’000 497 784 832 Current $’000 Non-current $’000 68 731 459 420 — 271 691 Total $’000 488 731 730 1,949 2,113 1,258 a) Make good provision 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. 71 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 13 Non-current liabilities – Trade and other payables Net present value of future trailing commissions payable Note 14 Non-current liabilities – Deferred tax liabilities The balance comprises temporary differences attributable to: Expected value of contract assets Intangibles Prepayments and other receivables Set off of deferred tax assets pursuant to set off provisions (Note 9) Net deferred tax liabilities Deferred tax liabilities to be settled within 12 months Deferred tax liabilities to be settled after more than 12 months 2019 $’000 201,396 201,396 2018 $’000 196,711 196,711 2019 $’000 2018 $’000 112,940 108,274 1,660 71 2,131 131 114,671 110,536 (82,503) (79,623) 32,168 30,035 84,636 30,913 27,437 83,099 114,671 110,536 Movements – Consolidated At 30 June 2017 Charged to the income statement At 30 June 2018 Charged to the income statement At 30 June 2019 Expected value of contract assets $’000 Intangibles $’000 Prepayments and other receivables $’000 100,456 7,818 108,274 4,666 112,940 1,346 785 2,131 (471) 1,660 42 89 131 (60) 71 Total $’000 101,844 8,692 110,536 4,135 114,671 72 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 15 Contributed equity Share capital Ordinary shares – fully paid 2019 shares ’000 2018 shares ’000 2019 $’000 2018 $’000 124,149 123,964 8,097 7,764 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 2019: Details Total ordinary shares on issue Treasury shares a) Total ordinary shares held as contributed equity Number of shares 124,997,440 (848,334) 124,149,106 a) Treasury shares 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 27 for further information). Date 30 June 2017 Details Balance 14 September 2017 Shares issued under the Share Rights Plan to employees 14 September 2017 Shares issued under the Performance Share Plan to employees 15 September 2017 Shares issued under the Share Rights Plan to employees 17 September 2017 Treasury shares issued to the Mortgage Choice Employee Incentive Trust 30 June 2018 Balance 14 September 2018 Shares issued under the Share Rights Plan to employees 14 September 2018 Shares issued under the Performance Share Plan to employees 5 April 2019 Shares issued under the Share Rights Plan to employees 30 June 2019 Balance Movements in ordinary share capital: Date 30 June 2017 Details Balance 14 September 2017 Shares issued under the Share Rights Plan to employees 14 September 2017 Shares issued under the Performance Share Plan to employees 15 September 2017 Shares issued under the Share Rights Plan to employees 17 September 2017 Treasury shares issued to the Mortgage Choice Employee Incentive Trust 17 September 2017 Held as treasury shares 30 June 2018 Balance 14 September 2018 Shares issued under the Share Rights Plan to employees 14 September 2018 Treasury shares issued to the Mortgage Choice Employee Incentive Trust 5 April 2019 Shares issued under the Share Rights Plan to employees 30 June 2019 Balance Number of shares 1,202,873 (64,550) (76,527) (66,677) 38,706 1,033,825 (14,901) (122,522) (48,068) 848,334 $’000 7,277 132 208 147 — — 7,764 30 246 57 8,097 Number of shares 123,755,861 64,550 76,527 66,677 38,706 (38,706) 123,963,615 14,901 122,522 48,068 124,149,106 Employee share scheme Information relating to the employee share scheme, including details of shares issued under the scheme, is set out in Note 27. 73 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 16 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 2019 $’000 1,379 1,309 402 (332) 1,379 Nature and purpose of reserves Share-based payments reserve The share-based payments reserve is used to recognise the fair value of options and performance shares granted but not vested. b) Retained profits Balance 1 July Adjustment for adoption of AASB15 Net profit for the year Dividends Balance 30 June Note 17 Dividends a) Ordinary shares 2019 $’000 76,579 1,705 13,724 (15,000) 77,008 2018 $’000 1,309 2,075 (279) (487) 1,309 2018 $’000 94,836 — 4,238 (22,495) 76,579 Final dividend declared out of profits of the Company for the year ended 30 June 2017 of 9.0 cents per fully paid share paid on 21 September 2017: – Fully franked based on tax paid @ 30% – 9.0 cents per share Interim dividend declared out of profits of the Company for the half-year ended 31 December 2017 of 9.0 cents per fully paid share paid 22 March 2018: – Fully franked based on tax paid @ 30% – 9.0 cents per share Final dividend declared out of profits of the Company for the year ended 30 June 2018 of 9.0 cents per fully paid share paid on 10 October 2018: – Fully franked based on tax paid @ 30% – 9.0 cents per share Interim dividend declared out of profits of the Company for the half-year ended 31 December 2018 of 3.0 cents per fully paid share paid 15 April 2019: – Fully franked based on tax paid @ 30% – 3.0 cents per share 2019 $’000 2018 $’000 — 11,246 — 11,249 11,250 — 3,750 15,000 — 22,495 74 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 17 Dividends continued 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 3.0 cents per fully paid ordinary share, (2018 – 9.0 cents) fully franked based on tax paid at 30%. The aggregate amount of the proposed dividend expected to be paid on 15 October 2019 out of retained profits at 30 June 2019, but not recognised as a liability at year end, is 2019 $’000 2018 $’000 3,750 11,250 c) Franked dividend The franked portions of the final dividends recommended after 30 June 2019 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 2019. Franking credits available for subsequent financial years to the equity holders of the parent entity based on a tax rate of 30% (2018 – 30%) 2019 $’000 2018 $’000 1,416 2,078 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. 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 $1,607,000 (2018: $4,821,000). Note 18 Key management personnel disclosures Key management personnel compensation Short term employee benefits Post employment benefits Long-term benefits Termination benefits Share based payments Balance 30 June 2019 $ 2018 $ 2,230,742 2,628,373 157,587 30,174 — 158,666 73,693 568,528 295,539 (353,398) 2,714,042 3,075,862 Detailed remuneration disclosures are provided in the Directors’ report on pages 18 – 35 of the remuneration report. 75 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 19 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 non related audit firms: 2019 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 Touche Tohmatsu Australian firm: – Actuarial services – Taxation services – Financial modelling services Total remuneration for non-audit services 2018 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 Touche Tohmatsu Australian firm: – Actuarial services – Taxation services – Financial modelling services Total remuneration for non-audit services $ 224,000 224,000 30,000 48,850 19,645 98,495 $ 213,230 213,230 75,000 18,344 137,400 230,744 Note 20 Contingencies Contingent liabilities The Group had contingent liabilities at 30 June 2019 in respect of: a) Guarantees Guarantees given in respect of premises leases $842,423 (2018: $853,111) b) 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 2019 and 30 June 2018, 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. 76 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 21 Commitments Lease commitments Non-cancellable operating leases The Group leases various offices under non cancellable 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 Note 22 Related party transactions I) Parent entity The ultimate parent entity within the Group is Mortgage Choice Limited. II) Subsidiaries Interests in subsidiaries are set out in Note 23. 2019 $’000 2018 $’000 1,078 3,675 — 4,753 1,212 4,841 — 6,053 III) Key management personnel Disclosures relating to key management personnel are set out in Note 18. Additional disclosures are set out in the Directors’ report in the remuneration report. IV) Loans to/from related parties The Group has formed trusts to administer the Group’s employee share scheme. These are funded by the parent entity. These trusts are 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 23 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 1b: Name of entity MC Loan Book Security Pty Limited Help Me Choose Pty Limited Mortgage Choice Financial Planning Pty Limited Country of Incorporation Class of Shares Australia Australia Australia Ordinary Ordinary Ordinary Equity holding * 2019 % 100 100 100 2018 % 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. 77 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 24 Events occurring after the balance sheet date Dividend payment Subsequent to year end, a final ordinary dividend of $3,750,000 (3.0 cents per fully paid share) was declared out of profits of the Company for the year ended 30 June 2019 on 21 August 2019 to be paid on 15 October 2019. Note 25 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 Interest paid Reversal of make good provision Net loss (gain) on sales of non-current assets 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 2019 $’000 13,724 2,114 253 (1,528) 402 (600) 56 40 — 663 25 (3,082) 758 621 524 164 14,134 2018 $’000 4,238 1,587 (26,060) 52,934 (279) (577) — — 4 270 (109) (1,234) (195) (1,559) (6,986) 193 22,227 78 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 26 Earnings per share a) Basic earnings per share From continuing operations b) Diluted earnings per share From continuing operations Earnings used in calculating earnings per share Profit from continuing operations Consolidated 2019 Cents 11.0 10.9 2019 $’000 2018 Cents 3.4 3.4 2018 $’000 13,724 4,238 2019 Number 2018 Number 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 124,997,440 124,988,956 Adjustments for calculation of diluted earnings per share: – Share rights 402,440 213,989 Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 125,399,880 125,202,945 Information concerning the classification of securities a) 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. b) Share Rights Plan Share rights granted to eligible employees under the Mortgage Choice Share Rights Plan that have vested are considered to be ordinary shares and have been included in the determination of basic earnings per share. Details relating to the share rights are set out in the Remuneration report. Note 27 Share-based payments a) 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. 79 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 27 Share-based payments continued 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 attached 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 unlawful 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 below. 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 eligible employees are set out below. Further information on the performance shares and the detailed vesting criteria are set out in the remuneration report. In the event that no further grants are made under this plan, the PSP will not be terminated before the end of the last vesting period of shares granted under this plan. b) Share Rights Plan (SRP) The 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. 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. 80 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 27 Share-based payments continued 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 below. 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 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 Performance Share Plan: Offer Date Vesting date Value Number Number Number Number Number Number 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 2019 17-September-2015 14-September-2018 17-September-2015 14-September-2018 25-October-2016 14-September-2019 25-October-2016 14-September-2019 $2.01 $1.19 $2.28 $1.30 Total 137,523 137,523 146,044 146,044 567,134 — (137,523) — — — — — — — — — — — (137,523) — — — — 146,044 146,044 — (137,523) — (137,523) 292,088 Weighted average exercise price $1.70 $0.00 $2.01 $0.00 $1.19 $1.79 2018 22-September-2014 14-September-2017 22-September-2014 14-September-2017 17-September-2015 14-September-2018 17-September-2015 14-September-2018 25-October-2016 14-September-2019 25-October-2016 14-September-2019 Total $2.72 $1.68 $2.01 $1.19 $2.28 $1.30 76,527 62,610 255,254 255,254 254,431 254,431 1,158,507 — — — — — — — (76,527) — — — — — — — — (62,610) — (117,731) — (117,731) — (108,387) — (108,387) — — 137,523 137,523 146,044 146,044 (76,527) — (514,846) 567,134 Weighted average exercise price $1.76 $0.00 $2.72 — $1.69 $1.70 The weighted average remaining contractual life of performance shares outstanding at the end of the period was 0.21 years (2018 – 0.72 years). 81 Mortgage Choice Annual Report 2019 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 27 Share-based payments continued Set out below are summaries of shares conditionally issued under the Share Rights Plan: Offer Date Vesting date Value Number Number Number Number Number Number 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 2019 06-October-2017 14-September-2020 06-October-2017 14-September-2020 03-April-2018 1 03-April-2018 1 03-April-2018 03-April-2018 03-April-2019 03-April-2020 14-September-2019 14-September-2020 28-November-2018 14-September-2021 28-November-2018 14-September-2021 Total $1.78 $1.40 $1.26 $1.26 $1.50 $1.50 $1.23 $0.81 171,068 114,044 — — — — — — — — 45,000 45,000 10,675 10,674 406,978 271,318 — — (45,000) — — — — — 285,112 789,645 (45,000) Weighted average exercise price $1.63 $1.10 $1.26 1) For accounting purposes, the grant date for these share rights was 5 November 2018. 2018 07-April-2015 15-September-2017 25-August-2016 14-September-2017 25-August-2016 14-September-2018 06-October-2017 14-September-2020 06-October-2017 14-September-2020 $2.60 $2.21 $2.21 $1.78 $1.40 56,560 59,772 59,772 — — — — — 305,816 203,876 (56,560) (59,772) — — — — — — — — — — — — — — — — — — — — — — — — 171,068 114,044 — 45,000 10,675 10,674 406,978 271,318 — 1,029,757 — $1.24 — — (59,772) — — — — (134,748) — (89,832) 171,068 114,044 Total 176,104 509,692 (116,332) — (284,352) 285,112 Weighted average exercise price $2.33 $1.63 $2.40 — $1.75 $1.63 The weighted average remaining contractual life of performance shares outstanding at the end of the period was 1.84 years (2018 – 2.21 years). CEO Share rights offered 3rd April 2018 The CEO’s share rights offered on 3rd April 2018 relate to a special one-off grant of 90,000 and the deferred portion of the CEO’s STI for FY2018 as per her contract, details of which are set out in the Remuneration Report. The share rights were granted on 5th November 2018 and 7th September 2018 respectively. The accounting grant date for these share rights is 3 April 2018. c) Expenses arising from share-based payment transactions Total expenses arising from share based payment transactions recognised during the period as part of employee benefit expense were as follows: Shares issued under PSP 2019 $’000 402 402 2018 $’000 (279) (279) 82 Notes to Consolidated Financial Statements For the year ended 30 June 2019 Note 28 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 2019 $’000 2018 $’000 110,046 105,831 391,745 390,764 85,168 79,459 309,885 307,774 8,097 1,379 72,384 81,860 13,366 13,366 7,764 1,309 73,917 82,990 3,842 3,842 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 $842,423 (2018 – $853,111). 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 2019 or 30 June 2018. 83 Mortgage Choice Annual Report 2019 Directors’ declaration For the year ended 30 June 2019 In the Directors’ opinion: a) the financial statements and notes set out on pages 38 – 83 are in accordance with the Corporations Act 2001, including: i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2018 and of their performance, for the financial year ended on that date; and b) Note 1(a) confirms that the financial 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 Officer and the Chief Financial Officer required by Section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. Vicki Allen Chairman Sydney 21 August 2019 84 Independent audit report to members of Mortgage Choice Limited Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney, NSW, 2000 Australia Phone: +61 2 9322 7000 www.deloitte.com.au Independent Auditor’s Report to the Members of Mortgage Choice Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Mortgage Choice Limited (the “Company”) and its subsidiaries (the “Group”) which comprises the consolidated balance sheet as at 30 June 2019, the consolidated income statement, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies and the directors’ declaration. In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including: (i) (ii) giving a true and fair view of the Group’s financial position as at 30 June 2019 and of its financial performance for the year then ended; and complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for Opinion those standards are We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. further described in We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of the Company, would be in the same terms if given to the directors as at the time of this auditor’s report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key Audit Matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. These matters were Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Asia Pacific Limited and the Deloitte Network. 85 Mortgage Choice Annual Report 2019 Independent audit report to members of Mortgage Choice Limited addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key Audit Matter Future Trailing commissions How the scope of our audit responded to the Key Audit Matter Our audit procedures included but were not limited to: As at 30 June 2019, the Group has recognised a contract asset trailing commissions receivable of $376 million as disclosed in Note 7 representing the trailing expected value of commissions Trailing commissions payable of $272 million were also recognised and disclosed in Note 11 and 13 representing the net trailing present value of commissions payable by the Group. receivable. future future The trailing commission receivable, which is a contract asset, is initially recognised at its transaction price using the expected value approach. A significant financing component is also involved in determining this variable consideration. As such, the contract asset is subsequently adjusted by recalculating the net present value of estimated future cash flows at the original rate. Subsequent to initial recognition, the expected value of this contract asset is re-estimated based on circumstances present at each reporting date. effective interest The trailing commission payable is recognised at fair value on initial recognition and at amortised cost subsequent to initial recognition of the trailing commissions receivable and payables. Both the expected value recognition of the transaction price and the fair value of the trail commission payable at significant require recognition management judgement with regard to:  Estimation of the discount rate to be applied to loans originated in that year, book  Loan rate run off assumptions; and  Percentage of commissions paid to franchisees.  Evaluating and testing the key controls management have to determine the net present value of the future trailing commission receivable and payable, in place  Comparing previously forecast trailing commission income and expense by management to the actual results to assess historical accuracy of management’s estimates,  Assessing the extraction of loan data used in management’s model for completeness,  Evaluating the accuracy of the loan data by matching a sample of loans listed on the loan data to external Lender Commission Statements,  Challenging the reasonableness of management’s assumptions in the determination of the trailing commission receivable and payable based on industry comparative run off rates and market observable inputs for the discount rate,  Recalculating the expected percentage to be paid to franchisees based on the loan book data and remuneration structure communicated;  Engaging internal experts to independently develop a model, using the loan data inputs and assumptions applied by management, which was used to recalculate the valuation of trailing commission receivable and payable. This was compared to management’s valuation, in order to test the integrity and mathematical accuracy of management’s model.  Assessing the application of AASB 9 Financial Assets (AASB 9) and AASB 15 Revenue from Contracts with Customers (AASB 15) by management to the trailing commission asset, including impact on transition to the new standards, 86 Independent audit report to members of Mortgage Choice Limited classification as a contract asset under AASB 15, and the application of the impairment provisions of AASB 9 to the amounts recognised. We also considered the appropriateness of the Group’s disclosures in Note 3 the financial statements. Other Information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2019, but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. 87 Mortgage Choice Annual Report 2019 Independent audit report to members of Mortgage Choice Limited As part of an audit in accordance with the Australian Auditing Standards, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the financial report, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control.  Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.  Conclude on the appropriateness of the directors’ use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial report or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the financial report, including the disclosures, and whether the financial report represents the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the financial report. We are responsible for the direction, supervision and performance of the Group’s audit. We remain solely responsible for our audit opinion. We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the financial report of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. 88 Independent audit report to members of Mortgage Choice Limited Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in pages 14 to 34 of the Directors’ Report for the year ended 30 June 2019. In our opinion, the Remuneration Report of Mortgage Choice Limited, for the year ended 30 June 2019, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. DELOITTE TOUCHE TOHMATSU Heather Baister Partner Chartered Accountants Sydney, 21 August 2019 89 Mortgage Choice Annual Report 2019 Shareholder Information For the year ended 30 June 2019 The shareholder information set out below was applicable as at 31 July 2019. A) Distribution of equity securities Analysis of numbers of equity security holders by size of holding: Class of equity security 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over There were 285 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 HSBC Custody Nominees (Australia) Limited Ochoa Pty Ltd J P Morgan Nominees Australia Pty Limited Citicorp Nominees Pty Limited Ochoa Pty Ltd National Nominees Limited Mr Rodney Gordon Higgins SCJ Pty Limited BNP Paribas Noms Pty Ltd Mr Stephen Craig Jermyn Pacific Custodians Pty Limited T M Paddy Pty Ltd Macren Pty Ltd Est David Madden Mr Mike Fegelson Mr Kenneth John Mason & Mrs Alison Mason Mr Peter David Ritchie & Mrs Leigh Margaret Ritchie < Richie Fam S/FD A/C> T M Paddy Pty Ltd EMU Super Fund Pty Ltd < EMU Superannuation Fund A/c> Mr Peter Higgins Chata Holdings Pty Ltd Ordinary Shares 876 1,665 911 1,163 73 4,688 Ordinary Shares Number held 20,611,785 14,763,886 9,620,000 5,947,604 4,030,206 3,506,989 2,151,531 2,094,226 2,000,000 1,523,272 1,000,000 848,486 495,936 450,000 400,000 400,000 400,000 314,863 307,939 306,973 254,253 250,500 Percentage of issued shares 16.49 11.81 7.70 4.76 3.22 2.81 1.72 1.68 1.60 1.22 0.80 0.68 0.40 0.36 0.32 0.32 0.32 0.25 0.25 0.25 0.20 0.20 71,678,449 57.34 90 Shareholder Information For the year ended 30 June 2019 C) Substantial holders Substantial holders in the Company are set out below: Ordinary Shares Spheria Asset Management Pty Ltd Commonwealth Bank of Australia* R G Higgins and Ochoa Pty Ltd Pinnacle Investment Management Group Limited Number held 23,651,652 21,806,731 15,221,215 6,939,466 * The relevant interests in 1,194,946 are/were held by Colonial First State Investment 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. 91 Mortgage Choice Annual Report 2019 Corporate Directory As at 21 August 2019 Directors V L Allen, Chairman S J Brennan S J Clancy D Chandran A C Gale P G Higgins R G Higgins Chief Executive Officer S R Mitchell Secretary I J Parkes Executives Chief Financial Officer I J Parkes General Manager, Distribution N C Rose-Innes General Manager, Group Marketing M J McCarney General Manager, Product & Corporate Communications E A Dupont-Brown General Manager, Financial Planning T J Milnes General Manager, Human Resources M J Pitton Head of IT V C ten Krooden Notice of 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 Time: 10am Date: 16 October 2019 Registered office Level 10, 100 Pacific Highway North Sydney NSW 2060 Phone: (02) 8907 0444 Share register Link Market Services Limited Level 12, 680 George St Sydney NSW 2000 Phone: (02) 8280 7111 Auditor Deloitte Touche Tohmatsu Chartered Accountants Grosvenor Place 225 George Street Sydney NSW 2000 Solicitors Herbert Smith Freehills ANZ Tower 161 Castlereagh 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 address www.mortgagechoice.com.au 92 

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