Annual Report 2014 Contents 1 Results at a Glance 2 About us 4 Chairman’s Report 6 CEO’s Report 10 Review of Boutiques 12 Treasury Group Services 13 Directors 14 Directors’ Report 30 Auditor’s Independence Declaration 31 Corporate Governance Statement 36 37 Statement of Comprehensive Income 38 Statement of Financial Position 39 Statement of Changes in Equity 40 Statement of Cash Flows 41 Notes to the Financial Statements 77 Director’s Declaration 78 Independent Audit Report 80 ASX Additional Information 81 Corporate Directory Income Statement Results at a Glance Corporate Directory 2 80 81 ABN 39 006 708 792 Favourable market conditions and continued funds inflows at RARE Infrastructure and Investors Mutual underpinned another year of strong earnings growth. Directors M. Fitzpatrick (Chairman) A. McGill (Managing Director, appointed 30 August 2013) & Chief Executive Officer P. Kennedy R. Hayes M. Donnelly Key Financial Highlights during the year: Chief Financial Officer J. Ferragina Normalised net profit after tax (NPAT) Company Secretaries R. Ramswarup J. Ferragina (Appointed 31 July 2014) $14.0m Registered Office Level 14 39 Martin Place Sydney, NSW, 2000 (02) 8243 - 0400 Phone Total funds under management Facsimile (02) 8243 - 0410 Bankers Westpac Banking Corporation $25.4bn Share Register Computershare Investor Services Pty Ltd 452 Johnston Street Abbotsford, Victoria, 3067 Phone (03) 9415 - 5000 Full year dividend (fully franked) Auditors Deloitte Touche Tohmatsu 50c Internet Address www.treasurygroup.com Year End FUM ($bn) Aggregate Boutique Management Fees ($m) Reported NPAT ($m) Underlying NPAT ($m Final Dividend (cps) Full Year Dividend (cps) $ 25.4 98.3 13.1 14.0 27.0 50.0 % change 48.5 18.4 26.0 27.3 17.4 25.0 1 Results at a Glance Favourable market conditions and continued funds inflows at RARE Infrastructure and Investors Mutual underpinned another year of strong earnings growth. Key Financial Highlights during the year: Normalised net profit after tax (NPAT) $14.0m Total funds under management $25.4bn Full year dividend (fully franked) 50c Year End FUM ($bn) Aggregate Boutique Management Fees ($m) Reported NPAT ($m) Underlying NPAT ($m Final Dividend (cps) Full Year Dividend (cps) $ 25.4 98.3 13.1 14.0 27.0 50.0 % change 48.5 18.4 26.0 27.3 17.4 25.0 About us Treasury Group is a specialist investment and financial services business, focused on boutique funds management companies. Our philosophy is to partner with talented investment professionals to deliver the highest standard of investment outcomes for investors. We invest capital and provide a range of services to support the growth and development of our partner boutiques. The structure of our services and investments are flexible in order to the meet the needs of boutiques in their different stages of development. Our offering can include some, or all of the following: – Capital investment structured as equity, debt or otherwise for specified purposes; – Distribution and marketing services; – Responsible Entity services; and – Other business support services including risk and compliance, accounting, finance, HR, and operations. Annual Report 2014 2 3 170.3% Treasury Group total shareholder return has significantly exceeded the S&P/ ASX 300 Accumulation Index over the past three years. 32.9% 42.2% 17.3% 3 year returns 2011–2014 1 year returns 2013/14 S&P ASX 300 total returns TRG total returns Chairman’s Report On behalf of your Board, I am pleased to report another successful year at Treasury Group. Excellent financial results were a consequence of a rising market benefitting our boutiques and hard work by our executive team and staff. Funds Under Management Funds under management increased by 49% to $25.4 billion at year end. The acquisition of ROC Partners in May 2014 contributed $5.3bn in FUM for the full year ended 30 June 2014. The aggregated net retail funds inflow from RARE and IML for the year ending 30 June 2014 totalled $648 million, compared to $425 million in FY2013. Dividend The Board of Directors has declared a fully franked final dividend of 27 cents per share, an increase of 17% on the final dividend for FY2013. The increase reflects the Board’s confidence in the Company’s strong full year result and operating outlook. Market Conditions The strong financial result for Treasury Group can be primarily attributed to the positive growth in funds under management and earnings from two of our key boutiques, RARE Infrastructure and Investors Mutual. Treasury Group’s model is operationally leveraged to financial markets and this year we benefitted from the positive market conditions. Social Responsibility Treasury Group continues to support a number of very capable and hard working organisations in their efforts to bring about worthwhile social change. For a number of years, we have supported Third Link Investment Managers via the provision of investment and support services on a pro-bono basis. Third Link invests in social change by increasing the impact and sustainability of a range of charities. It provides funding and strategic support to carefully selected non-profit partners. Third Link is a pioneer organisation and I invite you to learn more about their work by visiting www.thirdlink.com.au During the year, our Managing Director and Chief Executive Andrew McGill, finalised his restructuring of Treasury Group with the merger of Evergreen Capital and Freehold Investment Management, the sale of Treasury Asia Asset Management, optimising outcomes for Treasury Group from the closure of Orion’s funds management business, and the acquisition of a minority interest in ROC Partners, an MBO from Macquarie Bank. The second half of the year was dominated by work on the exciting Northern Lights transaction which was announced on 5 August 2014. We also added to our executive strength, hiring the experienced Andrew Howard from Mercer as Chief Investment Officer, and adding a further sales resource in London. Financial Result Treasury Group’s underlying net profit after tax increased to $14.0m, up 27% on the prior year. Statutory net profit after tax was $13.1m, an increase of 26%. Treasury Group continues to maintain a strong balance sheet. Annual Report 2014 4 5 Funds Under Management ($ billions) All managers associated with Treasury Group – June 2002 to June 2014 25 20 15 10 5 0 2 0 N U J 2 0 C E D 3 0 N U J 3 0 C E D 4 0 N U J 4 0 C E D 5 0 N U J 5 0 C E D 6 0 N U J 6 0 C E D 7 0 N U J 7 0 C E D 8 0 N U J 8 0 C E D 9 0 N U J 9 0 C E D 0 1 N U J 0 1 C E D 1 1 N U J 1 1 C E D 2 1 N U J 2 1 C E D 3 1 N U J 3 1 C E D 4 1 N U J Outlook The Board and management of Treasury Group have worked hard on behalf of shareholders over the course of the 2014 Financial Year to build on the strong position that the company ended the previous year. With the continuation of positive market conditions and strong contributions from our key boutiques, RARE Infrastructure and Investors Mutual, a satisfying earnings result has been achieved for shareholders. We are now embarking on a new phase of growth building from the new platform which will be provided from the proposed merger with the merger of Northern Lights Capital Group. This company transforming transaction will provide for improved earnings diversification, a seamless international distribution capability and access to new high growth boutiques; overseen by a management team with greater depth. Finally, I would like to thank all our staff, boutique partners and clients for their continued support and I look forward to continuing to work closely with you as Treasury Group embarks on this next phase of growth. Mike Fitzpatrick Chairman CEO’s Report Favourable market conditions and continued funds inflows at RARE Infrastructure and Investors Mutual underpinned another year of strong earnings growth. The proposed merger with Northern Lights is expected to provide the platform for continued growth going forward. There were also significant outcomes achieved during the year across Treasury Group’s existing portfolio as we continued our proactive approach to the management of Treasury Group’s investments and interests. Actions commenced or completed during the year included: – Merger of Evergreen Capital and Freehold Investment Management; – Sale of Treasury Asia Asset Management to Nikko Asset Management; – Negotiation with Orion management in relation to the restructure of Orion Asset Management’s funds management business; and – Acquisition of an equity stake in ROC Partners, an Australian and Asian private equity investment and advice business acquired by way of a management buyout of a well established business from Macquarie Bank. Operational and Financial Performance Total funds under management rose by 48.5%1 during the year to finish at $25.4bn. In part, this reflected more favourable market conditions. However, it also reflected strong investment performance at Treasury Group boutiques and funds flows. Funds inflows were experienced at RARE Infrastructure and Investors Mutual, while outflows were experienced at Celeste. The average net margin earned by our boutique partners on managed funds was up to 58 basis points, the third consecutive year of increase. Once again, this reflected an improved mix of business across the Treasury Group portfolio. Normalised net profit after tax was $14.0 million, an increase of 27% versus prior year. This reflects significantly improved outcomes across our portfolio of boutiques during FY2014 with aggregate management fee income across Treasury Group boutiques up 18%. Treasury Group’s Share of Associates Net Profit after Tax was up 32% versus prior year, demonstrating once again the “scalability” of the multi-boutique model of funds management. Business Performance Through the course of 2014, we saw equity markets rise, volatility remain relatively low and Australian investors continue to favour higher yielding investments. Across the Australian funds management industry, net funds flows to equities strategies were generally subdued but in contrast Treasury Group’s largest boutiques saw inflows including net inflows from retail investors. Generally, market conditions provided a favourable background for RARE Infrastructure and Investors Mutual which underpinned the higher earnings . In August, we were delighted to announce a proposed merger with Northern Lights Capital Group (“Northern Lights”). The proposed merger is expected to be a transformational event in the history of Treasury Group and will result in the creation of an international portfolio of asset management businesses and will execute on key elements of our stated strategy. Management committed very considerable effort to the Northern Lights transaction during the second half of the 2014 financial year and since. The merger is addressed in more detail later in this report. 1. On a normalised basis, the increase was 17.6% excluding $5.3bn of FUM added due to investment in ROC Partners Annual Report 2014 6 7 Composition of FUM vs Average Margin FUM $bn at year end 30 25 20 15 10 5 0 Trilogy Freehold (Evergreen) & AR Capital Aubrey & Global Value Investors Avg Margin (bps) TAAM ROC Partners Celeste RARE Infrastructure Orion Investors Mutual % incl Trilogy (RHS) % excl Trlogy (RHS) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Statutory net profit after tax was $13.1 million, up 26% compared to last year. The statutory result includes the impact of one-off abnormal income or expenses associated with actions taken during the year and profits on investments sold during the year. It also includes the impact of accounting decisions at year end such as impairment charges and the write off of deferred tax assets within GVI. Expenses at Treasury Group were again lower than the prior year as we continue to benefit from the cost saving actions undertaken two years ago. However, Treasury Group’s revenues were materially lower this year as the full impact was felt from having fewer fee paying boutiques within our portfolio and lower revenues from current boutiques. Capital levels at Treasury Group are surplus to all regulatory requirements and contribute to funding for the proposed merger with Northern Lights. At year end, cash, available-for-sale investments and loans to boutiques totalled $23.9m. There was no outstanding debt and operating cash flow during the year was $12.2m. The value of Treasury Group’s investments in partner boutiques is carried at $29.2m which represents historical cost plus our share of undistributed earnings over time. A significant proportion of this carrying value is reflected in cash and liquid assets held at boutique level. At 30 June, the aggregate cash and liquid assets held by Treasury Group boutiques was $72.5m and Treasury Group’s proportionate share of that amount was $29.6m. CEO’s Report continued Market Environment Against a back drop of a continued record low interest rate environment the Australian Share market recorded a double digit return for the 2014 Financial Year, which follows a similar result from the previous fiscal year. The market remained sensitive to movements of Central Banks, with the Australian market having a strong start to the Financial Year in no small part due to the Reserve Bank lowering the cash rate to 2.5% in August last year, a level which it still sits at today. The All Ordinaries Price Index rose by 17.6%, while the Small Ordinaries Index rose by 13.1%. While Industrial stocks strongly outperformed Resources stocks in the 2013 Financial Year, it was a different result this fiscal year with the All Resources Index returning 14.2% against the All Industrials result of 11.9%. With cash rates and bond yields remaining at record lows, investors remained attracted to the dividend yields available from stocks, particularly the big four banks. While it was a strong year for the local market, it still lagged a number of its developed market peers, with the US market ending the Financial Year strongly as the S&P 500 reached an all-time high in late June. The US Federal Reserve indicated that it would continue to keep rates at record low levels based on its desire to see economic conditions in the US improve. Overall, the market backdrop provided a positive environment for both our local and global managers. Investor demand for yield assisted both Investors Mutual and RARE Infrastructure, while stronger sentiment towards small cap stocks assisted Celeste in delivering positive absolute returns for investors. Funds management as an industry continues to provide an attractive investment opportunity for investors with mandated compulsory superannuation contributions rising and Australia remaining one of the fastest growing funds management sectors globally. Treasury Group remains well placed to benefit from these strong industry fundamentals. Via our wholly owned subsidiary, Treasury Group Investment Services Limited, we provide a full suite of business support services to our partner boutiques and selected external clients. 2. Subject to completion of required shareholders agreement processes at Investors Mutual, Celeste and Orion. 3. Investors Mutual, Celeste and Orion Proposed Merger with Northern Lights Capital Group In August, we announced a proposed merger with Northern Lights Capital Group, a US based multi- boutique asset management business with FUM of approximately A$24.2bn across its portfolio of 13 associated funds management businesses. Together with Treasury Group’s existing portfolio, the merger will create an international business with A$49.6bn of FUM across 21 boutiques diversified across a range of investment strategies and geographies. The merger is to be structured via a newly established Australian trust into which both Northern Lights and Treasury Group portfolio assets will be transferred2. Treasury Group Limited will remain listed and following the merger will own a 61% equity interest in the merger trust. Management and operations will be integrated and the business will be operated as one group under the direction of a common board of directors. From Treasury Group’s perspective, there will be no change of control. Treasury Group will retain all existing franking credits. Importantly, Treasury Group expects to be able to continue to pay franked dividends to its shareholders in future. All necessary upfront funding has been committed. However, the proposed merger remains subject to a number of conditions including regulatory approvals, consents from clients of some Northern Lights boutiques, finalisation of the merger structure, and satisfaction of conditions to draw down of an external debt facility. In addition, in relation to some of Treasury Group’s existing boutique investments3, we must comply with pre-emptive rights processes before being entitled to transfer or sell to the merger trust the shares that we own in those boutiques. We continue to work towards completion of the transaction by the end of October. It is expected that the transaction will deliver significant strategic and financial benefits. The transaction is expected to be materially accretive from completion, deliver increased portfolio diversification, provide exposure to key Northern Lights boutiques which have experienced strong growth and deliver strengthened investment and distribution capabilities. Strategy Looking forward, the merged group will be well placed to partner with outstanding asset management professionals worldwide. The merger will result in strengthened management and investment teams with executives located to access deal flow within international markets. Annual Report 2014 Financial Performance Treasury Group Underlying Profit S&P/ASX 300 8 9 Treasury Group financial performance is strongly correlated with the level of listed equities markets. The S&P/ASX 300 Index increased by 12% during 2014. Source: Treasury Group, Standard & Poor’s 2008 2008 2009 2009 2010 2010 2011 2011 2012 2012 2013 2013 2014 2014 In addition to partnering with early stage asset management businesses, the combined group will have scale and financial capacity to invest in established businesses. Over the past 5 years, Treasury Group and Northern Lights have completed a combined 14 investments. The merged business will have 14 sales executives across offices in the US, Australia, and the UK. We will have access to an extensive US retail distribution platform. We will also have the benefit of a strategic relationship with BNP Paribas with its retail distribution capabilities, particularly across some European markets. Over the past 5 years, the combined Treasury Group and Northern Lights distribution teams have raised over A$8bn in FUM for our boutique partners. In short, the proposed merger does not so much mark a change of strategy by Treasury Group but rather a significant enhancement of our capabilities to execute our strategy across international markets. Conclusion In a number of ways, 2014 has been an outstanding year for Treasury Group. At our largest boutiques we have seen continued growth in FUM and earnings. Together with favourable market conditions, this has delivered another year of strong returns for shareholders. At Treasury Group, we have made significant progress towards many of our strategic goals via the proposed merger with Northern Lights. Also, we have again been diligent and proactive in the management of existing portfolio interests. Assuming that all conditions are satisfied so as to allow the proposed merger to complete as planned, the merged business that will be created is expected to provide a platform for future growth in assets and earnings for the benefit of Treasury Group shareholders for years to come. It will be a very significant milestone in the history of your business. Finally, I would like to thank all Treasury Group employees and also staff at our boutique partners for their hard work again this year. Treasury Group’s business is a people business and outcomes for our shareholders are a direct result of the skill, expertise and diligence of our people. Andrew McGill Managing Director and Chief Executive Officer Review of Boutiques Treasury Group boutiques have delivered strong investment returns for clients and outperformed their market benchmarks over medium and long term horizons. Celeste Celeste Funds Management is a long only Australian equities manager with a focus on listed smaller companies. The Celeste team aims to provide above benchmark returns for investors with a conservative nature and a patient disposition. Celeste continues to be highly rated by asset consultants and research houses. During the year, FUM fell from $646m to $597m as at 30 June 2014. Celeste’s investment performance is well above its benchmark over 3 years and longer time periods including the delivery of 10% annualised returns over benchmark since inception (May 1998). Orion Asset Management Orion Asset Management during the year underwent a significant strategic and operational change, resulting in the closure of the Australian equities business. Going forward its focus will be on distribution and administration of funds by New York based, Trilogy Global Advisors (Trilogy). The alliance between Orion and Trilogy continues to be a positive one, with Trilogy now managing over $4.9 billion in FUM from investors across Australia, New Zealand and South East Asia. RARE RARE Infrastructure, founded in 2006 by Richard Elmslie and Nick Langley, specialises in the investment and management of securities in global listed infrastructure including airports, toll roads, gas, electricity and water. RARE has product offerings in North America, Europe/UK as well as Australia. During the year, FUM grew from $7.1 billion to $9.1 billion as at 30 June 2014. RARE continues to attract strong support from Australian institutional and retail clients as well as offshore institutions including sovereign wealth and pension funds. RARE’s significant outperformance versus its benchmark over 1, 3 & 5 year periods to 30 June 2014 has further cemented RARE’s leadership position amongst its global peers. Investors Mutual Led by the experience of Anton Tagliaferro and Hugh Giddy, Investors Mutual (IML) has a conservative investment style with a long term focus that aims to deliver consistent returns for clients. It achieves this through the disciplined application of a fundamental and value based approach to investing. During the year ending 30 June 2014, funds under management rose to $4.9 billion, an increase of 15% for the year. This was sustained by the continued institutional support and positive retail flows experienced over the year. IML was also a Finalist for the Domestic Equity Awards by Morningstar and Australian Financial Markets Association (AFMA). Recently, IML also successfully launched the listed investment company, QV Equities, raising $180 million from retail investors. QV equities specialises in companies outside the S&P/ ASX 20 Index. Annual Report 2014 10 11 During the year, RARE’s funds under management grew from $7.1 billion to $9.1 billion as at 30 June 2014 $9.1 billion Freehold Investment Management Freehold Investment Management (FIM) is a business specialising in direct and indirect property. Treasury Group gained its exposure to FIM following the merger between FIM and Evergreen Capital Partners. FIM is at a relatively early stage of development and currently manages approximately $110 million across its domestic listed property and infrastructure funds. FIM successfully attained a recommended rating from Lonsec which has helped generate further interest from the retail/ wholesale market. Octis Asset Management Led by Jerome Ferracci, Octis Asset Management Pte Ltd is an Asian multi strategy hedge fund manager based in Singapore. The investment team aims to capture growth from Asian markets whilst limiting volatility and drawdowns. Octis utilises a number of different strategies that includes; equities, futures, options, commodities and foreign exchange securities. Octis manage a Cayman based fund and have recently launched an Australian managed investment scheme to tap into the family office and retail market. Aubrey Aubrey Capital Management is a global growth equity thematic manager based in Edinburgh, Scotland. Led by Andrew Dalrymple, the Aubrey team members are experienced global equity investors focused on concentrated portfolios of growth stocks. Aubrey is also the appointed sub manager of the GVI Global Industrial Fund. During the year, Aubrey’s funds under management increased by 15% to $528 million and Aubrey successfully retained its recommended rating from research house Zenith. Aubrey was also added to a number of approved product lists within the retail market which will lead to flows during the FY2015 and beyond. Aubrey continues to garner interest from institutional investors both locally and offshore. Treasury Group Services Via our wholly-owned subsidiary Treasury Group Investment Services Limited, we provide a full suite of business support services to our partner boutiques and selected external clients. Services Offered Include: – distribution and sales; – acting as Responsible Entity for pooled investment funds; – risk management; – legal and regulatory compliance; – accounting and finance; – company secretarial and corporate governance oversight; – human resources management; – investment operations oversight; – business administration and office logistics; and – information technology and automation solutions. These services are provided through our team of experienced and professional staff. The services provided by Treasury Group allow investment staff to focus on their area of specialisation – delivering strong investment returns on the funds they manage. Treasury Group provides these services to clients via different pricing models, including fixed fee arrangements, variable hourly rates and commission or success-based fees. During their development phase, Treasury Group boutiques often benefit from the provision of services by Treasury Group at less than market-based rates. Pricing for mature boutiques and third party clients is based on market rates. Annual Report 2014 12 13 Directors Directors Michael Fitzpatrick, (Chairman) Peter Kennedy, (Non-Executive Director) Andrew McGill, (Managing Director and Chief Executive Officer) Reubert Hayes, (Non-Executive Director) Melda Donnelly, (Non-Executive Director) Directors’ Report Your Directors submit their report for the year ended 30 June 2014. Directors The names and details of the Company’s Directors in office during the financial year and until the date of this report are listed below. Directors were in office for this entire period unless otherwise stated. Names, qualifications, experience and special responsibilities M. Fitzpatrick, (Chairman) B. Eng, B (Oxon) Honours Mr Fitzpatrick joined the Board on 5 October 2004. He was the founder and Managing Director of Hastings Funds Management Limited. Prior to establishing Hastings in 1994, he was a Director of Credit Suisse First Boston. He is also a Director of Rio Tinto Ltd, Rio Tinto plc, Chairman of the Australian Football League and former Chairman of the Australian Sports Commission. Mr Fitzpatrick is also a member of the Audit Committee, Remuneration Committee and Nomination Committee. A. McGill, (Managing Director, appointed 30 August 2013) Mr McGill has more than 20 years financial markets experience, including investment and management experience within the alternative asset sector of the funds management industry. He joined Treasury Group as Chief Executive Officer in July 2011 and has overall responsibility for management of the business including the Company’s investment and partnering activities. Prior to joining Treasury Group, Mr McGill was a founding partner of Crescent Capital, an independent mid-market private equity firm, where he lead the successful development of that business from 2000 to 2010. Prior to establishing Crescent, he held senior roles within Macquarie Bank’s Corporate Finance and Direct Investment teams. Previous to that, he was a strategy consultant with LEK Partnership. P. Kennedy, (Non-executive Director) B.Ec. L.L.M. Mr Kennedy joined the Board on 4 June 2003, is the Managing Partner with Madgwicks lawyers and has over 30 years experience in commercial law. Mr Kennedy has also served as a Chairman of Australian Value Funds Management Limited (now called Prime Financial Group Ltd). He is the Chairman of the Audit Committee and a member of the Remuneration Committee. R. Hayes, (Non-executive Director) SF Fin, FAICD Reubert Hayes joined the Board on 22 February 2007. Mr Hayes has over 40 years experience in investment management and stockbroking research, and was a founder and CEO of Ausbil Dexia Limited, a specialist wholesale boutique asset management operation. Mr Hayes was also a joint founder of Barclays Bank’s investment operations in Australia in 1984, and was CEO of that business for 12 years until 1996. Prior to this, Mr Hayes held senior investment roles with AMP and Westpac. Mr Hayes is a Senior Fellow of the Financial Services Institute of Australia and a Fellow of the Australian Institute of Company Directors. He is the Chairman of the Remuneration Committee and sits on the Audit Committee. M. Donnelly, (Non-executive Director) B.C. Melda Donnelly joined the Board on 28 March 2012. Ms Donnelly is the Founder and former Chairman of the Centre for Investor Education (CIE), a specialist education and consultancy firm for Executives in Australian and superannuation funds, institutional investment bodies and the financial services markets. Ms Donnelly’s previous work experience includes CEO of the Queensland Investment Corporation, Deputy Managing Director of ANZ Funds Management and Managing Director of ANZ Trustees. Ms Donnelly is a former Deputy Chairperson of the Victorian Funds Management Corporation and a current Non-executive Director of Ashmore Group plc and a current Non-executive Director of UniSuper Ltd. In addition, Ms Donnelly is a member of the Advisory Committee of the Oxford University Centre for Ageing. Ms Donnelly is the Chairperson of the Nomination Committee and a member of the Audit Committee. Company Secretaries R. Ramswarup, BA (Justice Administration) Ms Ramswarup commenced with Treasury Group Ltd in March 2008. She has worked in company secretarial roles at Wattyl and AMP and has secretariat experience in local government and professional services. Ms Ramswarup has completed the Graduate Diploma in Applied Corporate Governance and is a member of the Governance Institute of Australia. J. Ferragina, BCom, M App Fin, CA, FFin, GAICD (appointed 31 July 2014) Mr Ferragina is a Chartered Accountant and Fellow Member of the Taxation Institute of Australia. He has gained specialised experience in a range of funds management companies including Colonial First State Investment Managers and AMP Global Investors Ltd, which led him to a position as CFO and Company Secretary of Ronin Property Group, a separately listed company spun out of AMP. Prior to his appointment as CFO of Treasury Group Limited in October 2005, he was Head of Finance at DBRREEF (now Dexus). Annual Report 2014 14 15 Interests in the shares and options of the Company and related bodies corporate As at the date of this report, the interests of the Directors in the shares and options/performance rights of Treasury Group Ltd were: M. Fitzpatrick A. McGill R. Hayes P. Kennedy M. Donnelly Earnings Per Share Basic earnings per share Diluted earnings per share Dividends Final dividend declared: – on ordinary shares (fully franked) Dividends paid in the year: Interim for the year – on ordinary shares (fully franked) paid on 27 March 2014 Final for 2013 shown as recommended in the 2013 report – on ordinary shares (fully franked) paid on 25 September 2013 Corporate Information Options/ Performance rights over Ordinary Shares – – – – – Cents 56.6 55.0 $ Ordinary Shares 2,701,285 530,000 – 213,487 20,000 Cents per share 27 6,398,324 23 5,306,274 23 5,306,274 Corporate Structure Treasury Group Ltd is a company limited by shares and is incorporated and domiciled in Australia. Treasury Group Ltd has prepared a consolidated financial report incorporating the entities that it controlled and jointly controlled during the financial year. The Group’s corporate structure as at the date of this report is as follows: Treasury Group Investment Services Limited (100%) Global Value Investors (100%) AR Capital Management Pty Ltd (100%) Treasury Octis Pty Limited (100%) Octis Asset Management Pte Ltd (20%) Treasury Roc Pty Limited (100%) ROC Partners Pty Ltd (15.03%) TREASURY GROUP LTD Investors Mutual Ltd (47.22%) Treasury Evergreen Pty Limited (100%) Freehold Investment Management (15%) See page 17 IML Investment Partners Pty Ltd (40%) RARE Infrastructure Ltd (40%) RARE IP Trust (40%) Orion Asset Management (Aust) Pty Ltd (49.99%) Celeste Funds Management Limited (39.17%) Aubrey Capital Management Ltd (22.2%) See page 17 Directors’ Report continued Operating and Financial Review Review of Operations Nature of operations and principal activities The principal activities of the consolidated entity during the financial year were: Provision of funds management services to: – Institutions; – Master funds and wraps; – Retail investors and – Private clients. There have been no significant changes in the nature of those activities during the year. Employees The consolidated entity employed 17 full time equivalent employees as at 30 June 2014 (2013: 17). The consolidated entity includes Treasury Group Ltd (parent), Treasury Group Investment Services Ltd, Global Value Investors Ltd and AR Capital Management Pty Ltd. Funds management/business performance Treasury Group Ltd have experienced continued FUM growth driven by favourable market conditions, increased appetite from retail investors, strong performance from key boutique partners and the addition of a new boutique partner ROC Partners. FUM growth across the Group increased by 48% to $25.4bn ($9.5bn as TRG share). This growth in FUM is a reflection of a continued, stable and strong performance delivered by other Treasury Group’s partner boutiques as well as the addition of ROC Partners. The increased level of inflows from retail investors of RARE Infrastructure Ltd and Investors Mutual Ltd have contributed to the growth of FUM. The Group’s performance is strongly correlated with the level of listed equities markets as the fees and revenues earned by the boutique partners are based upon percentage of funds managed. The Group’s results improved as a result of various strategies implemented during the year. The Executive management continues to review significant investment opportunities to diversify Treasury Group’s investment and product offerings, completion of new partner boutique such as ROC Partners, pursuing mergers and acquisitions at corporate level, proactive management of investments and interests, pursuing efficiency from support services and investing in core capabilities. The Group’s results arose from four main business segments. The results from Australian equities increased by 6% which arose from the increased contribution of Investors Mutual Ltd, IML Investment Partners and Celeste Funds Management. The results from alternative equities increased by 47% mainly due to consistent inflows and strong performance of RARE Infrastructure Ltd. The Group’s outsourcing and responsible entity services decreased by 59% due to loss of mandate with Premium Investors Ltd (PRV) in the previous year. Lastly, the central administration segment improved by 19% due to continued control, efficiency improvements and expense management at the corporate level. Refer to Note 20 for further discussion on the segment information. Below are the key business areas of the Group’s operations: Australian Equities Investors Mutual Ltd (IML) provides a funds management capability to both institutional and retail investors. The consolidated entity holds 47.22% of the issued capital of IML. Investors Mutual Limited is considered a jointly controlled entity of the Group. IML Investment Partners Limited, a jointly controlled entity of Treasury Group Ltd undertakes a sub advisory role to exclusively manage funds for Investors Mutual Limited and its institutional clients. Treasury Group Ltd has a 40% interest in the sub advisory business with the investment team holding the remaining 60% of equity. Celeste Funds Management Limited is an Australian equity manager with a small companies focus. Treasury Group Ltd acquired 39.17% equity with the majority of ownership being held by the investment team of Celeste Funds Management Limited. Celeste Funds Management Limited is considered a jointly controlled entity of the Group. Alternative Equities RARE Infrastructure Ltd and its subsidiaries (RARE Group), a boutique asset manager specialises in listed global infrastructure. Treasury Group Ltd owns 40% each of RARE and RARE IP Trust (RIP). RARE and RIP are considered as associates of the Group. Octis Asset Management Pte Ltd is an Asian multi strategy equity manager based in Singapore. Treasury Group owns 20% equity in the Company. Annual Report 2014 16 17 ROC Partners is an Australian and Asian Private equity investment and advice business. It specialises in advice and private equity investment services for investors in Australia, US and Europe. Funds under advice include investments in primary funds, secondaries and co-investment opportunities across the Asia-Pacific Region. The consolidated entity holds 15% of the issued capital of ROC Partners. ROC Partners is considered a jointly controlled entity of the Group. Treasury Group owns 15.03% interest in the Company. AR Capital Management Pty Ltd is an Australian equity absolute return manager. Treasury Group owns 100% of the issued capital of AR Capital Management Pty Ltd. This is currently being wound up. International Equities Orion Asset Management Services Pty Ltd, a wholly-owned controlled entity of Orion Asset Management (Aust) Pty Ltd, provides distribution services to Trilogy LLC. The consolidated entity holds 49.99% of the issued capital of Orion Asset Management (Aust) Pty Ltd. Orion Asset Management (Aust) Pty Ltd is considered a jointly controlled entity of the Group. Global Value Investors Ltd invests in global industrial companies that exhibit recurring earnings, and a strong, stable and competitive business. Treasury Group Ltd owns 100% interest in the Company. The funds are managed by Aubrey Capital Management. Aubrey Capital Management is a global growth equity thematic manager based in Edinburgh, Scotland. Treasury Group Ltd holds convertible preference shares that entitle Treasury Group Ltd to take 22.2% of the equity capital of Aubrey Capital Management. The convertible preference shares are treated as Available-For-Sale Assets by the Group in accordance with Accounting Standards. In addition, Treasury Group Ltd was issued two options which will allow Treasury Group Ltd to acquire a further 10% if certain conditions are met. Property Freehold Investment Management (FIM) is an investment manager established in 2009 specialising into direct property, Australian Real Estate Investment Trusts (A-REITs) and unlisted property funds. Treasury Group holds options in FIM which, upon conversion, will deliver an equity interest of 30%. These options are exercisable at the election of Treasury Group. In addition, the employees of FIM are entitled to equity-based incentives which are linked to profit targets and FUM. In the event these are met, Treasury Group’s holdings are diluted to 15%. The options are treated as available-For-Sale Assets by the Group in accordance with Accounting Standards. Administration & Compliance Services Treasury Group Investment Services Limited, a wholly-owned controlled entity of Treasury Group Ltd provides administrative, accounting, and compliance services to certain members of the Group. It is also the responsible entity for the majority of schemes in the Group. Operations, acquisitions and disposal On 31 October 2013, Treasury Group Ltd completed the sale of its loan assets and 43.96% equity holding in Treasury Asia Asset Management (TAAM) to Nikko Asset Management International (Nikko). TRG sold loans and equity holdings for the respective book values. On 13 November 2013, Freehold Investment Management (FIM) and Evergreen Capital Partners (Evergreen) successfully completed a merger with FIM as the surviving entity. Under the new structure, Evergreen shareholders sold their shares in Evergreen in return for equity securities (options) in FIM. Following the transaction, FIM owns 100% of the issued capital in Evergreen. As a consequence of the merger, Treasury Group holds options in FIM which, upon conversion, will deliver an equity interest of 30%. These options are exercisable at the election of Treasury Group. In addition, the employees of FIM are entitled to equity-based incentives which are linked to profit targets and FUM. In the event these are met, Treasury Group’s holdings are diluted to 15%. On 16 May 2014, FIM undertook a capital raising limited to its existing shareholder base through the issuance of convertible preference shares which has a convertibility feature. On 30 May 2014, Treasury Group participated in this capital raising to the amount of $600,000. This is treated as loan to FIM fixed at 15% per annum for two years. On 2 December 2013, the Board of Orion Asset Management restructured its Australian Equities fund management business. Orion ceased to provide funds management services to institutional clients and several members of Orion’s investment management team exited the business. Orion also ceased to manage the Orion Australian Share Fund for retail clients. On 30 April 2014, Treasury Group Ltd acquired a further 7% equity of ownership in Orion Asset Management (Aust) Pty Ltd as a result of the corporate restructuring that the Orion Group had undertaken. As a result, Treasury Group owns 49.99% of Orion Asset Management (Aust) Pty Ltd. Orion’s alliance with Trilogy Global Advisors has remained unchanged. On 16 April 2014, Treasury Group Ltd announced the execution of an agreement to invest in ROC Partners, an Australian and Asian private equity investment and advice business. On 30 May 2015, Treasury Group Ltd completed the acquisition of 15.03% equity in ROC Partners for $556,000. In addition, TRG has provided a facility of $4,500,000 of which $2,450,000 was drawn down on 29 May 2014. Directors’ Report continued Operating Results for the Year The above events and transactions reflected in a consolidated profit for the year attributable to members of Treasury Group Ltd amounted to $13,061,814 (2013: $10,390,514). The net profit after tax of the group as reported in the current year has increased by 26% compared to the 30 June 2013 comparative result as shown in the table below reconciling the underlying profit as follows: Net profit attributable to members of the parent Add/(Deduct): – Impairment of goodwill – Impairment of investment in subsidiary (AR Capital Management) – Impairment of investments accounted for under the equity method – Legal fees – Write off of deferred tax asset in subsidiary (Global Value Investors) – Tax adjustment to recognise tax losses previously unrecognised – Net settlement fee from PRV restructure – Employee and restructuring costs – Consulting fees Underlying profit Consolidated 2014 $ 2013 $ 13,061,814 10,390,514 252,764 41,012 – 159,928 520,000 – – – – 331,124 – 800,000 278,643 – (454,950) (537,264) 140,000 76,250 14,035,518 11,024,317 Earnings Per Share The earnings for the last financial year reflect the strong performance across the portfolio boutiques, increase in net margin due to favourable changes in portfolio mix and efficiency improvements and expense management at the corporate level. Basic earnings per share (cents) Diluted earnings per share (cents) 2014 56.6 55.0 2013 45.0 45.0 Financial Position Treasury Group Ltd has a strong balance sheet and sound capital structure. This is evident from the Company’s positive cash flow position and no existing borrowing facilities that were required to date to fund the growth activities of the Group. Consolidated cash balance as at 30 June 2014 is $12.9m. Net assets increased by 5% which is largely attributable to the current year’s profit after tax. Treasury Group carries no bank debt. As at 30 June 2014, Treasury Group Ltd holds Available-For-Sale-Investments amounting to $8.2m which can be readily converted to cash should the need arise. The value of Treasury Group’s investment in partner boutiques is carried at $29.2m which represents historical cost plus the share of undistributed earnings over time. A significant proportion of this carrying value is reflected in cash and liquid assets held at the boutique level. Treasury Group Ltd has the capacity to pay dividends to its shareholders. During the year, Treasury Group Ltd paid 46 cents in dividends, an increase of 24% compared to the comparative period. A final dividend of 27 cents per share was declared on 5 August 2014. Treasury Group Investment Services Limited, a wholly owned subsidiary of the Group, is required to retain Net Assets of $5m for regulatory capital requirements as a holder of an Australian Financial Services Licence with ASIC and operating as a Responsible Entity of Managed Investment Schemes. Cash Flow from Operations Net cash flow from operating activities increased by $1.3m to $12.2m or by 11% over the year. This increase arose from the consistent dividend and distribution payments from the equity accounted investments to Treasury Group Ltd. Annual Report 2014 18 19 Business Strategies and Prospects Treasury Group continues to expand and diversify its portfolio by partnering with outstanding asset management professionals worldwide. On 5 August 2014, Treasury Group Ltd announced that it has entered into an agreement to merge with Northern Lights Capital Group (Northern Lights), a privately owned, US-based, multi-boutique funds management business with offices in the United States, United Kingdom and Europe (France). It is expected that the merger will deliver significant strategic and financial benefits to Treasury Group and its shareholders. It provides exposure to Northern Lights boutiques which have experienced strong growth. It creates a diversified international portfolio of multi-asset management businesses and it executes key elements of Treasury Group’s strategy. Material Business Risks The material business risks faced by Treasury Group Ltd that are likely to have an impact on the financial prospects of the Company and how the Company manages these risks include: Global market risks The nature of the business of Treasury Group Ltd means that the Group is always exposed to market volatility and potential adverse market conditions. Major international listed equity markets continue to display volatility on both upside and downside with publicised global macro risks such as higher European growth and deflation, slower growth in China and monetary policies in the US and Japan. While these risks are external and beyond the control of the Group, a number of our boutique partners delivered exceptional performance including Investors Mutual Ltd, RARE Infrastructure Ltd and Celeste Funds Management Limited. Market risk is however at the core of the business. Regulatory environment The business of the Group operates in a highly regulated environment that is frequently subject to review and regular change. Treasury Group Ltd’s risk and compliance team are always working to ensure that the Group is compliant with the new financial and regulatory requirements. In 2013, Treasury Group worked with its Boutique partners to ensure compliance with the Future of Financial Advice Reforms Act. In 2014, Treasury Group has also worked with its Boutique partners to ensure compliance with the new Privacy Act amendments, the AML/CTF amendments and the Foreign Account Tax Compliance Act. Significant Changes in the State of Affairs On 7 August 2013, Mr. Andrew Howard was appointed as Chief Investment Officer of Treasury Group Ltd. On 30 August 2013, Mr. Andrew McGill was appointed as Managing Director of Treasury Group Ltd. On 31 October 2013, Treasury Group Ltd completed the sale of its loan assets and 43.96% equity holding in Treasury Asia Asset Management (TAAM) to Nikko Asset Management International (Nikko). TRG sold loans and equity holdings for the respective book values. On 13 November 2013, Freehold Investment Management (FIM) and Evergreen Capital Partners (Evergreen) successfully completed a merger with FIM as the surviving entity. Under the new structure, Evergreen shareholders sold their shares in Evergreen in return for equity securities (options) in FIM. Following the transaction, FIM owns 100% of the issued capital in Evergreen. As a consequence of the merger, Treasury Group holds options in FIM which, upon conversion, will deliver an equity interest of 30%. These options are exercisable at the election of Treasury Group. In addition, the employees of FIM are entitled to equity-based incentives which are linked to profit targets and FUM. In the event these are met, Treasury Group’s holdings are diluted to 15%. On 16 May 2014, FIM undertook a capital raising limited to its existing shareholder base through the issuance of convertible preference shares which has a convertibility feature. On 30 May 2014, Treasury Group participated in this capital raising to the amount of $600,000. This is treated as loan to FIM fixed at 15% per annum for two years. On 2 December 2013, the Board of Orion Asset Management restructured its Australian Equities fund management business. Orion ceased to provide funds management services to institutional clients and several members of Orion’s investment management team exited the business. Orion also ceased to manage the Orion Australian Share Fund for retail clients. On 30 April 2014, Treasury Group Ltd acquired a further 7% equity of ownership in Orion Asset Management (Aust) Pty Ltd, as a result of the corporate restructuring that the Orion Group had undertaken. As a result, Treasury Group owns 49.99% of Orion Asset Management (Aust) Pty Ltd. Orion’s alliance with Trilogy Global Advisors has remained unchanged. On 16 April 2014, Treasury Group Ltd announced the execution of an agreement to invest in ROC Partners, an Australian and Asia private equity investment and advice business. On 30 May 2015, Treasury Group Ltd completed the acquisition of 15.03% equity in ROC Partners for $556,000. In addition, TRG has provided a facility of $4,500,000 of which $2,450,000 was drawn down on 29 May 2014. Other than the information provided above, there have been no other significant changes in the state of affairs of the Company during the financial year. Directors’ Report continued Significant Events after the Balance Date On 5 August 2014, the Directors of Treasury Group Ltd declared a final dividend on ordinary shares in respect of the 2014 financial year. The total amount of the dividend is $6,398,324 which represents a fully franked dividend of 27 cents per share. The dividend has not been provided for in the 30 June 2014 financial statements. On 5 August 2014, Treasury Group Ltd and Northern Lights Capital Group (Northern Lights) agreed to a merger creating an international multi-boutique business with A$49.6bn FUM. Northern Lights is a privately owned international multi-boutique asset management group headquartered in the United States with 13 associated boutiques. A new Australian Trust and trustee company has been established which will own interests in the combined 21 boutiques and give effect to the merger. The new Australian Trust will have its Board, management and operations integrated. Treasury Group will be entitled to 61% of the economic interest of the Trust and it will have majority board representation. The Trust will issue Treasury Group Class A Trust Units and Northern Lights will be issued Class B Trust Units with 39% interest. Treasury Group will retain all existing franking credits and Treasury Group is expected to be able to continue to pay franked dividends to its shareholders in the future. Treasury Group and Northern Lights will treat the Trust as a joint venture arrangement for accounting purposes. Upon completion of the transaction, Treasury Group will transfer all its underlying assets to the Trust. This transfer will be a deemed sale and a gain on the sale will be recognised at the time of completion. Assuming that TRG share price on completion date is similar to the share price on 5 August 2014, the gain on sale is A$159.3m¹ and the assets to be transferred to the Trust will be valued at A$223.1m¹. Going forward post completion, TRG will recognise its investment in the merger trust as an investment in a joint venture. The accounting will follow the principles of equity accounting. TRG will reflect a share of profit from the trust and its share of the carrying value of the underlying assets of the trust. The merger transaction is viewed to create diversified international portfolio of asset management businesses and it executes Treasury Group’s growth strategy. 1 Based on the TRG share price as at 4 August 2014. Performance Rights On 7 August 2013, Treasury Group Ltd granted additional 100,000 performance rights which have vesting date of 7 August 2016 (2013: 39,007 granted on 1 July 2012 and have vesting date of 1 July 2015) to officers and certain employees as part of their long term incentives. The performance rights on issue were valued based on the valuation made by RSM Bird Cameron using a hybrid monte-carlo/binomial option pricing model on the performance rights that were issued on 11 July 2011. The value of each right at issue was $1.64. Total value of the outstanding performance rights is $227,972 amortised over three years from the grant date. The amount of performance rights amortisation expense for the period was $427,150 (2013:$373,479). Of the 640,000 performance rights granted on 11 July 2011 to key management personnel, 96% vested on 12 July 2014. As a result, 614,400 Treasury Group Ltd shares were allocated to key management personnel. In addition, other employees were allocated 12,857 Treasury Group shares as a result of vesting of performance rights. Indemnification and Insurance of Directors and Officers The Company has entered into an agreement for the purpose of indemnifying Directors and Officers of the Company in certain circumstances against losses and liabilities incurred by the Directors or officers on behalf of the Company. The following liabilities, except for a liability for legal costs, are excluded from the above indemnity: a. A liability owed to the Company or related body corporate; b. A liability for pecuniary penalty order under section 1317G or a compensation order under section 1317H of the Corporations Act 2001; c. A liability owed to someone other than the Company or a related body corporate and did not arise out of conduct in good faith; d. Any other liability against which the Company is precluded by law from indemnifying the Director. The insurance contract prohibits the disclosure of the insurance premium for insuring officers of the company against a liability which may be incurred in that person’s capacity as an officer of the Company. Annual Report 2014 20 21 Remuneration Report (Audited) This report outlines the remuneration arrangements for Directors and Executives of Treasury Group Ltd in accordance with the requirements of the Corporations Act 2001 and its Regulations. It also provides the remuneration disclosures required by paragraphs Aus 29.4 to Aus 29.7.2 of AASB 124 Related Party Disclosures, which have been transferred to the Remuneration Report in accordance with Corporations Regulation 2M.6.04. For the purposes of this report Key Management Personnel (KMP) of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the Company and the Group, directly or indirectly, including any Director (whether executive or otherwise) of the parent company, and includes the three executives of the Parent. The prescribed details for each person covered by this report are detailed below under the following headings: – Key management personnel – Remuneration policy – Relationship between the remuneration policy and company performance – Remuneration of key management personnel – Key terms of employment contracts Key Management Personnel The directors and other key management personnel of the consolidated entity during or since the end of the financial year were: Non-executive Directors M. Fitzpatrick P. Kennedy R. Hayes M. Donnelly Executive Officers A. McGill J. Ferragina Chairman, Non-executive Director Non-executive Director Non-executive Director Non-executive Director Managing Director (appointed 30 August 2013) & Chief Executive Officer Chief Financial Officer & Company Secretary Except as noted, the named persons held their current position for the whole of the financial year and since the end of the financial year. Remuneration Philosophy The performance of the Company depends upon the quality of its Directors and Executives. To prosper, the Company must attract, motivate and retain highly skilled Directors and Executives. To this end, the Company embodies the following principles in its remuneration framework: – Provide competitive rewards to attract high calibre executives; – Link executive rewards to shareholder value; and – Significant portion of Executive remuneration ‘at risk’, dependent upon meeting pre-determined performance benchmarks. Remuneration Committee The Remuneration Committee of the Board of Directors of the Company is responsible for determining and reviewing compensation arrangements for the Directors and the Executive Team. The Remuneration Committee assesses the appropriateness of the nature and amount of emoluments of such officers on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a high quality board and executive team. Remuneration Structure In accordance with best practice corporate governance, the structure of Non-executive Director and Executive remuneration is separate and distinct. Directors’ Report continued Non-executive Director Remuneration Objective The Board seeks to set aggregate remuneration at a level which provides the Company with the ability to attract and retain Directors of the highest caliber, whilst incurring a cost which is acceptable to shareholders. Structure In accordance with the ASX Listing Rules the aggregate remuneration of Non-executive Directors is determined from time to time by a general meeting. An amount not exceeding the amount determined is then divided between the Directors as agreed. The latest determination was at the General Meeting held on 15 November 2006 when shareholders approved an aggregate remuneration of $650,000 per year for services of Directors as directors of the Company and its subsidiaries. The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst Directors is reviewed annually. Non-executive Directors do not receive performance-based bonuses from Treasury Group Ltd. Executive Remuneration Objective The Company aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Company and so as to: – Reward executives for company, business unit and individual performance targets set by reference to appropriate benchmarks; – Align the interests of executives with those of shareholders; – Link reward with the strategic goals and performance of the Company; and – Ensure total remuneration is competitive by market standards. Structure Remuneration consists of the following key elements: – Fixed Remuneration – Variable Remuneration – Short Term Incentive (STI); and Long Term Incentive (LTI) – The proportion of fixed remuneration and variable remuneration is established by the Remuneration Committee. Fixed Remuneration Objective The level of fixed remuneration is set so as to provide a base level of remuneration which is both appropriate to the position and is competitive in the market. Fixed remuneration is reviewed annually by the Remuneration Committee and the process consists of a review of performance, relevant comparative remuneration in the market and advice on policies and practices. Variable Remuneration – Short Term Incentive (STI) Objective The objective of the STI plan is to link the achievement of the Company’s operational targets with the remuneration received by the Executives charged with meeting those targets. The STI is fully discretionary in the hands of the Remuneration Committee. The Remuneration Committee receives a recommendation from the Chief Executive Officer (CEO) on executive performance. The CEO bases his report on a number of tailored Key Performance Indicators (KPI) for each Executive. The total potential STI available is set at a level so as to provide sufficient incentive to the Executive to achieve the operational targets such that the cost to the Company is reasonable. Structure The Board sets annual KPIs for the CEO against which performance is measured. The KPIs are based on financial targets, growth and business development targets as well as operational management. The focus of the KPIs is to drive decision making in a manner that increases returns to shareholders in the short and longer term. The financial targets and heavily weighted in the STI calculation. The board also considers the general value add to the business and the company’s stakeholders through areas such as investor relations, deal origination and strategy. Annual Report 2014 22 23 Following are the CEO’s KPIs for 2015: – Achievement of EPS growth targets – Completion of targeted deal opportunities – Achievement of strategic plan milestones – Qualitative assessment of management of staff – Qualitative assessment of effectiveness of communications with market – Discretionary element Variable Remuneration – Long Term Incentive (LTI) Objective The objective of the LTI plan is to reward Executives in a manner which aligns this element of remuneration with the creation of shareholder wealth. The awarding of the LTIs is fully discretionary in the hands of the Remuneration Committee and granted under the same governance process as detailed for STI’s above. Structure LTI grants are delivered in the form of performance rights/options or shares and are subject to service conditions and performance target measures over a three-year period. Performance rights A long term incentive plan is currently being considered for the CEO and CFO following the expiry of performance rights on 12 July 2014. As part of the completion of the merger with Northern Lights which is estimated to be completed by the end of October, the Remuneration Committee will undertake a full review the remuneration structure of KMP of the combined group, including the CEO and CFO. It is expected that if a LTI scheme is included, it will consist of TRG performance rights. The vesting structure and competitor group against which performance is measured will reflect the post transaction structure of the group. Between 2012 and 2013, the Company granted performance rights to other employees as part of their long term incentives. The performance rights have been split into two equal tranches and each tranche is subject to different total shareholder return (TSR) performance hurdles. TSR measures the return to a shareholder over the Performance period in terms of changes in the market value of the shares plus the value of any dividends paid on the shares. Each TSR hurdle compares the TSR performance of Treasury Group with the TSR performance of each of the entities in a comparator group described below: Tranche 1 – S & P ASX 300 comparator Group 50% of the performance rights are subject to the TSR hurdle that compares the TSR performance of Treasury Group at the end of the performance period with the growth in TSR over the same period of the S&P ASX 300 companies. Tranche 2 – selected comparator group 50% of the performance rights will be subject to a TSR hurdle that compares the TSR performance of Treasury Group at the end of the performance period with the growth in TSR over the same period of a selected comparator group of companies. Each company in the comparator group is weighted equally. The comparator group comprises: – BT Investment Management Ltd – Perpetual Limited – K2 Asset Management Holdings Limited – Hunter Hall International Limited – Platinum Asset Management Limited – Magellan Financial Group – IOOF Holdings Limited The percentage of performance rights which vest (if any) will be determined by the Board in reference to the percentile ranking achieved by the company over the performance period compared to the comparator group applying under the relevant TSR hurdle for the tranche: TSR growth – percentile ranking Performance rights that vest (%) 75th percentile or above Between 50th and 75th percentile 50th percentile Below 50th percentile 100% Progressive pro rata vesting from 50% at 2% for every one percentile increase above the 50th percentile 50% Nil Upon vesting of the performance rights a share is allocated for each performance right. The shares will rank equally and have the same voting rights and dividend eligibility as other ordinary shares in the company. Directors’ Report continued Lapse of Performance Rights Performance rights lapse to the extent that performance conditions are not satisfied. These include: – Cessation of employment before the end of the vesting period – Contravention of dealing restrictions – Acting dishonestly or fraudulently Change of Control Generally in the event of a change of control whether through takeover, scheme of arrangement or any other transaction that the Board determines is likely to result in a change of control, the performance rights may vest at the Board’s discretion. Relationship Between The Remuneration Policy and Company Performance The table below set out summary information about the Group’s earnings and movements in shareholder wealth for the five years to 30 June 2014. Bonuses are paid on individual and Company performance. The Remuneration Committee has ultimate discretion in determining the amount of bonus pool: Revenue Net profit before tax Net profit after tax Share price at start of year ($) Share price at end of year ($) Interim dividend (cps)¹ Final dividend (cps)¹ EPS Diluted EPS KMP bonuses ($) 2014 $ 2013 $ 2012 $ 2011 $ 2010 $ 2,323,656 4,303,143 3,944,594 4,492,981 5,601,816 15,187,652 10,803,395 6,415,796 9,889,480 11,491,620 13,061,814 10,390,514 6,751,757 10,005,104 11,676,131 7.07 9.57 23 27² 56.6 55.0 4.09 7.07 17 23 45.0 45.0 3.96 4.09 14 20 29.3 29.3 5.06 3.96 14 20 43.4 43.4 4.11 5.06 12 14 50.6 50.6 629,500 539,200 502,166 992,443 1,421,527 1 Franked to 100% at 30% corporate income tax rate. 2 Declared on 5 August 2014 and has not been provided for in the 30 June 2014 financial statements. Annual Report 2014 24 25 Remuneration of Key Management Personnel Details of the nature and amount of each element of the remuneration of each Director of the Company and each of the key management personnel of the Company and the consolidated entity for the financial year are as follows: Short term Post employment Share based payments Other Total Performance related Salary & fees $ Cash Bonus $ Super- annuation $ Options/ Performance rights¹ $ Shares $ Others $ $ Non-executive Directors M. Fitzpatrick – Chairman 2014 2013 114,679 114,679 P. Kennedy – Non-executive Director 2014 2013 120,000 120,000 R. Hayes – Non-executive Director 2014 2013 68,807 80,275 M. Donnelly – Non-executive Director 2014 2013 68,632 55,046 Executives Officers – – – – – – – – 10,608 10,321 – – 6,365 7,225 6,348 4,954 – – – – – – – – – – – – – – – – A. McGill – Managing Director (appointed 30 August 2013) & Chief Executive Officer 2014 2013 425,575 406,850 373,500 360,000 J. Ferragina – Chief Financial Officer 2014 2013 302,225 303,530 256,000 179,200 17,775 16,470 17,775 16,470 Total remuneration: Key Management Personnel 2014 2013 1,099,918 1,080,380 629,500 539,200 58,871 55,440 – – – – – – 273,333 273,333 76,533 76,533 349,866 349,866 1 Refer to Note 22 for the vesting conditions of options and performance rights granted to Executives. – – – – – – – – – – – – – – 125,287 125,000 120,000 120,000 75,172 87,500 74,980 60,000 1,090,183 1,056,653 652,533 575,733 2,138,155 2,024,886 – – – – – – – – 34% 34% 39% 31% 27% 27% The value of performance rights granted to key management personnel as part of their remuneration were valued based on the valuation made by RSM Bird Cameron using a hybrid monte-carlo/binomial option pricing model on the performance rights that were issued on 11 July 2011. The amounts disclosed as part of remuneration for the financial year have been determined by allocating the grant date value on a straight line basis over the period from grant date to vesting date. Of the 640,000 performance rights granted on 11 July 2011 to key management personnel, 96% vested on 12 July 2014. As a result, 614,400 Treasury Group Ltd shares were allocated to key management personnel. The relative proportions of those elements of remuneration of key management personnel that are linked to performance: Executives A. McGill J. Ferragina Maximum potential of bonus based on fixed remuneration 2013 2014 Actual bonus based on fixed remuneration linked to performance2 2013 2014 100% 80% 100% 80% 83% 80% 80% 56% 2 KMP bonuses are paid in two instalments being 50% on August and 50% on June the following year. Only the 50% payable on August is provided for as at 30 June 2014. No key management personnel appointed during the period received a payment as part of his consideration for agreeing to hold the position. Directors’ Report continued Bonuses and Share-Based Payments Granted As A Compensation for The Current Financial Year Cash Bonuses No other cash bonuses were granted during 2014. Employee Share Option Plan A Long Term Incentive Plan has been established where Treasury Group Ltd, at the discretion of the Board of Directors, awards performance rights to Directors, executives and certain members of staff of the Group. Each performance right at the time of grant represents one Treasury Group Ltd share if it vests. Each employee performance rights converts into one ordinary share of Treasury Group Ltd on vesting date. No amounts are paid or payable by the recipient of the performance rights on vesting date. The performance rights carry neither rights to dividends nor voting rights. The number of performance rights granted is calculated in accordance with the performance-based formula approved by the Remuneration Committee. The performance rights vest after three years from grant date. Details of share-based payments/performance rights granted as compensation to key management personnel during the current financial year: During the financial year Option series Numbers granted Numbers vested % of grant vested % of grant forfeited % of compensation for the year consisting of performance rights Executive Officers A. McGill J. Ferragina – – – – – – – – – – – – At the date of this report, the performance rights of the following key management personnel that were granted to them as part of their compensation have vested. The performance rights that have vested have been converted into one ordinary share of Treasury Group Ltd in accordance with the LTI plan rules. Executive Officers A.McGill J. Ferragina Performance rights Performance rights that vest No. of ordinary shares of Treasury Group Ltd issued Value vested Value unvested 500,000 140,000 96% 96% 480,000 4,660,800 194,200 134,400 1,305,024 54,376 The following table summarises the value of performance rights granted, vested or lapsed as at the date of this report, in relation to performance rights granted to key management personnel as part of their remuneration: Executive Officers A.McGill J. Ferragina Value of performance rights granted at the grant date¹ Value of shares vested through performance rights² Value of performance rights lapsed at the date of lapsed – – 4,660,800 194,200 1,305,024 54,376 1 The value of performance rights granted to key management personnel as part of their remuneration is calculated as at the grant date using a hybrid monte-carlo/binomial option pricing model prepared by RSM Bird Cameron. The amounts disclosed as part of remuneration for the financial year have been determined by allocating the grant date value on a straight line basis over the period from grant date to vesting date. 2 The value of performance rights vested during the date of this report is calculated as at the vesting date. Annual Report 2014 26 27 Key Terms of Employment Contracts The Chief Executive Officer, Mr Andrew McGill, is employed under contract. His employment contract commenced on 12 July 2011 with a base salary package of $450,000 (gross including superannuation) and has no predetermined termination date. Under the terms of the contract, Mr McGill or Treasury Group may terminate the contract giving six months written notice with no termination benefits. As a long term incentive, Mr McGill was awarded 500,000 performance rights on 12 July 2011 with each right at the time of grant representing one Treasury Group Ltd share if it vests. The performance rights have been split in two equal tranches and each tranche is subject to different total shareholder return (TSR) performance hurdles over a three-year period. Vesting conditions are subject to performance hurdles which are discussed earlier in this report. On 12 July 2014, these performance rights have vested at 96%. Accordingly, Mr. McGill was allocated 480,000 Treasury Group shares. Mr McGill is also eligible for a short term incentive based on a number of clearly defined Key Performance Indicators. The short term incentive is for up to 100% of base salary and paid in two equal instalments over a two year period. The Company may terminate the contract at any time without notice if serious misconduct has occurred. Where termination with cause occurs, Mr McGill is only entitled to that portion of remuneration which is fixed, and only up to the date of termination. On termination with cause, any unvested performance rights will immediately be forfeited. Where employment is terminated with notice, no further payments will be paid by the Company except unpaid salary accrued to the date of termination and accrued annual leave. Where employment is terminated with notice, deferred short term incentives will also be paid. However, the Board retains the discretion to determine that some or all unvested performance rights vest or lapse with effect from or after the cessation date. The Chief Financial Officer, Mr Ferragina, is employed under contract. The current employment contract has no predetermined termination date. Under the terms of the contract Mr Ferragina may terminate the contract by giving three months written notice with no termination benefits. As a long term incentive, Mr Ferragina was awarded 140,000 performance rights on 12 July 2011 with each right at the time of grant representing one Treasury Group Ltd share if it vests. The performance rights have been split in two equal tranches and each tranche is subject to different total shareholder return (TSR) performance hurdles over a three-year period. Vesting conditions are subject to the same performance hurdles as discussed earlier in this report. On 12 July 2014, these performance rights have vested at 96%. Accordingly, Mr. Ferragina was allocated 134,400 Treasury Group shares. Key Management Personnel Equity Holdings Fully paid ordinary shares of Treasury Group Ltd 30 June 2014 Non-executive Directors M. Fitzpatrick P. Kennedy R. Hayes M. Donnelly Executives A. McGill J. Ferragina Balance 1 July 2013 Granted as remuneration Received on vesting of performance rights/options Net change other # Balance held nominally (As at the date of this report) 2,701,285 213,487 – – 50,000 22,404 – – – – – – – – – – – – – 2,701,285 213,487 – 20,000 20,000 480,000 480,000 530,000 134,400 118,996 141,400 Directors’ Report continued Key Management Personnel Equity Holdings Fully paid ordinary shares of Treasury Group Ltd 30 June 2013 Directors M. Fitzpatrick P. Kennedy R. Hayes M. Donnelly Executives A. McGill J. Ferragina Balance 1 July 2012 Granted as remuneration Received on vesting of performance rights/options Net change other # Balance held nominally 2,701,285 211,200 – – 50,000 22,404 – – – – – – – – – – – – – 2,701,285 2,287 213,487 – – – – – – 50,000 22,404 Performance rights of Treasury Group Ltd Balance at 1 July Granted as compensation Received on vesting of performance rights/options Net change other # Balance At 30 June Balance Vested at 30 June Vested but not exercisable Vested and exercisable Performance rights vested as at the date of this report 30 June 2014 No. No. No. No. No. No. No. No. No. A. McGill 500,000 J. Ferragina 140,000 30 June 2013 A. McGill 500,000 J. Ferragina 140,000 – – – – – – – – – – – – 500,000 140,000 500,000 140,000 – – – – – – – – 480,000 480,000 134,400 134,400 – – – – Directors’ Meetings The number of meetings of Directors (including meetings of Committees of Directors) held during the year and the number of meetings attended by each Director were as follows: Directors Meetings Audit Committee Meetings Meetings eligible to attend Meetings Attended Meetings eligible to attend Meetings Attended Remuneration Committee Meetings Meetings eligible to attend Meetings Attended Nomination Committee Meeting Meeting eligible to attend Meeting Attended 11 8 11 11 11 11 8 11 11 11 4 4 4 3 4 4 4 3 3 3 3 0 3 3 3 0 1 1 1 1 M. Fitzpatrick A. McGill* P. Kennedy R. Hayes M. Donnelly * Mr McGill was not a Director for the full year. Annual Report 2014 28 29 Committee Membership As at the date of this report, the Company had an Audit Committee, a Remuneration Committee and a Nomination Committee of the Board of Directors. Members acting on the Committees of the Board during the year were: Audit Remuneration Nomination P. Kennedy (Chairman) R. Hayes (Chairman) M. Donnelly (Chairperson) M. Fitzpatrick R. Hayes M. Donnelly M. Fitzpatrick P. Kennedy M. Fitzpatrick Tax Consolidation Effective 1 July 2003, for the purposes of income taxation, Treasury Group Ltd and its 100% owned entities have formed a tax consolidated group. Corporate Governance In recognising the need for the highest standards of corporate behaviour and accountability, the Directors of Treasury Group Ltd support the Principles of Corporate Governance. The Company’s Corporate Governance Statement is contained in the following section of this annual report. Environmental Regulation and Performance The Group’s operations are not presently subject to significant environmental regulation under the law of the Commonwealth and State. Non-Audit Services The Directors are satisfied that the provision of non-audit services during the year by the auditor is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. Auditor Independence The Directors received an independence declaration from the auditors of Treasury Group Ltd. A copy of the declaration is set out on page 30. Signed in accordance with a resolution of the Directors. M. Fitzpatrick Chairman 20 August 2014 Auditor’s Independence Declaration To the Directors of Treasury Group Ltd Annual Report 2014 Corporate Governance Statement 30 31 The ASX Corporate Governance Council has published Corporate Governance Principles and Recommendations (“ASX Principles”) on what it considers to be best practice in conducting the business of a listed company. The ASX Listing Rules require companies to disclose their compliance with the guidelines on an “if not, why not” basis in their annual report to shareholders. The Guidelines are set out recommended practice in the form of eight principles 1. Lay solid foundations for management and oversight 2. Structure the Board to add value 3. Promote ethical and responsible decision making 4. Safeguard integrity in financial reporting 5. Make timely and balanced disclosure 6. Respect the rights of shareholders 7. Recognise and manage risk 8. Remunerate fairly and responsibly Treasury Group Ltd’s (the Company) adherence to each of these principles, together with details of the policies adopted by the Board to ensure compliance is described on a principle by principle basis below. In accordance with the ASX Principles the Company has posted copies of its governance policies, charters and procedures on its website www.treasurygroup.com Principle 1: Lay Solid Foundations for Management and Oversight The Board’s role is to govern the Company rather than to manage it. The Board recognises the importance of clearly delineating between its roles and the roles of management, and has adopted a formal statement of matters reserved to itself and a list of delegations to management. It is the responsibility of the Board to oversee the activities of management in carrying out these delegated duties. In carrying out its governance role, the main task of the Board is to drive the performance of the Company. The Board must also ensure that the Company complies with all of its contractual, statutory and any other legal obligations, including the requirements of any regulatory body. The Board is accountable to shareholders for the successful operations of the Company. Full details of the Board’s role and responsibilities are contained in the Board Charter, a copy of which is contained in the Corporate Governance section on the Company’s website. Role of Senior Executives It is the role of senior executives to manage the Company in accordance with the direction and delegations of the Board and the responsibility of the Board to oversee the activities of senior executives in carrying out these delegated duties. The Board conducts an annual review of the performance of senior executives against pre-determined qualitative and quantitative key performance indicators. Senior executives undergo an induction programme to gain an understanding of the Company’s financial position, its strategies, operations and risk management policies as well as the rights, duties, responsibilities and roles of the Board and senior executives. Principle 2: Structure the Board to Add Value The Board considers independent decision-making as critical to effective governance, and the Company recognises the importance of independent directors and the external perspective and advice that they can offer. The names of the Directors and their qualifications and experience are included in the profiles in the Directors Report, along with the term of office held by each of the Directors. The Board is made up primarily of Non-executive Directors with a majority of independent directors as recommended by the ASX Principles. Mr Kennedy, Mr Hayes and Ms Donnelly are Non-executive Directors, and meet the ASX Principles’ criteria for independence. Mr Fitzpatrick is a Non-executive Director and Chairman of the Company, but is a major shareholder of the Company and as such he does not meet the ASX Principles’ criteria for independence. However, his experience and knowledge of the Company make his contribution to the Board such that it is appropriate for him to remain as Chairman of the Board. The Board size is considered appropriate for the size of the Company’s operations. The Company’s Managing Director and Chief Executive Officer is Mr Andrew McGill. The Company’s Chairman and CEO have separate roles. The division of responsibilities between the Chairman and the CEO are set out in the Board charter. All Directors bring an independent judgment to bear in Board deliberations. The Board established a Nomination Committee in 2004, to help achieve a structured Board that adds value to the Company by ensuring an appropriate mix of skills are present in Directors on the Board at all times. Corporate Governance Statement continued During the financial year, the members of the Nomination Committee were Ms Donnelly (Chairperson) and Mr Fitzpatrick. Mr Hayes resigned as a member of the Nomination Committee during the year. Whilst the ASX principles recommend three members for a Nomination Committee given the size of the Company and the Board, the Board has decided that two committee members is sufficient. The Nomination Committee’s charter and a description of the process for selection and appointment of new directors are available on the Company’s website. The Board Charter provides for the undertaking of annual Board and Committee performance evaluation. The objective of this evaluation is to provide best practice Corporate Governance to the Company. During the reporting period the Chairman met with individual Directors to discuss their performance. The Nomination Committee is responsible for making recommendations for the appointment and removal of Directors. During the reporting period the Committee recommended Mr McGill be appointed to the Board as Managing Director & CEO. In order to achieve continuing improvement in Board performance, all Directors are able to undergo continual professional development. Specifically, Directors are provided with the resources and training to address skills gaps where they are identified. New Directors undergo an induction process in which they are given a full briefing on the Company. Where possible, this includes meetings with key executives, tours of the premises, an induction package and presentations. Information conveyed to new directors includes: – details of the role and responsibilities of a director; – formal policies on director appointment as well as conduct and contribution expectations; – details of all relevant legal requirements; – access to a copy of the Board and Committee Charters; – guidelines on how the Board processes function; – details of past, recent and likely future developments relating to the Board; – background information on and contact information for key people in the organisation; – an analysis of the Company; – a synopsis of the current strategic direction of the Company including a copy of the current strategic plan and annual budget; and – a copy of the Constitution of the Company. Each Director has the right of access to all Company information and to the Company’s executives. The Board collectively and each Director, subject to informing the Chairman, has the right to seek independent professional advice from a suitably qualified advisor, at the Company’s expense, up to specified limits, to assist them to carry out their responsibilities. Where appropriate, a copy of this advice is to be made available to all other members of the Board. Principle 3: Promote Ethical and Responsible Decision-Making To ensure that the Company maintains the highest standards of integrity, honesty and fairness in its dealings with all stakeholders, the Board has established a formal Code of Conduct for management and employees and also a Code of Ethical Conduct for the Board. These Codes act as a guide for compliance with legal and other obligations that the Company has to stakeholders which include customers, clients, government authorities, creditors, employees and the community as whole. These Codes govern all the Company’s commercial operations and the conduct of the Board, employees, consultants, contactors, advisors and all other people when they represent the Company. These Codes also outline the responsibility and accountability of individuals for reporting and investigating unethical practices and can be viewed in the Corporate Governance section on the Company’s website. The Company has a Securities Trading Policy under which Directors and employees and their associates may only trade in the Company’s securities during specific period trading windows. This policy can be viewed in the Corporate Governance section of the Company’s website. The Board has a Diversity Policy. The Board’s measurable objectives for achieving gender diversity are: – a minimum of one female Director; – at least 20% of senior executives to be female; and – at least 35% of managers to be female. Annual Report 2014 32 33 Total Female 5 3 6 7 1 0 3 3 % 20% – 50% 43% Currently the proportion of women at different levels within the organisation is as follows: Board Senior Executives Managers Employees The representation of women across the organisation as a whole is 33%. Principle 4: Safeguard Integrity in Financial Reporting The Board established an Audit Committee in 2004. The Audit Committee has a formal charter, which can be found in the Corporate Governance section of the Company’s website. The Audit Committee comprises of four non-executive directors, three of whom are independent, and the Committee is also chaired by an independent director. During the year under review, the members of the Audit Committee were Mr Kennedy (Chairman), Mr Fitzpatrick, Mr Hayes and Ms Donnelly (appointed 21 August 2014). Whilst Mr Fitzpatrick is not independent, the Company believes that the Committee structure is adequate to perform its duties independently. All members can critically evaluate financial statements and are financially literate. Mr Kennedy, the Chairman, has a commerce background with experience in financial and accounting matters. Details of members’ qualifications may be found in the director profiles in the Directors’ Report. The Audit Committee held four meetings for the year and details of attendance of the members of the Audit Committee are contained in the Directors’ Report. Information on procedures for the selection and appointment of the external auditor and for the rotation of external audit engagement partners may be found in the Corporate Governance section of the Company’s website. Principle 5: Make Timely and Balanced Disclosure The Board has established a Continuous Disclosure Policy for ensuring compliance with the ASX Listing Rule disclosure requirements. This policy is located in the Corporate Governance section of the Company’s website. The Board has designated the Company Secretary as the person responsible for overseeing and coordinating disclosure of information to the ASX as well as communicating with the ASX. In accordance with the ASX Listing Rules, the Company immediately notifies the ASX of information: – concerning the Company that a reasonable person would expect to have a material effect on the price or value of the Company’s securities; and – that would, or would be likely to, influence persons who commonly invest in securities in deciding whether to acquire or dispose of the Company’s securities. Upon confirmation of receipt from the ASX, the Company posts all information disclosed in accordance with this policy on the Company’s website in an area accessible by the public. To enhance clarity and balance of reporting and to enable investors to make an informed assessment of the Company’s performance, financial results are accompanied by a commentary. Details of payments to executives for the 2013/14 financial year are disclosed in the Directors’ Report. Core entitlements of any new executives will be disclosed at the time when they are agreed as well as at the time the actual payment is made. Principle 6: Respect the Rights of Shareholders The Company respects the rights of its shareholders and to facilitate the effective exercise of those rights the Company is committed to: – communicating effectively with shareholders through releases to the market via ASX, the Company’s website, information mailed to shareholders and the general meetings of the Company; – giving shareholders ready access to balanced and understandable information about the Company and corporate proposals; – making it easy for shareholders to participate in general meetings of the Company; and – requesting the external auditor to attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report. The Shareholder Communications Policy is published on the Company’s website in its Corporate Governance section. Corporate Governance Statement continued Principle 7: Recognise and Manage Risk The Board’s Charter clearly establishes that it is responsible for ensuring that there is a sound system for overseeing and managing risk. The Audit Committee is also responsible for establishing policies on risk oversight and management. A summary of the Company’s Risk Management and internal compliance and control system is available on the Company’s website in its Corporate Governance section. Due to the size and scale of operations of the Company, there is no separate internal audit function or Risk Management Committee. In accordance with Recommendation 7.3 of the ASX Principles, the CEO and CFO have stated in writing to the Board: “That – the statement given in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal compliance and control which implements the policies adopted by the Board; and – the Company’s risk management and internal compliance and control system is operating efficiently and effectively in all material respects in relation to financial reporting risks.” The Company’s Risk and Compliance Services team has designed and implemented a risk management and internal control system to manage Treasury Group’s material business risks. Risk is managed on an enterprise wide basis, with risks being reviewed across the whole group of companies, as well as risks arising from key stakeholder relationships and external events. The Company has an on-line governance, risk and compliance software system which allows material business risks to be linked to mitigating controls so that the performance of Treasury Group’s enterprise risk and compliance programs can be monitored continuously. Management provides monthly board reports on the effectiveness of managing the Company’s business risks. Principle 8: Remunerate Fairly and Responsibly The Board has established a Remuneration Committee to assist the Board in making appropriate decisions about incentive schemes and superannuation arrangements. The role of the Remuneration Committee is to assist the Board in fulfilling its responsibilities in respect of establishing appropriate remuneration levels and incentive policies for employees. Mr Kennedy, Mr Fitzpatrick and Mr Hayes are the current members of the Remuneration Committee. Mr Hayes, the Chairman of the Remuneration Committee is an Independent Director. Ms Donnelly was a member of the Remuneration Committee from 17 July 2013 until her resignation from the Committee on 21 August 2013. The Remuneration Committee has a formal charter which is available on the website of the Company in the Corporate Governance Section. The Board have endorsed the following Senior Executive Remuneration Policy and the Non-executive Director Remuneration Policy. Senior Executive Remuneration Policy The Company is committed to remunerating its senior executives in a manner that is market-competitive and consistent with best practice as well as supporting the interests of shareholders. Consequently, under the Senior Executive Remuneration Policy the remuneration of senior executives may be comprised of the following: – fixed salary that is determined from a review of the market and reflects core performance requirements and expectations; – a performance bonus designed to reward actual achievement by the individual of performance objectives and for materially improved Company performance; – participation in Treasury Group Long Term Incentive Plan (LTI Plan) and – statutory superannuation. By remunerating Senior Executives through performance and long-term incentive plans in addition to their fixed remuneration, the Company aims to align the interests of senior executives with those of shareholders and enhance Company performance. The amount of remuneration, including both monetary and non-monetary components, for each of the Key Management Personnel during the year (discounting accumulated entitlements) is detailed in the Directors’ Report. The value of shares, performance rights and options granted to Senior Executives has been calculated using the Binomial method. Annual Report 2014 34 35 The objective behind using this remuneration structure is to drive improved Company performance and thereby increase shareholder value as well as aligning the interests of executives and shareholders. The Board may use its discretion with respect to the payment of bonuses, stock options and other incentive payments. This discretion is exercised on the following basis: – Retentions and motivation of key executives; – Attraction of quality management to the Company; and – Performance incentives which allow executives to share the rewards of the success of the Company. The Treasury Group LTI Plan had been approved by shareholders in which executives may participate. The number of shares and performance rights issued under the plan are reasonable in relation to the existing capitalisation of the Company and all payments under the plan are made in accordance with thresholds set in plans approved by shareholders. Non-executive Director Remuneration Policy Non-executive Directors are paid their fees out of the maximum aggregate amount approved by shareholders for the remuneration of Non-executive Directors. Non-executive Directors do not receive performance based bonuses and do not participate in the option scheme of the Company. Non-executive Directors are entitled to statutory superannuation. The payment to Directors is based on a workload criterion. Consequently, all Non-executive Directors, except the Chairman receive a fixed amount plus a load for Committee Membership and Committee chairing. The Chairman receives an extra loading given the duties and extra time associated with the position. Current Director Remuneration The aggregate amount of remuneration paid to Non-executive Directors is approved by shareholders and is currently $650,000. Further information in relation to the remuneration of Directors can be found in the Directors’ Report. Income Statement for the year ended 30 June 2014 Revenues Gain/(loss) on investments Salaries and employee benefits expenses Other expenses Consolidated 2014 $ 2013 $ 2,323,656 4,303,143 845,156 (403,703) (4,466,383) (4,517,723) (3,286,577) (3,628,471) Notes 5(a) 5(b) 5(c) 5(c) Share of net profits of equity accounted investments 12(e) 19,771,800 15,050,149 Profit before income tax Income tax expense Profit for the year Attributable to: Non-controlling interest Members of the parent 15,187,652 10,803,395 6(c) (2,109,758) (399,156) 13,077,894 10,404,239 16,080 13,725 19(e) 13,061,814 10,390,514 Earnings per share (cents per share) – basic for profit for the year attributable to ordinary equity holders of the parent – diluted for profit for the year attributable to ordinary equity holders of the parent Franked dividends paid per share (cents per share) for the financial year 24 24 7(b) 56.6 56.6 46 45.0 45.0 37 The above income statement should be read in conjunction with the accompanying notes. Annual Report 2014 Statement of Comprehensive Income for the year ended 30 June 2014 Profit for the year Other Comprehensive Income Items that may be reclassified to profit and loss Net unrealised (losses)/gains on available-for-sale investments taken to equity Income tax relating to items reclassified Share of after-tax gain on available-for-sale investments of an associate Other comprehensive (loss)/income for the year (net of tax) Total comprehensive income for the year Attributable to: Non-controlling interest Members of the parent The above statement of comprehensive income should be read in conjunction with the accompanying notes. 36 37 Consolidated 2014 $ 2013 $ 13,077,894 10,404,239 (213,894) 1,301,512 64,169 (390,452) (13,250) 8,445 (162,975) 919,505 12,914,919 11,323,744 16,080 13,725 12,898,839 11,310,019 Statement of Financial Position as at 30 June 2014 Current assets Cash and cash equivalents Trade and other receivables Other assets Total current assets Non-current assets Trade and other receivables Available-for-sale investments Loans and other receivables Deferred tax Investments accounted for using the equity method Plant and equipment Intangibles Goodwill Total non-current assets Total assets Current liabilities Trade and other payables Provisions Financial liability Total current liabilities Non-current liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Equity attributable to equity holders of the parent Contributed equity Reserves Retained profits Non-controlling interest Total equity The above statement of financial position should be read in conjunction with the accompanying notes. Notes 8(a) 9 9 10 11 6(d) 12(b) 13 14 15 16 17 18 17 Consolidated 2014 $ 2013 $ 12,860,219 12,116,947 11,117,179 7,578,686 1,093,163 175,232 25,070,561 19,870,865 833,073 723,958 11,005,105 9,893,255 4,797,624 3,629,539 781,881 2,760,114 29,242,193 30,633,054 61,447 12,540 70,270 18,440 – 252,764 46,733,863 47,981,394 71,804,424 67,852,259 7,671,969 5,861,982 221,903 – 213,202 600,000 7,893,872 6,675,184 135,882 135,882 99,650 99,650 8,029,754 6,774,834 63,774,670 61,077,425 19(a) 19(f) 19(e) 29,594,265 29,594,265 4,088,120 3,823,945 30,092,285 27,643,019 – 16,196 63,774,670 61,077,425 Annual Report 2014 Statement of Changes in Equity for the year ended 30 June 2014 38 39 Consolidated Ordinary shares $ Note Share options reserve $ Net unrealised gains reserve $ Retained earnings $ Non- controlling interest $ Total $ 29,594,265 3,447,286 376,659 27,643,019 16,196 61,077,425 – (162,975) 13,061,814 16,080 12,914,919 – – – – 7(b) 427,150 – – – – – – – (10,612,548) – 427,150 (32,276) (32,276) – – (10,612,548) 63,774,670 29,594,265 3,874,436 213,684 30,092,285 As at 1 July 2013 Total comprehensive income for the year Share-based payments Share bought back for non-controlling interest Dividends paid At 30 June 2014 The above statement of changes in equity should be read in conjunction with the accompanying notes. Consolidated Ordinary shares $ Note Share options reserve $ Net unrealised gains reserve $ Retained earnings $ Non- controlling interest $ Total $ 29,594,265 3,073,807 (542,846) 25,788,684 2,471 57,916,381 – – – 7(b) – 919,505 10,390,514 13,725 11,323,744 373,479 – – – – (8,536,179) – – 373,479 (8,536,179) 29,594,265 3,447,286 376,659 27,643,019 16,196 61,077,425 As at 1 July 2012 Total comprehensive income for the year Share-based payments Dividends paid At 30 June 2013 The above statement of changes in equity should be read in conjunction with the accompanying notes. Statement of Cash Flows for the year ended 30 June 2014 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Dividends and distributions received Interest received Notes Consolidated 2014 $ 2013 $ 20,675,949 20,005,673 (27,016,738) (23,173,780) 17,885,459 13,507,057 615,407 570,870 Net cash flows from operating activities 8(b) 12,160,077 10,909,820 Cash flows from investing activities Proceeds from disposal of available-for-sale investments Purchase of available-for-sale investments Repayment of loans by associates Advances to associates Advances to other related party Proceeds from disposal of investment accounted for under the equity method Purchase of investment accounted for under the equity method Purchase of plant and equipment Purchase of intangible assets Net cash flows (used in)/from investing activities Cash flows from financing activities Shares bought back for non-controlling interest Equity dividends paid on ordinary shares Net cash flows (used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year The above statement of cash flows should be read in conjunction with the accompanying notes. 3,281,492 7,562,073 (2,300,000) (6,121,318) 1,889,028 343,750 (2,450,000) (600,000) 235,960 – – – (811,420) (225,395) (15,224) (10,609) (1,817) – (771,981) 1,548,501 (32,276) – (10,612,548) (8,536,179) (10,644,824) (8,536,179) 743,272 3,922,142 12,116,947 8,194,805 8(a) 12,860,219 12,116,947 Annual Report 2014 Notes to the Financial Statements for the year ended 30 June 2014 40 41 1. Corporate Information The financial report of Treasury Group Ltd (the ‘Company’ or the ‘Group’) for the year ended 30 June 2014 was authorised for issue in accordance with a resolution of the Directors on 20 August 2014. Treasury Group Ltd is a company limited by shares incorporated in Australia whose shares are publicly traded on the Australian Securities Exchange (ASX). The nature of operations and principal activities of the Group are disclosed in the Directors’ Report. 2. Summary of Significant Accounting Policies a. Basis of Preparation The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has also been prepared on a historical cost basis, except for financial assets held at fair value through profit and loss, and available-for-sale investments, which have been measured at fair value. The financial report is presented in Australian dollars. Treasury Group Ltd is a for-profit entity. b. Compliance with IFRS The financial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. Standards and Interpretations affecting amounts reported in the current period (and/or prior periods) The following new and revised Standards and Interpretations have been adopted in the current year and have affected the amounts reported in these financial statements. Standards affecting presentation and disclosure Standard/Interpretation Summary AASB 2011-4 ‘Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements’ This standard removes the individual key management personnel disclosure requirements in AASB 124 ‘Related Party Disclosures’. As a result the Group only discloses the key management personnel compensation and for each of the categories required in AASB 124. In the current year the individual key management personnel disclosure previously required by AASB 124 is now disclosed in the remuneration report due to an amendment to Corporations Regulations 2001 issued in June 2013. AASB 10 ‘Consolidated Financial Statements’ and AASB 2011-7 ‘Amendments to Australian Accounting Standards arising from the consolidation and Joint Arrangements standards’ AASB 10 replaces the parts of AASB 127 Consolidated and Separate Financial Statements’ that deal with consolidated financial statements and Interpretation 112 ‘Consolidation – Special Purpose Entities’. AASB 10 changes the definition of control such that an investor controls an investee when a) it has power over an investee, b) it is exposed, or has rights, to variable returns from its involvement with the investee, and c) has the ability to use its power to affect its returns. All three of these criteria must be met for an investor to have control over an investee. Previously, control was defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Additional guidance has been included in AASB 10 to explain when an investor has control over an investee. Some guidance included in AASB 10 that deals with whether or not an investor that owns less than 50 per cent of the voting rights in an investee has control over the investee is relevant to the Group. The Directors of the Company made an assessment as the date of the initial application of AASB 10 (i.e. 1 July 2013) as to whether or not the Group has control over associates accounted for under the new standard. The outcome of this assessment was that there was no change in control as a result of the application of AASB 10. Notes to the Financial Statements continued 2. Summary of Significant Accounting Policies (Cont.) Standard/Interpretation Summary AASB 11 ‘Joint Arrangements’ and AASB 2011-7 ‘Amendments to Australian Accounting Standards arising from the consolidation and Joint Arrangements standards’ AASB 12 ‘Disclosure of Interests in Other Entities’ and AASB 2011-7 ‘Amendments to Australian Accounting Standards arising from the consolidation and Joint Arrangements standards’ AASB 11 replaces AASB 131 ‘Interests in Joint Ventures’, and the guidance contained in a related interpretation, Interpretation 113 ‘Jointly Controlled Entities – Non-Monetary Contributions by Venturers’, has been incorporated in AASB 128 (as revised in 2011). AASB 11 deals with how a joint arrangement of which two or more parties have joint control should be classified and accounted for. Under AASB 11, there are only two types of joint arrangements – joint operations and joint ventures. The classification of joint arrangements under AASB 11 is determined based on the rights and obligations of parties to the joint arrangements by considering the structure, the legal form of the arrangements, the contractual terms agreed by the parties to the arrangement, and, when relevant, other facts and circumstances. A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint operators) have rights to the assets, and obligations for the liabilities, relating to the arrangement. A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement (i.e. joint venturers) have rights to the net assets of the arrangement. Previously, AASB 131 contemplated three types of joint arrangements – jointly controlled entities, jointly controlled operations and jointly controlled assets. The classification of joint arrangements under AASB 131 was primarily determined based on the legal form of the arrangement (e.g. a joint arrangement that was established through a separate entity was accounted for as a jointly controlled entity). The initial and subsequent accounting of joint ventures and joint operations is different. Investments in joint ventures are accounted for using the equity method (proportionate consolidation is no longer allowed). Investments in joint operations are accounted for such that each joint operator recognises its assets (including its share of any assets jointly held), its liabilities (including its share of any liabilities incurred jointly), its revenue (including its share of revenue from the sale of the output by the joint operation) and its expenses (including its share of any expenses incurred jointly). Each joint operator accounts for the assets and liabilities, as well as revenues and expenses, relating to its interest in the joint operation in accordance with the applicable Standards. The Directors of the Company have reviewed and assessed the Group’s investments for compliance with AASB 11 and noted no impact on the financial reporting of currently held investments. AASB 12 is a new disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. In general, the application of AASB 12 has resulted in more extensive disclosures in the consolidated financial statements. The Directors have assessed the implementation of this requirement and accordingly, new disclosures on material associates have been included in the consolidated financial statements. Annual Report 2014 42 43 Standard/Interpretation Summary AASB 13 ‘Fair Value Measurement’ and AASB 2011-8 ‘Amendments to Australian Accounting Standards arising from AASB 13’ AASB 119 ‘Employee Benefits’ (2011) and AASB 2011-10 ‘Amendments to Australian Accounting Standards arising from AASB 119 (2011)’ AASB 2012-2 ‘Amendments to Australian Accounting Standards – Disclosures – Offsetting Financial Assets and Financial Liabilities’ The Group has applied AASB 13 for the first time in the current year. AASB 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The scope of AASB 13 is broad; the fair value measurement requirements of AASB 13 apply to both financial instrument items and non-financial instrument items for which other AASBs require or permit fair value measurements and disclosures about fair value measurements, except for share-based payment transactions that are within the scope of AASB 2 ‘Share-based Payment’, leasing transactions that are within the scope of AASB 117 ‘Leases’, and measurements that have some similarities to fair value but are not fair value (e.g. net realisable value for the purposes of measuring inventories or value in use for impairment assessment purposes). AASB 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under AASB 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. Also, AASB 13 includes extensive disclosure requirements. AASB 13 requires prospective application from 1 January 2013. In addition, specific transitional provisions were given to entities such that they need not apply the disclosure requirements set out in the Standard in comparative information provided for periods before the initial application of the Standard. In accordance with these transitional provisions, the Group has made any new disclosures required by AASB 13 for the 2013 comparative period. In the current year, the Group has applied AASB 119 (as revised in 2011) ‘Employee Benefits’ and the related consequential amendments for the first time. AASB 119 (as revised in 2011) changes the accounting for defined benefit plans and termination benefits. The most significant change relates to the accounting for changes in defined benefit obligations and plan assets. The amendments require the recognition of changes in defined benefit obligations and in the fair value of plan assets when they occur, and hence eliminate the ‘corridor approach’ permitted under the previous version of AASB 119 and accelerate the recognition of past service costs. All actuarial gains and losses are recognised immediately through other comprehensive income in order for the net pension asset or liability recognised in the consolidated statement of financial position to reflect the full value of the plan deficit or surplus. Furthermore, the interest cost and expected return on plan assets used in the previous version of AASB 119 are replaced with a ‘net interest’ amount under AASB 19 (as revised in 2011), which is calculated by applying the discount rate to the net defined benefit liability or asset. These changes have had no impact on the financial reporting of Treasury Group. The Group has applied the amendments to AASB 7 “Disclosures – Offsetting Financial Assets and Financial Liabilities’ for the first time in the current year. The amendments to AASB 7 require entities to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for financial instruments under an enforceable master netting agreement or similar arrangement. The amendments have been applied retrospectively. As the Group does not have any offsetting arrangements in place, the application of the amendments has had no material impact on the disclosures or on the amounts recognised in the consolidated financial statements. Notes to the Financial Statements continued 2. Summary of Significant Accounting Policies (Cont.) Standards and Interpretations affecting the reported results or financial position There are no new and revised Standards and Interpretations adopted in these financial statements which affected the reporting results or financial position. Standards and Interpretations in issue not yet adopted At the date of authorisation of the financial statements, the Standards and Interpretations listed below were in issue but not yet effective. Their adoption has not had any significant impact on the amounts reported in these financial statements but may affect the accounting for future transactions or arrangements. Standard/Interpretation AASB 9 ‘Financial Instruments’, and the relevant amending standards Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1 January 2018 30 June 2019 AASB 1031 ‘Materiality’ (2013) 1 January 2014 30 June 2015 AASB 2012-‘Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities’ AASB 2013-3 ‘Amendments to AASB 135 – Recoverable Amount Disclosures for Non-Financial Assets’ AASB 2013-‘5 ‘Amendments to Australian Accounting Standards – Investment Entities’ 1 January 2014 30 June 2015 1 January 2014 30 June 2015 1 January 2014 30 June 2015 AASB 2013-9 ‘Amendments to Australian Accounting Standards – Conceptual Framework, Materiality and Financial Instruments ’ 1 January 2014 30 June 2015 At the date of authorisation of the financial statements, the following IASB Standards and IFRIC Interpretations were also in issue but not yet effective, although Australian equivalent Standards and Interpretation have not yet been issued. Standard/Interpretation Narrow-scope amendments to IAS 19 Employee Benefits entitled Defined Benefit Plans: Employee Contributions (Amendments to IAS 19) Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending 1 July 2014 30 June 2015 Annual Improvements to IFRS’s 2010-2012 Cycle Annual Improvements to IFRS’s 2011-2013 Cycle 1 July 2014 1 July 2014 30 June 2015 30 June 2015 IFRS 14 Regulatory Deferral Accounts 1 January 2016 30 June 2017 IFRS 15 Revenue from contracts with Customers 1 January 2017 30 June 2018 Annual Report 2014 44 45 e. Cash and Cash Equivalents Cash and short-term deposits in the Statement of Financial Position comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less, that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. For the purposes of the Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined above. f. Trade and Other Receivables Trade receivables, which are generally on 30 day terms, are recognised at fair value and subsequently valued at amortised cost using the effective interest method, less any allowance for uncollectible amounts. Cash flows relating to short term receivables are not discounted as any discount would be immaterial. Collectability of trade receivables is reviewed on an ongoing basis. Debts that are known to be uncollectible are written off when identified. An allowance for doubtful debts is raised when there is objective evidence that the Group will not be able to collect the debt. Financial difficulties of the debtor or default payments are considered objective evidence of impairment. The amount of the impairment loss is the receivable carrying amount compared to the present value of estimated future cash flows, discounted at the original effective interest rate. The Group did not have any impaired trade receivables (2013: Nil). g. Impairment of Available-for-Sale Financial Assets The Group assesses at each balance date whether a financial asset or group of financial assets is impaired. If there is objective evidence that an available-for- sale investment is impaired, an amount comprising the difference between its cost (net of any principal repayment and amortisation) and its current fair value, less any impairment loss previously recognised in the Income Statement, is transferred from equity to the Income Statement. Reversals of impairment losses for equity instruments classified as available-for-sale are not recognised in profit. The Group would consider that there was objective evidence of impairment if there was a significant or prolonged decline in market value to below cost. c. Revenue Recognition Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Service fees Fees charged for providing administrative services to related companies are recognised as revenue as services are provided. Management fees Management fees on asset management activities are accrued as services are provided. Interest income Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Dividends and distributions Revenue is recognised when the Group’s right to receive the payment is established. d. Basis of Consolidation The consolidated financial statements comprise Treasury Group Ltd and its subsidiaries as at 30 June each year (the Group). Control is achieved when the Company : – has power over the investee – is exposed, or has rights, to variable returns from its involvement with the investee, and – has the ability to use its power to affect its returns. Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether a group controls another entity. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company. In preparing the consolidated financial statements, all intercompany balances and transactions, income and expenses and profit and losses resulting from intra-group transactions have been eliminated in full. Interests in associates are equity accounted and are not part of the consolidated Group (see Notes (g) and (h)). Notes to the Financial Statements continued 2. Summary of Significant Accounting Policies (Cont.) h. Investments in Associates The Group’s investments in its associates are accounted for using the equity method of accounting in the consolidated financial statements. The associates are entities in which the Group has significant influence and which are neither a subsidiary nor a joint venture. Under the Accounting Standards, significant influence is the power to participate in the financial and operating policy decisions of the investee, but is not control or joint control of those policies. The Group generally deems they have significant influence if they have the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. Under the equity method, the investments in the associates are carried in the Statement of Financial Position at cost plus post-acquisition changes in the Group’s share of net assets of the associates. Goodwill acquired in a business combination represents payment made by the acquirer in anticipation of future economic benefits from assets that are not capable of being individually identified and separately recognised. It is initially measured as cost being the excess of the cost of the business combination over the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities. Goodwill relating to the associates is included in the carrying amount of the investments and is not amortised. After application of the equity method, the Group determines whether it is necessary to recognise any additional impairment loss with respect to the Group’s net investment in the associates. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the Income Statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates in the consolidated financial statements reduce the carrying amount of the investment. The reporting dates of the associates and the Group are identical and the associates’ accounting policies conform to those used by the Group for like transactions and events in similar circumstances. The requirements of AASB 139 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with AASB 136 ‘Impairment of Assets’ as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount. Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with AASB 136 to the extent that the recoverable amount of the investment subsequently increases. When a group entity transacts with its associate, profits and losses resulting from the transactions with the associate are recognised in the Group’s consolidated financial statements only to the extent of interests in the associate that are not related to the Group. i. Investments in Joint Ventures Investments in which the Group has joint control are accounted for under the equity method in the consolidated financial statements similar to investments in associates as described in Note 2(h). j. Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of the acquisition of the business less accumulated impairment losses, if any. For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the cash- generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. The Group’s policy for goodwill arising on the acquisition of an associate is described at Note (h). Annual Report 2014 46 47 All regular way purchases of sales of financial assets are recognised on the trade date, i.e. the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the market place. Financial assets are derecognised when the right to receive cash flows from the financial assets have expired or been transferred. i. Financial assets at fair value through profit or loss Financial assets classified as held for trading are included in the category ‘financial assets at fair value through profit and loss’. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term with the intention of making a profit. Derivatives are also classified as held for trading unless they are designed as effective hedging instruments. Gains or losses on financial assets held for trading are recognised in profit or loss and the related assets are classified as current assets in the Statement of Financial Position. The fair value of financial assets at fair value through profit or loss is determined by reference to quoted market bid prices at the close of business on that balance date. ii. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains or losses are recognised in profit or loss when the loan and receivables are derecognised or impaired, as well as through the amortisation process. For loans and receivables carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. iii. Available-for-sale investments Available-for-sale investments are those non-derivative financial assets that are designated as available-for-sale or are not classified as any of the three other categories. After initial recognition, available-for-sale investments are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired, at which time the cumulative gain or loss previously reported in equity is recognised in profit or loss. The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on that balance date. k. Plant and Equipment Plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Major depreciation methods and periods are: 2014 & 2013 Furniture & fittings: 5 – 10 years diminishing value Office equipment: 3 – 10 years diminishing value Leasehold improvements: 1 – 6 years straight line The assets’ residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each financial year end. Disposal An item of plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the year the asset is derecognised. l. Intangibles Intangible assets acquired separately are initially measured at cost. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is recognised in profit or loss in the year in which the expenditure is incurred. Intangible assets with finite lives are amortised over the useful life and tested for impairment whenever there is an indication that the asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year end. m. Financial Assets Financial assets are classified into the following categories: financial assets ‘at fair value through profit or loss’ (FVTPL), ‘held-to-maturity investments, available-for- sale (AFS) financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that required delivery of assets within the time frame established by regulation or convention in the marketplace. When financial assets are recognised initially they are measured at fair value, plus, in the case of assets not at fair value through profit or loss, directly attributable transaction costs. Notes to the Financial Statements continued 2. Summary of Significant Accounting Policies (Cont.) n. Income Tax The income tax expense (revenue) for the year comprises current income tax expense (income) and deferred tax expense (income). Current income tax expense charged to the profit or loss is the tax payable on taxable income measured at the amounts expected to be paid to (recovered from) the relevant taxation authority. Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year as well as unused tax losses. Current and deferred income tax expense (income) is charged or credited outside profit or loss when the tax relates to items that are recognised outside profit or loss. Except for business combinations, no deferred income tax is recognised from the initial recognition of an asset or liability, where there is no effect on accounting or taxable profit or loss. Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled and their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability. Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised. Where temporary differences exist in relation to investments in subsidiaries, branches, associates, and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future. Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where: (a) a legally enforceable right of set-off exists; and (b) the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled. The group has applied the Stand-Alone Taxpayer approach in determining the appropriate amount of current taxes to allocate to members of the tax consolidation group. The tax funding agreement provides each member of the tax consolidated group to pay a tax equivalent amount to or from the parent in accordance with their current tax liability or current tax asset. Such amounts are reflected in amounts receivable from or payable to the parent company in their accounts and are settled as soon as practicable after lodgment of the consolidated return and payment of the tax liability. The deferred taxes are allocated to members of the tax consolidated group in accordance with the principles of AASB 112. Tax Consolidation Effective 1 July 2003, for the purposes of income taxation, Treasury Group Ltd and its 100% owned entities have formed a tax consolidated group. Treasury Group Ltd is the head entity of the tax consolidated group. Members of the tax consolidated group have entered into a tax sharing arrangement in order to allocate income tax expense to the wholly-owned entities on a pro-rata basis. Under a tax funding agreement, each member of the tax consolidated group is responsible for funding their share of any tax liability. In addition, the agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At the balance date, the possibility of default is remote. o. Other Taxes Revenues, expenses and assets are recognised net of the amount of GST except: – when the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item, as applicable; and – receivables and payables, which are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Statement of Financial Position. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Annual Report 2014 48 49 Liabilities recognised in respect of short-term employee benefits, are measured at their nominal values using the remuneration date expected to apply at the time of settlement. Liabilities recognised in respect of long term employee benefits are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. t. Contributed Equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. u. Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Operating leases Operating lease payments are recognised as an expense in the Income Statement on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction of the liability. v. Earnings Per Share Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude costs of servicing equity (other than dividends), divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share is calculated as net profit attributable to members of the parent, adjusted for: – costs of servicing equity (other than dividends), if any; – the after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses; – other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares; and – divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element, if any. p. Impairment of Non-financial Assets Other Than Goodwill Amortising intangible assets and property, plant and equipment are tested for impairment if events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. q. Trade and Other Payables Trade payables and other payables are carried at amortised cost and due to their short term nature they are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of the goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. r. Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. s. Employee Leave Benefits i. Short term and long term employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave, when it is probable that settlement will be required and they are capable of being measure reliably. Notes to the Financial Statements continued 2. Summary of Significant Accounting Policies (Cont.) w. Share-based Payments Equity-settled transactions: The Group provides benefits to employees (including Senior Executives and Directors) of the Group in the form of share-based payment transactions, whereby employees render services in exchange for shares or rights over shares (equity-settled transactions). During the year, there were two plans in place to provide these benefits: i. The Treasury Group LTI Plan had been established where Treasury Group Ltd, at the discretion of the Board of Directors, awards performance rights to Directors, executives and certain members of staff of the Group. Each performance right at the time of grant represents one Treasury Group Ltd share if it vests. ii. The Employee Share Plan, which provides the opportunity to the employees (including Directors) of the Group to purchase shares in the parent company at a discount. The cost of the equity-settled Treasury Group LTI Plan is measured by reference to the fair value at the date at which they are granted. The fair value is determined using a Binomial model. In valuing equity-settled transactions, no account is taken of any performance conditions, other than conditions linked to the price of the shares of Treasury Group Ltd (market conditions), if applicable. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award (the vesting period). The cumulative expense recognised for equity-based transactions at each reporting date until vesting date reflects (i) the extent to which the vesting period has expired and (ii) the Group’s best estimate of the number of equity instruments that will ultimately vest. No adjustment is made for the likelihood of market performance conditions being met as the effect of these conditions is included in the determination of fair value at grant date. The Income Statement charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period. No cumulative expense is recognised for awards that do not ultimately vest due to the non-fulfilment of a non- market condition. If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. In addition an expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. If an equity-settled award is cancelled, it is treated as if it has vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award, and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award as described in the previous paragraph. The dilutive effect, if any, of outstanding options and performance rights are reflected as additional share dilution in the computation of earnings per share. x. Foreign Currency Translation i. Functional and presentation currency Both the functional and presentation currency of Treasury Group Ltd and its subsidiaries are Australian dollars ($). ii. Transactions & balances Transactions in foreign currencies are initially recorded in the functional currency by applying an average spot exchange rate for the period. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance date. Non-monetary items are measured in terms of historical cost in a foreign currency and are translated using the exchange rate at the date the fair value was determined. y. Comparatives Where necessary, comparative information has been immaterially reclassified and repositioned for consistency with current year disclosures. Annual Report 2014 50 51 3. Financial Risk Management Objectives and Policies The Group’s principal financial instruments comprise of cash, short-term deposits, available-for-sale investments, investments at fair value through profit and loss, receivables and payables. Details of significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument is disclosed in Note 2 to the financial statements. Risk Exposures and Responses Interest rate risk The Group’s exposure to market interest rates relates primarily to the Group’s cash and short term investments. At balance date, the Group had the following mix of financial assets exposed to Australian variable interest rate risk: Financial Assets Cash at bank and on hand Consolidated 2014 $ 2013 $ 12,860,219 12,116,947 12,860,219 12,116,947 The following sensitivity analysis is based on the interest rate risk exposures in existence at the balance date. If interest rates had moved during the year as illustrated in the table below (using an average cash balance), with all other variables held constant, post tax profit and reserves would have been affected as follows: Consolidated +0.75% [2013:0.75%]/(75 basis points), [2013:75 basis points] -0.75% [2013:0.75%]/(75 basis points), [2013:75 basis points] Post Tax Profit Higher/(Lower) 2014 $ 2013 $ 69,762 48,571 (69,762) (48,571) The movements in profit are due to higher/lower interest income from cash and short term deposit balances. The Group’s profit and reserves do not have any significant sensitivity to fixed interest rate risk as the loans made by Treasury Group Ltd to its related parties, which are the only assets or liabilities exposed to fixed interest rate risk, are carried at amortised cost. Credit risk Credit risk arises from the financial assets of the Group, which comprise cash and cash equivalents, trade and other receivables, investments at fair value through profit and loss, and loans receivable from related entities. The Group’s exposure to credit risk arises from potential default of the counterparty, with the maximum exposure equal to the carrying amount of these instruments. Exposure at balance date is addressed in each applicable note. The Group does not hold any credit derivatives to offset its credit exposure. The Group trades only with recognised, creditworthy third parties, and as such collateral is not requested nor is it the Group’s policy to securitise its trade and other receivables. Receivables balances and loans made to related entities are monitored on an ongoing basis at Board level and remain within approved levels, with the result that the Group’s exposure to bad debts is not significant. It is a core part of Treasury Group Ltd’s policy to extend loans to new companies in the Group to provide them financing until they reach profitability. As with all new start-ups there is a risk that a new venture will fail, in which case Treasury Group Ltd would have to write the loan off. All loans made to new ventures are monitored on an ongoing basis at Board level to minimise the risk of a write off occurring. The maximum exposure to credit risk is the carrying value of the loans. Notes to the Financial Statements continued 3. Financial Risk Management Objectives and Policies (Cont.) Liquidity risk The Group does not have any external financing liabilities and has significant cash balances. As such management is of the opinion that it does not face significant liquidity risks. Management prepares cash flow forecasts on a monthly basis to ensure that it has sufficient liquid assets to meet its liabilities. The Group’s objective is to maintain financial flexibility and only invests surplus funds in cash and short-term deposits. Both in the current and proceeding year all of the Group’s financial liabilities are due within 6 months or less. Price risk Equity security price risk arises from investments in unlisted managed trusts. The investments are made by members of the Group for the purpose of seeding new products. A simple analysis has been conducted to provide some perspective when considering the determination of a reasonably possible change. As at year end, the Group had the following exposure to equity security price risks: Available-for-sale investments – Units in managed investment trusts – Unlisted shares in other corporations Consolidated 2014 $ 2013 $ 8,174,164 8,568,200 900 1,100 8,175,064 8,569,300 As at year end, if the price for the Group’s investments had moved, as illustrated in the table below, with all other variables held constant, post tax profit and reserves would have been affected as follows: Consolidated MSCI World index +10% MSCI World index -10% Reserves Higher/(Lower) 2014 $ 2013 $ 572,254 599,851 (572,254) (599,851) For the investments that are classified as available-for-sale, movements in market value are captured in an Unrealised Gains Reserve and do not impact reported profit unless they are deemed to be impaired at reporting date. As at 30 June 2014, the Group has no investments at fair value through profit or loss and only available for sale investments with any potential gains or losses being taken to equity. Foreign Currency Risk Investments in foreign currency funds are individually approved by the Board. The Group has not hedged its foreign currency exposure. A simple analysis has been conducted to provide some perspective when considering the determination of a reasonably possible change. The Group does not have any significant transactional currency exposures. Annual Report 2014 At year end, the Group had the following exposure to foreign currency: Available-for-sale investments – British Pound 52 53 Consolidated 2014 $ 2013 $ 1,393,261 1,323,955 1,393,261 1,323,955 For the investments that are classified as available-for-sale, movements in market value are captured in an Unrealised Gains Reserve and do not impact reported profit unless they are deemed to be impaired at reporting date. As at year end, had the Australian Dollar moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity would have been affected as follows: Consolidated AUD/GBP +10% AUD/GBP -10% Equity Higher/(Lower) 2014 $ 2013 $ 97,528 92,677 (97,528) (92,677) Fair value measurements recognised in the Statement of Financial Position Some of the Group’s available-for-sale assets are measured at fair value at the end of each reporting period. The following table gives an information about how the fair values of these available-for-sale assets of the Group is determined (in particular, the valuation techniques and inputs used): Financial assets/financial liabilities 1. Investments in unlisted unit trusts 2. Investment in Freehold Investment Management - Options 3. Investments in Aubrey Capital Management -convertible preference shares Fair values at 2014 2013 Fair value Hierarchy Valuation techniques and key inputs Significant unobservable inputs 8,175,064 8,569,300 Level 2 Not required The fair value of the unlisted available-for- sale investments is based on the current unit price of the investments which is determined by the value of the underlying investments of the unit trust. 1,436,780 – Level 3 Cost Unlisted equity instrument where value cannot be reliably measured. Start up investment and impairment assessment undertaken by management against initial acquisition milestones. Milestones include future FUM inflows, stability of management team, business costs and discount rates. 1,393,261 1,323,955 Level 3 Discounted cash flow. 18% discount rate Future cash flows are determined based on current Funds Under Management of the business using various growth rates discounted at 18%. Long term revenue growth rates, taking into account management’s experience and knowledge of market conditions of the specific industries. Relationship of unobservable input Not required Not required The higher the discount rate, the lower the fair value. The higher the growth rate, the higher the fair value. The fair values of the available-for-sale assets included in the level 2 and 3 categories have been determined in accordance with generally accepted pricing models based a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk of counterparties. Notes to the Financial Statements continued 3. Financial Risk Management Objectives and Policies (Cont.) Fair value measurements recognised in the Statement of Financial Position The available-for-sale investments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 on the degree to which the fair value is observable. – Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. – Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as market prices) or indirectly (i.e. derived from prices). – Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). There were no transfers between any levels. Significant assumptions in determining fair value of financial assets and liabilities The fair value of the options is estimated using a discounted cash flow model, which includes some assumptions that are not supportable by observable market prices or rates. In determining the fair value, a revenue growth derived from FUM growth factors ranging from 3-10% has been used with appropriate probabilities assigned to each. In addition, expense growth of 3-10% has been used and a discount factor of 20% has been applied. If these revenue and expense inputs to the valuation model were 10% higher/lower while all the other variables were held constant, the carrying amount of the options would decrease/increase by $121,765. The fair value of the convertible preference shares is estimated using a discounted cash flow model, which includes some assumptions that are not supportable by observable market prices or rates. In determining the fair value, a revenue growth derived from FUM growth factors ranging from 0-50% has been used with appropriate probabilities assigned to each. In addition expense growth of 5% has been used and a discount factor of 18% has been applied. If these revenue and expense inputs to the valuation model were 10% higher/lower while all the other variables were held constant, the carrying amount of the shares would decrease/increase by $139,326. Reconciliation of Level 3 fair value measurements of financial assets Opening balance Revaluation of Aubrey and acquisition of FIM Total Opening balance Revaluation and additional acquisition of Aubrey Total 30 June 2014 Available for sale Level 3 1,323,955 1,506,086 2,830,041 30 June 2013 Available for sale Level 3 862,808 461,147 1,323,955 Annual Report 2014 54 55 4. Significant Accounting Judgments, Estimates and Assumptions The preparation of the financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgments and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgments and estimates on experience and other factors, including expectations of future events that may have an impact on the Group. All judgments, estimates and assumptions made are believed to be reasonable based on the most current set of circumstances available to management. Actual results may differ from the judgments, estimates and assumptions. Significant judgments, estimates and assumptions made by management in the preparation of these financial statements are outlined below: i. Significant Accounting Judgments Taxation Judgment is also required in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the Statement of Financial Position. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. These depend on estimates of future income, operating costs, dividends and other capital management transactions. Judgments are also required about the application of income tax legislation. These judgments and assumptions are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised on the Statement of Financial Position and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred tax assets and liabilities may require adjustment, resulting in a corresponding credit or charge to the income statement. Deferred tax assets Deferred tax assets are recognised for deductible temporary differences to the extent that management considers that it is probable that future taxable profits will be available to utilise those temporary differences. Classification of and valuation of investments The Group classified investments in unit trusts as ‘available-for-sale’ investments and movements in fair value are recognised in unrealised reserves except the impairments are recognised in profit and loss. The fair value of the investments has been determined by reference to the published unit price. The fair value of convertible securities has been determined based on Directors’ valuation. Impairment of non-financial assets The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. These include performance, technological, economic and political environments and future product expectations. If an impairment trigger exists the recoverable amount of the asset is determined. This involves value in use calculations, which incorporate a number of key estimates and assumptions. ii. Significant Accounting Estimates and Assumptions Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined using hybrid monte- carlo/binomial option pricing model with the assumptions detailed in Note 22. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity. Long service leave provision The liability for long service leave is recognised and measured at the present value of the estimated future cash flows to be made in respect of all employees at balance date. In determining the present value of the liability, attrition rates and pay increases through promotion and inflation have been taken into account Valuation and Impairment of Non Current Loans and Receivables The Group carries loans and receivables at amortised cost with impairments for these loans and receivables recognised in profit and loss. Determining whether non current loans and receivables are impaired requires an estimation of the future cash flows expected from the loans and applying a suitable discount rate in order to calculate present value. The carrying amount of non current loans and receivables at the balance date was $4,797,624 (2013: $3,629,539). There was no impairment charge during the year (2013: nil). Goodwill Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the directors to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The carrying amount of goodwill at 30 June 2014 was nil (2013: $252,764). An impairment charge of $252,764 (2013: $331,124) was recognised during the year. Notes to the Financial Statements continued 5. Revenue and Expenses a. Revenues from continuing operations Fee income Fund management fees Service fees – associates – other Total fee income Dividends and distributions Unit trust distribution Total dividends and distributions Interest Related parties – associates Other persons/corporations Total interest Other Income Other income Total revenues b. Gains on investments Net gains on disposal of available-for-sale investments Impairment of investment in subsidiary (AR Capital Management) Impairment of investment accounted for under the equity method Total gains/(losses) on investments Notes Consolidated 2014 $ 2013 $ 423,461 1,385,405 1,229,355 1,713,743 – 202,028 1,652,816 3,301,176 147,947 395,048 147,947 395,048 323,329 199,564 299,155 285,325 522,893 584,480 – 22,439 2,323,656 4,303,143 886,168 396,297 (41,012) – – (800,000) 845,156 (403,703) Annual Report 2014 56 57 Notes Consolidated 2014 $ 2013 $ 4,039,233 4,144,244 427,150 373,479 4,466,383 4,517,723 13 (a) 13 (a) 13 (a) 14 (a) 1,747 20,916 1,384 7,717 2,231 27,515 2,305 15,917 c. Expenses Salaries and employee benefits Salaries and employee benefits Share-based payment expense arising from equity-settled share-based payment transactions Depreciation and amortisation Furniture & fittings Office equipment Leasehold improvements Software Total depreciation and amortisation of non-current assets 31,764 47,968 Other expenses Accounting & audit fees Operating lease rental – minimum lease payments Marketing & communication expenses Travel & accommodation costs Payroll tax Legal & compliance fees Consulting fee & IT charges Insurance charges Directors’ fees (non-executives) Share registry & ASX fees Subscriptions and training expenses Impairment of goodwill Other expenses Total other expenses 259,657 375,529 138,845 242,191 122,514 165,742 791,152 151,283 375,439 116,567 142,812 252,764 120,318 170,602 410,295 249,728 210,392 164,803 235,700 651,431 266,528 392,500 103,258 210,296 331,124 183,846 3,254,813 3,580,503 3,286,577 3,628,471 15 (a) Notes to the Financial Statements continued 6. Income Tax a. Income tax benefit The major components of income tax benefit are: Income Statement Current income tax Consolidated 2014 $ 2013 $ Adjustments in respect of current income tax charge of previous years (375,936) (110,506) Deferred income tax Relating to origination and reversal of temporary differences Relating to utilisation of tax losses Write off of deferred tax asset in subsidiary (Global Value Investors) Benefit from previously unrecognised difference/tax loss Tax adjustment to recognise tax losses previously unrecognised Income tax (expense) reported in the Income Statement b. Amounts charged directly to other comprehensive income (106,134) (116,588) (1,169,352) (627,012) (520,000) 61,664 – – – 454,950 (2,109,758) (399,156) Deferred income tax related to income charged or credited directly to other comprehensive income Unrealised loss/(gain) on available-for-sale investments Income tax benefit/(payable) reported in other comprehensive income 173,668 (112,737) 173,668 (112,737) c. Reconciliation between aggregate tax benefit recognised in the income statement and tax expense calculated per the statutory income tax rate A reconciliation between tax benefit and the product of accounting profit before income tax multiplied by the Group’s applicable income tax rate is as follows: Accounting (profit) before income tax: At the Group’s statutory income tax rate of 30% (2013: 30%) Share-based payments Reversal of share in net profit of associates Distributions received Expenditure not allowable for income tax purposes Adjustments in respect of current income tax charge of previous years Dividend difference Others Tax adjustment to recognise tax losses previously unrecognised Aggregate income tax (expense) (15,187,652) (10,803,395) (4,556,295) (3,241,019) (128,145) (112,044) 5,931,540 4,515,045 (3,133,729) (1,583,400) (7,913) (8,682) (375,936) (110,506) – (313,500) 160,720 – – 454,950 (2,109,758) (399,156) Annual Report 2014 58 59 d. Recognised deferred tax assets and liabilities Deferred income tax at 30 June relates to the following: Consolidated Deferred tax assets Tax losses Statement of Financial Position 2014 $ 2013 $ Income Statement 2014 $ 2013 $ 634,390 2,099,432 (1,127,091) (412,076) Tax losses of acquired subsidiaries – 562,261 (562,261) (240,000) 240,000 3,793 108,657 (29,696) 45,265 – – – 54,954 – – – 534 Revaluation of available-for-sale investments at fair value charged to equity Impairment of investment in ARCM Impairment of investment accounted for under the equity method Accruals and provisions Deductible capital expenditures Deferred tax liabilities 105,752 217,017 – 375,751 87,919 – 108,360 240,000 414,827 – 1,420,829 3,424,880 Revaluation of convertible notes to fair value (551,230) (551,230) – Revaluation of available-for-sale investments at fair value charged to equity Receivables Deferred tax (76,730) (10,988) (112,737) (799) 11,990 (6,143) (638,948) (664,766) 781,881 2,760,114 (1,795,486) (116,588) e. Tax consolidation Effective 1 July 2003, for the purposes of income taxation, Treasury Group Ltd and its 100% owned entities have formed a tax consolidated group. Treasury Group Ltd is the head entity of the tax consolidated group. Members of the tax consolidated group have entered into a tax sharing arrangement in order to allocate income tax expense to the wholly- owned entities on a pro-rata basis. Under a tax funding agreement, each member of the tax consolidated group is responsible for funding their share of any tax liability. In addition, the agreement provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. At the balance date, the possibility of default is remote. Tax effect accounting by members of the tax consolidated group Members of the tax consolidated group allocate current taxes to members of the tax consolidated group in accordance with their accounting profit for the period, while deferred taxes are allocated to members of the tax consolidated group in accordance with the principles of AASB 112 Income Taxes. Allocations are made at the end of each half year. The allocation of taxes is recognised as an increase/decrease in the subsidiaries’ inter-company accounts with the tax consolidated group head company, Treasury Group Ltd. The Group has applied the group allocation approach in determining the appropriate amount of current taxes to allocate to members of the tax consolidated group. Notes to the Financial Statements continued 7. Dividends Paid and Proposed Treasury Group Ltd 2014 $ 2013 $ a. Dividends proposed and not recognised as a liability* Final fully franked dividend 27 cents per share (2013: 23 cents per share) 6,398,324 5,306,274 b. Dividends paid during the year Current year interim Fully franked dividend (23 cents per share) (2013: 17 cents per share) 5,306,274 3,922,028 Previous year final Fully franked dividend (23 cents per share) (2013: 20 cents per share) 5,306,274 4,614,151 Total paid during the year (46 cents per share) (2013: 37 cents per share) 10,612,548 8,536,179 * Calculation based on the ordinary shares on issue as at 28 August 2014 c. Franking credit balance The amount of franking credits available for the subsequent financial year are: – franking account balance as at the end of the financial year at 30% (2013: 30%) 9,597,667 9,378,174 – franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date The amounts of franking credits available for future reporting periods: – impact on the franking account of dividends proposed or declared before the financial report was authorised for issue but not recognised as a distribution to equity holders during the year Franking credits carried forward after payment of final dividend The tax rate at which paid dividends have been franked is 30% (2013: 30%). Dividends proposed will be franked at the rate of 30% (2013: 30%). 607,114 915,732 10,204,781 10,293,906 (2,742,139) (2,274,117) 7,462,642 8,019,789 Annual Report 2014 60 61 Consolidated 2014 $ 2013 $ 12,860,219 12,116,947 12,860,219 12,116,947 13,077,894 10,404,239 (19,771,800) (15,050,149) 19,805,351 13,547,967 41,012 – – 800,000 (886,168) (396,297) 31,764 252,764 47,968 331,124 (147,946) (395,048) (28,874) 427,150 5,900 85,416 (54,117) 373,479 11,609 (45,146) (3,538,493) (2,929,864) (1,027,046) 684,698 1,978,233 448,519 1,809,987 3,038,311 8,701 36,232 70,071 22,456 12,160,077 10,909,820 8. Cash and Cash Equivalents a. Reconciliation of cash and cash equivalents Cash balance comprises: – cash at bank and on hand Closing cash balance b. Reconciliation Profit for the year Adjustments for Share of associates’ net profits Dividend and distribution received from associates Impairment of investment in subsidiary Impairment of investment accounted for under equity method (Gain) on disposal of available-for-sale investment Depreciation and amortisation of non-current assets Impairment of goodwill Non-cash distributions and dividends Non-cash interest Share-based payments Foreign exchange loss Others Changes in assets and liabilities (Increase) in trade and other receivables (Increase)/decrease in other assets Decrease in deferred tax assets Increase in trade and other payables Increase in current provisions Increase in non-current provisions Net cash flow from operating activities At reporting date, Treasury Group Ltd did not have any financing facilities available. Notes to the Financial Statements continued 9. Trade and Other Receivables Current Trade receivables Sundry receivables Other receivables Related party receivables – Associates — Dividend — Distribution — Other Note Consolidated 2014 $ 2013 $ 6,500,907 4,835,029 3,988 161,265 2,664 79,091 27 1,416,600 2,136,708 2,640,000 – 394,419 525,194 11,117,179 7,578,686 a. Allowance for impairment loss Trade receivables are non-interest bearing and generally on 30 day terms. An allowance for impairment loss is recognised when there is objective evidence that an individual trade receivable is impaired. No allowance for impairment losses has been made. 2014 2013 * Past due not impaired (‘PDNI’) Total $ 0-30 days $ 31-60 days PDNI* $ 61-90 days PDNI* $ 11,117,179 10,550,171 7,578,686 6,995,367 40,252 72,124 17,100 90,804 +91 days PDNI* $ 509,656 420,391 Receivables past due but not impaired is $567,008 (2013:$583,319). All overdue amounts as at 30 June 2013 have been received in full. Management is satisfied that payment will be received in full. b. Related party receivables For terms and conditions of related party receivables refer to Note 27. c. Fair value and credit risk Due to the short term nature of these receivables, their carrying value is assumed to approximate their fair value. The maximum exposure to credit risk is the fair value of receivables. Collateral is not held as security with the exception of the receivable from disposal of subsidiary, which was secured by the shares of the subsidiary disposed. It is not the Group’s policy to transfer (on-sell) receivables to special purpose entities. Trade receivables represent the Group’s outstanding invoices for management fees. As the fees are receivable from large investment and superannuation funds, management regards the credit risk as very low. Non-current Security deposits Consolidated 2014 $ 2013 $ 833,073 723,958 833,073 723,958 The amount receivable is in Australian Dollars, non-interest bearing and is not considered past due or impaired. Annual Report 2014 10. Available-for-Sale Investments Non-current – Investment in Octis Asia Pacific Fund Limited* – Investment in Octis Opportunities Fund* – Investment in Aubrey Conviction Fund* – Aubrey Capital Management** – Investment in Freehold Investment Management*** – Unlisted shares in other corporations 62 63 Consolidated 2014 $ 2013 $ 3,035,532 5,921,032 3,030,546 – 2,108,086 2,647,168 1,393,261 1,323,955 1,436,780 900 – 1,100 11,005,105 9,893,255 * These investments represent seed capital to assist in the growth and marketing of these products. Units in funds are readily saleable with no fixed terms. The fair value of the unlisted available for sale investments is based on the current unit price of the investments which is determined by the Value of the underlying investments of the unit trust. ** Whilst classified as an available-for-sale to satisfy the definition under the accounting standards, the Board views this as a long term holding investment. The acquisition price of these securities was $1,314,073. The change in fair value reflects movements in fair value between reporting periods, including foreign exchange rates. *** Whilst classified as an available-for-sale to satisfy the definition under the accounting standards, the Board views this as a long term investment. The valuation of this investment was based on the net present value of the discounted cash flows of FIM. 11. Loans and Other Receivables Loans receivables due from: Associates Advances to other related party Notes Consolidated 2014 $ 2013 $ 27 4,197,624 3,629,539 600,000 – 4,797,624 3,629,539 All amounts are receivable in Australian Dollars and are not considered past due or impaired. a. Loans On 31 October 2013, Nikko bought from Treasury Group Ltd all loans and receivables due from TAAM. On 29 May 2014, Treasury Group Ltd initially funded the $4,500,000 working capital facility to ROC Partners by $2,450,000. The balance of the loan receivable from associates as at 30 June 2014 represents the subordinated loan to RARE and loan to ROC Partners. The loan to RARE is subordinated to all other creditors as a condition of their Australian Financial Services Licence as agreed with the Australian Securities and Investments Commission (ASIC). Interest rates on the loans vary between 7.5% to 8%. The advances to other related party is fixed at 15% per annum and has a maturity date of 16 May 2016. Notes to the Financial Statements continued 12. Investments Accounted for using the Equity Method Investments in associates a. Interests in associates Name Investors Mutual Ltd – ordinary shares Orion Asset Management (Aust) Pty Ltd – ordinary shares Treasury Asia Asset Management Ltd – ordinary shares RARE IP Trust – units RARE Infrastructure Ltd – ordinary shares IML Investment Partners Ltd – ordinary shares Celeste Funds Management Ltd – ordinary shares Evergreen Capital Partners Pty Ltd – ordinary shares Octis Asset Management Pte Ltd – ordinary shares ROC Partners Pty Limited – ordinary shares Notes Consolidated 2014 $ 2013 $ 12(b) 29,242,193 30,633,054 29,242,193 30,633,054 Ownership interest held by consolidated entity 2014 % 2013 % Balance date 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June 30 June 47.22 49.99 – 40.00 40.00 40.00 39.17 – 20.00 15.03 47.22 41.99 43.96 40.00 40.00 40.00 39.17 30.00 20.00 – i. Principal activity a. Investors Mutual Ltd provides a funds management capability to both institutional and retail investors. b. Orion Asset Management (Aust) Pty Ltd is the parent company of Orion Asset Management Ltd, a wholesale fund management company in Australia. c. Treasury Asia Asset Management Ltd is a boutique asset manager specialising in the Asia Pacific Region. This was sold on 31 October 2013. d. RARE IP Trust and RARE Group [RARE Infrastructure Ltd, RARE North America, RARE Infrastructure Sovereign Enterprise, RARE Infrastructure (Europe) Ltd, RARE Infrastructure (UK) Ltd, RARE Infrastructure (USA) Inc.] are funds management businesses specialising in listed global infrastructure assets. e. IML Investment Partners Ltd provides investment sub advisory services to Investors Mutual Ltd. f. Celeste Funds Management Limited is an Australian equity manager with a smaller companies focus. g. Evergreen Capital Partners Pty Ltd is an Australian equity absolute return manager which focuses on management of ASX listed equities via an absolute return style. Evergreen merged with FIM on 13 November 2013. h. Octis Asset Management Pte Ltd is an Asian multi strategy equity manager based in Singapore. i. ROC Partners Pty Limited is an Australian and Asian private equity investment and advice business. These entities, except Octis Asset Management Pte Ltd, are incorporated and domiciled in Australia. Annual Report 2014 64 65 Consolidated 2014 $ 2013 $ 30,633,054 29,697,032 811,420 225,395 (2,155,480) – 19,771,800 15,050,149 (10,445,762) (5,278,000) (9,359,589) (8,269,967) (13,250) 8,445 – (800,000) 29,242,193 30,633,054 32,524,868 30,510,221 1,596,128 977,788 (16,440,196) (14,099,555) (1,638,890) (1,598,177) 16,041,910 15,790,277 43,405,089 36,367,614 24,842,644 19,173,361 (5,070,844) (4,123,212) 19,771,800 15,050,149 b. Carrying amount of investments accounted for using the equity method Balance at the beginning of the year – acquisition of associate – disposal of associate – share of associates’ net profits for the year – trust distribution received from an associate – dividends received from associates – share of unrealised gains reserve of associate – impairment of investment in associates Balance at the end of the year c. Share of associates’ balance sheet Current assets Non-current assets Current liabilities Non-current liabilities Net assets d. Share of associates’ revenues Revenues e. Share of associates’ net income Profit before income tax Income tax expense Profit after income tax On 31 October 2013, Treasury Group Ltd sold its equity ownership in Treasury Asia Asset Management Ltd to Nikko. On 13 November 2013, Evergreen was merged with FIM. As a result, the equity accounted investment in Evergreen was treated as if it was disposed of during the year and subsequently recognised as FIM available-for-sale investment. f. Details of each of the Group’s material associates at the end of the reporting period are as follows: Name of Associate Principal Activity IML Funds Management IML Investment Partners Ltd Funds Management RARE Infrastructure Ltd Funds Management RARE IP Trust Funds Management Place of incorporation and operation Australia Australia Australia Australia Proportion of ownership interest and voting power held by the Group 2014 47.22% 40.00% 40.00% 40.00% 2013 47.22% 40.00% 40.00% 40.00% All of the above associates are accounted for using the equity method in the consolidated financial statements. Notes to the Financial Statements continued 12. Investments Accounted for using the Equity Method (Cont.) Summarised financial information in respect of each of the Group’s material associates is set out below. The summarised financial information below represents amount shows in associate’s financial statements in accordance with the Accounting Standards. 2014 Current assets Non-current assets Current liabilities Non-current liabilities Net assets Goodwill Carrying Amount of the Group’s interest Year ended 30 June 2014 Revenue Profit for the year Other comprehensive income for the year Total comprehensive income for the year Dividends/distributions received during the year 2013 Current assets Non-current assets Current liabilities Non-current liabilities Net assets Goodwill Carrying amount of the Group’s interest Year ended 30 June 2013 Revenue Profit for the year Other comprehensive income for the year Total comprehensive income for the year Dividends received from the associate during the year Investors Mutual Group RARE Group 31,284,143 32,963,030 348,863 1,124,406 9,858,359 20,785,135 – 1,741,649 21,774,648 11,560,651 4,851,599 2,602,810 14,823,379 7,141,408 34,747,017 55,184,330 13,077,054 31,847,660 (28,060) – 13,048,994 31,847,660 5,958,461 8,777,359 Investors Mutual Group RARE Group 30,695,892 21,666,023 365,696 1,442,922 12,320,392 13,532,458 – 2,120,874 18,741,196 7,455,613 5,361,563 2,661,695 14,153,179 5,643,941 28,387,933 37,717,034 10,559,178 20,384,430 – – 10,559,178 20,384,430 4,551,708 6,118,000 Annual Report 2014 66 67 30/06/2014 30/06/2013 16,632,990 19,179,857 4,944,506 595,645 10,405,476 7,601,894 5,964,806 1,729,106 5,207,214 10,444,591 Year ended 30/06/2014 Year ended 30/06/2013 15,632,144 21,600,696 3,962,866 5,212,092 3,149,639 2,158,260 Consolidated 2014 $ 2013 $ 12,082 (5,192) 6,890 12,082 (3,445) 8,637 434,827 (388,473) 46,354 419,603 (367,557) 52,046 12,089 (3,886) 8,203 61,447 12,089 (2,502) 9,587 70,270 8,637 (1,747) 6,890 52,046 15,224 (20,916) 46,354 9,587 – (1,384) 8,203 10,868 (2,231) 8,637 75,081 4,480 (27,515) 52,046 5,763 6,129 (2,305) 9,587 Notes 13 (a) 13 (a) 13 (a) g. Following is an aggregate of other associates which are not deemed material: Current assets Non-current assets Current liabilities Non-current liabilities Net assets Revenue Profit for the year Dividends received during the year 13. Plant and Equipment Furniture & fittings At cost Accumulated depreciation Office equipment At cost Accumulated depreciation Leasehold improvements At cost Accumulated depreciation Total a. Reconciliations Reconciliations of the carrying amounts of plant and equipment at the beginning and end of the current financial year. Furniture & fittings Opening balance Depreciation expense Closing balance Office equipment Opening balance Additions Depreciation expense Closing balance Leasehold improvements Opening balance Additions Depreciation expense Closing balance Notes to the Financial Statements continued 14. Intangibles Software At cost Accumulated amortisation a. Reconciliations Reconciliations of the carrying amounts of intangibles at the beginning and end of the current financial year. Software Opening balance Additions Amortisation expense Closing balance 15. Goodwill Cost Accumulated impairment losses Note Consolidated 2014 $ 2013 $ 114,944 121,779 (102,404) (103,339) 14 (a) 12,540 18,440 18,440 34,357 1,817 (7,717) 12,540 – (15,917) 18,440 252,764 583,888 (252,764) (331,124) – 252,764 The goodwill relates to AR Capital Management. No goodwill is reflected in the Statement of Financial Position. 16. Trade and Other Payables (Current) Trade payables Other payables Related party payables: – associates 643,184 937,255 946,759 941,552 6,091,530 3,973,671 7,671,969 5,861,982 a. Fair value Due to the short term nature of these payables, their carrying value is assumed to approximate their fair value. b. Related party payables For terms and conditions relating to related party payables please refer to Note 27. c. Interest rate and liquidity risk Trade and other payables are non-interest bearing. Liquidity risk exposure is not regarded as significant. Trade, other and related party payables are all due within less than 90 days. Annual Report 2014 68 69 Note Consolidated 2014 $ 2013 $ 213,202 113,407 143,131 127,986 (104,706) (57,915) 221,903 213,202 99,650 36,232 135,882 77,194 22,456 99,650 – 600,000 17. Employee Provisions Current Provision for annual leave, beginning balance Provisions during the year Annual leave taken Provision for annual leave, closing balance Non-Current Provision for long service leave, beginning balance Provisions during the year Provision for long service leave, closing balance 18. Financial Liability Current As a result of the merger between Freehold Investment Management and Evergreen Capital Partners, the contingent liability of $600,000 to Evergreen was extinguished as at 31 December 2013. 19. Contributed Equity and Reserves a. Ordinary shares Issued and fully paid 2014 $ 2013 $ 29,594,265 29,594,265 Effective 1 July 1998, the Corporations legislation in place abolished the concepts of authorised capital and par value shares. Accordingly the Company does not have authorised capital nor par value in respect of its issued shares. Fully paid ordinary shares carry one vote per share and carry the right to dividends. b. Movements in ordinary shares on issue Treasury Group Ltd 2014 Number of shares 2013 Number of shares $ $ Balance at beginning of the financial year 23,070,755 29,594,265 23,070,755 29,594,265 Balance at end of the financial year 23,070,755 29,594,265 23,070,755 29,594,265 c. Capital management The Company’s capital management policies focus on ordinary share capital. When managing capital, management’s objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits to other stakeholders. Management periodically reviews the capital structure to take advantage of favourable costs of capital or high returns on assets. During the year ended 30 June 2014, management paid dividends of $10,612,548 (2013: $8,536,179). The Directors anticipate maintaining a dividend payout ratio over a medium term period of at least 60-80% of underlying profit in a normal year subject to future acquisitions. The Group does not have any external borrowings. Notes to the Financial Statements continued 19. Contributed Equity and Reserves (Cont.) d. Long term incentives- performance rights On 7 August 2013, Treasury Group Ltd granted additional 100,000 performance rights which have vesting date of 7 August 2016 (2013: 39,007 granted on 1 July 2012 and have vesting date of 1 July 2015) to officers and certain employees as part of their long term incentives. The performance rights on issue were valued based on the valuation made by RSM Bird Cameron using a hybrid monte-carlo/binomial option pricing model on the performance rights that were issued on 11 July 2011. The value of each right at issue was $1.64. Total value of the outstanding performance rights is $227,972 amortised over three years from the grant date. The amount of performance rights amortisation expense for the period was $427,150 (2013: $373,479). At the end of the year, there were no unissued ordinary shares in respect of which performance rights were outstanding to employees of the Group. Of the 640,000 performance rights granted on 11 July 2011 to key management personnel, 96% vested on 12 July 2014. As a result, 614,400 Treasury Group Ltd shares were allocated to key management personnel. In addition, other employees were allocated 12,857 Treasury Group shares as a result of vesting of performance rights. e. Retained profits Balance at the beginning of the year Profit for the year Dividends Balance at end of year f. Reserves Net unrealised gains reserve Balance at the beginning of the year Net unrealised (losses)/gains on available for sale investments taken to equity Income tax relating to items not reclassified Share of after-tax gain on available for sale investments of associates Balance at end of year Share options reserve Balance at end of year Total Reserves Consolidated 2014 $ 2013 $ 27,643,019 25,788,684 13,061,814 10,390,514 (10,612,548) (8,536,179) 30,092,285 27,643,019 Consolidated 2014 $ 2013 $ 376,659 (542,846) (213,894) 1,301,512 64,169 (390,452) (13,250) 8,445 213,684 376,659 3,874,436 3,447,286 4,088,120 3,823,945 Net unrealised gains reserve The reserve records after tax fair value changes on available-for-sale investments. Share Options reserve This reserve is used to record the value of equity benefits provided to employees and Directors as part of their remuneration. Refer to Note 22 for further details of these plans. Annual Report 2014 70 71 20. Segment Information Information reported to the Group’s Board of Directors for the purposes of resource allocation and assessment of performance is specifically focused on the profit after tax earned by each business within the Group. Therefore the Group’s reportable segments under AASB 8 are included in the table below. Information regarding these segments is presented below. The accounting policies of the reportable segments are the same as the Group’s accounting policies. The following is an analysis of the Group’s results by reportable operating segment: Segment profit after tax for the year – Outsourcing and responsible entity services – Australian equities – Alternative investments – Central administration costs and directors’ salaries Total per Income Statement Segment net assets for the year – Outsourcing and responsible entity services – Australian equities – Alternative investments – Central administration Total per Statement of Financial Position Consolidated 2014 $ 2013 $ 338,150 830,764 7,478,915 7,069,305 11,841,348 8,056,603 19,658,413 15,956,672 (6,580,519) (5,552,433) 13,077,894 10,404,239 5,625,758 5,960,548 21,233,035 22,103,482 23,362,365 18,446,603 50,221,158 46,510,633 13,553,512 14,566,792 63,774,670 61,077,425 Other than Australia, no country represents more than 10% of revenue for Treasury Group Ltd and its associates. No individual customer represents more than 10% of revenue for Treasury Group Ltd and its associates. Notes to the Financial Statements continued 21. Commitments and Contingencies Operating lease commitments The Group has entered into commercial property leases to meet its office accommodation requirements. These non- cancellable leases have remaining term of three years as at 30 June 2014. All leases include a clause to enable upward revision of the rental charge on an annual basis according to prevailing market conditions. Future minimum rentals payable under non-cancellable operating leases as at 30 June are as follows: Future minimum rentals: Minimum lease payments – not later than one year – later than one year and not later than five years Aggregate lease expenditure contracted for at reporting date Amounts not provided for: – rental commitments Total not provided for Aggregate lease expenditure contracted for at reporting date 22. Employee Benefits and Superannuation Commitments Consolidated 2014 $ 2013 $ 329,389 576,950 316,720 906,339 906,339 1,223,059 906,339 1,223,059 906,339 1,223,059 906,339 1,223,059 The Treasury Group LTI Plan The Treasury Group LTI Plan has been established where Treasury Group Ltd, at the discretion of the Board of Directors, awards performance rights to Directors, executives and certain members of staff of the Group. Each performance right at the time of grant represents one Treasury Group Ltd share if it vests. On 7 August 2013, Treasury Group Ltd granted additional 100,000 performance rights which have vesting date of 7 August 2016 (2013: 39,007 granted on 1 July 2012 and have vesting date of 1 July 2015) to officers and certain employees as part of their long term incentives. The performance rights on issue were valued based on the valuation made by RSM Bird Cameron using a hybrid monte-carlo/binomial option pricing model on the performance rights that were issued on 11 July 2011. The value of each right at issue was $1.64. Total value of the outstanding performance rights is $227,972 amortised over three years from the grant date. The amount of performance rights amortisation expense for the period was $427,150 (2013: $373,479). Of the 640,000 performance rights granted on 11 July 2011 to key management personnel, 96% vested on 12 July 2014. As a result, 614,400 Treasury Group Ltd shares were allocated to key management personnel. In addition, other employees were allocated 12,857 Treasury Group shares as a result of vesting of performance rights. Employee Share Plan The Employee Share Plan has been established whereby Treasury Group Ltd, at the discretion of the Board of Directors, provides the opportunity to employees and Directors to purchase shares in Treasury Group Ltd at market value less a discount of 5% to 20%. These shares are purchased via a salary sacrifice arrangement. The shares are held in trust at the employees’ request for a period between 2 and 10 years. Employees have to be employed by the consolidated group while taking part in the plan. There are 17 employees eligible to participate in the plan. Shares acquired under the Employee Share Plan vest immediately. There were no shares purchased during the year (2013: 4,360 at weighted average cost of $4.91). The balance as at 30 June 2014 was 3,099 shares (2013: 46,751). There were no shares that vested during the year (2013: 4,360) and 43,652 shares were sold (2013: 3,345). The weighted average cost of the shares remaining is $12.0 (2013: $7.37) per share. Annual Report 2014 72 73 23. Subsequent Events On 5 August 2014, the Directors of Treasury Group Ltd declared a final dividend on ordinary shares in respect of the 2014 financial year. The total amount of the dividend is $6,398,324 which represents a fully franked dividend of 27 cents per share. The dividend has not been provided for in the 30 June 2014 financial statements. On 5 August 2014, Treasury Group Ltd and Northern Lights Capital Group (Northern Lights) agreed to a merger creating an international multi-boutique business with A$49.6bn FUM. Northern Lights is a privately owned international multi-boutique asset management group headquartered in the United States with 13 associated boutiques. A new Australian Trust and trustee company has been established which will own interests in the combined 21 boutiques and give effect to the merger. The new Australian Trust will have its Board, management and operations integrated. Treasury Group will be entitled to 61% of the economic interest of the Trust and it will have majority board representation. The Trust will issue Treasury Group Class A Trust Units and Northern Lights will be issued Class B Trust Units with 39% interest. Treasury Group will retain all existing franking credits and Treasury Group is expected to be able to continue to pay franked dividends to its shareholders in the future. Treasury Group and Northern Lights will treat the Trust as a joint venture arrangement for accounting purposes. Upon completion of the transaction, Treasury Group will transfer all its underlying assets to the Trust. This transfer will be a deemed sale and a gain on the sale will be recognised at the time of completion. Assuming that TRG share price on completion date is similar to the share price on 5 August 2014, the gain on sale is A$159.3m¹ and the assets to be transferred to the Trust will be valued at A$223.1m¹. Going forward post completion, TRG will recognise its investment in the merger trust as an investment in a joint venture. The accounting will follow the principles of equity accounting. TRG will reflect a share of profit from the trust and its share of the carrying value of the underlying assets of the trust. The merger transaction is viewed to create diversified international portfolio of asset management businesses and it executes Treasury Group’s growth strategy. 1 Based on the TRG share price as at 4 August 2014. 24. Earnings Per Share Consolidated 2014 $ 2013 $ Net profit attributable to ordinary equity holders of the parent 13,061,814 10,390,514 Number of shares Weighted average number of ordinary shares used in calculating basic earnings per share: 23,070,755 23,070,755 Effect of dilutive securities: Dilutive effect of potential ordinary shares – share options and performance rights – – Adjusted weighted average number of ordinary shares used in calculating diluted earnings per share 23,070,755 23,070,755 Earnings per share (cents per share) basic for profit for the year attributable to ordinary equity holders of the parent diluted for profit for the year attributable to ordinary equity holders of the parent 56.6 56.6 45.0 45.0 Performance rights do not have a diluted effect on the Earnings per Share calculation as the vesting conditions of these rights have not been met as at 30 June 2014. Had the performance rights that had vest on 12 July 2014 actually vested on 30 June 2014, the diluted effect of these performance rights on the Earnings per Share calculation would have been 55.0. Notes to the Financial Statements continued 25. Key Management Personnel Disclosures a. Details of Key Management Personnel (i) Non-executive Directors M. Fitzpatrick Chairman (Non-Executive) P. Kennedy Director (Non-Executive) R. Hayes Director (Non-Executive) M. Donnelly Director (Non-Executive) (ii) Executives A. McGill Managing Director (appointed 30 August 2013) & Chief Executive Officer J. Ferragina Chief Financial Officer & Company Secretary b. Compensation for Key Management Personnel Short-term Post employment Share-based payments Total remuneration Consolidated 2014 $ 2013 $ 1,729,418 1,619,580 58,871 55,440 349,866 349,866 2,138,155 2,024,886 KMP bonuses are paid in two instalments being 50% on August and 50% on June the following year. Only the 50% payable on August is provided for as at 30 June 2014. c. Transactions with director-related entity Details of the transactions with Director-related entities are set out in Note 27. All transactions were conducted on commercial terms. d. Loans to key management employees No loans have been advanced to key management employees at any stage during the financial year ended 30 June 2014 (2013: $Nil). 26. Auditor’s Remuneration Auditor of Parent entity (Deloitte Touche Tohmatsu) Amounts received or due and receivable by Deloitte Touche Tohmatsu: – an audit or review of the financial report of the entity and any other entity in the consolidated group and associates – corporate advisory services to the entity and any other entity in the consolidated group – – tax advisory services to the entity and any other entity in the consolidated group tax compliance services to the entity and any other entity in the consolidated group – other services to the entity and any other entity in the consolidated group Total Consolidated 2014 $ 2013 $ 224,466 58,800 442,982 65,545 74,440 197,587 – 6,575 14,590 58,394 866,233 277,146 Annual Report 2014 74 75 27. Related Party Disclosures The consolidated financial statements include the financial statements of Treasury Group Ltd and the controlled entities in the following list: Companies Treasury Capital Management Pty Ltd Treasury Group Investment Services Limited Treasury Group Nominees Pty Ltd Global Value Investors Ltd Treasury Evergreen Pty Limited AR Capital Management Pty Ltd All subsidiaries are incorporated in Australia. Transactions with related parties Percentage of equity interest held by the consolidated entity 2014 2013 100 100 100 100 100 100 100 100 100 100 100 77.8 Service fees During the year, Treasury Group Ltd and its wholly-owned entity, Treasury Group Investment Services Limited provided administrative services to associates. Dealings were on commercial terms and conditions. Details of service fees and receivables at reporting date are disclosed in Note 5 and Note 10 to the financial report respectively. Dividend and distribution Dividends and distributions received and receivable at reporting date are disclosed in Note 5 and Note 9 to the financial report respectively. Loans Loans advanced by Treasury Group Ltd to associates are with a fixed repayment date once repayment clause has been triggered. Interest on the loans is capitalised at commercial rates until repayment clauses have been triggered. During the year, Treasury Group Ltd provided additional loans to associates for $2,450,000 (2013: $Nil) and received $1,889,028 (2013: $343,750) in repayments. Details of interest income and the amount remaining outstanding at year-end are disclosed in Note 5 and Note 11 to the financial report respectively. Notes to the Financial Statements continued 28. Parent Entity Disclosure The accounting policies of the parent are consistent with the consolidated entity. i. Financial Performance Profit for the year Other comprehensive income for the year (net of tax) Total comprehensive income ii. Financial Position Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Equity Issued capital Retained earnings Reserves Share options Net unrealised gains/(losses) reserve Total equity 2014 $ 2013 $ 14,203,006 8,352,207 (293,944) 859,334 13,909,062 9,211,541 13,316,626 9,258,596 37,736,719 38,538,683 51,053,345 47,797,279 1,224,158 1,417,581 135,882 67,733 1,360,040 1,485,314 29,594,265 29,594,265 16,283,472 13,035,337 3,874,436 3,447,286 (58,868) 235,077 49,693,305 46,311,965 Annual Report 2014 Director’s Declaration 76 77 In accordance with a resolution of the Directors of Treasury Group Ltd, I state that: 1. In the opinion of the Directors: a. the financial statements and notes are in accordance with the Corporations Act 2001, including: i. giving a true and fair view of the Consolidated Entity’s financial position as at 30 June 2014 and of its performance for the year ended on that date; ii. complying with Accounting Standards and Corporations Regulations 2001; and iii. complying with International Financial Reporting Standards, as stated in Note 2 to the financial statements b. there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declarations required to be made to the Directors in accordance with section 295A of the Corporations Act 2001 for the year ended 30 June 2014. On behalf of the Board M. Fitzpatrick Chairman 20 August 2014 Independent Audit Report 36 76 Annual Report 2014 78 79 21 28 ASX Additional Information Additional information required by the Australian Stock Exchange Ltd and not shown elsewhere in this report is as follows. a. Distribution of equity securities (as at 6 August 2014) The number of shareholders by size of holding, in each class of share are: 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over The number of shareholders holding less than a marketable parcel of shares are: b. Twenty largest shareholders (as at 6 August 2014) The names of the twenty largest holders of quoted shares are: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 RBC Investor Services Australia Nominees Pty Limited (Perpetual) Squitchy Lane Holdings Pty Ltd BNP Paribas Noms Pty Ltd Citicorp Nominees Pty Ltd UBS Wealth Management Australia Nominees Pty Ltd JP Morgan Nominees Australia Limited Mr Timothy Gerard Ryan Kattag Holdings Pty Ltd Mini-Me Ventures Pty Ltd National Nominees Limited Mr Michael Brendan Patrick De Tocqueville HSBC Custody Nominees (Australia) Limited Banson Nominees Pty Ltd HFM Investments Pty Ltd Top Pocket Pty Ltd RBC Investor Services Australia Nominees Pty Ltd Penswood Pty Ltd Bond Street Custodians Limited 29th Marsupial Pty Ltd Mardom Pty Ltd Ordinary shares Number of holders Number of shares 1,196 1,407 239 137 22 672,621 3,445,565 1,716,414 3,404,955 14,457,943 3,001 23,697,498 48 519 Listed ordinary shares Number of shares Percentage of ordinary shares 2,806,036 2,401,500 1,683,469 993,809 844,218 729,038 703,927 554,000 480,000 473,466 425,000 395,948 370,313 250,000 250,000 201,938 199,000 197,031 172,050 141,400 11.84 10.13 6.91 4.19 3.56 3.08 2.97 2.34 2.03 2.00 1.79 1.67 1.56 1.05 1.05 0.85 0.84 0.83 0.73 0.59 14,227,143 60.03 c. Substantial shareholders The names of substantial shareholders who have notified the Company in accordance with section 671B of the Corporations Act 2001 are: Perpetual Limited Michael Fitzpatrick d. Voting rights All ordinary shares (whether fully paid or not) carry one vote per share without restriction. Number of Shares 2,806,036 2,701,285 Annual Report 2014 Corporate Directory 80 81 ABN 39 006 708 792 Directors M. Fitzpatrick (Chairman) A. McGill (Managing Director, appointed 30 August 2013) & Chief Executive Officer P. Kennedy R. Hayes M. Donnelly Chief Financial Officer J. Ferragina Company Secretaries R. Ramswarup J. Ferragina (Appointed 31 July 2014) Registered Office Level 14 39 Martin Place Sydney, NSW, 2000 Phone (02) 8243 - 0400 Facsimile (02) 8243 - 0410 Bankers Westpac Banking Corporation Share Register Computershare Investor Services Pty Ltd 452 Johnston Street Abbotsford, Victoria, 3067 Phone (03) 9415 - 5000 Auditors Deloitte Touche Tohmatsu Internet Address www.treasurygroup.com