Where the world’s moving ANNUAL REPORT 2018 OFX GROUP LIMITED ACN 165 602 273 Contents 2 4 6 7 9 Our Story Our Global Footprint Setting the Benchmark in Client Care How Our People Demonstrate Our Beliefs Where We’re Focussing Our Efforts 10 Financial Highlights 11 12 15 19 Chairman’s Letter CEO’s Letter Executive Team Directors’ Report and Financial Report 85 Shareholder Information 87 Corporate Information Client Stories 3 8 Hakuba Snow Tours Benjamin Siggers 14 17 Peter Pigott Flow Hive OFX Group Limited Annual Report 2018 1 The world we live in is constantly moving. And with it, we’re moving to embrace increasingly globalised ways of living and working, where people are frequently engaging across borders, for business or personal reasons. As we evolve, some brands have been paying attention, adapting their services to help to facilitate our global lifestyles, seamlessly. OFX is one of these brands. We help people move money around the world, quickly, safely and efficiently, with competitive exchange rates and low fees. We focus on doing one thing, and doing it exceptionally well. Our support team is highly experienced, culturally relevant and always available, infusing confidence with our clients in our ability to consistently deliver. For 20 years, we’ve been helping international citizens and businesses participate in the global economy. The world will keep moving, and so will we. 2 OFX Group Limited Annual Report 2018 Our Story Our Story Since 1998, we’ve been helping consumer and corporate clients We were founded by two banking entrepreneurs who were inspired to drive change Driven by the insight that clients deserve a ’fair go’ when it comes to foreign exchange, we have truly Australian roots, but our business is global While our HQ is in Sydney, we have offices in Auckland, Hong Kong, London, Singapore, San Francisco and Toronto We’ve been innovating the foreign exchange market for two decades, and we work collaboratively with our banking partners to deliver a better experience Our individual consumer clients use us for transfers including immigrations, property investment and travel Our corporate clients include importers, exporters, online sellers transacting in global currencies, and businesses with growing global interests OFX Group Limited Annual Report 2018 Client Story 3 Hakuba Snow Tours FROM SPREADSHEETS TO SNOWFIELDS Queenslander Matt Gillespie, 30, turned his back on life as an accountant to become a barista. When that plan went surprisingly well, he sold the coffee shop and – following the purchase of a Japanese pension – set up Hakuba Snow Tours, originally built as part of the Nagano Olympics accommodation in October 2016. The company provides ski guides and all-inclusive accommodation and dining in one of the most accessible ski-in, ski-out locations in the Hakuba Valley. Matt teamed up with OFX as an international currency partner early in his Japanese adventure. With multiple AUD – JPY transactions to plan in the early days, he knew that it was important to be savvy when it came to moving his hard-earned funds. “Working as an accountant, I knew that the banks weren’t going to give me the best deal on the foreign exchange front, so I looked to OFX. Their platform integrates with the accounting software I use, so it was all seamless – easy. I calculate that I’ve saved at least A$50,000 over 18 months by using OFX compared to bank rates. When you’re setting up in business, that kind of money makes a big difference.” Going into 2018, Matt’s business is debt free and he has his sights set on acquiring the block of land next door, to further expand his business. He works during the winter season and spends the Japanese summer months chasing the snow on the other side of the globe. I knew the banks weren’t going to give me the best deal on foreign exchange, so I looked to OFX.” Matt Gillespie 4 OFX Group Limited Annual Report 2018 Our Global Footprint Our Global Footprint Our international offices enable us to deliver real-time client service How we make international payments a local experience 24/7 Client Support Team $ Competitive rates – usually up to 70% better than bank rates* * Average savings based on published rates of ANZ, Westpac, NAB and CBA on a single transfer of AUD $10,000 to USD between 15.3.18 and 23.4.18 excluding weekends. OFX Group Limited Annual Report 2018 Our Global Footprint 5 How we make international payments a local experience Knowledgeable and local service Rapid transfers – most transfers clear on the next business day Secure network – our proprietary bank to bank network helps keep money 6 OFX Group Limited Annual Report 2018 Setting the Benchmark in Client Care Setting the Benchmark in Client Care I run a UK business from Cape Town, and regularly transfer funds from the UK to ZA (South Africa) using using OFX. This has worked well for over 14 years. We have just bought a 45ft Lagoon Catamaran in Spain, and paid the owners in Australia, using OFX. As you read this, my family and I (including the kids and two small dogs) are leaving to sail around the world, over three years. We plan to start a blog –’two dogs on a cat!’” Jason Ball, UK Whether it’s for transferring funds to my children living overseas, paying a tour operator for my next exotic holiday abroad, investing overseas or simply reimbursing a friend for an expense (e.g. for a wreath or a wedding gift), we all need a cost-effective and reliable forex dealer. OFX is one.” Gabriel Lee, Australia In 2016, as a family, we moved to the south of Spain. OFX has been a lifesaver. Not only a more convenient alternative to the big banks, it literally saved us thousands of Euros in fees, commissions and unfair exchange rates. OFX has actually paid for our summer holidays in France with what they saved us! Thank you, OFX.” Kfir Kalish, Spain OFX Group Limited Annual Report 2018 7 How Our People Demonstrate Our Values How Our People Demonstrate Our Beliefs Our team of over 340 employees enjoys a diverse, driven and collaborative culture where they are empowered to perform at their best. Here are some of the ways our team has brought our company values to life over the past 12 months: Push boundaries Always keep learning Get stuff done We’re better together Inspire client confidence Push boundaries Sonam Khedup in our Canadian office saw an opportunity to provide high net worth clients with an improved experience, and went for it. His work streamlined identification verification processes, making registration quicker. Twice as many high net worth clients were able to register and deal within one month. We are now also rolling this out globally. This was made possible by the desire to push boundaries, and the project was well supported by local leadership and operations teams. We’re better together More than 30 OFX employees from across the organisation worked collaboratively to develop our Global Currency Account. Together, they delivered an innovative and future-focused platform for our clients, wherever they’re located. Our Global Currency Account demonstrates our whole organisation’s shared commitment to our clients. “Clients asked, we listened, and driven by client feedback the OFX Global Currency Account has gone live as an evolution of the online sellers product. It is the accumulation of a lot of hard work across the entire business from Legal, Compliance, Risk, Operations, Finance, Sales, Marketing, Onboarding & Technology. Great work team!” – Matthew Littlejohn, Product Owner, Global Currency Account Inspire client confidence Putting our clients at the centre of what we do is a value that has come to the fore over the last 12 months, with great personal advocacy from our CEO. Feedback from clients is overwhelmingly positive. “They say how you react to problems/complaints defines you & your company. I got on LI (Linked-In) to complain about how OFX wouldn’t allow INAMO to transfer money to the US. Lynda Coker GAICD gets on and intro’s CEO Skander Malcolm who gets his team onto the problem. Outcome: Within 48 hours funds transferred – awesome customer experience as well. You could hear the culture in the emails so thanks to you both.” – Peter Colbert, founder & CEO of INAMO I’m all but speechless when it comes to OFX. EVERY time that I call for support, assistance, information, the conversation ends with me smiling, assured. Correspondence is prompt, courteous, professional, human. OFX is nothing short of BRILLIANT! OFX makes me feel secure and important. ‘Life’ should run as magnificently as OFX. I am absolutely grateful.” Judah Kessler from Vermont, USA, on our North American team’s work 8 OFX Group Limited Annual Report 2018 Client Story Benjamin Siggers HANDMADE MENSWEAR THAT TRULY MEASURES UP TO SUSTAINABILITY Benjamin Siggers offers bespoke suits, handmade in Italy by traditional producers. The company was co-founded by Matthew Benjamin and James Siggers in 2017 with a clear ambition to tackle the hidden environmental cost of fashion by providing a sustainable and stylish alternative. The brand uses organic cotton and invests a percentage of profits into clean water projects in developing countries. The company’s clients are predominantly based in London and Dubai, so the brand takes payments in both GBP and AED. Furthermore, the company’s suppliers are all based in Italy and paid in EU, so it’s crucial that these international payments are fast, easy and reliable. Before working with OFX, Matthew and James struggled to make payments to Italy. Every payment had to be transferred manually, to and from the founders’ personal bank accounts. This meant making multiple transactions to each Italian supplier, and cost the founders precious time during the early days of their business, as well as additional fees. “Our clients expect premium service. When international payments are delayed, it delays deliveries”, explains Matthew Benjamin. “This problem was resolved on the very first day that we started working with OFX. Since then, we’ve saved ourselves a whole lot of time and aggravation – and with international payments now taken care of, we now have more time to focus on building our business.” When international payments are delayed, it delays deliveries”, explains Matthew Benjamin. “This problem was resolved on the very first day that we started working with OFX.” Matthew Benjamin OFX Group Limited Annual Report 2018 9 Where We’re Focussing Our Efforts Where We’re Focussing Our Efforts During 2018, we completed a detailed audience research study to gain a deeper understanding of our clients. This divulged valuable insights around what they need and want from money transfer providers; their priorities and expectations. What we’ve learned will influence not only our marketing, but also our tech and product roadmap, so that we can keep improving and evolving our services in ways that are timely and relevant. With all global offices now operating under the single OFX brand, it has also been time to take stock of our place in the market, and identify what we want to be known for. At our core, we are a strong service company, and our clients tell us this is why they keep coming back. In 2019, we will push to gain more brand consideration among existing stakeholders and new audiences. Working from our solid foundations, our technology platforms offer our clients a simple digital pathway to access our services; our compliance framework ensures that client money is kept safe; and our ‘always on’ team, accessible 24/7 around the world, underpins the consistency of service. Looking forward, our core growth driver lies in evolving the client’s overall experience, from the first touch to funds being deposited. The needs of our consumer clients and corporate clients are varied, and we need to further customise our offerings for each. We will also continue to expand globally, with the recent opening of our Singapore office in April 2018 marking an opportunity to expand our Asia business. North America is at the heart of our global expansion investment this year. Partnerships will also be a driver of our growth, as we build strong alliances in the Fintech ecosystem. Strategic growth pillars Growth drivers Foundational enablers Client experience Geographic expansion Partnerships Tech foundations Risk management People 10 OFX Group Limited Annual Report 2018 Financial Highlights Financial Highlights 9.5% $21.2 $19.4 13.1% 963,700 852,300 4.6% $109.9 $105.1 7.5% $29.8 $27.8 2018 2017 2018 2017 2018 2017 2018 2017 Turnover ($b) Transactions (#) Net operating income ($m) Operating metrics EBITDA1 ($m) Financial metrics -4.6% $18.7 2018 $19.6 2017 NPAT2 ($m) Singapore office opened 963,700 Macquarie became a 51% shareholder. Toronto office opened and CanadianForex brand launched. Established first international payments solution with Macquarie. Annual international payments transaction turnover exceeded billion. $1 London office opened and UKForex brand launched. International payments services offered 24 hours a days a week. day, 5 Annual international payments transaction turnover exceeded $7 billion. Hong Kong office opened and ClearFX brand launched. San Francisco office opened and USForex brand launched. Established international payment solution with Travelex in the UK. Funds associated with Accel Partners and The Carlyle Group became shareholders. Launched Macquarie International Money Transfers service for Macquarie staff and retail clients in Australia. OFX brand launched. Move to the Cloud via AWS. OFX brand rolled out in the USA. OzForex Group Limited publicly listed on the Australian Securities Exchange. OFX brand rolled out in the UK. s n o i t c a s n a r t f o r e b m u N 05 Year 06 07 08 09 10 11 12 13 14 15 16 17 18 1 Earnings before interest, tax, depreciation and amortisation 2 Net profit after tax OFX Group Limited Annual Report 2018 Chairman’s Letter 11 Chairman’s Letter • Maintain our high quality risk management and compliance standards. I am pleased to say that the team executed well against all of these key criteria. Skander will outline these achievements in his letter to you. Another key objective was to improve the working relationship between the Board and the management team, by building a culture of transparency, trust, candour, contestability and foresight. During the year, the Board and management have undertaken a number of joint activities to achieve improvement in this area. Our goal was to return OFX to being a sustainable growth company, in an environment of changing and intensifying competition. For the years 2011 to 2013 the sum of all the private funding to cross border fintechs was $18.8 billion. For the years 2014 to 2016, this increased to $67.8 billion, reflecting the huge amount of investment in our competitive space. A lot of these private equity and venture capital-funded competitors are chasing client growth with a view to selling their companies in the short term with a valuation based upon client numbers. At OFX, we know that not all clients are the same. We want higher lifetime value clients who value an easy-to-use digital process but also know there is a helping hand when they need one. We are focusing on building an investible company in the cross-border payments space. One where we grow active clients who do more frequent, higher value transactions with us over time, where we are able to maintain reasonable margins as well as strong risk management and compliance standards, and where we can make prudent investments to deliver sustainable earnings growth for our shareholders. We believe we have a strong, client focused culture at OFX. Our culture is a tangible key to success for our business. OFX is a company where if you deliver financial results but you behave in a way that is not aligned to our values, you will not be rewarded. In fact, you will be coached on how to improve your values, or shown the door. We are fortunate to have a hugely committed group of employees, in whom we continue to invest to enhance their capabilities and help them grow with OFX. Finally, I want to thank our people all over the world for their contribution to what has been a successful year for OFX. Your efforts and your commitment to our clients have positioned us well for the future. Steven Sargent Chairman Fellow Shareholders, It has been a solid year for OFX. We’re pleased that we were able to deliver on the commitments we made to you last year. We appointed a number of new executives throughout the year which included; Selena Verth (Chief Financial Officer), Wendy Glasgow (Chief Technology Officer), Mike Kennedy (President, North America) and Mark Shaw (Chief Risk Officer). We also welcomed Lisa Frazier as a Non-Executive Director. Lisa has deep expertise in technology and has worked in fast-growth, disruptive environments. It is also great to have Lisa, who lives in the San Francisco area of the United States, on the ground in our key growth geography. We believe that we have the right people at the executive level to drive and deliver the strategic growth objectives of the company. You may recall that, upon Skander Malcolm’s appointment, the Board and management team agreed that we would improve our execution. To that end, the Board asked Skander and the executive team to: • Intensify our focus on the execution of the projects we were working on, reduce the number of projects and prioritise them; • Drive the business to deliver positive operating leverage by growing revenue faster than operating expenses; • Develop a better picture of the existing and prospective client drivers, so that we can grow confidently; • Deepen our knowledge of the highly fragmented and fast moving payments market and develop a strategy based on this work and the client insight analysis; and 12 OFX Group Limited Annual Report 2018 CEO’s Letter CEO’s Letter 2018 In addition to the improvements we drove in our client experience, I was pleased with the profit outcomes we delivered in 2018, particularly the revenue growth, the strong cost management, and driving positive operating leverage. This was a core commitment from us to our investors, and it was important to me that we delivered. Our performance highlights included: • NOI growth in every quarter, but particularly the way it built from -7.4% in Q1 to 11.5% in Q4 when comparing to prior comparative periods. In 2018, we exceeded $10 million in fee and trading income in a month four times. Prior to this year we had only done it twice in our history – and both during periods of extreme volatility. We have developed momentum, and we have done that without the historic benefit of volatility in the markets. • Our cost management: we grew cash operating expenses from $77.4 million to $80.1 million, or 3.5%, which is slower than in 2017 or 2016, and yet grew our revenue faster. Our discipline and visibility to cost has grown each quarter, and we feel better informed today about where we can add cost to drive returns than we did 12 months ago. • Our marketing execution was strong. We grew registrations 6.0%, but we did that whilst delivering decreases in cost per registrations (our marketing investment was broadly flat) and whilst growing the value of each new client. • Our cost per transaction declined by 5.0% as we worked with our banking partners to optimise the transaction costs and built better electronic and digital payment capabilities. We also added speed on behalf of our clients, reducing time to settlement in key currency corridors. • Active clients grew from 156.7 thousand to 161.9 thousand, a growth of 3.3%. • NOI margin remained steady at 52bps. In addition to these performance highlights, I especially liked the progress in the corporate business globally, as well as the growth being driven by our North American and Asian teams. It was pleasing to get the Australian business momentum in Q3 and Q4. Further, the efforts to re-engage our inactive clients have been rewarding – in one campaign we even managed to re-activate a client who had been inactive since 2003! I’m pleased with the progress we have made in 2018. As I set out in last year’s letter, putting the client at the heart of our thinking, executing well, investing selectively, and being strong risk managers were the priorities for us, and have driven the progress we made. Our progress can be measured across a number of areas: • Net operating income (NOI) growth of 4.6%, with the final two quarters being 7.1% and 11.5%, driven by strong performances in our corporate business and North America and Asia; • Client experience: Net Promotor Score (NPS) scores at a global level of 59, our repeat clients (those 12 months or more with us) delivering over 70% of our total revenue; and • Our technical foundations overhaul continued. We added over 50 new product features, launched our new website in Australia, as well as several new versions of our app globally, and made considerable progress in our technical ’backbone’, which we will continue to build on in 2019. It was also a year of change in our people and teams. We farewelled some ’legends’ of OFX, but we also added some very strong talent across the company, including at the executive level. I am more confident in our capabilities now than I was 12 months ago, and am looking forward to drawing on this confidence, and working with all of our people to execute our plans for 2019. OFX Group Limited Annual Report 2018 CEO’s Letter 13 Raising money for Breast Cancer Awareness day Our risk management remained strong – we invested in further people and tools, increased visibility and attention in a couple of areas, and extended our engagement with key regulators globally. We saw no major breaches in 2018, continuing our strong track record. We see our risk management culture as being both critical and a point of differentiation, and we will not be complacent here. When we do it well, we drive both trust and speed – two things our clients expect and appreciate. The year was not without its challenges also. We lost some real talent and experience at the executive level. We saw competition intensity grow in all our key markets. Regulatory expectations grew, and the industry paid record fines for breaches. We didn’t execute everything we wanted in terms of product and technical delivery. And we can always do more for our clients during their client journeys. However, it was a good year on balance, with teams operating well, good execution, growing clients, and pleasing economic delivery. 2019 In 2019 our growth priorities are clear – improving the client experience, continuing our geographic expansion, (with an emphasis on North America and Asia), and building partnerships to help us grow and execute better. We believe these growth levers can only be accessed if we take care of the fundamentals that underpin our company – our technological foundations, our risk management, and our people. Our investment in the business, funded by strong cash generation, will grow. We are grateful for the strong support from our clients, employees, Board, and investors to invest in these areas. My assessment of the size of the opportunity is unchanged – it is large – and my enthusiasm to unlock it is undimmed. Finally, a huge thank you to the OFX team. We have delivered a great client experience, worked tirelessly across the world to deliver better cost outcomes and been creative in accessing new growth; and the combination of high integrity and great team spirit has been inspirational. Skander Malcom Chief Executive Officer and Managing Director 14 OFX Group Limited Annual Report 2018 Client story "Sophie” by Judith Holmes Drewry Image credit: Le Blanc Fine Art Peter Pigott A LIFE-LONG PASSION FOR SCULPTURE Thirty years ago, Peter Pigott (now 82) and his wife Ann walked into an art gallery in London. He came across a bronze sculpture of a young woman and was ’blown away’ by its realism. Making enquiries, he discovered that Judith Holmes Drewry was the sculptor, and she worked with her husband, Lloyd Le Blanc, another famous sculptor. They used the traditional ’lost wax’ bronze casting process, a method that has been used for over 5,000 years. Peter and Ann drove to Leicestershire directly from London, and met Judith and her family. Peter used this meeting to pitch for the role of Australian sales and distribution representative for the artists. His first order was placed for two container loads of their work and at a launch party at the Pigotts’ heritage property at Mount Wilson (in Sydney’s Blue Mountains) in 1995, they sold over $300,000 worth of art in one day. The Pigotts have used OFX to fund the import of these valuable bronze artworks, transferring AUD to GBP on a regular basis. In addition to existing artworks, custom sculptures in the likeness of children have proved popular with Australian clients. Peter explained, “We really like using OFX, their rates are terrific and the friendly service is second to none. I am ancient and they call me and walk me through the process so patiently. Every time, it’s simply a joy to deal with them.” The Mount Wilson property is the perfect enchanted garden setting to display works by two of the top bronze portrait sculptors in the world. The gardens were originally developed in 1877 by Charles Moore, the Director of the Sydney Botanic Gardens. There is a sanctuary on-site for the once thought extinct parma wallaby – a miniature breed of wallaby that still exists in Tasmania and some isolated pockets of NSW. OFX’s rates are terrific and the friendly service is second to none. It is a joy to deal with them.” Peter Pigott OFX Group Limited Annual Report 2018 Executive Team 15 Executive Team From left to right: Selena Verth, Rebecca Shears, Skander Malcolm, Adam Smith, Mark Shaw, Freya Smith, Wendy Glasgow, Mike Kennedy SKANDER MALCOLM Chief Executive Officer and Managing Director Skander joined OFX Group Limited (OFX) in February 2017. He has more than 23 years’ experience in financial services including payments technology platforms in both established and emerging markets. As President and CEO of GE Capital (A&NZ), he led a team of more than 4,500 employees with an emphasis on delivering sustainable growth and operational excellence. While in the UK he launched the country’s first and largest digital personal loan business, Hamilton Direct Bank, which grew to more than £3 billion (in assets) in its first five years. He holds a Bachelor of Economics from the University of Sydney. SELENA VERTH Chief Financial Officer Selena joined OFX in October 2017. Selena has more than 17 years’ experience in finance, analytics, M&A and risk across various roles. Her most recent role was Head of Finance – Platforms, Superannuation and Investments and Head of Wealth Analytics and Insight at BT Financial Group Australia. Prior to this, Selena held a number of senior financial roles within GE, including Leader, Financial Planning and Analysis and Commercial Finance for GE Global Growth and Operations, A&NZ; and Director of Business Development for GE Australia. Selena has a Bachelor of Commerce and an Executive MBA from the Australian Graduate School of Management and is a Certified Practising Accountant. ADAM SMITH Chief Operating Officer Adam commenced his role as Chief Operating Officer at OFX in October 2015. Adam has more than 20 years’ experience in top tier financial institutions, most recently as Co-Head of ANZ ETFS. Prior to this, Adam has held a number of commercial and operational positions within ANZ Global Markets, Macquarie Group and Deutsche Bank. Adam combines a strong background in financial markets products with an extensive knowledge of business support functions such as product development, technology, operations, risk and finance. Adam has a Bachelor of Economics from the University of Sydney and a Master of Business (Finance) from the University of Technology Sydney. 16 OFX Group Limited Annual Report 2018 Executive Team WENDY GLASGOW Chief Technology Officer MIKE KENNEDY President, North America Wendy joined OFX in February 2018. Mike joined OFX in September 2017. Wendy has over 18 years’ experience in the technology industry, leading teams to deliver business critical online products to Australian and international markets. Wendy has led global product and engineering teams at organisations including AOL UK, Microsoft International and most recently spent over five years at Google leading Data Platforms and Consulting across APAC markets. Her focus at Google included launching Google’s advanced data product, Ads Data Hub, while working with top partners developing and implementing integrated data, analytics and marketing strategies focused on delivering business growth. Wendy holds a Bachelor of Information Technology and a Bachelor and Graduate Certificate in Laws from Queensland University of Technology. FREYA SMITH Chief Legal Officer and Company Secretary Freya joined OFX in September 2015. She has over 10 years’ experience in legal practice and governance. Freya holds a Bachelor of Commerce and a Bachelor of Laws (Honours), a Master of Laws (High Distinction) and a Graduate Diploma of Applied Corporate Governance from the Governance Institute of Australia. Freya is admitted in the High Court of Australia, the Federal Court of Australia and the Supreme Court of New South Wales and is a member of the Association of Corporate Counsel and an Associate of the Governance Institute of Australia. Freya is also currently a Non-Executive Director and Chairman-elect of the Sydney Fringe Festival. REBECCA SHEARS Chief Marketing Officer Rebecca commenced her role as Chief Marketing Officer at OFX in August 2016. Rebecca has more than 20 years’ experience in marketing roles both in the UK and in Australia. She started her career at Unilever and has since held positions at British Telecom, Telstra and T-Mobile. Her most recent role was Head of Marketing for the UK and Ireland at HP Inc, focusing on increasing brand consideration, market share and driving digital transformation for its e-commerce business across Europe. Rebecca holds a degree in Business and Commerce from Notthingham Trent University and a Postgraduate Diploma from the Charted Institute of Marketing. With 20 years’ financial services and payments experience, Mike is an accomplished executive in both large corporate environments and early stage start-ups. Most recently, Mike was the co-founder and CEO of the high-growth digital payments company, clearXchange (now Zelle) – the largest bank-focused digital P2P payments network in the USA. Mike has also held a number of senior positions with McKinsey & Co and Wells Fargo, including Executive Vice President, Head of Innovation & Payments Strategy, Senior Vice President and Head of Group Strategy and Implementation within Wells Fargo’s Wealth Management Group. Mike has a Master of Business Administration, with distinction, from Harvard Business School and a Master of Science, Industrial Engineering and a Bachelor of Science, Industrial Engineering, with distinction from Stanford University. MARK SHAW Chief Risk Officer Mark joined OFX in January 2018 as Chief Risk Officer. He is responsible for growing and maintaining the trust of OFX’s clients and stakeholders through effective risk and compliance management. Mark brings with him a track record in senior risk, compliance and regulatory affairs roles, gained at leading Australian and New Zealand banks over the past 15 years. Most recently he led the Operational Risk & Compliance function for the Australia Division at ANZ. Mark held several other senior compliance roles within ANZ, including Head of Compliance in both Australia and New Zealand. Before joining ANZ in 2007, Mark worked at Suncorp managing the group’s governance, policy and regulatory training frameworks, and overseeing compliance and operational risk teams across Australia. Mark holds Bachelors degrees in Law and Computer Science from the University of Queensland and has also completed all three levels of the Chartered Financial Analyst (CFA) program. Before joining the world of finance, Mark was a professional rugby player, playing for the European club Calvisano S.R.L for the 2001/02 season and representing Italy at an Under 19 level. OFX Group Limited Annual Report 2018 Client Story 17 Flow Hive THE BYRON BAY ONLINE SELLER DISRUPTING THE BEEKEEPING INDUSTRY Passionate hobbyist beekeepers, Byron-based father and son duo Cedar and Stuart Anderson became frustrated with the age-old problem of extracting honey from the hive, without killing too many bees – or getting stung! Cedar explained, “You’d have to suit up, smoke the bees, crack the hive open, lift out the frames, sweep off the bees, transport the frames to your honey shed, uncap each frame with a hot knife, stick the frames in a centrifuge, spin out the honey, filter out the wax and bee bits, fill your jars, take the empty frames back to the hive, open the hive again to put them back in, then clean everything up.” Following a decade of work, the Andersons have invented the beekeeper’s dream – a custom built hive with patented technology, featuring taps that simply release the honey from specially designed ’flow’ frames. In February 2015, an Indiegogo campaign saw Flow Hive secure over $3.3 million in start-up funds, representing the sixth most successful crowdfunding campaign ever run. Flow Hive is now selling its revolutionary hives online, and shipping its bee friendly hives to every corner of the world. OFX is assisting the business with its foreign currency management, including setting up a Global Currency Account that channels funds from Amazon and PayPal. Companies selling online and converting back to domestic currencies often use OFX’s limit order function, to help them select an exchange rate level at which their funds will automatically debit. OFX is assisting us with setting up a virtual US dollar account [Global Currency Account] to channel funds from online marketplaces.” Cedar Anderson OFX Group Limited Annual Report 2018 19 Directors’ Report and Financial Report Directors’ Report and Financial Report 20 Directors’ Report 30 Remuneration Report 47 Auditor’s Independence Declaration 48 Financial Statements 48 Consolidated Statement of Comprehensive Income 49 Consolidated Statement of Financial Position 50 Consolidated Statement of Changes in Equity 51 Consolidated Statement of Cash Flows 52 Notes to the Financial Statements 52 About this Report 54 Segment Information 56 Results for the Year 61 Financial Assets and Liabilities 67 Other Assets and Liabilities 70 Capital Structure 71 Other Items 77 Directors’ Declaration 78 Independent Auditor’s Report 85 Shareholder Information 87 Corporate Information 20 OFX Group Limited Annual Report 2018 Directors’ Report Directors’ Report For the financial year ended 31 March 2018 From left to right: Steven Sargent, Douglas Snedden, Melinda Conrad, Skander Malcolm, Grant Murdoch The Directors of OFX Group Limited (OFX, the Company), submit their report (including the Remuneration Report), the Statement of Comprehensive Income and the Statement of Cash Flows for the year ended 31 March 2018 and the Statement of Financial Position as at 31 March 2018 of the Company and its subsidiaries (the Consolidated Entity, the Group), the auditor’s report, and report as follows: 1. Directors The Directors of the Company as at 31 March 2018 at any time during or since the end of the financial year are: Company in 2008 and was a member of GE’s Global Corporate Executive Council, the first Australian to ever be appointed to such positions in GE’s history. Current directorships Director: Origin Energy Limited, Nanosonics Limited, Lumitron Technology Inc., The Great Barrier Reef Foundation, Chair of the Origin Foundation. Other: Fellow of the Australian Academy of Technological Sciences and Engineering and a Fellow of the Australian Institute of Company Directors. Interest in shares: 100,000 ordinary shares. STEVEN SARGENT Chairman – BBus, FAICD, FAATSE Member of the Audit, Risk and Compliance Committee and the Remuneration and Nomination Committee Age: 57 years Appointed: 4 August 2016 Independent Director Residence: Sydney, Australia Steve joined OFX in August 2016 and has over 36 years’ global corporate experience in industries including banking, financial services, mining and energy. Steven’s prior professional experience includes 22 years at General Electric, including a number of leadership positions as President and CEO GE Capital Australia and NZ and President and CEO GE Capital Asia Pacific. Steve was appointed Vice President and Officer of General Electric OFX Group Limited Annual Report 2018 Directors’ Report 21 JOHN ALEXANDER (‘SKANDER’) MALCOLM Chief Executive Officer and Managing Director – BEc Previous directorships The Reject Shop Limited (resigned 30 June 2017) Age: 49 years Appointed: 1 February 2017 Not independent Residence: Sydney, Australia Skander was appointed Chief Executive Officer and Managing Director on 1 February 2017. He has more than 23 years’ experience in financial services including payments technology platforms in both established and emerging markets. As President and CEO of GE Capital (A&NZ), he led a team of more than 4,500 employees with an emphasis on delivering sustainable growth and operational excellence. While in the UK he launched the country’s first and largest digital personal loan business, Hamilton Direct Bank, which grew to more than £3 billion (in assets) in its first five years. Current Directorships Nil Interest in shares: 1,904,136 ordinary shares (of which 1,877,166 have been issued under the Company’s Executive Share Plan). MELINDA CONRAD Non-Executive Director – MBA (Harvard), FAICD Interest in shares: 100,000 ordinary shares. GRANT MURDOCH Non-Executive Director – MCom (Hons), FAICD, FICAA Chair of the Audit, Risk and Compliance Committee Appointed: 19 September 2013 Age: 66 years Independent Director Residence: Brisbane, Australia Grant joined OFX in September 2013 and has over 35 years’ experience in accounting and corporate finance. Grant’s prior professional experience includes Head of Corporate Finance for Ernst & Young Queensland, and he is a graduate of the Kellog Advanced Executive Program at the North Western University, Chicago, United States. Current directorships Director: ALS Limited, Redbubble Limited, UQ Holdings Limited, Lynas Corporation Limited Other: Senator of the University of Queensland; Adjunct Professor School of Business, Economics and Law at the University of Queensland; member of Queensland State Council of Australian Institute of Company Directors. Chair of the Remuneration and Nomination Committee and member of the Audit, Risk and Compliance Committee Previous directorships Cardno Limited (resigned 6 November 2015) Age: 49 years Appointed: 19 September 2013 Independent Director Residence: Sydney, Australia Melinda joined OFX in September 2013 and has over 20 years’ experience in business strategy and marketing. Melinda’s prior professional experience includes executive roles at Harvard Business School, Colgate- Palmolive, and several retail businesses. Melinda was previously a director of APN News & Media Limited and David Jones Limited. Current directorships Director: ASX Limited, Caltex Australia Limited, Stockland Corporation Ltd, the George Institute for Global Health, the Centre for Independent Studies. Other: Fellow of the Australian Institute of Company Directors; member of the Australian Institute of Company Directors Corporate Governance Committee QIC Limited (resigned 30 September 2017) Interest in shares: 245,000 ordinary shares. DOUGLAS SNEDDEN Non-Executive Director – BEC (ANU), MAICD Member of the Remuneration and Nomination Committee and member of the Audit, Risk and Compliance Committee Age: 60 years Appointed: 16 March 2015 Independent director Residence: Sydney, Australia Doug joined OFX in March 2015 and has over 30 years’ experience in finance, consulting, strategic management and outsourcing. Doug has previously worked as Country Managing Director of Accenture Australia. 22 OFX Group Limited Annual Report 2018 Directors’ Report Current directorships Director: Chairman of Odyssey House NSW McGrath Foundation, Chairman of Chris O’Brien Lifehouse, Chairman of isentia Group Limited, and Securities Industry Research Centre of Asia-Pacific (Sirca) Limited Other: Member of the National Library of Australia Council, Director of Frisk Pty Ltd, Member of the Australian Institute of Company Directors Interest in shares: 100,000 ordinary shares. LISA FRAZIER Non-Executive Director – MBA, Bachelor of Chemical Engineering, GradDip Finance and Investment, MAICD Age: 49 years Appointed: 1 April 2018 Independent Director Residence: San Francisco, United States of America Lisa joined OFX in April 2018. Lisa has over 17 years’ experience in digital and technology specialising in digital disruption, product innovation, client experience, data analytics and marketing across the B2B and B2C sectors. Lisa is currently based in the Silicon Valley providing specialised advice to Fintech companies. Previously, she worked at Commonwealth Bank of Australia in the chief digital role as Executive General Manager Digital Channels. Lisa was previously a Partner at McKinsey & Company – Technology, Media & Telecom, based in New York and then San Francisco – where she led teams in the areas of digital strategy and transformation, digital media and marketing, and new business development. Interest in shares as at 31 March 2018: Nil. 2. State of affairs and significant changes in the state of affairs In the Directors’ opinion there have been no significant changes in the state of affairs of the Group during the year. A further review of matters affecting the Group’s state of affairs is contained on pages 24 and 25 in the Operating and financial review. 3. Directors The following persons were Directors of the Company during the year and as at the date of the Report: Steven Sargent Skander Malcolm Melinda Conrad Grant Murdoch Chairman Managing Director and Chief Executive Officer (CEO) Non-Executive Director Non-Executive Director Douglas Snedden Non-Executive Director Lisa Frazier Non-Executive Director, appointed 1 April 2018 The background, qualifications and experience of each of the Directors as at the date of this Report is included on pages 20 to 22. 4. Company Secretaries Freya Smith Freya is the Chief Legal Officer and Company Secretary for OFX Group Limited. Freya was appointed as Company Secretary on 11 October 2016. She has over 10 years’ experience in legal practice and governance. Freya holds a Bachelor of Commerce and a Bachelor of Laws (Honours), a Master of Laws (High Distinction) and a Graduate Diploma of Applied Corporate Governance from the Governance Institute of Australia. Freya is admitted in the High Court of Australia, the Federal Court of Australia and the Supreme Court of New South Wales and is a member of the Association of Corporate Counsel and an Associate of the Governance Institute of Australia. Freya is also currently a Non-Executive Director and Chairman-elect of the Sydney Fringe Festival. Naomi Dolmatoff (appointed 18 October 2017) Naomi is an experienced Company Secretary and has worked with ASX-listed entities in the financial services and mining and resources industries. Naomi holds a Bachelor of Commerce (Finance) with distinction and a graduate Diploma in OFX Group Limited Annual Report 2018 Directors’ Report 23 Applied Corporate Governance. Naomi is also an Associate of both the Governance Institute of Australia and the Institute of Chartered Secretaries and Administrators (UK). 5. Directors’ meetings The following table shows meetings held between 1 April 2017 and 31 March 2018 and the number attended by each Director or committee member. Director S Sargent S Malcolm1 M Conrad G Murdoch2 D Snedden Board Audit, Risk and Compliance Committee Remuneration and Nomination Committee Eligible Attended Eligible Attended Eligible Attended 15 15 15 15 15 15 15 14 15 15 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 5 4 5 6. Directors’ interests The relevant interest of each Director in the equity of the Company as at the date of this Report is outlined in the table below. All interests are ordinary shares unless otherwise stated. Type Opening balance Issued3 Acquisition Disposals/forfeit Closing balance S Sargent S Malcolm M Conrad G Murdoch D Snedden L Frazier ordinary ordinary ordinary ordinary ordinary ordinary 100,000 – – – 1,877,166 26,970 100,000 245,000 100,000 – – – – – – – – – – – – – – – 100,000 1,904,136 100,000 245,000 100,000 – There were no disposals of shares by the Directors during the year or share transactions post year end. 1 Mr Malcolm is not a member; however he attended the Audit, Risk and Compliance Committee and the Remuneration and Nomination Committee meetings at the invitation of the committees. 2 Mr Murdoch is not a member; however he attended the Remuneration and Nomination Committee meetings at the invitation of the committee. 3 Shares were granted in accordance with the Executive Share Plan and are restricted until performance measures have been met and the corresponding loan in respect of those shares has been repaid. 24 OFX Group Limited Annual Report 2018 Directors’ Report 7. Principal activities The Group’s principal activity during the year was the provision of international payments and foreign exchange services. 8. Dividend and distributions Dividends paid or determined by the Company during and since the end of the year are set out in Note 19 to the Financial Statements respectively. Per share (cents) Total amount ($000) Franked1 Payment date Final 2018 Interim 2018 Final 2017 3.00 7,296 100% 2.40 5,843 100% 2.90 7,016 100% 22 June 2018 15 December 2017 23 June 2017 9. Operating and financial review A summary of financial results for the years ended 31 March is outlined below: Net operating income EBITDA2 EBITDA margin3 Net profit (after tax) Earnings per share (EPS) (cents) 2018 $’000 109,923 29,825 27.1% 18,687 7.79 2017 $’000 105,115 27,752 26.4% 19,596 8.17 Growth % 4.6% 7.5% – (4.6%) – Higher active client numbers and increased propensities to deal helped to drive fee and trading income growth momentum in all geographies. Net operating income grew by 4.6% to $109.9 million. The Group is committed to making continued, sustained and significant investment in the Group’s core business, human capital, infrastructure and technology. An Executive Team restructure continued throughout the year, and the Group is delighted to be able to welcome our new executives to execute our strategy and drive future growth. The Group also paid short-term incentives in the year ended 31 March 2018. NPAT is down 4.5% to $18.7m due to a higher effective tax rate due to Research & Development (R&D) and Offshore Banking Unit (OBU) benefits recognised in FY17. Australia and New Zealand (A&NZ) continued as the largest contributor to fee and trading income for the Group. During the year we have re-activated our Australian business and although fee and trading income remained flat for FY18, we saw solid growth in the second half of the year. The Group saw a return to growth in our European business, increasing fee and trading incomeby 5% to $20.7 million, as the impact of Brexit diminishes. The Group’s A&NZ and North American business contributed 70% of the Group’s fee and trading income in the year ended 31 March 2018. In North America, there are operations in Canada and the USA. The Group operates in 49 of the states in the United States of America and all of Canada throughout the year ended 31 March 2018. During the year, we appointed Mike Kennedy as President of North America to lead OFX’s growth in North America. In May, we launched an out-of-home marketing campaign taking over San Francisco’s Embarcadero station, raising brand awareness to complement our display, search engine marketing, social media and client advocacy. The majority of our North American business is now derived from returning clients. Fee and trading income increased by 12% in North America. Contribution to total fee and trading income of the Group from North America increased from 17.5% in FY17 to 18.8% in FY18. Increased promotional and employment expenditure during the year decreased EBITDA from $3.8 million in FY17 to $2.1 million in FY18. 1 All dividends are fully franked based on tax paid at 30%. 2 Earnings before interest, tax, depreciation and amortisation (EBITDA) is a non IFRS measure that is unaudited. 3 EBITDA margins are calculated with reference to net operating income. OFX Group Limited Annual Report 2018 Directors’ Report 25 Hong Kong has been the main focus of the Group’s Asian operations for FY18. Fee and trading income grew by 68% to $6.0 million in FY18. The Group continues to grow its presence in the Asian market, driven by a strong performance of clients using our Global Currency Account. Together, the Group’s Asian and North American businesses contributed 23.9% of the Group’s fee and trading income in the year ended 31 March 2018. The International Payment Solutions (IPS) division (Wholesale division) maintained the Group’s existing branded partnership solutions for Macquarie Bank and others in Australia and New Zealand. The year saw the exiting of the UK Travelex partnership. The IPS division’s fee and trading income decreased by 5.8% to $8.6 million in FY18. Earnings before interest, tax, depreciation and amortisation (EBITDA)1 Less income tax expense Less depreciation and amortisation Statutory NPAT 2018 $’000 29,825 (6,219) (4,919) 18,687 2017 $’000 27,752 (4,391) (3,765) 19,596 Growth % 7.5% 41.6% 30.7% (4.6%) The Group’s financial position remains strong. The balance sheet consists predominantly of cash and client liabilities. The cash held for own use position increased to $47.3 million from $32.5 million. The Group currently has no external debt. The financial position provides a good platform to pursue future growth opportunities. 10. Strategy Our strategy remains simple: deliver a competitively priced and well supported product in the markets in which we operate. Our team will be focused on the few but critical initiatives that will help us grow: grow our acquisition marketing and sales, improve our service delivery, especially in on-boarding, and continue to improve our technology platform to drive a better client experience, lower cost, and enhanced security for our clients and shareholders. 11. Operational Highlights • Global website and mobile application re-branding completed • Continued enhancements of the registration and on-boarding process and client experience • Embarked on and completed a segmentation of our prospect audience and client base • More targeted display marketing • Launched the CRM marketing program • Launched the API Developer Portal • Employed four new executives to the Global Executive Team • Online Sellers Resource Hub launched • Incremental infrastructure, system and server upgrades and enhancements 1 The Group actively uses its cash balances as part of its hedging strategy, making the interest income integral to its earnings. For this reason, the Group regularly uses EBITDA as a measure of performance. 26 OFX Group Limited Annual Report 2018 Directors’ Report 12. Risk The potential risks associated with the Group’s business are outlined below (also refer Note 11 on pages 63 to 66). This list does not cover every risk that may be associated with the Group, and the occurrence or consequences of some of the risks described are partially or completely outside the control of the Group, its Directors and senior management. There is also no guarantee or assurance that the risks will not change or that other risks will not emerge: • Regulatory compliance – The cross-border payments market is a highly regulated area of economic activity. The Group devotes significant resources to comply with applicable regulations. However, there is a risk that any new or changed regulations could require the Group to increase its spending on regulatory compliance and/or change its business practices, which could adversely affect the Group’s profitability. There is a risk that such regulations could also make it uneconomic for the Group to continue to operate in places where it currently does business. In addition, there is a risk that evidence of a serious failure to comply with laws may result in severe penalties, including being forced to cease doing business as a result of a revocation or cancellation of one or more of the Group’s regulatory licences or authorisations. OFX’s business is overseen by over 55 state and federal regulators across seven countries which conduct periodic reviews of its compliance. • Information technology (IT) – The Group’s business operations rely on IT infrastructure and systems. Any interruptions to these operations could impair the Group’s ability to operate its client-facing websites, which could have a negative impact on performance. The Group has a number of operational processes and disaster risk recovery plans in place to mitigate this risk. • Data security – Through the ordinary course of business, the Group collects a wide range of personal and financial data from clients. The Group takes measures to protect this data, however, there is a risk that a cyber-attack may result in data being compromised, resulting in loss of information integrity, breaches of the Group’s obligations under applicable laws or client agreements and website and system outages, each of which may potentially have a material adverse impact on the Group’s reputation and financial performance. • Relationships with banking counterparties – The Group relies on banks to conduct its business, particularly to provide its network of local and global bank accounts and act as counterparties in the management of foreign exchange and interest rate risk. There is a risk that one or more of these banks may cease to deal with the Group (which may occur on short notice), cease to deal with international payments services generally, substantially reduce the services it offers, substantially alter the terms on which it is willing to offer services to the Group, exit one or more of the markets for which the Group uses its services, or collapse. This has occurred in the past and may occur again in the future. The Group manages this risk by investing in strong risk and compliance infrastructure and by having a suite of banking service providers to ensure that there is redundancy in its banking relationships to operate effectively. • Fraud – There is a risk that, if the Group’s services are used to transfer money in connection with a fraud or theft, the Group may be required to take steps to recover the funds involved and may in certain circumstances be liable to repay amounts that it accepted for transfer, even after it has made the corresponding international payment. For example, when the Group accepts payment by direct debit, it may ultimately be held liable for the unauthorised use of bank account details in an illegal activity and be required to refund the transaction. If the rate of refunds becomes excessive, banks and card associations may also require the Group to pay additional penalties. The Group has a range of fraud prevention controls in place to mitigate this risk. • Foreign exchange rate fluctuations – The Group may be affected by a change in the value of currencies, in particular a strengthening of the Australian dollar, which may impact both transaction turnover and reported earnings. The Group continues to increase its geographic footprint, and therefore the diversity of its currency flows, in order to mitigate the impact of any one currency’s fluctuation. • Credit – The Group enters into forward exchange contracts with some of its clients and its banking counterparties. There is a risk that, in the event that a client or counterparties fail to make payment upon settlement of these contracts, the Group will be exposed to the mark-to-market value of the transactions. • Competition – A substantial increase in competition could: result in the Group’s services becoming less attractive to consumer or corporate clients and partner companies; require the Group to increase its marketing or capital expenditure; or require the Group to reduce its price or alter other aspects of its business model to remain competitive. The Group continues to invest in exceptional service delivery in order to retain clients as well as product innovation, marketing and monitoring competition to ensure that it is able to respond to such challenges. OFX Group Limited Annual Report 2018 Directors’ Report 27 13. Outlook Our outlook remains positive. We can drive strong and consistent earnings growth by: • Improving the client experience; • Continuing our geographic expansion, with an emphasis on North America and Asia; and • Building partnerships to help us grow and execute better. We have a strong balance sheet, a good track record of service delivery, an experienced and ambitious team, and a clear mandate from our Board and our shareholders to grow. 14. Events subsequent to balance date Ms Lisa Frazier was appointed to the Board of OFX Group Limited effective 1 April 2018. As at the date of this Report, the Directors are not aware of any other circumstance that has arisen since 31 March 2018 that has significantly affected, or may significantly affect the Group’s operations in future financial years, the results of those operations in future financial years, or the Group’s state of affairs in future financial years. 15. Likely developments and expected results While the impacts of foreign exchange market conditions make accurate forecasting challenging, it is currently expected that the combined net profit for the financial year ending 31 March 2019 will increase versus the financial year ended 31 March 2018. A growth driver for the Group is the number of active clients (the number of clients who have transacted at least once in the prior 12 months). The growth in active clients for FY18 was up 3.3% to 161.9 thousand. This was driven by the increased focus on active and inactive clients through Client Relationship Marketing (CRM). We expect continued growth in the active client base of North America. This will drive growth in the North American market and build on the segment’s increased contribution to the Group. The opening of the Group’s Singapore office in April 2018 provides further growth in Asia. We will also enhance our Online Sellers Platform (Global Currency Account). This will continue to build on the growth in revenue and profit in Asia. Europe is a more competitive market and growth in active clients is building. The Group expects to build on the revenue growth in Europe. The Australia and New Zealand region will continue to be the largest single contributor to the net profit of the Group. Accordingly, the Group’s result for the financial year ending 31 March 2019 is expected to be up on the result in FY18. The Group’s short-term outlook remains subject to the range of challenges outlined in the risks on page 26, including market conditions, the impact of volatility in the foreign exchange markets, the cost of its client acquisition through online channels, potential regulatory changes and tax uncertainties. OFX is well positioned to deliver continued growth in the short to medium term. 28 OFX Group Limited Annual Report 2018 Directors’ Report 16. Insurance and indemnification of Directors and officers The Directors of the Company, and such other officers as the Directors determine, are entitled to receive the benefit of an indemnity contained in the Constitution of the Company, to the extent allowed by the Corporations Act 2001 (Cth) (Corporations Act). The Company has entered into a standard form deed of indemnity, insurance and access with the Non-Executive Directors against liabilities they may incur in the performance of their duties as Directors of the Company, to the extent permitted by the Corporations Act. The indemnity operates only to the extent that the loss or liability is not covered by insurance. During the year, the Company has paid premiums in respect of contracts insuring the Directors and officers of the Company against liability incurred in that capacity to the extent allowed by the Corporations Act. The terms of the policies prohibit disclosure of the details of the liability and the premium paid. 17. No officers are former auditors No officer of the Consolidated Entity has been a partner of an audit firm or a Director of an audit company that is the auditor of the Company and the Consolidated Entity for the financial year. 18. Non-audit services The Company may decide to employ the external auditor on assignments additional to its statutory audit duties where the auditor’s expertise and experience with the Company and/or the Group are important. The Audit, Risk and Compliance Committee is required to pre-approve all audit and non-audit services provided by the external auditor. The committee is not permitted to approve the engagement of the auditor for any non-audit services that may impair or appear to impair the external auditor’s judgement or independence in respect of the Company. The Board has considered the non-audit services provided during the year by the auditor and, in accordance with written advice provided by resolution of the Audit, Risk and Compliance Committee, is satisfied that the provision of those non-audit services during the year by the auditor is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act for the following reasons: • All non-audit services were subject to the corporate governance procedures adopted by the Group and have been reviewed by the Audit, Risk and Compliance Committee to ensure that they do not impact the integrity and objectivity of the auditor; and • The non-audit services provided do not undermine the general principles relating to auditor independence as set out APES110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Group, acting as an advocate for the Group or jointly sharing risk or rewards. During the year, the following fees were paid or payable for non-audit services provided by the external auditor of the Company PricewaterhouseCoopers (PWC), to its related practices and non-related audit firms: Taxation services Other professional services Total remuneration for non-audit services 2018 $’000 264 – 264 2017 $’000 135 56 191 OFX Group Limited Annual Report 2018 Directors’ Report 29 19. Auditor’s independence declaration A copy of the Auditor’s Independence Declaration as required under section 307C of the Corporations Act in relation to the audit for the year ended 31 March 2018 is on page 47 of this Report. 20. Chief Executive Officer/Chief Financial Officer declaration The Chief Executive Officer and the Chief Financial Officer have given the declarations to the Board concerning the Group’s Financial Statements and other matters as required under section 295A(2) of the Corporations Act. 21. Rounding of amounts The Group is of the kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, and in accordance with that instrument, amounts in the directors’ report and the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated. 30 OFX Group Limited Annual Report 2018 Remuneration Report Remuneration Report For the financial year ended 31 March 2018 Remuneration Committee Chairman’s Letter Dear Shareholder, On behalf of the Board, I am pleased to present OFX’s 2018 Remuneration Report. The last couple of years have been challenging as we have worked to improve the financial performance of the Group. As I write this, I am encouraged with the Group’s FY18 financial results which show the commencement of the improvement we have been seeking. This has been the result of a significant amount of hard work at all levels within the organisation as we seek to improve our clients’ experiences while upholding OFX’s values. A key part of the Board’s strategy to achieve this improved performance has been focusing on ensuring that OFX attracts (and can retain) key talent, particularly experienced senior executives with strong leadership experience from across the financial services and technology industries. I am pleased to report that during the last 12 months, OFX has strengthened its Board and Key Management Personnel (KMP) with the appointment of Lisa Frazier as a Non-Executive Director, Selena Verth as Chief Financial Officer and Wendy Glasgow as our Chief Technology Officer. We have also welcomed Mike Kennedy, Vice President, North America and Mark Shaw, Chief Risk Officer to the Executive team. We believe that we have the right people at the Executive level to drive and deliver the strategic growth objectives of the Group. During the financial year, KMP met between 72.5% and 81.7% of their targets. This has been achieved by hard work in driving operational execution including growing revenue faster than operating expenses and developing a good understanding of client needs to promote growth. Additionally, OFX has reduced its number of projects but intensified its focus on the projects that matter. This strategic shift of focus will assist in driving our objectives and at the same time ensuring that we maintain our high quality risk management and compliance standards. Short Term Incentive (STI) To be eligible for STI, a minimum earnings before tax (EBT) gateway must be achieved by the Company of at least 90% of target EBT budget. For the first time in recent years, the Group has achieved 92% of its budgeted EBT for the financial period and therefore eligible for STI. For the 2018 financial year, the Board set $117.2m Net Operating Income (NOI), $27.1m EBT and 175,000 Active Clients as the financial metric targets for KMP. Non-financial metrics were agreed with KMP at the beginning of each financial year. For the reporting period these included objectives around leadership and culture, project management and delivery, risk management outcomes, Net Promoter Score (NPS) outcomes and employee engagement scores. Combined, KMP achieved between 72.5% and 81.7% of their targets and accordingly STI is payable for FY18. Current Long Term Incentive (LTI) In the 2017 financial year, the Group introduced a new LTI being the Executive Share Plan (ESP). The ESP was approved by shareholders at the 2016 AGM. During FY18, KMP (Skander Malcolm and Selena Verth) were offered a single grant of shares upfront. The shares for the single grant are split into two tranches (A and B), each having a separate vesting condition of Compound Annual Growth Rate (CAGR) of Constant Currency Net Operating Income Growth (NOI Growth) and CAGR of Constant Currency Earnings per Share (EPS Growth) over a performance period of three financial years commencing 1 April 2017. No grants issued under the ESP were due to vest in the 2018 financial year. The Board has decided not to increase fees paid to Non-Executive Directors during the financial year. Fees paid to Non-Executive Directors have remained the same since the Company’s listing on the ASX in 2013. Director fees The Board is cognisant of the need to ensure that the remuneration mix for Executives is appropriately balanced. It comprises fixed pay, STI and LTI to encourage retention but to also provide the right level of motivation to achieve OFX’s strategic objectives. It also must drive alignment with shareholder value creation. OFX Group Limited Annual Report 2018 Remuneration Report 31 As foreshadowed within our 2017 Remuneration Report, during FY18 OFX completed an extensive incentive plan review during FY18 to consider whether the existing STI and LTI structure remained appropriate to the Company. We consulted with several stakeholders, looked at industry best practice and considered these in the context of our global operations. As a result of the review, OFX has decided to retain its existing ESP which is used to govern equity issuances under the Company’s long term incentive plan. The ESP was last approved by shareholders in 2016 and modifications to the ESP are being considered for approval at the 2018 Annual General Meeting (AGM). OFX is also planning to seek shareholder approval of its Global Equity Plan (GEP) which will be used to facilitate equity issuances under its short term incentive plan. It is the intention that these plans will be effective during the 2019 financial year. We believe this type of structure creates a clear alignment of our Executives’ and employees’ interests with that of shareholders and is appropriate to the agile, fast moving business environment in which OFX operates. Further, we understand and embrace stakeholder expectations around remuneration. We believe that this structure will also ensure that, over the medium term, Executives are encouraged to think and act like shareholders, while also upholding OFX’s values. Yours sincerely, Melinda Conrad Remuneration and Nomination Committee Chair 32 OFX Group Limited Annual Report 2018 Remuneration Report Introduction The Directors of OFX Group Limited (the Company) present the Remuneration Report for the Company and its controlled entities (collectively the Group or OFX) for the financial year ended 31 March 2018 prepared in accordance with the requirements of the Corporations Act 2001 (Cth) (the Corporations Act) and as audited as required by section 308(3C) of the Corporations Act. 1. Key Management Personnel The Remuneration Report outlines the remuneration arrangements in place for the Key Management Personnel (KMP) of the Group, which comprises all Directors (Executive and Non-Executive) and those Executives who have authority and responsibility for planning, directing and controlling the activities of the Group. In this report, ’Executives’ refers to members of the Group Executive team, which includes KMP and other executives. The following table details the Group’s KMP during the 2018 financial year and up to the date of this report: Name Non-Executive Directors Role Steven Sargent Melinda Conrad Grant Murdoch Douglas Snedden Lisa Frazier Executive Director Skander Malcolm Other KMP Mark Ledsham Selena Verth Adam Smith Chairman and Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director Non-Executive Director, appointed 1 April 2018 Managing Director and Chief Executive Officer (CEO) Chief Financial Officer (CFO), ceased to be KMP on 13 April 2017 CFO, commenced as KMP on 16 October 2017 Chief Operating Officer (COO) Craige Pendleton-Browne Chief Technology Officer (CTO), ceased to be KMP on 30 April 2018 Wendy Glasgow CTO, commenced as KMP on 19 February 2018 Contractual arrangements – Skander Malcolm – Managing Director and CEO Mr Malcolm was appointed Managing Director and CEO effective 1 February 2017. For the 2018 financial year Mr Malcolm’s TFR was $650,000 per annum. At the AGM held on 2 August 2017, Shareholders approved Mr Malcolm eligible to participate in the OFX Executive Share Plan (ESP). During the period, 1,877,166 shares were granted to Mr Malcolm as a single LTI grant representing 150% of his fixed remuneration, which will vest over a three year performance period. The shares are split into two tranches (A and B), each having a separate vesting condition of Compound Annual Growth Rate (CAGR) of Constant Currency Net Operating Income (NOI Growth) and CAGR of Constant Currency Earnings Per Share (EPS Growth). Vesting is based on performance against a Threshold Measure, a Target Measure and a Stretch Measure as per the following table: Tranche Vesting Condition1 Threshold Measure Target Measure Stretch Measure Tranche A (50%) Tranche B (50%) EPS CAGR over 3 year performance period NOI CAGR over 3 year performance period 12.5% 10% 15% 12.5% 17.5% 15% 1 Measured on a constant currency basis. OFX Group Limited Annual Report 2018 Remuneration Report 33 The terms of Mr Malcolm’s appointment and termination arrangements are set out below. Contract Components Duration Termination by Executive Termination by the Company Post-employment restraints Treatment of STI and LTI Details Ongoing contract 6 months’ notice 6 months’ notice 6 month post-employment non-compete and non-solicitation restraint, or failing that, 3 months after termination. Upon termination, if the CEO is considered a good leaver, the CEO will be entitled to a pro-rata STI award. Board discretion applies to the treatment of any unvested LTI. KMP (excluding Managing Director and CEO) employment contracts and notice periods are set out below: Contract Components Duration Details Ongoing contract Termination by Executive 6 months’ notice for all KMP Termination by the Company 6 months’ notice for all KMP Post-employment restraints C Pendleton-Browne and A Smith have 6 month post-employment restraints. W Glasgow and S Verth have a restraint of up to 12 months after termination of employment. No other KMP have post-employment restraints. Treatment of STI and LTI Upon termination, if the KMP is considered a good leaver, the KMP may be entitled to a pro-rata STI award. Board discretion applies to the treatment of any unvested LTI. 2. Remuneration snapshot for the 2018 financial year Executives of the Group receive Total Reward Remuneration (TRR) that comprises fixed and variable (at risk) annual pay, a blend of fixed short-term and long-term incentives and which has three components: • Fixed – Total Fixed Remuneration (TFR); • At Risk – Short Term Incentive (STI); and • At Risk – Long Term Incentive (LTI). The relative proportion of ’fixed’ and ’at risk’ components of Executive remuneration varies by Executive. Executives with a closer link to the growth drivers of the business have a higher proportion of ’at risk’ remuneration, while Executives more aligned to risk and compliance functions have a lower ’at risk’ component. Participation in special retention plans is not taken into account in determining the Executives’ percentage allocations. The three components of the remuneration framework are outlined as follows: Total fixed remuneration (TFR) • 28-70% of TRR. • TFR is set by reference to benchmark market information for comparable roles and individual performance. • Includes cash, non-financial benefits, and superannuation. Short Term Incentive (STI) • 15-43% of TRR. • 40% of target STI is based on non- financial Key Performance Indicators (KPIs) and 60% of target STI is based on financial KPIs. • Paid in cash and shares. The STI paid in shares is deferred over a two- year period. • 90% Earnings Before Tax (EBT) Budget gateway. Long Term Incentive (LTI)1 • 15-30% of TRR. • Executive Share Plan (ESP) as approved by shareholders at the 2016 AGM. • Shares granted upfront pursuant to a company loan. • Performance hurdles linked to NOI and EPS at constant currency. 1 In addition to the components set out above, a number of grants issued under the Legacy LTI Plan remain on foot subject to vesting conditions as determined by the Board. 34 OFX Group Limited Annual Report 2018 Remuneration Report Remuneration is reviewed annually to ensure it remains competitive within the market. Remuneration increases are subject to merit and are in respect of Executives, subject to the approval of the Board, on the recommendation from the Remuneration and Nomination Committee. Pursuant to delegated authority by the Board, the Remuneration and Nomination Committee has the discretion to approve total bonus pool, salary increase pool, changes to the CEO/ Managing Director, CFO and Global Executive Team remuneration and bonus payments, annual STI payments to the Global Executive Team and the issuance of performance rights under OFX’s ESP, as it considers appropriate. 3. Role of the Remuneration and Nomination Committee The Remuneration and Nomination Committee (Remuneration Committee) is responsible for reviewing and making recommendations to the Board on the Company’s remuneration packages for Non-Executive Directors, the CEO, and Executives. It is also responsible for reviewing the Company’s recruitment policies, superannuation arrangements, Board and Executive succession planning and performance evaluations among other things. The Charter of the Remuneration and Nomination Committee is available on the Group’s website at www.ofx.com/en-au/investors/corporate-governance/. To assist in performing its duties, the Remuneration Committee seeks independent advice from external consultants on various remuneration related matters. The Remuneration Committee follows protocols around the engagement and use of external remuneration consultants to ensure compliance with the relevant Executive remuneration legislation. OFX did not obtain any remuneration recommendations from consultants during the 2018 financial year that related to remuneration of any of the KMP. 4. Remuneration principles and structure The objective of the remuneration framework is to ensure reward for performance is competitive and appropriate for the results delivered. The remuneration framework aligns remuneration for Executives across the Group with achievement of strategic objectives and the creation of value for shareholders. The Group’s remuneration framework is structured to: • Encourage a strong focus on performance and support the delivery of positive returns to the Group’s shareholders; • Attract, retain and motivate appropriately qualified and experienced individuals who will contribute to the Group’s financial and operational performance; • Motivate Executives to deliver results with both short and long-term horizons at the same time meeting OFX’s values; and • Align Executive and shareholder interests through share ownership. Overview of Executive remuneration components Total Fixed Remuneration (TFR) TFR may be delivered as a combination of cash and prescribed non-financial benefits at the Executive’s discretion. Retirement benefits are provided via defined contributions to approved superannuation funds. Executives are offered a competitive base pay that comprises the fixed cash component of pay and rewards inclusive of superannuation. External remuneration consultants from time to time provide analysis and advice to ensure TFR is set to reflect the market for a comparable role. OFX Group Limited Annual Report 2018 Remuneration Report 35 Short Term Incentive (STI) STI Component Details Eligibility All KMP, with the exception of Wendy Glasgow, were eligible to participate in the STI during the 2018 financial year. The exclusion of Wendy’s eligibility for the FY18 STI was considered appropriate on the basis of her appointment late in the financial year period on 19 February 2018. However, Wendy will be eligible to participate during STI for FY19. Opportunity The size of the STI opportunity available to each Executive is based on their accountabilities and impact of their role on the Company. This is typically in the range of 15-50% of TRR. KPIs If an Executive commences or ceases employment with the Company during the financial year, the Board will consider eligibility for a pro-rata share of their STI entitlement. Executives will not be eligible for a STI payment if terminated due to misconduct, poor performance or in general, if they resign. The Remuneration Committee will annually approve the KPIs to link Executive STI and the level of payout if the KPI targets are met. This includes setting any maximum payout and minimum levels of performance. The Remuneration Committee is responsible, after the preparation of the financial statements each year (in respect of financial measures) and after a review of performance against non-financial measures by the CEO (and in the case of the CEO, by the Board following recommendation by the Committee), for recommending to the Board the final STI payout for the previous financial year. The Board retains the discretion to vary the final STI payout if performance is considered to be deserving of either a greater or lesser amount. The KPIs linked to STI comprise two tranches and within each tranche are a series of objectives. To be eligible for access to STI a minimum EBT performance gateway must be achieved of at least 90% of target EBT. No STI will be payable if the 90% EBT Budget gateway is not met irrespective of whether the Tranche A and Tranche B performance indicators are met. Target EBT is approved by the Board at the commencement of the performance period. Tranche A – Non-financial performance indicators 40% of the total target STI is available in Tranche A (non-financial performance indicators). If an Executive does not meet a minimum performance threshold in Tranche A, they are not eligible to participate in Tranche B. The non-financial performance indicators are designed to drive leadership performance and behaviours consistent with the role and expectations for each Executive. These include objectives around leadership and culture, project management and delivery, risk management outcomes, Net Promoter Score (NPS) outcomes and employee engagement scores. Tranche B – Financial performance indicators 60% of the total target STI is available in Tranche B. The financial performance indicators for the 2018 financial year were: • NOI; • EBT; and • Active Clients1 In the event of out performance against the target financial and non-financial performance indicators, there is a potential additional outperformance bonus available of 20% on Tranche A and 33% on Tranche B. Payment CEO: 50% in cash and the remaining 50%, subject to shareholder approval, deferred equity to be delivered in performance rights to vest one year after issue with a holding lock applied for a further one year after vesting. Executives: 75% settled in cash with 25% deferred to be delivered in performance rights to vest one year after issue with a holding lock applied for a further one year after vesting. The CEO and Executives do not receive any dividends and are not entitled to vote in relation to the rights during the vesting period. If a participant ceases employment before the rights vest, the rights will be forfeited, except in limited circumstances that are approved by the Board on a case-by-case basis. The fair value of the rights is determined based on the market price of the Company’s shares at the grant date, with an adjustment made to take into account the vesting period over two years and expected dividends during that period that will not be received by the participants. 1 Active Clients are the numbers of clients who have transacted at least once in the prior 12 months. 36 OFX Group Limited Annual Report 2018 Remuneration Report Long Term Incentive (LTI) LTI was available to KMP in the 2018 financial year pursuant the OFX Group Limited Executive Share Plan (the ESP) as approved by shareholders at the Company’s 2016 AGM. Under the ESP, non-recourse loans are issued for the sole purpose of acquiring shares in the Group. OFX underwent an extensive equity incentive plan review during FY18 to consider whether the existing LTI structure remained appropriate and that the interests of executives eligible to participate in the LTI were appropriately aligned with those of shareholders. The outcome of the review was to retain its existing ESP which was last approved by shareholders in 2016, with minor modifications being considered. It is intended that the ESP will again be presented for shareholder approval at OFX’s 2018 AGM. The Executive Share Plan LTI Component Objective Eligibility Award value Loan arrangements Allocation methodology, timing and performance period Details The ESP is designed to link long-term KMP reward with the ongoing creation of shareholder value, with the allocation of equity awards which are subject to satisfaction of performance hurdles as set by the Board. During the 2018 financial year, the ESP was limited to KMP. Non-Executive Directors are not eligible to participate in the ESP. During the 2018 financial year, LTI awards under the ESP were in the range of 15-30% of TRR. The loan amount provided to each KMP is based on their LTI target amount (LTI percentage of TFR) multiplied by an externally determined ’loan value’ which is calculated using an adjusted Black-Scholes option pricing valuation model. The loan is ’interest free’ in that there is no annual interest charge to the participant on the loan. However, the notional value of this interest is taken into account in the overall structure of the plan. The KMP is obliged to pay a portion of the post-tax value of any dividends received during the loan term toward repayment of the loan amount. To access shares under the ESP, KMP must repay their loan in full. Following the end of the relevant vesting period, assuming the earnings ’gateway’ is achieved, the KMP can either repay the loan directly or sell some or all of their shares and apply the proceeds to repay the loan. Repayment of the loan must be received within two years in order to access the shares. The Board may, in its discretion, include one or more vesting conditions as a term of the Loan which, if satisfied, will result in part forgiveness of the loan. The Board may exercise this discretion for current shares on foot under the ESP if NOI Growth or EPS Growth (defined below) for the relevant performance period exceeds the Stretch Measure as set out in the invitation terms. The ESP was approved by shareholders at the Company’s 2016 AGM. For the 2018 financial year, Skander Malcolm and Selena Verth were offered a single grant of shares upfront. The shares for the single grant are split into two tranches (A and B), each having a separate vesting condition of Compound Annual Growth Rate (CAGR) of Constant Currency Net Operating Income Growth (NOI Growth) and CAGR of Constant Currency Earnings per Share (EPS Growth) over a performance period of three financial years commencing 1 April 2017. In previous financial years, a triple grant had been issued as an incentive to focus on the key performance drivers of the Group’s strategy at that time, helping to deliver sustainable growth in shareholder value. The three tranches had performance periods of three, four and five years respectively. During the 2018 financial year, the vesting conditions for the applicable FY17 award (Tranche 2) was modified for each of Adam Smith and Craige Pendleton-Browne such that the vesting is now aligned with that of the CEO. This has the effect of changing the vesting conditions to be based on performance against a Threshold Measure, a Target Measure and a Stretch Measure. Shares under the ESP were issued in the 2018 financial year at a price equal to the five-day volume weighted average price (VWAP) for the period prior to issue. A loan will be provided equal to the five-day VWAP multiplied by the total number of shares to be issued. OFX Group Limited Annual Report 2018 Remuneration Report 37 LTI Component Vesting condition Performance testing Trading restrictions Forfeiture conditions Control event Details The shares for each award are split into two tranches (Tranche A and Tranche B), each having a separate vesting condition of Compound Annual Growth Rate (CAGR) of constant currency Net Operating Income (NOI Growth) and CAGR of constant currency Earnings Per Share (EPS Growth) over a specified performance period. The Board implemented a ’gateway’ level of minimum acceptable growth in EPS performance below which no shares will vest which applies to both tranches. These are detailed on page 32. The shares are subject to performance hurdles and ongoing employment. The performance hurdles to apply to each issuance will be determined by the Board at the time of issue. Testing of the vesting conditions for each tranche will occur once the results for the relevant financial year in the last year of the performance period have been approved by the Board. There is no retesting of the vesting conditions. KMP must not transfer, encumber, hedge or otherwise deal with shares acquired under the ESP until the loan in respect of those shares has been paid in full or arrangements satisfactory to the Board are made for repayment of the loan in full from proceeds of sale of the shares. At all times, KMP must also comply with OFX’s Securities Trading Policy. If the performance-based vesting conditions are not met then the shares will be forfeited, with the forfeited shares treated as full consideration for the repayment of the loan. The Board has absolute discretion to determine that some or all of the unvested Shares will vest if there is a takeover or scheme of arrangement of the Company or a proposed winding up of the Company. Shareholder approval Shareholder approval is required for the issue of shares to any Executive Director. 5. Legacy remuneration practices Legacy LTI Plan OFX’s LTI changed in the 2017 financial year from the Legacy LTI Plan to the ESP to align with market practice, while continuing to support the Group’s strategy. The Legacy LTI Plan is now a legacy plan. The Legacy LTI Plan issued performance rights, service rights and share options to Executives and KMP. The Legacy LTI Plan will continue to operate until all issuances on foot vest or lapse in accordance with relevant vesting conditions as determined by the Board. The grants under the Legacy LTI Plan have the following vesting conditions: Performance rights Issuance Retention rights tranche 11 Retention rights tranche 21 Retention rights tranche 3 FY15 performance rights Vesting Level (EBTDA CAGR) EPS CAGR ≥ 14% ≥ 14% ≥ 14% ≥ 17% 100% ≥ 19% ≥ 19% ≥ 19% ≥ 22% 25%-100% 0% Performance Period 14%-19% 14%-19% 14%-19% 17%-22% <14% <14% <14% <17% 54 Months 54 Months 54 Months 36 Months Vesting Level (NOI CAGR) EPS CAGR 100% 25%-100% 0% Performance Period FY16 performance rights ≥ 17% ≥ 22% 17%-22% <17% 36 Months 1 The performance period and performance targets of these tranches were modified in the 2017 financial year to align with tranche 3. 38 OFX Group Limited Annual Report 2018 Remuneration Report Service rights Service rights are not subject to performance conditions. Vesting is subject to meeting employment service requirements. Share options Share options are not subject to performance conditions. Vesting is subject to meeting employment service requirements and an exercise price. 6. Group performance The Group’s 2014-2018 annual financial performance measures are listed below. The financial measures for the Group for the period 1 April 2013 to 11 October 2013 are based on the results of OzForex Limited (formerly OzForex Pty Limited), as the Group’s financial results have been prepared as a continuation of the OzForex Limited consolidated group. Performance Metrics Net operating income1 EBITDA Underlying EBITDA Active Clients Basic earnings per share2 Underlying basic earnings per share3 Dividend per share4 Closing share price 2014 $72.6m $22.4m $29.4m 120,500 6.84cps 8.92cps 2015 $90.1m $34.5m $34.5m 142,500 10.11cps 10.11cps 2016 2017 2018 $103.9m $105.1m $109.9m $33.1m $36.1m 150,900 9.09cps 9.95cps $27.8m $27.8m 156,700 8.17cps 8.17cps $29.8m $29.8m 161,900 7.79cps 7.79cps N/A $0.05875 $0.07184 $0.05900 $0.05800 $3.30 ($1.30 above ’retail’ price) $2.41 $2.02 $1.48 $1.69 1 Net operating income, a non-IFRS measure, is the combination of ’Fee and trading income’ and “Fee and commission expense’ and ’Interest income’. These are not calculations based on constant currency. 2 For the calculation of EPS refer to Note 6 of the financial statements. These are not calculations based on constant currency. 3 Underlying basic earnings per share is the basic earnings per share calculation utilising the Underlying NPAT of the Group. 4 This represents dividends distributed in the period. OFX Group Limited Annual Report 2018 Remuneration Report 39 7. Executive remuneration disclosures Short-term employment benefits Post- employment benefits Long- term benefits Share-based payments Cash salary and fees Year Cash bonus Other1 Superannu- ation Long service leave Performance rights Share loan Options Total Current KMP S Malcolm2 2018 630,059 306,375 2017 105,064 – A Smith3 2018 330,059 115,188 2017 320,538 – S Verth4 2018 2017 161,987 120,587 – W Glasgow5 2018 38,500 2017 – C Pendleton- Browne6 Former KMP 2018 330,136 3,000 2017 330,692 M Ledsham7 2018 251,375 R Kimber8 M Loyez9 2017 330,448 2018 2017 2018 2017 – 400,397 – 96,025 Total KMP Remuneration – – – – – – – – – – – – – – – – – – – – – – – 19,941 4,904 19,940 26,134 10,024 – 3,658 – 19,940 26,780 545 – 889 366 – – – – 860 339 260,419 304,259 – – 58,545 10,443 145,639 65,749 34,166 35,719 – – – – – – (77,293) (65,749) 59,093 65,749 11,122 (37,087) (208,272) (65,749) 19,539 9,561 (214,724) 65,749 – – – – – – – – – – – – – – – – 1,521,598 109,968 535,064 558,426 362,483 – 42,158 – 210,894 482,653 (48,611) 210,573 – 530,398 22,331 – – 184,331 17,866 29,356 60,919 18,484 1,061,885 – – – – – – – 298,222 – – – – 2018 1,742,116 545,150 – 84,625 (34,793) 67,565 218,923 – 2,623,586 2017 1,583,164 – 714,729 117,554 10,266 19,364 258,166 18,484 2,721,727 1 Other payments relate to amounts paid subject to separation arrangements following cessation of employment. 2 S Malcolm commenced employment with the Group on 1 February 2017. 3 A Smith commenced employment with the Group on 6 October 2015. 4 S Verth commenced employment with the Group on 16 October 2017. Includes payment of FY18 STI in accordance with sign on agreement. 5 W Glasgow commenced employment with the Group on 19 February 2018. 6 C Pendleton-Browne was a KMP for the whole of the reporting period, however ceased to be KMP and an employee on 30 April 2018. 7 M Ledsham’s remuneration includes a writeback of previously expensed share-based payments. M Ledsham ceased to be KMP on 13 April 2017. 8 R Kimber ceased to be KMP and employee on 31 January 2017. 9 M Loyez ceased to be KMP and employee on 22 July 2016. 40 OFX Group Limited Annual Report 2018 Remuneration Report Short Term Incentive The minimum EBT performance gateway of at least 90% of target EBT was achieved during the year ended 31 March 2018 and therefore Executives were eligible for STI. For the CEO, the STI is settled 50% in cash and the remaining 50%, subject to shareholder approval, deferred equity to be delivered in performance rights to vest one year after issue with a holding lock applied for a further one year after vesting. For Executives, the STI is settled 75% in cash with 25% deferred to be delivered in performance rights to vest one year after issue with a holding lock applied for a further one year after vesting. FY18 performance and achievement of STI KMP were assessed under an agreed set of financial and non-financial key performance indicators for the 2018 financial year period and STI achieved by each member of KMP is set out below: KMP S Malcolm A Smith S Verth C Pendleton-Browne W Glasgow STI at target STI achievement STI achievement $ Cash $ STI portion deferred $ 750,000 210,000 221,7701 210,000 N/A 81.7% 72.5% 72.5% 0% N/A 612,750 152,250 160,783 – N/A 306,375 114,188 120,587 – N/A 306,375 38,063 40,196 – N/A Payment Mr Malcolm’s performance was assessed by the Board on the following financial and non-financial key performance indicators: • Deliver EBITDA of $32m through strong operational execution; • Manage risk to ensure no major risk events were incurred during 2018; • Develop a detailed client insight program that can improve Cost Per Registration, drive positive trend in NPS and increase activity from both active and inactive clients; • Deliver the Company’s technology program on budget, on time and on expectation to drive a better client experience; and • Deliver investment cases for Board consideration for further investment. ESP Australian Accounting Standards require the shares be treated as options for accounting purposes due to the structure of the plan. The shares are not subject to an exercise price and the amounts receivable from participants in relation to these loans are not recognised in the consolidated financial statements. The details of notional options held by executives under the Executive Share Plan during the year ended 31 March 2018 are set out in the tables below. 1 Includes payment of FY18 STI in accordance with sign on agreement. OFX Group Limited Annual Report 2018 Remuneration Report 41 Issuance Grant date Vesting date Expiry date Share-based loan (tranche 1) 30 September 2016 7 June 2019 6 June 2021 Share-based loan (tranche 2) 30 September 2016 7 June 2020 6 June 2022 Share-based loan (tranche 3) 30 September 2016 7 June 2021 6 June 2023 FY18 share-based loan 22 September 2017 7 June 2020 6 June 2022 Price per share at grant date Performance achieved % vested 0.74 0.81 0.87 0.65 To be determined To be determined To be determined To be determined – – – – The number and value of notional options held by KMP under the ESP during the 2018 financial year is set out below. Held at 1 April 2017 Granted during the year Exercised during the year Lapsed during the year Held at 31 March 2018 Value of options at grant date $ Current KMP A Smith S Malcolm S Verth 500,000 – – – 1,877,166 220,370 C Pendleton-Browne1 500,000 Former KMP M Ledsham 500,000 – – – – – – – – – – 500,000 1,877,166 220,370 (500,000) (500,000) – – 401,698 1,220,158 143,241 384,650 384,650 Loans to Executives under ESP The details of non-recourse loans provided to the executives under the ESP during the 2018 financial year are set out below. The value of the loan is calculated using the five-day volume weighted average price (VWAP) for the period prior to issue. Held at 1 April 2017 $ Advances during the year $ Loan forgiveness during the year $ Repayments during the year $ Held at 31 March 2018 $ Interest free value $ Highest indebtedness during the year $ – 3,397,670 (23,878) 3,373,792 102,003 – – – – – – (13,755) 1,044,105 (2,803) 396,067 – (1,057,860) (1,057,860) – – – 60,814 11,975 – 3,397,670 1,057,860 398,870 – 42,091 1,057,860 2,182 1,057,860 Name Current KMP S Malcolm A Smith S Verth W Glasgow C Pendleton- Browne1 Former KMP 1,057,860 – – 1,057,860 – 398,870 – – – M Ledsham2 1,057,860 1 C Pendleton-Browne was a KMP for the whole of the reporting period, however ceased to be KMP and an employee on 30 April 2018. Shares forfeited following C Pendleton-Browne ceasing to be an employee and will be dealt with in accordance with the terms of the ESP, the proceeds of which will satisfy the loan applicable to those shares. 2 M Ledsham ceased to be KMP on 13 April 2017 and shares forfeited will be dealt with in accordance with the terms of the ESP, the proceeds of which will satisfy the loan applicable to those shares. 42 OFX Group Limited Annual Report 2018 Remuneration Report Legacy LTI Plan Performance rights, service rights and options as vested and on foot as at 31 March 2018. Performance rights On vesting, each performance right is convertible into one ordinary share of the Company. No exercise price is payable. Service rights Service rights are issued in certain circumstances as part of the initial employment arrangements for employees. The only vesting condition is ongoing employment at the vesting date. On vesting, each service right is convertible into one ordinary share of the Company. No exercise price is payable. Share options On vesting, each share option is convertible into one ordinary share of the Company. An exercise price of $2.49 is payable in order for the options to vest and must be exercised within 12 months of the vesting date. There were no share options issued during the year ended 31 March 2018. Further information on share-based payments is set out in Note 22 of the Financial Report. The details of performance rights, service rights and share options relating to the Legacy LTI Plan are set out below: Issuance Grant date Vesting date Retention rights tranche 11 20 October 2014 Retention rights tranche 21 20 October 2014 Retention rights tranche 3 20 October 2014 FY15 performance rights 26 June 2015 Service rights Executive A 16 October 2015 7 June 2019 7 June 2019 7 June 2019 7 June 2018 7 June 2017 Service rights Executive B 20 November 2015 20 November 2018 Share options tranche 1 Share options tranche 2 1 June 2015 1 June 2015 30 June 2018 30 June 2019 Price per share at grant date Performance achieved % vested 2.21 2.21 2.21 1.84 2.51 2.42 0.52 0.50 To be determined To be determined To be determined No N/A N/A N/A N/A – – – – 100% 0% – – 1 The performance period of these tranches was modified in the 2017 financial year to align with tranche 3. OFX Group Limited Annual Report 2018 Remuneration Report 43 Movement in share-based payments during the year The movement in the performance rights, service rights and share options during the year ended 31 March 2018 is outlined below: Number granted during the year Number vested during the year Number forfeited during the year Held at 31 March 2018 Held at 1 April 2017 Value of shares at 1 April 2017 $1 Value of vested shares $1 Value of shares forfeited $1 Value of shares at 31 March 2018 $1 Current KMP A Smith Service rights – Executive A C Pendleton-Browne2 Service rights – Executive B Former KMP M Ledsham3 – – – – 92,829 – (92,829) – – 233,001 (233,001) – 82,645 – – – – (82,645) – 200,001 – (200,001) – – (450,000) (59,838) – 994,500 – 101,102 – – (994,500) (101,102) Retention rights 450,000 FY15 performance rights 59,838 Transactions of KMP Shares held in the Company by KMP at the end of the financial year, excluding shares granted under the ESP, are set out below. Held at 1 April 2017 Exercise of share options or rights during the period Other movements Held at 31 March 2018 Current KMP S Malcolm S Verth A Smith W Glasgow C Pendleton-Browne2 Former KMP M Ledsham3 – – – – – 27,500 – – 92,829 – – – 26,970 5,800 – – – – 26,970 5,800 92,829 – – 27,500 1 The value of shares reflects the fair value at the time of grant. 2 C Pendleton Browne was a KMP for the whole of the reporting period, however ceased to be KMP and an employee on 30 April 2018. 3 Ceased to be KMP on 13 April 2017. The balance above is reflective of the known balance at resignation date. 44 OFX Group Limited Annual Report 2018 Remuneration Report The percentage of remuneration received as fixed pay and at-risk pay during the year ended 31 March 2018 by the Executive KMP is outlined below: Fixed and at-risk remuneration Name S Malcolm A Smith S Verth W Glasgow C Pendleton-Browne1 Fixed remuneration 43% 65% 48% 100% 167% At risk – STI At risk – LTI Deferred Cash bonus Rights Options Share loan 17% 6% 9% – – 20% 22% 33% – 1% – 5% – – (37%) – – – – – 20% 2% 10% – (31%) 8. Non-Executive Director disclosure Fee framework The Board seeks to set fees for the Non-Executive Directors that reflect the demands which are made on and the responsibilities of the Directors, and at a level which will attract and retain directors of the highest quality. Non-Executive Director fees will be reviewed from time to time and they may seek the advice of external remuneration advisors for this purpose. There were no changes in fees during the year. Fee pool The maximum payable to be shared by all Non-Executive Directors is currently set at $1,000,000 per annum, which was approved by shareholders in General Meeting prior to the Company’s listing on the ASX in 2013. To preserve independence, Non-Executive Directors do not receive any equity as part of their remuneration and do not receive any performance related compensation. Non-Executive Directors receive superannuation contributions where required by Superannuation Guarantee legislation. Fees applicable for 2018 Role Chairperson fee Base Director fee Committee Chair fee Committee Member fee $ 200,000 100,000 25,000 15,000 1 C Pendleton-Browne was a KMP for the whole of the reporting period, however ceased to be KMP and an employee on 30 April 2018. OFX Group Limited Annual Report 2018 Remuneration Report 45 Statutory Non-Executive Director fees for the year ended 31 March 2018 Details of the fees paid to the Non-Executive Directors are outlined below: Non-Executive Directors S Sargent1 M Conrad G Murdoch D Snedden P Warne2 Total Non-Executive Director remuneration Year 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017 Short-term employee benefits Post-employment benefits Cash salary and fees Superannuation Total 210,130 118,850 127,854 127,854 114,155 114,155 118,721 118,721 – 131,334 570,860 610,914 19,870 230,000 11,198 12,146 12,146 10,845 10,845 11,279 11,279 – 130,048 140,000 140,000 125,000 125,000 130,000 130,000 – 12,175 143,509 54,140 625,000 57,643 668,557 9. Non-Executive Director shareholdings Details of the Non-Executive Directors’ and their affiliates’ shareholdings in OFX Group Limited are set out below: Non-Executive Directors S Sargent M Conrad G Murdoch D Snedden Year 2018 2017 2018 2017 2018 2017 2018 2017 Shares held at the beginning of the year 100,000 – 100,000 100,000 245,000 145,000 100,000 39,000 Movement – 100,000 – – – 100,000 – 61,000 Shares held at the end of the year 100,000 100,000 100,000 100,000 245,000 245,000 100,000 100,000 10. Securities Trading Policy All Directors and employees are required to comply with the Group’s Securities Trading Policy in undertaking any trading in the Company’s shares and may not trade if they are in possession of any inside information. Directors and employees can only trade during the specified trading windows immediately following the release of the half year and full year results and the annual meeting. In addition, Directors and certain restricted employees may only trade during the trading windows with prior written clearance as set out in the Policy. The Policy prohibits employees who participate in any equity-based plan from entering into any transaction in relation to unvested securities which would have the effect of limiting the economic risk of an unvested security. 1 S Sargent commenced as Non-Executive Director on 4 August 2016. 2 P Warne ceased as Non-Executive Director on 14 November 2016. 46 OFX Group Limited Annual Report 2018 Remuneration Report 11. Outlook The Group will continue to review and adjust its reward mechanisms annually, as required, to ensure that its long-term growth aspirations are met. This Directors’ Report is made in accordance with a resolution of the Directors. On behalf of the Board 22 May 2018 Steven Sargent Chairman Skander Malcolm Chief Executive Officer and Managing Director OFX Group Limited Annual Report 2018 Auditor’s Independence Declaration 47 Auditor’s Independence Declaration Auditor’s Independence Declaration As lead auditor for the audit of OFX Group Limited for the year ended 31 March 2018, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of OFX Group Limited and the entities it controlled during the period. CPG Cooper Partner PricewaterhouseCoopers Sydney 22 May 2018 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 48 OFX Group Limited Annual Report 2018 Financial Statements Financial Statements Consolidated Statement of Comprehensive Income For the year ended 31 March 2018 Fee and trading income Fee and commission expense Net income Interest and other income Net operating income Employment expenses Promotional expenses Occupancy expenses1,2 Other operating expenses1,2 Earnings before interest expense, tax, depreciation and amortisation (EBITDA)1,2 Depreciation and amortisation expense1,2 Net profit before income tax Income tax expense Net profit attributable to ordinary shareholders Other comprehensive income Other comprehensive income that may be reclassified to profit and loss Exchange differences on translation of foreign operations, net of hedging Total comprehensive income attributable to ordinary shareholders Earnings per share attributable to ordinary shareholders: Basic Diluted Notes 2 2 2 3 3 3 3 4 6 6 2018 $’000 119,022 (10,662) 2017 $’000 114,063 (10,117) 108,360 103,946 1,563 109,923 (46,104) (16,127) (4,018) (13,849) 29,825 (4,919) 24,906 (6,219) 1,169 105,115 (42,772) (16,303) (4,091) (14,197) 27,752 (3,765) 23,987 (4,391) 18,687 19,596 (29) (65) 18,658 19,531 Cents 7.79 7.69 Cents 8.17 8.05 The above Consolidated Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 1 Refer to ’Changes to presentation’ on page 53. 2 Comparative information has been restated to conform with presentation in the current year. Financial Statements Consolidated Statement of Financial Position For the year ended 31 March 2018 Assets Cash held for own use1,2 Cash held for settlement of client liabilities1,2 Deposits due from financial institutions Derivative financial assets Prepayments Other receivables2 Property, plant and equipment Intangible assets Prepaid current income tax Deferred income tax assets Total assets Liabilities Client liabilities1,2 Derivative financial liabilities Other creditors and accruals Provisions Current tax liabilities Deferred income tax liabilities Total liabilities Net assets Equity Ordinary share capital Retained earnings Foreign currency translation reserve Share-based payments reserve Total equity attributable to shareholders OFX Group Limited Annual Report 2018 Financial Statements 49 Notes 2018 $’000 2017 $’000 7 7 7 9 8 12 13 5 7, 8 9 14 15 5 18 47,252 155,826 10,189 12,930 2,874 1,882 3,874 7,246 – 215 32,535 115,924 10,114 14,154 2,402 2,133 5,473 5,456 2,238 219 242,288 190,648 156,867 10,690 6,133 4,562 944 98 179,294 62,994 24,360 37,608 184 842 62,994 116,894 7,351 7,047 1,763 – 120 133,175 57,473 24,360 31,636 213 1,264 57,473 The above Consolidated Statement of Financial Position should be read in conjunction with the accompanying notes. 1 Refer to ’Changes to presentation’ on page 53. 2 Comparative information has been restated to conform with presentation in the current year. 50 OFX Group Limited Annual Report 2018 Financial Statements Financial Statements Consolidated Statement of Changes in Equity For the year ended 31 March 2018 Balance at 1 April 2016 Net profit Other comprehensive income Total comprehensive income Transactions with shareholders in their capacity as shareholders: Dividends paid Expenses related to share-based payments Balance at 31 March 2017 Net profit Other comprehensive income Total comprehensive income Transactions with shareholders in their capacity as shareholders: Dividends paid Expenses related to share-based payments Notes Ordinary share capital $’000 24,360 – – – – – – 24,360 – – – – – – 19 22 19 22 Balance at 31 March 2018 24,360 Foreign currency translation reserve $’000 278 – (65) (65) – – – 213 – (29) (29) – – – 184 Share-based payments reserve $’000 2,298 – – – – (1,034) (1,034) 1,264 – – – – (422) (422) 842 Total equity $’000 53,229 19,596 (65) 19,531 (14,253) (1,034) (15,287) 57,473 18,687 (29) 18,658 (12,715) (422) (13,137) 62,994 Retained earnings $’000 26,293 19,596 – 19,596 (14,253) – (14,253) 31,636 18,687 – 18,687 (12,715) – (12,715) 37,608 The above Consolidated Statement of Changes in Equity should be read in conjunction with the accompanying notes. OFX Group Limited Annual Report 2018 Financial Statements 51 Financial Statements Consolidated Statement of Cash Flows For the year ended 31 March 2018 Cash flows from operating activities1 Profit from ordinary activities after income tax Adjustments to profit from ordinary activities Depreciation and amortisation Movement in share-based payment reserve Foreign exchange revaluation Fair value changes on financial assets and liabilities through profit/(loss) Movement in foreign currency translation reserve Operating cash flow before changes in working capital Changes in assets and liabilities (Increase) in prepayments and other receivables Decrease in deferred tax assets (Increase)/decrease in cash held for client liabilities Increase/(decrease) in amounts due to clients (Decrease)/increase in accrued charges and creditors (Decrease)/increase in deferred tax liabilities Increase/(decrease) in provisions Increase/(decrease) in tax provision Net cash flows from operating activities1 Cash flows from investing activities Payments for property, plant and equipment Payments for intangible assets Cash deposited with financial institutions Net cash flows from investing activities Cash flows from financing activities Dividends paid Net cash flows from financing activities Net increase in cash held for own use Cash held for own use at the beginning of the year Exchange gains on cash held for own use Cash held for own use at the end of the year Including cash held for settlement of client liabilities (classified as operating activities) Cash held for settlement of client liabilities at the beginning of the year Cash inflows from clients Cash outflows to clients Exchange gain on cash held for client liabilities Cash held for settlement of client liabilities at the end of the year Total cash and cash equivalents Notes 2018 $’000 2017 $’000 18,687 19,596 4,919 (422) (665) 4,563 (29) 3,765 (1,034) (1,706) (123) (65) 27,053 20,433 (221) 4 (39,902) 39,973 (914) (22) 2,799 3,182 (639) 1,091 8,903 (8,627) 2,293 98 (704) (293) 31,952 22,555 (243) (4,867) (75) (5,185) (12,715) (12,715) 14,052 32,535 665 47,252 (821) (4,601) 10,688 5,266 (14,253) (14,253) 13,568 17,261 1,706 32,535 115,924 124,827 21,160,084 19,368,113 (21,122,033) (19,377,341) 1,851 155,826 203,078 325 115,924 148,459 19 7 7 7 The above Consolidated Statement of Cash Flows should be read in conjunction with the accompanying notes. 1 Refer to ’Changes to presentation’ on page 53. 52 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements About this Report For the year ended 31 March 2018 ABOUT THIS REPORT OFX Group Limited (the Company) is a company limited by shares, incorporated and domiciled in Australia. Its shares are publicly traded on the Australian Securities Exchange. This financial report presents the consolidated performance, position and cash flows of OFX Group Limited and its subsidiaries (the Group). The Group is for-profit for the purpose of preparing the financial statements. The accounting policies explained in this report are consistent for all the periods presented unless otherwise stated. The Directors have the power to amend and reissue the financial report. The financial report is a general purpose financial report which: • Is prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001 (Cth). Consequently, this financial report has also been prepared in accordance with and complies with IFRS as issued by the IASB. • Has been prepared under the historical cost convention except for derivatives and share-based payments which are measured at fair value. • Presents reclassified comparative information where required for consistency with the current year’s presentation. • Is presented in Australian dollars with all values rounded to the nearest thousand dollars in accordance with ASIC Legislative Instrument 2016/191 unless otherwise indicated. No new Accounting Standards or amendments to Accounting Standards became effective in the current year and had a material impact on the Group. Refer to Note 26 for further details. Critical estimates and judgements Preparing the financial report requires judgement in applying the accounting policies and calculating certain critical accounting estimates. The Group’s critical accounting estimates and significant judgements are: • Fair value of financial instruments (Note 10). • Share-based payments (Note 22). Basis of consolidation The consolidated financial report comprises the assets and liabilities of all subsidiaries of OFX Group Limited (‘the Group’) as at 31 March 2018 and the results of all subsidiaries for the year then ended. A list of controlled entities at year end is contained in Note 21. Subsidiaries are all those entities over which the Group has the power to direct the relevant activities, exposure to significant variable returns and the ability to utilise power to affect the Group’s own returns. The determination of control is based on current facts and circumstances and is continuously assessed. 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. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Investments in subsidiaries are accounted for at cost in the separate financial statements of Ozforex Limited in accordance with AASB 127 Separate Financial Statements. 1 Refer to ’Changes in Presentation’ on page 53. OFX Group Limited Annual Report 2018 53 Notes to the Financial Statements Notes to the Financial Statements About this Report For the year ended 31 March 2018 Functional and presentation currency Foreign operations are measured in the Group’s financial statements using the currency of the primary economic environment in which the foreign operation operates (the functional currency). The functional currencies of overseas subsidiaries are listed in Note 21. The Group’s financial statements are presented in Australian dollars, which is the Group’s functional and presentation currency. Exchange differences arising on translation of investments in foreign controlled entities that do not have an Australian dollar functional currency are recognised in the foreign currency translation reserve. GST Revenues, expenses and fixed assets are recognised net of the associated GST, unless the GST is not recoverable from the relevant taxation authority. Receivables and creditors are presented including the GST. The net GST recoverable from, or payable to, each taxation authority is presented in other receivables or other payables. Cash flows are presented including GST. The GST components of the cash flows arising from investing or financing activities which are recoverable from, or payable to, the taxation authority, are presented as operating cash flows. Changes to presentation The Consolidated Statement of Comprehensive Income • Includes recognition of expenses classified by nature in the current period. This approach is determined to most accurately reflect the relevant components of the Group’s financial performance. Expenses have previously been classified by function. • Has been presented with an additional subtotal demonstrating earnings before interest expense, taxation, depreciation and amortisation (EBITDA). EBITDA is the measure used by the Group internally to evaluate performance, establish strategic goals and to allocate resources. EBITDA is a non-audited financial measure commonly used to benchmark performance. The Consolidated Statement of Financial Position Current period Cash and cash equivalents balances have been updated to present separately: • Cash balances held for own use; and • Balances held for subsequent settlement of client liabilities. This has been determined most effective to the user’s understanding of the Group’s own cash balances compared with cash balances held to settle client liabilities. Cash and cash equivalent balances were previously presented as a single balance combining cash balances held for own use and balances held for subsequent settlement of client liabilities. The Consolidated Statement of Cash Flows • Has been presented applying the indirect method in the current period. Profit has been adjusted for non-cash items, deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows. • This is determined most appropriate to demonstrate the cash flow of the Group’s cash held for own use and demonstrate separately the cash flow of client funds. The Consolidated Statement of Cash Flows was previously. presented applying the direct method. 54 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Segment Information For the year ended 31 March 2018 NOTE 1. SEGMENT INFORMATION The operating segments presented below reflect how senior management and the board of directors (the chief operating decision makers) allocate resources to the segments and review their performance. The chief operating decision makers examine the performance both from a product and geographic perspective and have identified five reportable segments. The two products are international payment services and international payment solutions: • International payment services are monitored by geographic region (based on client location) and provide bank to bank currency transfers servicing businesses and consumers. • International payment solutions are monitored globally and provide strategic partners with a package which includes: OFX IT platform; client service; compliance sophistication; banking relationships; and payments capabilities. Segment fee and trading income – 2018 v 2017 ($’000)1 2018 2017 International payment services 0% $61,247 $61,429 4% $119,022 $114,063 5% 12% $20,718 $19,812 $22,421 $20,084 68% $6,008 $3,577 -6% $8,628 $9,161 A&NZ Europe North America Asia International payment solutions Total Segment EBITDA – 2018 v 2017 ($’000)1 International payment services 7% $29,825 $27,752 2018 2017 28% $18,193 $14,261 -13% $4,997 $5,749 -46% $3,801 $2,062 93% $1,573 $816 -4% $3,000 $3,125 A&NZ Europe North America Asia International payment solutions Total 1 Comparative information has been restated to conform with presentation in the current year. OFX Group Limited Annual Report 2018 55 Notes to the Financial Statements Notes to the Financial Statements Segment Information For the year ended 31 March 2018 Group EBITDA1 Depreciation and amortisation Net profit before income tax Income tax expense Net profit 2018 Segment assets Intergroup eliminations Deferred tax assets Total assets Segment liabilities Intergroup eliminations Deferred tax liabilities Total liabilities 2017 Segment assets1 Intergroup eliminations Deferred tax assets Total assets Segment liabilities1 Intergroup eliminations Deferred tax liabilities Total liabilities 2018 $’000 29,825 (4,919) 24,906 (6,219) 18,687 2017 $’000 27,752 (3,765) 23,987 (4,391) 19,596 International payment solutions $’000 Consolidated $’000 – – – – – – – – 267,977 (25,904) 215 242,288 (205,100) 25,904 (98) (179,294) 198,665 (8,236) 219 190,648 (141,291) 8,236 (120) (133,175) International payment services Australia & New Zealand $’000 161,832 Europe $’000 32,546 North America $’000 56,049 (4,937) (12,081) – Asia $’000 17,550 (8,886) (118,444) (28,144) (47,883) (10,629) – – 25,904 – 134,155 (1,934) 21,915 (6,302) 30,823 11,772 – – (92,424) (19,277) (24,197) 3 – 5,559 (5,393) 2,674 1 Comparative information has been restated to conform with presentation in the current year. 56 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Results for the Year For the year ended 31 March 2018 NOTE 2. REVENUE Fee and trading income Fee and trading income consists of the foreign currency transaction margins, fees charged on low-value transactions and changes in exchange rates between the time when a client rate is agreed and a subsequent hedge transaction is entered into by the Group. Fee and trading income is presented inclusive of realised and unrealised income earned from the sale of foreign currency contracts to clients. Fee and commission expense Fee and commission expenses are transactional banking fees and commissions paid to strategic and referral partners. Interest income Interest income is recognised using the effective interest rate method, which spreads fees and costs associated with an interest bearing receivable across its life. Realised margin and fees on foreign exchange contracts Unrealised losses on foreign exchange contracts Revaluation of foreign exchange assets and liabilities Fee and trading income Fee and commission expense Net income Interest and other income Net operating income 2018 $’000 122,501 (4,204) 725 2017 $’000 112,279 (79) 1,863 119,022 114,063 (10,662) 108,360 (10,117) 103,946 1,563 109,923 1,169 105,115 OFX Group Limited Annual Report 2018 57 Notes to the Financial Statements Notes to the Financial Statements Results for the Year For the year ended 31 March 2018 NOTE 3. EXPENSES Refer to Note 22 for details of the Group’s share-based payments, Note 15 for details of the employee provisions and Notes 12 and 13 for details on property, plant and equipment and intangibles. Employment expenses Salaries and related costs including commissions Employee short-term incentives Share-based payments Defined contribution plan Total employee compensation expense Other employment expenses (on-costs, recruitment and staff training) Total employment expenses Occupancy expenses Operating lease rentals Other occupancy expenses Total occupancy expenses Other operating expenses Professional fees Information technology Communication Compliance Insurance Travel Bad and doubtful debts Non-recoverable GST Other expenses Total other operating expenses Depreciation and amortisation Depreciation of furniture, fittings and leasehold improvements Depreciation of computer equipment Amortisation of website and mobile applications Amortisation of software Total depreciation and amortisation 2018 $’000 2017 $’000 (38,657) (38,144) (2,833) 202 (35) 229 (2,283) (2,250) (43,571) (40,200) (2,533) (46,104) (2,572) (42,772) (2,652) (1,366) (4,018) (2,047) (5,177) (665) (1,995) (822) (862) (663) (224) (1,394) (13,849) (1,261) (581) (2,295) (782) (4,919) (2,988) (1,103) (4,091) (2,403) (4,794) (701) (2,158) (841) (1,058) (484) (285) (1,473) (14,197) (1,325) (535) (1,536) (369) (3,765) 58 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Results for the Year For the year ended 31 March 2018 NOTE 4. INCOME TAXES Income tax expense is the tax payable on the current period’s taxable income adjusted for changes in deferred income tax. Changes in deferred tax assets and liabilities are due to temporary timing differences and to unused tax losses. Current income tax is based on tax laws enacted or substantively enacted in each jurisdiction of the Group’s operations at the end of the reporting period. If required, provisions are established for the amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method at the tax rates expected to apply when the assets are recovered or the liabilities are settled. Deferred tax assets and liabilities arise on temporary differences between the tax base of assets and liabilities and their carrying amounts. In addition, deferred tax assets may be recognised due to unused tax losses. Amounts are only recognised to the extent it is probable future taxable amounts will be available to use those temporary differences or tax losses. Deferred tax assets and liabilities are offset when: • There is a legally enforceable right to offset current tax assets and liabilities; and • The deferred tax balances relate to the same taxation authority. Current tax assets and liabilities are offset when: • There is a legally enforceable right to offset; and • There is an intention to settle on a net basis. Current and deferred taxes attributable to amounts recognised directly in equity are also recognised directly in equity. Tax consolidation The tax consolidation legislation was adopted by the Group as of 15 October 2013. As a consequence, Ozforex Limited and its wholly-owned Australian controlled entities are taxed as a single entity. The Group has a tax year ending on 30 September. Offshore Banking Unit Ozforex Limited, a subsidiary of OFX Group Limited, was declared an Offshore Banking Unit (OBU) on 10 October 2015. In accordance with Australian income tax legislation, assessable offshore banking (OB) income derived by the OBU is taxable at a concessional rate of 10%. OB income includes revenue earned on foreign exchange transactions with offshore counterparties, excluding those with any AUD component. a) Income tax expense Current tax expense Adjustments to current tax of prior years1 Total current tax expense Deferred income tax (benefit)/expense Total income tax expense 2018 $’000 6,237 – 6,237 (18) 6,219 2017 $’000 3,782 (580) 3,202 1,189 4,391 1 The prior period tax adjustment reflected in the prior year relates to OBU transactions included within the period from 10 October 2015 to 31 March 2016. OFX Group Limited Annual Report 2018 59 Notes to the Financial Statements Notes to the Financial Statements Results for the Year For the year ended 31 March 2018 b) Reconciliation of income tax expense to prima facie tax payable Net profit before income tax Prima facie income tax expense at 30% (2017: 30%) Decrease in tax expense as a result of operating as an OBU in the current period Decrease in tax expense as a result of operating as an OBU in a prior period1 Research and Development tax credits Other items Total income tax expense NOTE 5. DEFERRED INCOME TAX ASSETS/(LIABILITIES) Deferred income tax assets The balance comprises temporary differences attributable to: Provisions and accrued expenses IPO expenditure deemed capital for taxation Tax credit carry forward Financial instruments Property, plant and equipment Total deferred income tax assets – before offset Offset deferred income tax liabilities (refer Note 4 for accounting policy) Net deferred income tax assets – after offset Deferred income tax liabilities Tax credit carry forward Financial instruments Property, plant and equipment Total deferred income tax liabilities – before offset Offset deferred income tax assets (refer Note 4 for accounting policy) Net deferred income tax liabilities – after offset 2018 $’000 24,906 7,472 (995) – (149) (109) 6,219 2017 $’000 23,987 7,196 (1,060) (580) (817) (348) 4,391 2018 $’000 2017 $’000 1,241 348 174 – 13 1,776 (1,561) 215 (966) (635) (58) (1,659) 1,561 (98) 951 1,043 239 3 – 2,236 (2,017) 219 – (2,004) (133) (2,137) 2,017 (120) Net deferred income tax assets 117 99 1 The prior period tax adjustment reflected in the prior year relates to OBU transactions included within the period from 10 October 2015 to 31 March 2016. 60 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Results for the Year For the year ended 31 March 2018 NOTE 6. EARNINGS PER SHARE Earnings per share Basic earnings per share shows the profit attributable to each ordinary share. It is calculated as the net profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares in each year. Diluted earnings per share shows the profit attributable to each ordinary share if all the dilutive potential ordinary shares had been ordinary shares. There are no discontinued operations of the Group. (a) Earnings per share Basic Diluted (b) Earnings Net profit attributable to ordinary shareholders used to calculate basic and diluted earnings per share 2018 Cents 7.79 7.69 2017 Cents 8.17 8.05 $’000 $’000 18,687 19,596 (c) Weighted average number of shares Weighted average number of ordinary shares used to calculate basic earnings per share 240,000,000 240,000,000 Dilutive potential ordinary shares 3,032,889 3,465,211 Weighted average number of ordinary shares used as the denominator in calculating diluted earnings per share 243,032,889 243,465,211 OFX Group Limited Annual Report 2018 61 Notes to the Financial Statements Notes to the Financial Statements Financial Assets and Liabilities For the year ended 31 March 2018 NOTE 7. CASH AND CASH EQUIVALENTS, CLIENT LIABILITIES, AND DEPOSITS DUE FROM FINANCIAL INSTITUTIONS Cash and cash equivalents includes cash on hand and deposits held at short call with financial institutions with an original maturity of less than three months (together, ’cash held for own use’) and cash held for subsequent settlement of client liabilities. Cash held for subsequent settlement of client liabilities represents transactions in progress where amounts have been received by the Group but the corresponding payment has not yet occurred. They are unsecured and short-term in nature and are recognised initially at their fair value. Client liabilities are initially measured at amortised cost using the effective interest method and are shown in cash net of client receivable balances which are recognised in other receivables (refer Note 8). Gross client liabilities total $156,867,000 as at 31 March 2018 (2017: $116,894,000). Deposits due from financial institutions are primarily short-term deposits with an original maturity of greater than three months, but less than 12 months and are accounted for at the gross value of the outstanding balance and are held at amortised cost. Cash held for own use Cash held for settlement of client liabilities Cash and cash equivalents Deposits due from financial institutions Cash held for subsequent settlement of client liabilities Net cash held1 2018 $’000 47,252 155,826 203,078 2017 $’000 32,535 115,924 148,459 10,189 10,114 (155,826) (115,924) 57,441 42,649 NOTE 8. OTHER RECEIVABLES (CURRENT ASSETS) Other receivables includes client receivables, GST receivables and other debtors. Other debtors includes rental deposits and interest receivable. Client receivables includes amounts settled on behalf of OFX Group clients that are yet to be received. All receivables are recognised at amortised cost, less any impairment. Interest is recognised in the Statement of Comprehensive Income using the effective interest method. Client receivables GST receivables Other debtors Other receivables 2018 $’000 1,041 283 558 1,882 2017 $’000 970 474 689 2,133 1 Includes $28,552,027 (2017: $21,413,469) which is held as collateral by counterparties for over the counter derivative transactions. 62 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Financial Assets and Liabilities For the year ended 31 March 2018 NOTE 9. DERIVATIVE FINANCIAL INSTRUMENTS AT FAIR VALUE THROUGH PROFIT AND LOSS Derivative instruments entered into by the Group include foreign exchange forward contracts. They are principally used to offset foreign currency contracts with clients and as hedges over the group’s net investment in foreign operations. Derivatives are recognised at trade date and initially and subsequently measured at fair value. Movements in the carrying amounts of derivatives are recognised in net fee and trading income within the Consolidated Statement of Comprehensive Income. Value of forward contracts – assets Value of forward contracts – liabilities Net financial instruments at fair value 2018 $’000 12,930 (10,690) 2,240 2017 $’000 14,154 (7,351) 6,803 NOTE 10. FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES OFX Group has categorised its financial instruments that are either measured in the Statement of Financial Position at fair value or of which the fair value is disclosed, into a three level hierarchy based on the priority of the inputs to the valuation. A financial instrument’s categorisation within the valuation hierarchy is based on the lowest level input that is significant to the fair value measurement. Cash and cash equivalents, amounts due from financial institutions, client liabilities, creditors and receivables are excluded from the fair value hierarchy as these instruments are held at amortised cost. Their fair value approximates the carrying value as they are short-term in nature. Level Instruments Valuation process Level 1 - Traded in active markets and fair value is based on recent unadjusted quoted prices. Level 2 - Not actively traded and fair value is based on valuation techniques which maximise the use of observable market prices. Level 3 – Not actively traded and fair value is based on at least one input which is not observable in the market due to illiquidity or complexity. None – the Group does not hold any of these instruments. Not applicable. Over the counter derivatives. Foreign currency forward contract valuations are based on observable spot exchange rates and the yield curves of the respective currencies. None – the Group does not hold any of these instruments. Not applicable. OFX Group Limited Annual Report 2018 63 Notes to the Financial Statements Notes to the Financial Statements Financial Assets and Liabilities For the year ended 31 March 2018 NOTE 11. FINANCIAL RISK MANAGEMENT Risk management The Group is exposed to the following risks, and manages this in the following ways: Type of risk How the risk is managed Market risk – Market risk is comprised of both foreign currency risk and interest rate risk. Foreign currency risk – Arises from exposure to changes in foreign exchange rates between the time of agreeing rates with a client and either a corresponding hedge being taken out with a counterparty or an international payment settlement. Settlement typically occurs between 12 and 24 hours after the deal is entered or up to 12 months later for forward contracts with clients. The Group is also exposed to the interest rate risk embedded in forward contracts offered to its clients to lock in exchange rates up to 12 months in advance. Interest rate risk – Exposure to non-traded interest rate risk results from cash and term deposits held in different currencies. Credit risk – The risk that creditors (clients and financial institutions) will not make payments on their receivables and derivatives respectively, when they fall due. To manage the movement in foreign exchange rates, the Group aggregates transactions and nets out buy transactions against sell transactions. The Group then enters into forward foreign exchange hedging contracts with counterparty banks once exposure to a single currency reaches or exceeds a defined threshold. Settlement of client liabilities between 12 and 24 hours of receipt of client cash results in low exposure to non-traded interest rate risk. The Group typically does not payout client deals until associated funds have been received. In exceptional circumstances, senior management have the discretion to authorise same day payments, which can result in funds being paid prior to clearance of client funds. These transactions would only be approved for clients with a low risk of default and are pro-actively monitored to ensure timely settlement. For forward deals part payments are required to be made by clients. Active monitoring of client balances ensures that adequate collateral is held. The Group sets credit limits and obtains collateral with well-rated banking couterparties as security (where appropriate). Liquidity risk – The risk that the Group is unable to meet the obligations of its financial liabilities when they are due. Regular forecasts of the Group’s liquidity requirements. Surplus cash is maintained in highly liquid instruments. Continuous review of currency requirements in operating jurisdictions. Active maintenance of cash balances in currencies and geographical locations necessary to fund these requirements. Risk is managed on a globally consolidated basis for the Group. Risks in subsidiaries are subject to the same risk acceptance policies as the parent entity. 64 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Financial Assets and Liabilities For the year ended 31 March 2018 Market risk The main component of the Group’s market risk is exposure to foreign exchange rate fluctuations. The Group’s sensitivity to foreign exchange fluctuations risk by major currency held on the Consolidated Statement of Financial Position is shown below: Movement in exchange rate (basis points)1 +/-500 +/-500 +/-500 +/-500 31 March 2018 31 March 2017 CAD EUR GBP NZD SGD USD Other Total Sensitivity of profit before tax Sensitivity of equity after tax Sensitivity of profit before tax Sensitivity of equity after tax $’000 $’000 $’000 $’000 (15) (15) 6 (51) (1) 72 37 33 (11) 159 (14) (43) (4) (174) 60 (27) – 24 83 (1) 2 (58) 15 65 3 36 32 4 (3) (113) 79 38 Interest rate risk The Group’s sensitivity to movements in interest rates is as follows. Movement in exchange rate (basis points)1 +/-500 +/-500 +/-500 +/-500 31 March 2018 31 March 2017 Sensitivity of profit before tax Sensitivity of equity after tax Sensitivity of profit before tax Sensitivity of equity after tax AUD CAD EUR GBP NZD SGD USD Other Total $’000 421 36 85 90 50 17 278 89 1,066 $’000 316 27 67 67 36 12 184 70 779 $’000 356 33 42 60 55 6 141 100 793 $’000 252 25 32 43 39 4 91 77 563 1 Impact of positive movement shown. The impact of a negative movement is the inverse. OFX Group Limited Annual Report 2018 65 Notes to the Financial Statements Notes to the Financial Statements Financial Assets and Liabilities For the year ended 31 March 2018 Credit risk Maximum exposure to credit risk and credit quality of financial assets The amounts shown represent the maximum exposure of the Group to credit risk at the end of the reporting period. This is equal to the carrying amount of each class of financial assets in the table below. The Group uses internal credit ratings to manage the credit quality of its financial assets. The Group’s financial assets held with financial institutions are investment grade (between Aaa-Baa3). There are no balances that are past due or impaired as at 31 March 2018 (2017: nil). Cash and cash equivalents Investment grade 203,078 148,459 Rating 2018 $’000 2017 $’000 Deposits due from financial institutions Derivative assets – with financial institutions Derivative assets – with clients Other receivables2 Total gross credit risk Credit risk exposure Investment grade Investment grade Unrated1 Unrated2 10,189 7,766 5,164 1,882 10,114 7,251 6,903 2,133 228,079 174,860 2018 $’000 2017 $’000 Financial Institutions Investment grade $221,033 Clients Other receivables Unrated $5,164 $1,882 Financial Institutions Investment grade $165,824 Clients Other receivables Unrated $6,903 $2,133 Credit risk exposure by geography 2018 $’000 A&NZ Asia Europe North America Other $109,834 $11,856 $37,945 $68,358 $86 2017 $’000 A&NZ Asia Europe North America Other $92,637 $16,553 $28,562 $37,033 $75 1 Unrated balances relate to amounts due from entities that are not graded by the Company or by a public ratings agency. 2 Comparative information has been restated to conform with presentation in the current year. 66 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Financial Assets and Liabilities For the year ended 31 March 2018 Liquidity risk Maturity profile of obligations The table below summarises the maturity profile of the Group’s financial liabilities as at 31 March 2018 based on contractual undiscounted repayment cash flows. Derivatives are included in the less than three months column at their fair value, as they are frequently settled in the short term. Liquidity risk on these items is not managed on the basis of contractual maturity, since they are not held for settlement according to such maturity and will frequently be settled in the short term at fair value. Derivatives designated in a hedging relationship are included according to their contractual maturity. On demand $’000 3 months or less $’000 3 to 12 months $’000 1 to 5 years $’000 Over 5 years $’000 Total $’000 2017 Other liabilities1 Derivative financial instruments Inflows (Outflows) Total 2018 (1,534) (118,541) – (349) – – 802,641 352,402 (791,098) (357,000) (1,534) (106,998) (4,595) 6,344 (6,488) (493) Other liabilities1 (1,618) (160,013) (944) (388) Derivative financial instruments Inflows (Outflows) Total – – 860,691 290,924 45,810 (860,348) (289,247) (45,590) (1,618) (159,670) 733 (168) – – – – – – – – (120,424) 1,161,387 (1,154,586) (113,623) (162,963) 1,197,425 (1,195,185) (160,723) 1 Excludes items that are not financial instruments and non-contractual accruals and provisions. OFX Group Limited Annual Report 2018 67 Notes to the Financial Statements Notes to the Financial Statements Other Assets and Liabilities For the year ended 31 March 2018 NOTE 12. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is measured at cost less accumulated depreciation and impairment losses. Assets are depreciated on a straight-line basis over their estimated useful lives, as follows: Asset class Furniture and fittings Leasehold improvements Computer equipment Year ended 31 March 2017 Cost Less accumulated depreciation Net carrying amount Movement Balance at 31 March 2016 Additions Depreciation Balance at 31 March 2017 Year ended 31 March 2018 Cost Less accumulated depreciation Net carrying amount Movement Balance at 31 March 2017 Additions Depreciation Balance at 31 March 2018 Useful life 5 years Up to 5 years 3 years Total 10,910 (5,437) 5,473 6,512 821 (1,860) 5,473 11,153 (7,279) 3,874 5,473 243 (1,842) 3,874 Furniture, fittings and leasehold improvements Computer equipment 7,459 (3,063) 4,396 5,581 140 (1,325) 4,396 7,488 (4,324) 3,164 4,396 29 (1,261) 3,164 3,451 (2,374) 1,077 931 681 (535) 1,077 3,665 (2,955) 710 1,077 214 (581) 710 68 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Other Assets and Liabilities For the year ended 31 March 2018 NOTE 13. INTANGIBLE ASSETS Costs directly incurred in acquiring and developing certain software are capitalised and amortised on a straight-line basis over the estimated useful life, three years. Costs incurred on software maintenance are expensed as incurred. Website and application $’000 Software $’000 Year ended 31 March 2017 Cost Less accumulated amortisation Net carrying amount Movement Balance at 31 March 2016 Additions Amortisation Balance at 31 March 2017 Year ended 31 March 2018 Cost1 Less accumulated amortisation2 Net carrying amount Movement Balance at 31 March 2017 Additions1 Amortisation2 Balance at 31 March 2018 5,908 (1,748) 4,160 2,307 3,389 (1,536) 4,160 8,090 (4,043) 4,047 4,160 2,182 (2,295) 4,047 NOTE 14. OTHER CREDITORS AND ACCRUALS (CURRENT LIABILITIES) Accrued charges and sundry liabilities Trade creditors Other liabilities Total other liabilities 2,328 (1,032) 1,296 453 1,212 (369) 1,296 5,013 (1,814) 3,199 1,296 2,685 (782) 3,199 2018 $’000 4,601 181 1,351 6,133 Total $’000 8,236 (2,780) 5,456 2,760 4,601 (1,905) 5,456 13,103 (5,857) 7,246 5,456 4,867 (3,077) 7,246 2017 $’000 4,430 1,130 1,487 7,047 1 Includes $2,424,000 internally generated intangible assets comprising $511,000 website and application, and $1,912,000 software. 2 Includes $167,000 amortisation of internally generated software. OFX Group Limited Annual Report 2018 69 Notes to the Financial Statements Notes to the Financial Statements Other Assets and Liabilities For the year ended 31 March 2018 NOTE 15. PROVISIONS Employee provisions The Group has two employee short term incentive plans which are accrued as a liability and expensed over the annual service period until they are paid: • The short term incentive plan for Executives and selected employees, which is based on annual Key Performance Indicators (KPIs) and comprises 15% to 50% of their Total Reward Remuneration (TRR). • The staff profit share scheme for all other staff, which is based on the Group’s earnings before tax growth and the individual employee’s performance. When the long service leave is not expected to be settled within 12 months of year end, the liabilities are measured as the present value of expected future payments using the projected unit credit method. Leasehold makegood provision The Group holds a provision for makegood costs anticipated to be incurred in respect of office leases in Australia, London, Hong Kong and Canada. The provision is being accrued on a straight-line basis over the lease term. Carrying amount at beginning of the period Additional provisions made Release of provisions Carrying amount at the end of the period Employee provisions Annual leave Short term incentives Long service leave Leasehold makegood 1,428 2,504 (2,514) 1,418 – 3,043 (388) 2,655 335 95 (79) 351 – 138 – 138 Total 1,763 5,780 (2,981) 4,562 All employee provisions are current liabilities apart from $199,559 (2017: $229,000) of long service leave which is non-current. All leasehold makegood provisions are non-current. NOTE 16. OPERATING LEASE COMMITMENTS The Group leases offices under non-cancellable operating leases with original terms expiring within one to seven years. The leases have various escalation and extension clauses. The Group has no other commitments. Within one year Between one and five years After more than five years Total operating lease commitments 2018 $’000 2,817 6,284 – 9,101 2017 $’000 2,754 7,665 1,407 11,826 70 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Capital Structure For the year ended 31 March 2018 NOTE 17. CAPITAL MANAGEMENT The Group’s capital management strategy is to maximise shareholder value by optimising the level and use of capital, defined as share capital plus reserves. The Group’s capital management objectives are to: • Support the Group’s business and operational requirements. • Meet externally imposed capital requirements. • Safeguard the Group’s ability to continue as a going concern. The Group has continued to meet its internal and externally imposed capital requirements this year and no breaches have occurred. NOTE 18. ORDINARY SHARE CAPITAL Ordinary shares are classified as equity and measured based on the proceeds from issuing the shares less the directly attributable incremental costs, net of tax. There are 240,000,000 fully paid ordinary shares (2017: 240,000,000). Ordinary shares entitle the holder to vote and to receive dividends and the proceeds of the Company if it is liquidated in proportion to the number of shares held. There are 3,303,088 (2017: 1,933,218) restricted ordinary shares issued to KMP in connection with the ESL Plan. Refer to Note 22 for further information. NOTE 19. DIVIDENDS Dividends are recognised as a liability and a reduction to retained earnings when declared. All dividends recognised in the year were fully franked (2017: all). Final dividend from the preceding year $0.029 (2017: $0.031) per share Interim dividend $0.024 (2017: $0.028) per share Dividend withholding tax Total dividends recognised and paid 2018 $’000 (6,960) (5,755) – 2017 $’000 (7,440) (6,720) (93) (12,715) (14,253) On 22 May 2018, the Board determined a dividend of $0.03 per share ($7,296,000) as the final dividend for 2018. This dividend was determined after 31 March 2018 and so is not reflected in this financial report. As the Company is a holding company with no trading profits, this dividend will be funded through the profits of the subsidiaries. Ex-dividend date Record date Payment date Franked dividends Franking credits available for subsequent financial years based on a tax rate of 30% (2017: 30%) 7 June 2018 8 June 2018 22 June 2018 2018 $’000 3,696 2017 $’000 6,972 The above amounts represent the balance of the franking account as at the end of the financial period, adjusted for the franking credits that will arise from paying the current tax liability, but before taking account of the final declared dividend for 2018. OFX Group Limited Annual Report 2018 71 Notes to the Financial Statements Notes to the Financial Statements Other Items For the year ended 31 March 2018 NOTE 20. EVENTS OCCURRING AFTER BALANCE SHEET DATE Other than the dividends presented in Note 19, there were no other material post balance sheet events occurring after the reporting date requiring disclosure in these financial statements. NOTE 21. RELATED PARTY INFORMATION Subsidiaries The following entities are wholly-owned subsidiaries of the Group and all have a 31 March year end: Entity Country of Incorporation Functional currency CanadianForex Limited OzForex (HK) Limited OzForex Limited OFX Australia Pty Limited OFX Group Pty Limited OFX (SNG) PTE. Limited NZForex Limited UKForex Limited USForex Incorporated Canada Hong Kong Australia Australia Australia Singapore New Zealand United Kingdom United States CAD HKD AUD AUD AUD SGD NZD GBP USD NOTE 22. SHARE-BASED PAYMENTS The Group has two employee share based payment plans, the Legacy LTI Plan and the Executive Share Plan (ESP), which are both equity-settled. The nature of the issuances under the plans are listed below: Issuance Description ESP – Share loan Legacy LTI Plan Performance rights Service rights Share options Executives are provided with an interest free, non-recourse loan from the Group for the sole purpose of acquiring shares in the Company. Executives may not deal with the shares while the loan remains outstanding and any dividends paid on the shares are applied (on an after-tax basis) towards repaying the loan. Executives are entitled to exercise the voting rights attached to the shares from the date of allocation. If the Executive leaves the Group within the vesting period the shares allocated are returned to the Group, subject to discretion retained by the Directors. Performance rights are issued to reward employees, including Executives, based on the Group’s performance. The performance rights vest based on performance hurdles as set by the Board at the time of issuance. Performance rights are granted for no cost and are settled in shares on a one-for-one basis. Service rights are issued to employees at the discretion of the Board. The service rights vesting condition is ongoing employment at the vesting date. There are no performance hurdles. Service rights are granted for no cost and are settled in shares on a one-for-one basis. Share options are issued at the discretion of the Board. Share options vesting condition is ongoing employment at the vesting date. There are no performance hurdles. Share options are subject to an exercise price and are settled in shares on a one-for-one basis. For details on the vesting conditions of share issuances, refer to pages 40 to 42 in the Remuneration Report. 72 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Other Items For the year ended 31 March 2018 The share-based payment expense/(income) within employee benefits expenses is as follows: Legacy LTI Plan – Performance rights Legacy LTI Plan – Service rights Legacy LTI Plan - Share options ESP – Share loan STI – Performance rights Total share-based payment expense 2018 $ 2017 $ (731,642) (888,290) 16,192 30,936 192,002 291,008 382,638 18,484 258,167 – (201,504) (229,001) Accounting for share based payments The fair value determined at the grant date of the award is recognised as a share-based payment expense in the income statement with an offsetting increase in equity within share based payments reserve over the relevant performance period. The expense recognised is reduced to take account of the expense attributable to participating employees who do not remain in the employment of the Group throughout the vesting period. ESP The ESP was established to incentivise Executives to generate shareholder wealth. Detailed remuneration disclosures are provided in the Remuneration Report section of the Directors’ Report. Under the ESP, eligible Executives are provided with an interest free, non-recourse loan from the Group for the sole purpose of acquiring shares in the Company. Executives may not deal with the shares while the loan remains outstanding and any dividends paid on the shares are applied (on an after-tax basis) towards repaying the loan. Executives are entitled to exercise the voting rights attached to the shares from the date of allocation. If the Executive leaves the Group within the vesting period, the shares allocated are returned to the Group, subject to discretion retained by the Directors. The Board has implemented a gateway level of minimum performance for the ESP below which no benefit accrues, being a Board determined EPS CAGR over a three, four and five-year period. Calculated from the 31 March preceding the grant date. The gateway for the unvested plans is 15% for the 2016 award. This gateway is the minimum level of acceptable performance for any of the ESP shares to vest. Where the gateway EPS level of performance is met, there is a target measure for two performance hurdles, NOI CAGR (with a 50% weighting) and EPS CAGR (with a 50% weighting). The Board has discretion to forgive part of the loan repayment. Shares issued/allocated under the ESP are accounted for as options and as such the amounts receivable from employees in relation to these loans are not recognised in the financial statements. Settlement of share loans upon vesting are recognised as contributed equity. The options are externally measured at fair value at the date of grant using the Black-Scholes option pricing model. This valuation model generates possible future share prices based on similar assumptions that underpin relevant option pricing models to calculate the fair value (as at grant date) of options granted. Executives have two years from the vesting date to repay the loan and therefore exercise the options. The assumptions underlying the options’ valuations issued during the year are outlined in the table below. OFX Group Limited Annual Report 2018 73 Notes to the Financial Statements Notes to the Financial Statements Other Items For the year ended 31 March 2018 Performance period (years) 3 Vesting date 7 June 2021 Grant date share price Fair value at grant date Dividend yield Risk free interest rate Share price volatility $1.75 $0.65 – 2.37% 40% Short Term Incentive performance rights The fair value of the performance rights is determined using an option pricing model with the following inputs: Grant date Vesting date Grant date share price Fair value at grant date Expected future dividends Discount for lack of marketability Risk free interest rate Share price volatility To be determined 1 year after grant date $1.68 $0.96 $0.05 2.00% 2.00% 40% The fair value determined at the grant date of the award is recognised as a share based payment expense in the income statement with an offsetting increase in equity over the relevant performance period. The expense recognised is reduced to take account of the expense attributable to participating employees who do not remain in the employment of the Group throughout the vesting period. Legacy LTI Plan Performance rights There were no new issuances of performance rights under the Legacy LTI Plan during the year ended 31 March 2018. There were no cancellations during the year ended 31 March 2018. Service rights There were no new issuances of service rights under the Legacy LTI Plan during the year ended 31 March 2018. There were no cancellations during the year ended 31 March 2018. Share options There were no share options issued during the year ended 31 March 2018. Share-based payments outstanding Legacy LTI Plan – Performance rights Legacy LTI Plan – Service rights Legacy LTI Plan – Share options ESP – Share loan STI – Performance rights Balance at start of the year 1,548,002 240,824 205,193 Granted during the year Exercised during the year Forfeited during the year Balance at end of the year – – – – (799,666) 748,336 (158,179) (82,645) – – – – – 205,193 (1,000,000) 3,303,088 – 409,796 1,933,218 2,369,870 – 409,796 74 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Other Items For the year ended 31 March 2018 NOTE 23. KEY MANAGEMENT PERSONNEL In accordance with the requirements of AASB 124 Related Party Disclosures, the KMP include Non-Executive Directors and members of the Group Executive Team who have authority and responsibility for planning, directing and controlling the activities of OFX Group Limited. A summary of KMP compensation is set out in the table below. Key management personnel remuneration Remuneration Short-term employee benefits Post-employment benefits Termination payments Long-term employee benefits Share-based payments Total remuneration paid to key management personnel Detailed remuneration disclosures of individual KMP are provided in the Remuneration Report. 2018 $ 2017 $ 2,858,126 2,194,078 138,765 – (34,793) 286,488 175,197 714,729 10,266 296,014 3,240,586 3,390,284 Share holdings The total number of shares in the Company held during the year by the Directors and other KMP, including their personal related parties, are set out below. Number of options and rights for fully paid ordinary shares Number of fully paid ordinary shares Number of restricted ordinary shares 2018 Number 953,529 698,099 2017 Number 970,734 572,500 3,303,088 1,933,218 Outstanding loans The total loan amount outstanding from KMP in relation to the ESP is $4,813,964. Other transactions with KMP All transactions with KMP are made on normal commercial terms and conditions and in the ordinary course of business. There were no transactions during the financial year nor balances owing to or from KMP as at 31 March 2018. In the normal course of business, the Group occasionally enters into transactions with various entities that have Directors in common with the Group. Transactions with these entities are made on commercial arm’s length terms and conditions. The relevant Directors do not participate in any decisions regarding these transactions. OFX Group Limited Annual Report 2018 75 Notes to the Financial Statements Notes to the Financial Statements Other Items For the year ended 31 March 2018 NOTE 24. REMUNERATION OF AUDITORS (a) PwC Australia Audit and review of financial statements Taxation services Other professional fees Total remuneration of PwC Australia (b) Non-PwC auditors Audit and review of financial reports Total remuneration of non-PwC auditors NOTE 25. PARENT ENTITY FINANCIAL INFORMATION Dividends are recognised as income when the Company becomes entitled to the dividend. The ultimate parent entity is OFX Group Limited. Summary financial information Statement of Financial Position Investment in subsidiaries Total assets Share based payments reserve Ordinary share capital Total equity 2018 $ 2017 $ 411,500 263,674 – 675,174 364,353 135,318 55,960 555,631 32,533 32,533 32,992 32,992 2018 $ 2017 $ 25,202 25,202 842 24,360 25,202 25,624 25,624 1,264 24,360 25,624 Profit or loss for the year (intercompany dividends received) 12,715 14,253 Total comprehensive income Earnings per share attributable to ordinary shareholders: Basic earnings per share Diluted earnings per share 12,715 14,253 Cents 5.30 5.23 Cents 5.94 5.89 76 OFX Group Limited Annual Report 2018 Notes to the Financial Statements Notes to the Financial Statements Other Items For the year ended 31 March 2018 NOTE 26. OTHER ACCOUNTING POLICIES New Accounting Standards No new Accounting Standards or amendments to Accounting Standards became effective in the current year and had a material impact on the Group. Amendments to Accounting Standards and Interpretations that are not yet effective The following standards, amendments to standards and interpretations are relevant to current operations. The effects of the following standards are expected to be material: Reference Description AASB 16 Leases AASB 16 sets out the principles for leases for both lessees and lessors. For lessees, the distinction between operating and finance leases has been removed and so almost all leases will be brought on balance sheet. Accordingly, from 1 April 2018, commitments for operating leases disclosed in Note 16 will be recognised on the Consolidated Statement of Financial Position. Based on a preliminary analysis, the effects of the following standards are not expected to be material: Reference Description AASB 15 Revenue from Contracts with Clients AASB 9 Financial Instruments AASB 15 is based on the principle that revenue is recognised when control transfers to a client – so the principle of control replaces the existing principle of risks and rewards. OFX is continuing to assess the impact of AASB15 and currently does not anticipate a significant impact on the Group’s financial statements on initial application. AASB 9 will replace AASB 139 Financial Instruments and primarily changes the accounting for: • Classification and measurement: Determined based on the business model for holding, and the cash flows of, financial assets. Financial assets can only be held at amortised cost if there is a business model to collect the contractual cash flows of the asset and those cash flows represent payments which are solely principal and interest. All other financial assets are measured at fair value. • Hedge accounting: More closely aligned with financial risk management, and may be applied to a greater variety of hedging instruments and risks. • Impairment of financial assets: Expected credit losses are recognised, taking into account the weighted probability of forward-looking information, which includes macro-economic factors. Application of Standard 1 April 2019 Application of Standard 1 April 2018 1 April 2018 OFX Group Limited Annual Report 2018 Directors’ Declaration 77 Directors’ Declaration In the Directors’ opinion: a. the financial statements and notes for the year ended 31 March 2018 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 31 March 2018 and of its performance for the financial year ended on that date, and b. there are reasonable grounds to believe that OFX Group Limited will be able to pay its debts as and when they become due and payable, and c. ’About this Report’ on page 52 confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the Chief Executive Officer and Chief Financial Officer required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Directors. On behalf of the Board: Steven Sargent Chairman Skander Malcolm Chief Executive Officer and Managing Director 22 May 2018 78 OFX Group Limited Annual Report 2018 Independent Auditor’s Report Independent Auditor’s Report To the members of OFX Group Limited Independent auditor’s report To the members of OFX Group Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of OFX Group Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 31 March 2018 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: the Consolidated Statement of Financial Position as at 31 March 2018 the Consolidated Statement of Comprehensive Income for the year then ended the Consolidated Statement of Changes in Equity for the year then ended the Consolidated Statement of Cash Flows for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence 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. PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. OFX Group Limited Annual Report 2018 79 Independent Auditor’s Report Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. Materiality For the purpose of our audit we used overall Group materiality of $1.245 million, which represents approximately 5% of the Group’s profit before tax. We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. We chose Group profit before tax because, in our view, it is the key financial statement metric used in assessing the performance of the Group. We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. Audit Scope Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. The Group comprises multiple legal entities globally including OzForex Limited, NZForex Limited, UKForex Limited, USForex Incorporated, CanadianForex Limited and OzForex (HK) Limited. Most of the Group’s accounting systems are centralised in the corporate head office located in Sydney, where our audit was predominately carried out. Our overall audit approach considered each legal entity’s contribution to the Group’s financial report balances. 80 OFX Group Limited Annual Report 2018 Independent Auditor’s Report 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. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. We communicated the key audit matters to the Group’s Audit, Risk and Compliance Committee. Key audit matter How our audit addressed the key audit matter Recognition of fee and trading income Fee and trading income consists of the margin generated from foreign currency spreads, fees charged on low-value transactions and changes in exchange rates between the time when a client rate is agreed and a subsequent hedge transaction is entered into by the Group. Fee and trading income is presented inclusive of realised and unrealised income earned from sale of foreign currency contracts to customers. This was a key audit matter because it represents the most significant element of revenue in the Consolidated Statement of Comprehensive Income. See Note 2 of the financial report for further information. Our audit procedures included, among others, evaluating the design and performing tests over the operating effectiveness of relevant key revenue controls, including reconciliation controls between the transaction recording system, general ledger and bank statements. In addition, we: Performed data analytic techniques to recalculate realised margin on foreign exchange contracts recognised within fee and trading income; Compared a sample of foreign exchange rates utilised within the Group’s transaction recording system to independently obtained foreign exchange rates; Agreed a sample of individual foreign exchange transactions recorded by the Group throughout the financial year to underlying deal tickets and bank statements; Scanned for material reconciling items in cash account reconciliations at 31 March 2018; Agreed the dates of a sample of foreign exchange transactions to the corresponding deal ticket and bank statements to determine whether the relevant transactions were recorded in the correct period; Compared the valuations of approximately 99% of the derivative balances at balance date to our own independently derived valuations. This involved sourcing independent inputs from market data providers; Examined supporting documentation for a sample of manual journals related to fee and trading income. Existence and presentation of cash and cash equivalents Cash and cash equivalents include cash held for own use, cash held for settlement of client liabilities, and deposits held at short call with financial institutions with an original maturity of less than 3 months. Our testing of the cash and cash equivalents balance included assessing the design and performing tests over the operating effectiveness of key reconciliation controls between the transaction recording system, bank statements and the general ledger. OFX Group Limited Annual Report 2018 81 Independent Auditor’s Report Key audit matter How our audit addressed the key audit matter As at 31 March 2018, approximately 64% of this balance represented cash held for settlement of client liabilities where cash from clients had been received, but corresponding cash payments to nominated accounts had not yet occurred. During the year, the Group changed the way in which cash and cash equivalents are presented in the Consolidated Statement of Financial Position to reflect the nature of cash held. The Group also changed the presentation of the Consolidated Statement of Cash Flows from the direct method to the indirect method. This was a key audit matter due to the size of the cash balance which represents 84% of the Group’s total assets, the significance of the change in presentation, and the inherent importance of cash to a business involved in money transfer. See Notes 2 and 7 of the financial report and the Consolidated Statement of Cash Flows for further information. In relation to the balance as at 31 March 2018, we performed the following procedures amongst others: Compared the bank balances recorded by the Group at year-end to confirmations received directly from the relevant banks. Where we were unable to obtain a bank confirmation, we performed alternative procedures such as confirming the recorded balances to bank statements; Tested all bank reconciliations with a focus on material reconciling items, if any; Compared the foreign exchange rates used for the translation of foreign-currency denominated cash accounts at year-end to independently sourced exchange rates. Together with our financial reporting specialists, we considered the reasons for the change in presentation of cash and cash equivalents in the Consolidated Statement of Financial Position and the Consolidated Statement of Cash Flows. We also assessed the relevant disclosures in light of the requirements of Australian Accounting Standards. Client liabilities The client liabilities balance consists of cash received from customers in relation to foreign exchange transactions which await settlement. There are amounts within the balance that have been static for an extended period of time and they comprise part payments awaiting full payment prior to remittance and cash received where the client has not yet been identified. During the 2018 financial year the Group introduced a policy to derecognise certain longstanding unallocated client liabilities in circumstances where there is a remote chance of the liability ever being settled. This was a key audit matter due to the size of client liabilities balance which represents 87% of the Group’s total liabilities and the inherent uncertainties associated with the static transactions. See Notes 2 and 7 of the financial report for further information. Valuation of derivatives Our testing of client liabilities included an assessment of the design and testing of the operating effectiveness of key reconciliation controls between the transaction recording system, general ledger and bank statements. In addition, we performed the following procedures amongst others: Agreed a sample of client liabilities to individual deal tickets and cash receipts; Considered the post year-end settlement rates of the total balance between 1 April 2018 and 30 April 2018; Inspected the customer complaints log to identify significant matters raised concerning client liabilities; Analysed the breakdown of client liabilities at 31 March 2018 to consider the age profile of unallocated client liabilities; Considered the appropriateness of the Group’s policy to derecognise certain unidentified client liabilities. Derivative instruments entered into by the Group include spot and forward foreign exchange transactions Our procedures in relation to the valuations as at 31 March 2018 included amongst others: Checking whether the valuation methodology 82 OFX Group Limited Annual Report 2018 Independent Auditor’s Report Key audit matter How our audit addressed the key audit matter in the foreign exchange markets. This was a key audit matter due to the inherent judgment and estimation involved in the valuation of these derivatives. See Notes 9, 10 and 11 of the financial report for further information. applied by the Group was consistent with the prior year; Comparing the valuations of approximately 99% of the derivative balances at balance date to our own independently derived valuations. This involved sourcing independent inputs from market data providers. Together with our tax specialists, our procedures over taxation related balances included, amongst others, evaluating the analysis conducted by the Group for judgements made in respect of the ultimate amounts expected to be paid to tax authorities. This was made in the context of our understanding of the business, and assessing the appropriateness of the tax provisions in light of the requirements of Australian Accounting Standards. We also considered the Group’s OBU arrangements, tested the classification of OBU and non-OBU transactions on a sample basis against guidance provided in relevant tax legislation, and reviewed and assessed the projects and expenses that are eligible for concessional treatment together with our tax specialists. Taxation The Group is liable for tax in a number of jurisdictions, and in some cases, the final tax treatment is uncertain until resolved with the relevant tax authority. Consequently, the Group has made judgements about the incidence and quantum of tax exposures and liabilities which are subject to the future outcome of assessments by relevant tax authorities and potentially associated legal processes. In addition, OzForex Limited, a subsidiary of OFX Group Limited, is deemed an Offshore Banking Unit (OBU) meaning that eligible transactions recorded in the OBU are subject to a concessional tax rate of 10%. The subsidiary is also eligible for Research and Development tax credits (R&D Credits) on eligible expenditure which further reduces the tax expense. The Group made adjustments during the financial year to estimate the amount of concessional credits, however, because the relevant self-assessment tax claims are filed with the Australian Tax Office in arrears, the exact amount of the claims are not known with certainty at year-end. See Note 4 of the financial report for further information. Capitalisation of internally generated intangible assets During the year, the Group capitalised internal software development project costs of $2.4m. These projects were predominantly in relation to three applications, of which the largest is the Online Sellers (“OLS”) Platform. The amounts capitalised for all three projects mainly relate to employment expenses. The capitalisation of internally generated costs was a key audit matter due to the size of the internal costs capitalised and the judgement required by the Group in assessing whether the criteria set out in Australian Accounting Standards for capitalisation of such costs had been met, particularly the technical feasibility of the project and the likelihood of the project delivering Our testing of capitalised internally generated intangible assets included, amongst others: Discussing project plans with management and project leaders to develop an understanding of the nature and feasibility of key projects and activities performed; Inspecting business cases of key projects and analysing the assumptions applied to determine the feasibility of the projects and assumed future economic benefits; On a sample basis, agreeing payroll costs to supporting payroll records and assessing the Group’s determination of these costs as capitalised OFX Group Limited Annual Report 2018 83 Independent Auditor’s Report Key audit matter How our audit addressed the key audit matter sufficient future economic benefits. The Group’s judgements also included determining whether capitalised costs were of a developmental nature rather than research nature (which would result in the costs being expensed rather than capitalised) and whether costs, including payroll costs, were directly attributable to relevant projects. or expensed with reference to the requirements of Australian Accounting Standards; Assessing key metrics that support the future income stream of key projects. This included inspecting the revenue generated from newly released products to examine whether the initial assumptions applied in determining project feasibility continue to hold true. See Note 13 of the financial report for further information. Other information The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 31 March 2018, including Our Story, Our Global Footprint, Setting the Benchmark in Client Care, How Our People Demonstrate Our Beliefs, Where We’re Focussing Our Efforts, Financial Highlights, Chairman’s Letter, CEO’s Letter, Executive Team, Directors’ Report, Shareholder Information and Corporate Information, 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 accordingly 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 identified above 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 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 have no realistic alternative but to do so. 84 OFX Group Limited Annual Report 2018 Independent Auditor’s Report 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 the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 30 to 46 of the Directors’ Report for the year ended 31 March 2018. In our opinion, the remuneration report of OFX Group Limited for the year ended 31 March 2018 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. PricewaterhouseCoopers CPG Cooper Partner Sydney 22 May 2018 OFX Group Limited Annual Report 2018 Shareholder Information 85 Shareholder Information The shareholder information set out below is current as at 19 April 2018. Corporate Governance Statement In accordance with ASX Listing Rule 4.10.3 and the 3rd edition ASX Corporate Governance Council’s Principles and Recommendations, the 2018 Corporate Governance Statement, as approved by the Board, is available on the Company’s website at: https://www.ofx.com/en-au/investors/corporate-governance/. The Corporate Governance Statement sets out the extent to which OFX has followed the ASX Corporate Governance Council’s 29 Recommendations during the 2018 financial year. Substantial shareholders The number of securities held by substantial shareholders (holding not less than 5%) and their associates as shown in substantial shareholder notices as disclosed to the ASX as at 19 April 2018 are shown below. Name Microequities Northcape Capital Pty Ltd Renaissance Smaller Companies Pty Ltd BT Investment Management Limited Ellerston Capital Limited Selector Funds Management Limited Distribution of security holders Number held % of issued capital 20,931,883 17,452,746 15,710,057 23,941,627 12,594,871 12,681,180 8.72 7.27 6.55 9.98 5.12 5.28 Number of shares Total holders of ordinary shares Number of ordinary shares % of issued capital 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – 999,999,999 Total 1,100 2,536 1,348 1,593 84 6,661 643,296 7,537,895 10,655,037 40,523,623 186,465,914 245,825,765 Number of performance rights Total holders of performance rights Number of performance rights 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – 999,999,999 Total – 1 – 5 3 9 – 4,992 – 187,285 556,059 748,336 0.26 3.07 4.33 16.49 75.85 100.00 % – 0.67 – 25.03 74.31 100.00 There were 278 holders of less than a marketable parcel of ordinary shares, based on the Company’s closing market price of $1.80 on 19 April 2018. 86 OFX Group Limited Annual Report 2018 Shareholder Information Twenty largest security holders of ordinary shares Rank Name Units % of units 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED NATIONAL NOMINEES LIMITED G AND A LORD PTY LTDMR MATTHEW GILMOUR MICROEQUITIES ASSET MANAGEMENT PTY LTD CITICORP NOMINEES PTY LIMITED BNP PARIBAS NOMINEES PTY LTD BNP PARIBAS NOMS PTY LTD BOND STREET CUSTODIANS LIMITED BOND STREET CUSTODIANS LIMITED RICHARD KIMBER MR JOHN ALEXANDER MALCOLM M & J GILMOUR PTY LTD ECAPITAL NOMINEES PTY LIMITED MERRILL LYNCH (AUSTRALIA) NOMINEES PTY LIMITED ADAM MICHAEL SMITH BOND STREET CUSTODIANS LIMITED S M & R W BROWN PTY LTD 20. MR MARK STEPHEN LEDSHAM Totals: top 20 holders of fully paid ordinary shares Total remaining holders balance 50,954,591 48,987,166 15,025,185 9,300,000 9,245,200 8,563,641 6,718,199 6,576,750 3,272,213 2,900,000 2,588,411 1,955,895 1,904,136 1,610,000 1,054,492 837,021 592,829 550,000 550,000 500,000 20.73 19.93 6.11 3.78 3.76 3.48 2.73 2.68 1.33 1.18 1.05 0.80 0.77 0.65 0.43 0.34 0.24 0.22 0.22 0.20 173,685,729 72,140,036 70.65 29.35 Unquoted equity securities Securities issued under OFX’s Long Term Incentive Plan and/or Executive Share Plan are subject to vesting conditions which, if met, entitle the holder to ordinary fully paid shares in the Company. Fully paid ordinary shares (unquoted) Performance rights Number held 5,825,765 748,336 Number of holders 8 9 Voting Rights Ordinary fully paid shares The voting rights are governed by clause 37 of the Company’s Constitution, which provides that every member present personally or by proxy, attorney or representative at a general meeting of the Company shall, on a show of hands have one vote, and on a poll shall have one vote for every share held. Performance rights Performance right holders do not have any voting rights attached to the performance rights issued under the Company’s Long Term Incentive Plan. Buyback There is no current on-market buyback. Review of operations and activities A review of the Company’s operations and activities during the reporting period is available within the Directors’ Report. OFX Group Limited Annual Report 2018 Corporate Information 87 Corporate Information Directors Mr Steven Sargent (Chairman) Mr John (‘Skander’) Malcolm (Chief Executive Officer and Managing Director) Ms Melinda Conrad Mr Grant Murdoch Mr Douglas Snedden Ms Lisa Frazier Company Secretaries Ms Freya Smith Ms Naomi Dolmatoff Date of Annual General Meeting 7 August 2018 (subject to change) Registered Office and Principal Place of Business in Australia Share Register Auditor Level 19 60 Margaret Street Sydney NSW 2000 Australia Ph: +61 2 8667 8000 Fax: +61 2 8667 8080 Email: investors@ofx.com.au Link Market Services Limited Level 12, 680 George Street Sydney NSW 2000 Australia Ph: 1300 554 474 Email: registrars@linkmarketservices.com.au PricewaterhouseCoopers One International Towers Sydney Watermans Quay Barangaroo NSW 2000 Australia Stock Exchange Listing OFX Group Limited shares are listed on the Australian Securities Exchange: OFX Website www.ofx.com Designed by littledesignstudio WWW.OFX.COM