PG&E
Annual Report 2017

Plain-text annual report

ANNUAL REPORT PENGANA CAPITAL GROUP LIMITED Formerly known as Hunter Hall International Limited ABN 43 059 300 426 ANNUAL REPORT PENGANA CAPITAL HEAD OFFICE Level 12, 167 Macquarie Street Sydney NSW 2000 Australia Ph: +61 2 8524 9900 Fax: +61 2 8524 9901 PENGANA.COM 30 JUNE 2017 PENGANA.COM PENGANA IS A LEADING PROVIDER OF PREMIUM PRODUCTS THAT ARE BENCHMARK UNAWARE AND ACTIVELY MANAGED. CURRENTLY, PENGANA HAS CIRCA $3.1 BILLION OF FUNDS UNDER MANAGEMENT ACROSS BOTH GLOBAL AND AUSTRALIAN EQUITY STRATEGIES. TABLE OF CONTENTS Corporate Directory Letter from the Chairman Letter from the Chief Executive Officer Directors’ Report Auditor’s Independence Declaration Statement of Profit or Loss Statement of Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Directors’ Declaration Independent Auditor’s Report to the Members of Pengana Capital Group Limited Shareholder Information 5 6 8 17 29 30 31 32 33 34 35 72 73 77 ANNUAL REPORT 2017 | 3 ANNUAL REPORT 4 | PENGANA CAPITAL GROUP CORPORATE DIRECTORY DIRECTORS Warwick Negus Non-Executive Chairman Russel Pillemer Managing Director and Chief Executive Officer Robert Barry Non-Executive Director Jeremy Dunkel Non-Executive Director Kevin Eley Non-Executive Director David Groves Non-Executive Director COMPANY SECRETARY Paula Ferrao REGISTERED OFFICE Level 12, 167 Macquarie Street Sydney NSW 2000 Tel: +61 2 8524 9900 SHARE REGISTER Computershare Investor Services Pty Limited Level 4, 60 Carrington Street Sydney NSW 2000 Tel: 1300 787 272 AUDITOR Grant Thornton Audit Pty Ltd Level 17, 383 Kent Street Sydney NSW 2000 STOCK EXCHANGE LISTING Pengana Capital Group Limited shares are listed on the Australian Securities Exchange (ASX: PCG) WEBSITE www.pengana.com CORPORATE GOVERNANCE STATEMENT The Corporate Governance Statement, which is approved at the same time as the Annual Report, can be found at www.pengana.com ANNUAL REPORT 2017 | 5 ANNUAL REPORT 6 | PENGANA CAPITAL GROUP 6 | PENGANA CAPITAL GROUP LETTER FROM LETTER FROM THE CHAIRMAN THE CHAIRMAN DEAR FELLOW PENGANA SHAREHOLDER Thank you for your support of Pengana Capital Group (‘PCG’, the ‘Company’) through the 2017 financial year. I would also like to welcome the 507 new shareholders who joined through the year. This year has been one of significant change that has resulted in a very positive outcome and future for the Company. After a period of uncertainty for Hunter Hall International Limited (‘HHL’), you, our shareholders, voted in favour of the merger of Pengana Holdings Pty Ltd and HHL to create Pengana Capital Group Limited. The merged entity will deliver a diversified offering of investment solutions to clients, with $3.1 billion funds under management (‘FUM’) and it builds from the strength and stability of the Pengana business model. The highly synergistic nature of the businesses has meant that our integration projects have been going well, and I’m happy to report that we anticipate being able to deliver the cost savings and revenue benefits to shareholders that we outlined in the Explanatory Memorandum. To understand the financial results in this report, it is important to note that Australian Accounting Standards require that, as Pengana Holdings Pty Ltd was determined the acquiring entity, only 1 month of financial results from the previous Hunter Hall business was incorporated into the financial results of PCG. This, along with the costs of integration, means that this year’s results are not indicative of the future financial performance of the Company. The letter from your Chief Executive Officer, Russel Pillemer, provides more detail to accompany the financial results, as well as some further insight into the Pengana business which our newer shareholders in particular will find compelling. The Board and the Pengana executive team are unanimous in their excitement for the future of the Company. We are very well placed to grow the merged entity and deliver value to our clients and shareholders. ANNUAL REPORT“ THE BOARD AND THE PENGANA EXECUTIVE TEAM ARE UNANIMOUS IN THEIR EXCITEMENT FOR THE FUTURE OF THE COMPANY. WE ARE VERY WELL PLACED TO GROW THE MERGED ENTITY AND DELIVER VALUE TO OUR CLIENTS AND SHAREHOLDERS.” ANNUAL GENERAL MEETING COMMUNICATION Our Annual General Meeting (‘AGM’) details are as follows: Date: Tuesday, 28 November, 2017 Time: 10.00 am Location: Computershare Level 4, 60 Carrington Street Sydney If you are unable to attend, we encourage you to complete your proxy vote. Keeping our shareholders, as owners of the Company, informed is of utmost importance to us. We have reviewed our communications strategy to ensure that we provide you with timely, relevant information. You can keep up-to-date via: • Investor and adviser roadshows twice per year • Our AGM each year • Our monthly fund newsletters • Regular thought leadership and market insights papers • Webinars and video insights from our Portfolio Managers • Our new website, which you’ll continue to access via pengana.com The best way to ensure that you are kept up-to-date on all of our communications and insights, is to keep your email address updated and current on your Computershare account and to subscribe to our communications via our website. Thank you for your support in this year of change. Pengana is well placed to grow in the coming years and I look forward to meeting many of you at our upcoming AGM. Yours sincerely, Warwick Negus Chairman ANNUAL REPORT 2017 | 7 LETTER FROM THE CEO DEAR FELLOW PENGANA SHAREHOLDER I am very pleased to present the results for Pengana Capital Group Limited (‘Pengana’, ASX: PCG). This being the first Annual Report post the merger with Hunter Hall International Limited (‘HHL’), I want to take the opportunity to introduce myself and Pengana, and give you a brief background on our history, our focus and why our unique funds management model is a platform that delivers long-term returns for our investors and in turn, for you as a PCG shareholder. The attached financial statements, which are prepared using the Australian Accounting Standards (‘AAS’) and statutory requirements are likely to be quite confusing for most shareholders and in my view, are not a good indicator of the future potential earnings of the merged group. In this report, I will attempt to address the issues in the financial statements by providing further information and analysis that will hopefully provide you with additional clarity regarding the historical pro-forma performance of the merged group, as well as some insights into our future earnings potential. ANNUAL REPORT 8 | PENGANA CAPITAL GROUP THE PENGANA STORY PENGANA IS A LEADING PROVIDER OF PREMIUM PRODUCTS THAT ARE BENCHMARK UNAWARE AND ACTIVELY MANAGED. CURRENTLY, PENGANA HAS CIRCA $3.1 BILLION OF FUNDS UNDER MANAGEMENT (‘FUM’) ACROSS BOTH GLOBAL AND AUSTRALIAN EQUITY STRATEGIES. AN UNRELENTING QUEST TO GENERATE SUPERIOR LONG-TERM RETURNS. Over our 15-year history, Pengana’s primary focus has been “an unrelenting quest to generate superior long-term returns” for our investors – which we define as good long-term returns with lower risk and capital preservation. We are firmly of the view that our clients come first and that if we deliver for our clients then our shareholders will ultimately be major beneficiaries. This principle has guided Pengana as a private company and will continue to guide us as a public company. The recent merger with HHL was a landmark event for Pengana. Under this transaction, Pengana effectively acquired HHL through a reverse takeover and became a listed entity. This transaction created significant value for both sets of shareholders as the two businesses were highly synergistic and complementary. Both businesses operated predominantly in the Australian retail and high-net-worth markets, and HHL funds were predominantly in global equities whereas Pengana’s were predominantly in Australian equities. The addition of the HHL funds to Pengana has substantially enhanced our business and prospects, creating a larger and more diversified business. Pengana’s unique funds management business model provides significant competitive advantages and proven ability to deliver long-term returns. Pengana delivers centralised support from our corporate team, so that our fund managers can focus on managing their portfolios. Our fund managers are our partners and we share the profits of the business with them. In addition, our active strategies, coupled with non-benchmark mandates, gives our investment teams the freedom to invest in their best ideas. These elements of the Pengana model provide us with an unrivalled opportunity to attract and retain exceptional fund management teams who are vital to generating long-term investment performance across our funds. The Pengana corporate model also enhances the security of our client’s investments. Our highly capable centralised risk management, compliance and operations functions result in an extra layer of protection for our investors by providing an inherent segregation of duties that is usually only found at much larger institutional fund managers. ANNUAL REPORT 2017 | 9 ANNUAL REPORT LETTER FROM THE CEO (CONTINUED) Finally, because of Pengana’s ability to grow horizontally (i.e. by adding new teams and strategies), we can afford to be highly disciplined when it comes to assessing each strategy’s capacity constraints. For most strategies, at a large amount of FUM, there is a well-known inverse relationship between portfolio size and portfolio performance, and we will close (and have closed) strategies to new investments when we assess that further growth will impede future performance. Over the past 4 years, Pengana pre-merger has experienced significant increases in FUM growing by +26.7% p.a. whereas the HHL funds decreased by -8.1% p.a. resulting in pro-forma growth for the merged group of +11.5% p.a. One of the major aims of the merger is to put the ex-HHL funds on a positive growth trajectory. FUM OF MERGED GROUP (AS AT 30 JUNE 2017)1 $3,500 $3,000 $2,500 $2,020 $2,000 $1,500 $1,115 $1,000 1 . 5 % $2,879 e d 4 Y C A G R : 1 $2,528 C o m b i n $3,127 $794 $1,140 6 . 7 % $2,333 $1,739 $2,140 $1,117 $960 n e P A G R : 2 Y C a 4 n a g $1,411 $500 $905 $1,180 $0 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 Pengana pre-merger Hunter Hall 1 Note: past performance is not a reliable indicator of future performance. The amount of FUM can increase and decrease due to a range of factors including net fund flows, distributions to investors and investment performance. 10 | PENGANA CAPITAL GROUP ANNUAL REPORTPENGANA’S INVESTMENT STRATEGIES DIVERSIFICATION WITH PROVEN LONG-TERM TRACK RECORDS Pengana’s FUM is spread across several active strategies including: Australian multi-caps; Australian small-caps; global multi-caps; global small caps; Asian absolute return equities; global equities market neutral; global impact investing; and high conviction. FUND STRATEGY BREAKDOWN OF MERGED GROUP (AS AT 30 JUNE 2017) 6% 1% 1% 24% 43% 25% Australian multi-caps Australian small-caps Global multi-caps Global small-caps Hedge funds Other 2 Note: past performance is not a reliable indicator of future performance. The value of investments can increase and decrease. We are particularly proud of the proven long-term performance track records of each of our key strategies2. This is illustrated by the following table which summarises performance since inception (‘SI’) to 30 June 2017 relative to the equity index benchmarks. ANNUAL REPORT 2017 | 11 ANNUAL REPORT LETTER FROM THE CEO (CONTINUED) PENGANA’S INVESTMENT STRATEGIES (CONTINUED) STRATEGY Absolute Return Asia3 Australian Multi-caps4 Australian Small-caps5 Global Market Neutral6 Global Multi-caps7 Global Small-caps8 Global Impact Investing9 High Conviction10 * Since Inception Strategy inception Strategy SI* net return Benchmark SI* return Outperformance of benchmark SI* Oct-08 Jul-08 Nov-04 Sep-10 Jul-15 Apr-15 Jan-06 Dec-14 8.4% 11.1% 13.8% 9.2% 8.5% 10.2% 5.1% 57.2% na 5.4% 3.9% na 7.0% 6.3% 4.9% 8.4% na 5.7% 9.9% na 1.4% 3.9% 0.2% 48.8% Prior to the merger, HHL managed six vehicles with the bulk of the FUM invested in global equities, i.e. Hunter Hall Value Growth Trust (‘VGT’), Hunter Hall Global Equities Trust (‘GET’) and the listed investment company Hunter Hall Global Value Limited (ASX: HHV). Following the merger, there have been significant changes with each of these vehicles now being managed by a highly experienced team that manages the Pengana International Equities Fund (‘PIEF’), utilising the same global multi-cap strategy that has been used to run that fund since 2015. The Pengana International Equities strategy’s focus is on investing in a well-constructed portfolio of growing businesses at reasonable valuations. It employs a benchmark–unaware strategy with freedom to invest across all international equity markets and company sizes. I am confident that the Pengana International Equities team is well placed to achieve the strategy’s ultimate aim of generating superior and consistent long-term returns whilst reducing volatility and the risk of losing capital. 3 Pengana Absolute Return Asia Pacific Fund: equity market benchmark is na; performance fee benchmark is the RBA cash rate which has returned +3.1% SI of the strategy. These performance figures show the returns of the Absolute Return Asia Pacific Fund from inception on 1 September 2010 to the current date and, for the period prior to 1 September 2010, the since inception returns for the Australian dollar denominated shares issued by the Pengana Asia Special Events (Offshore) Fund (“Offshore Fund”) adjusted to reflect the different fees which apply to the Fund. The strategy inception date is 1 October 2008. The Fund is fully invested into the Offshore Fund. 4 Pengana Australian Equity Fund: benchmark shown is the S&P/ASX All Ords Index; performance fee benchmark is the RBA cash rate which has returned +3.2% SI of the strategy. 5 Pengana Emerging Companies Fund: benchmark is the S&P/ASX Small Ordinaries Index. 6 Pengana PanAgora Absolute Return Global Equities: equity market benchmark is na as this is a market neutral strategy; performance fee benchmark is the RBA cash rate which has generated a 2.9% return SI of the strategy. From December 2015, these performance figures are those of the Fund’s class A units. Between September 2010 and November 2015, AUD performance has been simulated by Pengana from the actual USD Composite gross strategy returns (prior to April 2013 using the Monthly Liquidity Composite; thereafter using the Daily Liquidity Composite) using 3 month rolling forwards to hedge movements in the AUDUSD spot rate. The effect of fees form part of this simulation. The Composite is comprised of all discretionary institutional accounts managed by PanAgora in this investment style. 7 Pengana International Equity Fund: benchmark is the MSCI All Country World Net Unhedged in AUD. 8 Pengana Global Small Companies Fund: benchmark is the MSCI All Country World SMID Cap Net Unhedged in AUD. 9 Pengana WHEB Sustainable Impact Fund: benchmark is the MSCI World Net Unhedged in AUD. The strategy’s AUD performance has been simulated by Pengana from the monthly net GBP returns of the Henderson Industries of the Future Fund (from 1 January 2006 to 31 December 2011) and the FP WHEB Sustainability Fund (from 30 April 2012 to 31 July 2017). This was done by: 1) converting the GBP denominated net returns to AUD using FactSet’s month-end FX rates (London 4PM); 2) adding back the relevant fund’s monthly ongoing charge figure; then 3) deducting the Pengana WHEB Sustainable Impact Fund’s management fee of 1.35% p.a. The WHEB Listed Equity strategy did not operate between 1 January 2012 and 29 April 2012 – during this period returns are nulled. The Henderson Industries of the Future Fund’s and the FP WHEB Sustainability Fund’s GBP net track record data is historical. 10 Hunter Hall High Conviction Trust: benchmark shown is the S&P/ASX All Ordinaries Index; performance fee benchmark is the RBA Cash Rate + 3% p.a. which returned 4.9% SI of the strategy. 12 | PENGANA CAPITAL GROUP ANNUAL REPORT COMMENTS ON RESULTS FOR 2017 AN ATTEMPT TO PROVIDE ADDITIONAL CLARITY AND INSIGHTS Pengana posted a statutory loss after tax attributable to Pengana shareholders of $2.8 million for the year to 30 June 2017. As noted above, due to the reverse acquisition accounting, the attached financial statements are likely to be quite confusing for most shareholders and in my view, are not a good indicator of the potential future earnings of the merged group. There are several key reasons for this including: 1. Exclusion of the earnings associated with the HHL business for the first 11 months of the year. The reason for this exclusion is that under the AAS, Pengana is deemed to be the acquiring entity and because the acquisition took place on 1 June 2017, only 1 month of HHL earnings are consolidated. In my view, it is relevant to include the full 12 months in order to gain a better understanding of the future earnings of the merged group. 2. Inclusion of costs associated with the merger. In my view, as these costs are non- recurring, it is relevant to exclude them in order to gain a better understanding of future earnings potential. 3. Inclusion of expenses associated with the Employee Loan Share Plan which was established prior to the merger. In my view, as these costs are non-recurring and/or non-cash items, it is relevant to exclude them in order to gain a better understanding of future earnings potential. 4. Consolidation of one fund where Pengana has significant holdings. The reason for this consolidation is that under AAS, where Pengana has been deemed to “control” the fund vehicles it invests in, the financial accounts of these vehicles are required to be consolidated into the financial results and position of Pengana. In my view, in order to gain a clearer understanding of the future earnings potential of our operating business, it is beneficial to exclude the consolidation of these fund vehicles. I note, that over time, Pengana intends not to have “control” in any of our funds. In this report, I will attempt to address the above issues by providing additional information and analysis. Hopefully this will provide you with further clarity and insights relevant to your assessment of Pengana. The following table shows a restatement of Pengana’s operating earnings before interest, tax, depreciation and amortisation (‘Merged Entity Adjusted Operating EBITDA’) for the year to 30 June 2017, after adjustments 1-4 as detailed above. ANNUAL REPORT 2017 | 13 LETTER FROM THE CEO (CONTINUED) PENGANA’S INVESTMENT STRATEGIES (CONTINUED) ADJUSTED OPERATING EBITDA – YEAR ENDED 30 JUNE 201711 Pengana – excluding HHL Operating revenue Net fund administration expenses Ongoing operating expenses Net performance fees12 Pengana pre-merger adjusted operating EBITDA HHL 12 months operating EBITDA Merged Entity Adjusted Operating EBITDA Reconciliation to Financial Statements HHL 11 months operating EBITDA Return on other investments and cash Merger expenses (reverse acquisition and restructuring costs) Employee loan share costs (share based payments expense) Other non-operating expenses Non-controlling interest Loss before tax attributable to Pengana shareholders Income tax expense Statutory loss after tax attributable to Pengana shareholders13 $’000 14,565 (1,711) (13,331) 5,530 5,053 6,129 11,182 (5,706) 2,771 (4,504) (5,029) (389) (120) (1,795) (1,019) (2,814) 11 Source: Pengana Management Accounts 12 Net of profit share to teams 13 As per Pengana Capital Group Limited 30 June 2017 Financial Statements 14 | PENGANA CAPITAL GROUP ANNUAL REPORT FUTURE EARNINGS POTENTIAL OPPORTUNITY TO GROW FUM AND LEVERAGE OUR EXPENSE BASE Over the coming years, we aim to improve the profitability of the Pengana business by growing our FUM and thereby our investment management fees. We have a highly scalable infrastructure and are well placed to grow FUM and fees at a much faster rate than the growth in expenses. Going forward, our operating EBITDA will be affected by the following: • Growth/reduction in management fees from growth/reduction in FUM. Note, at least 45-50% of these fees should flow to the bottom line after profit share payments to teams. • Performance fees from various funds. Note, at least 45-50% of these fees should flow to the bottom line after profit share payments to teams. • Management fees from the ex-HHL vehicles. Note, these fees will be reduced due to reductions in management fee rates as well as any net outflows of FUM. • Increased ongoing operating expenses from the HHL business. Note, these were stated in the Explanatory Memorandum to be $3 million i.e. $9 million less cost savings of $6 million. • As at 30 June 2017, Pengana had total net liquid assets of $29.7 million, including $11.4 million in net cash and $18.3 million in investments in various Pengana unit trusts and HHV. The return on these investments will impact earnings either through the consolidation of fund vehicles or return on investments. Note, Pengana has two Australian Financial Services Licenses (‘AFSL’), and for each AFSL, we are required to maintain $5 million in liquid assets (including $2.5 million in bank deposits). CAPITAL MANAGEMENT AND DIVIDENDS ANNOUNCEMENT OF FINAL DIVIDEND Pengana has no borrowings and at 30 June 2017 had $19.7 million of net liquid assets in excess of our regulatory requirements of $10 million. In addition to our net liquid assets, I also note that Pengana has provided employees with loans of $27 million, used to acquire shares in Pengana (prior to the merger). Whilst these loans do not appear on the balance sheet due to their treatment under the AAS, they nevertheless are economic assets of Pengana. The average interest rate on these loans is 7.9% (i.e. $2.1 million in total) and the employees are required to apply 100% of the dividends that they receive on these shares (net of tax) to make interest and capital payments. We are pleased to announce a fully franked final dividend of 4.5 cents per share for the six months to 30 June 2017. Shareholders on record at 14 September will receive this dividend on 28 September 2017. ANNUAL REPORT 2017 | 15 LETTER FROM THE CEO (CONTINUED) CHARITABLE CONTRIBUTIONS SUSTAINABLE SOCIAL IMPACT We aim to have a positive social impact via supporting worthy charities without diluting shareholder returns. We do this in two key areas: 1. Encouraging our staff to donate time to charitable causes and we are very proud of the contributions that they make. 2. The rebate of investment management fees where Pengana manages investments on behalf of various charitable organisations, including the Third Link Growth Fund, the ORAH Fund, and the Australian Philanthropic Services Foundation. In 2017, these equated to $146,000 and these amounts are projected to grow over time. THE FUTURE BUSINESS GROWTH AND ENHANCEMENT OF SHAREHOLDER VALUE Over the last 15 years, Pengana built a funds management business that succeeded in delivering long-term returns to our clients. This has enabled us to build a trusted brand and a wonderfully loyal client base. By continuing to focus on our “unrelenting quest to generate superior long- term returns for our investors”, we are well placed to continue to grow the business and enhance shareholder value. Our growth prospects are further enhanced by, our exceptional people, and our highly scalable business model and infrastructure. Over the coming months, Pengana will be holding numerous events for shareholders and clients around the country. I encourage you to contact us (via our website or telephone) and book a place to attend. At Pengana, we pride ourselves on the relationship that we have with our stakeholders and we would very much welcome the opportunity to meet with you in person. I am truly excited about the long-term future of Pengana and I look forward to sharing this journey with you. Yours sincerely, Russel Pillemer Chief Executive Officer 16 | PENGANA CAPITAL GROUP ANNUAL REPORTDIRECTORS’ REPORT 30 JUNE 2017 The Directors present their report, together with the Financial Statements, on the consolidated entity (referred to hereafter as the ‘group’) consisting of Pengana Capital Group Limited (referred to hereafter as the ‘company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 30 June 2017. DIRECTORS The following persons were Directors of Pengana Capital Group Limited during the whole of the financial year and up to the date of this report, unless otherwise stated: Warwick Negus – Chairman Russel Pillemer Robert Barry Jeremy Dunkel Kevin Eley David Groves Wayne Hawkins Peter Hall Mark Forstmann PRINCIPAL ACTIVITIES Appointed on 1 June 2017 Appointed on 1 June 2017 Appointed on 1 June 2017 Appointed on 1 June 2017 Resigned on 1 June 2017 Resigned on 7 March 2017 Resigned on 8 September 2016 The principal activity of the group is funds management with the objective of offering investment funds to high net worth and retail investors in Australia and New Zealand, and offshore investors. DIVIDENDS Dividends paid during the financial year were as follows: Final dividend for the year ended 30 June 2016 of $10.74 per Pengana Holdings Pty Ltd ordinary share paid on 18 October 2016 prior to the reverse acquisition Consolidated 2016 $’000 2017 $’000 6,000 – On 30 August 2017, an inaugural dividend was declared for the year ended 30 June 2017 of 4.5 cents per ordinary share fully franked with a record date of 14 September 2017 to be paid on 28 September 2017 by Pengana Capital Group Limited. Hunter Hall International Limited paid the following dividends prior to the reverse acquisition and they are not included in the consolidated results: (i) Final dividend for the year ended 30 June 2016 of 14.6 cents per ordinary share fully franked with a record date of 12 September 2016 and payment date of 26 September 2016. (ii) Interim dividend for the year ended 30 June 2017 of 4.0 cents per ordinary share fully franked with a record date of 7 March 2017 and payment date 21 March 2017. REVIEW OF OPERATIONS On 1 June 2017, Hunter Hall International Limited (now renamed Pengana Capital Group Limited) (‘the legal parent’ or ‘Hunter Hall’) acquired all the shares in Pengana Holdings Pty Ltd (‘the legal subsidiary’ or ‘Pengana Holdings’) in return for the issuance of 74,147,449 Hunter Hall shares to the Pengana Holdings shareholders. The result of the transaction is that the original Hunter Hall shareholders owned 26.9% and the Pengana Holdings shareholders owned 73.1% of all the issued shares of the merged entity, known soon after as Pengana Capital Group Limited (ASX: PCG). The transaction has been accounted for as a business combination and the principles of reverse acquisition accounting applied i.e. a reverse acquisition of Hunter Hall by Pengana Holdings. The current year represents the consolidated entity comprising Pengana Holdings for the entire year and Hunter Hall from 1 June 2017 to 30 June 2017. The comparative information represents the results of Pengana Holdings only. ANNUAL REPORT 2017 | 17 DIRECTORS’ REPORT – 30 JUNE 2017 (CONTINUED) The loss for the group after providing for income tax and non-controlling interest amounted to $2,814,000 (30 June 2016: profit of $1,986,000) and includes a $4,504,000 non-recurring expense for costs of the reverse acquisition and associated restructuring, and a share-based payment expense of $5,029,000. The equity of the group has been reduced by 22,853,722 treasury shares ($27,220,000), which are a result of the accounting of the loan share plan implemented during the year. Please refer to the letter from the Chief Executive Officer for further information on the current year results and future outlook. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS On 1 June 2017, Hunter Hall acquired Pengana Holdings Pty Ltd, as detailed above, and changed its name from Hunter Hall International Limited to Pengana Capital Group Limited. There were no other significant changes in the state of affairs of the group during the financial year. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR Apart from the dividend declared as discussed above, no other matter or circumstance has arisen since 30 June 2017 that has significantly affected, or may significantly affect the group’s operations, the results of those operations, or the group’s state of affairs in future financial years. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS Refer to the letter from the Chief Executive Officer for information on likely developments and further outlook. ENVIRONMENTAL REGULATION The group is not subject to any significant environmental regulation under Australian Commonwealth or State law. INFORMATION ON DIRECTORS Name: Title: Experience and expertise: Other current directorships: Warwick Negus Non-Executive Chairman Warwick Negus has more than 30 years’ experience in the finance industry across Asia, Europe and Australia. His previous executive roles include the Chief Executive Officer (‘CEO’) of Colonial First State Global Asset Management, co-founder and CEO of 452 Capital, and a Managing Director of Goldman Sachs in Australia, London and Singapore. He was also a Vice President of Bankers Trust Australia. Bank of Queensland Limited (ASX: BOQ); URB Investments Limited (ASX: URB); Virgin Australia Holdings Limited (ASX: VAH) and Washington H Soul Pattinson and Company Limited (ASX: SOL). Former directorships (last 3 years): None. Special responsibilities: Member of the Audit and Risk Committee. Interests in shares: 3,400,000 ordinary shares. 18 | PENGANA CAPITAL GROUP ANNUAL REPORTName: Title: Experience and expertise: Russel Pillemer Managing Director and Chief Executive Officer Russel Pillemer co-founded Pengana in 2003 together with the Hon. Malcolm Turnbull MP. He has been Pengana’s CEO since inception. Prior to founding Pengana, Russel Pillemer worked in the Investment Banking Division of Goldman Sachs in New York where he specialised in providing advice to funds management businesses. Before moving to New York, he was responsible for leading Goldman Sachs’ Australian Financial Institutions Group. Russel Pillemer was previously Chairman of Centric Wealth Group and a Principal of Turnbull Pillemer Capital. Other current directorships: Hunter Hall Global Value Limited (ASX: HHV). Former directorships (last 3 years): None. Special responsibilities: None. Interests in shares: 10,350,081 ordinary shares and 15,872,528 ordinary shares (treasury shares held under the loan share plan). Name: Title: Experience and expertise: Robert Barry Non-Executive Director Robert Barry was previously Non-Executive Chairman of Pengana Holdings Pty Ltd. He was previously Chairman of Snowy Hydro Limited, Deputy Chairman of AWB Limited and Chairman and Director of a number of other public and charitable organisations. He has spent 27 years in the investment banking industry. He co-founded the Dominguez & Barry Group and was Chief Executive of Dominguez Barry Samuel Montagu Limited, a predecessor to UBS Australia. He has had extensive experience in the financial services industry, both in Australia and internationally with three years in London as Head of International Capital Markets for the Midland Bank Group. Other current directorships: None. Former directorships (last 3 years): None. Special responsibilities: Interests in shares: None. None. Name: Title: Experience and expertise: Jeremy Dunkel Non-Executive Director Jeremy Dunkel is a Director of Taurus Capital, a family office investment consultancy specialising in philanthropy. His accounting and finance experience includes working for Chemical Bank, Chase Manhattan and Price Waterhouse. He is a director of Education Heritage Foundation, and the Moriah College Foundation, as well as the Chair of Y2i. Other current directorships: None. Former directorships (last 3 years): None. Special responsibilities: Chairman of the Nomination and Remuneration Committee and member of the Audit and Risk Committee. Interests in shares: 1,803,150 ordinary shares. ANNUAL REPORT 2017 | 19 DIRECTORS’ REPORT – 30 JUNE 2017 (CONTINUED) Name: Title: Experience and expertise: Kevin Eley Non-Executive Director Kevin Eley has over 31 years’ experience in management and investment in a broad range of industries including, manufacturing, mining, retail, finance and investment. Kevin Eley has worked for a major international accounting firm, two investment banks and was CEO of HGL Limited. Other current directorships: Milton Corporation Limited (ASX: MLT); EQT Holdings Ltd (ASX: EQT) and HGL Limited (ASX: HNG). Former directorships (last 3 years): Po Valley Energy Limited (ASX: PVE) and Kresta Holdings Limited (ASX: KRS). Special responsibilities: Member of the Nomination and Remuneration Committee and former member of the Audit and Risk Committee and former Chairman of the Independent Board Committee. Interests in shares: 200,000 ordinary shares. Name: Title: Experience and expertise: David Groves Non-Executive Director David Groves has 25 years’ experience as a company Director, including 15 years’ experience in financial services. David Groves is a Director of Pipers Brook Vineyard Pty Ltd and Tasman Sea Salt Pty Ltd. He is a former Director of Tassal Group Ltd and GrainCorp Ltd and a former executive with Macquarie Bank Limited and its predecessor, Hill Samuel Australia. David Groves is an advisory board member of the Australian Rugby Foundation and a member of the Council of Wollongong University. Other current directorships: Hunter Hall Global Value Limited (ASX: HHV). Former directorships (last 3 years): EQT Holdings Limited (ASX: EQT) and BCD Resources NL (ASX: BCD). Special responsibilities: Chairman of the Audit and Risk Committee, member of the Nomination and Remuneration Committee and former member of the Independent Board Committee. Interests in shares: 343,473 ordinary shares. ‘Other current directorships’ quoted above are current directorships for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. ‘Former directorships (last 3 years)’ quoted above are directorships held in the last 3 years for listed entities only and excludes directorships of all other types of entities, unless otherwise stated. 20 | PENGANA CAPITAL GROUP ANNUAL REPORTCOMPANY SECRETARY Ms Paula Ferrao has held the role of Company Secretary since 4 January 2017. Paula Ferrao is an executive of the group and was previously interim CEO of Hunter Hall International Limited, having previously held the position of Chief Financial Officer since 2010. Paula Ferrao has 19 years’ experience in the funds management industry with strong expertise in financial reporting and tax for corporate entities, listed investment companies, managed investment schemes and public offer superannuation funds and in all aspects of funds operations. MEETINGS OF DIRECTORS The number of meetings of the company’s Board of Directors (‘the Board’) and of each Board committee held during the year ended 30 June 2017, and the number of meetings attended by each Director were: Full Board Nomination and Remuneration Audit and Risk Committee Attended Held Attended Held Attended Held Warwick Negus Russel Pillemer Robert Barry Jeremy Dunkel Kevin Eley David Groves Wayne Hawkins Peter Hall Mark Forstmann Kevin Eley David Groves Wayne Hawkins 2 2 2 1 15 15 12 5 2 2 2 2 2 15 15 13 7 2 – – – – 3 3 3 – 2 – – – – 3 3 3 – 2 1 – – 1 5 6 4 – 1 1 – – 1 5 6 5 – 1 Independent Board Committee* Held Attended 9 9 9 9 9 9 Held: represents the number of meetings held during the time the Director held office or was a member of the relevant committee. *The Independent Board Committee was established to assess the various options available to Hunter Hall following the resignation of Peter Hall as its Chief Investment Officer. This committee has now been dissolved. REMUNERATION REPORT (AUDITED) The Remuneration Report details the key management personnel (‘KMP’) remuneration arrangements for the group, in accordance with the requirements of the Corporations Act 2001 and its Regulations. KMP are those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including all Directors. ANNUAL REPORT 2017 | 21 DIRECTORS’ REPORT – 30 JUNE 2017 (CONTINUED) REMUNERATION REPORT (AUDITED) (CONTINUED) Principles used to determine the nature and amount of remuneration The objective of the group’s executive reward framework is to ensure reward for performance is competitive and appropriate for the results delivered. The framework aligns executive reward with the achievement of strategic objectives and the creation of value for shareholders, and it is considered to conform to the market best practice for the delivery of reward. The Board of Directors (‘the Board’) ensures that executive reward satisfies the following key criteria for good reward governance practices: • competitiveness and reasonableness; • acceptability to shareholders; • performance linkage/alignment of executive compensation; and • transparency. The Nomination and Remuneration Committee (‘NRC’) is responsible for determining and reviewing remuneration arrangements for its Directors and executives. The performance of the group depends on the quality of its Directors and executives. The remuneration philosophy is to attract, motivate and retain high performance and high quality personnel. The remuneration framework of Pengana Holdings Pty Ltd has been adopted by the group and the recently established NRC will monitor, review and amend the framework going forward to ensure that it remains market competitive and complementary to the reward strategy of the group. In accordance with best practice corporate governance, the structure of Non-Executive Director and executive remuneration is separate. Non-Executive Directors’ remuneration Non-Executive Directors each have a letter of appointment with the company. Fees and payments to Non- Executive Directors reflect the demands and responsibilities of their role. Non-Executive Directors’ fees and payments are reviewed annually by the NRC. The NRC may, from time to time, receive advice from independent remuneration consultants to ensure Non-Executive Directors’ fees and payments are appropriate and in line with the market. The Chairman’s fees are determined independently to the fees of other Non-Executive Directors based on comparative roles in the external market. The Chairman is not present at any discussions relating to the determination of his own remuneration. Non-Executive Directors do not receive share options or other incentives. ASX listing rules require the aggregate Non-Executive Directors’ remuneration be determined periodically by a general meeting. The most recent determination was at the Annual General Meeting held on 16 November 2016, where the shareholders approved a maximum annual aggregate remuneration of $500,000. Executive remuneration The group aims to reward executives based on their position and responsibility, with a level and mix of remuneration which has both fixed and variable components. The executive remuneration and reward framework has the following components: • fixed remuneration, including superannuation and long service leave; and • share-based payments. The combination of these comprises the executive’s total remuneration. Fixed remuneration, consisting of base salary, superannuation and non-monetary benefits, will be reviewed annually by the NRC based on individual and business unit performance, the overall performance of the group and comparable market remuneration. Executives may receive their fixed remuneration in the form of cash or other fringe benefits where it does not create any additional costs to the group and provides additional value to the executive. Short-Term Incentives (‘STI’) are payable to KMP and other executives at the discretion of the Board and are not directly linked to the group profitability, however the profitability of the group is taken into consideration when determining bonuses. No STI was paid to KMP and other executives for the year ended 30 June 2017. 22 | PENGANA CAPITAL GROUP ANNUAL REPORT Long-Term incentives (‘LTI’) The Long-Term Incentives (‘LTI’) include long service leave and share-based payments. Prior to the reverse acquisition, Pengana Holdings Pty Ltd implemented a Loan Share Plan (‘LSP’) whereby it provided limited recourse loans to the CEO, certain employees and fund managers to acquire shares in Pengana Holdings Pty Ltd. Refer to section ‘Share-based compensation’ below for details of the LSP. A condition of the merger was a voluntary escrow of equity owned by KMP and other executives. The escrow periods range from one to six years. Use of remuneration consultants During the financial year PricewaterhouseCoopers was engaged by Pengana Holdings Pty Ltd to establish the LSP. PricewaterhouseCoopers was paid $189,357 for these services. An agreed set of protocols were put in place to ensure that the remuneration recommendations would be free from undue influence from KMP. The Board is satisfied that these protocols were followed and as such there was no undue influence. Voting and comments made at the company’s 2016 Annual General Meeting (‘AGM’) At the 2016 AGM, shareholders voted to approve the adoption of the Remuneration Report of Hunter Hall International Limited for the year ended 30 June 2016. The company did not receive any specific feedback at the AGM regarding its remuneration practices. Details of remuneration Amounts of remuneration Details of the remuneration of KMP of the group are set out in this section. Prior to the acquisition on 1 June 2017, Pengana Holdings Pty Ltd was not required to prepare a Remuneration Report in accordance with the Corporations Act 2001. As such, Remuneration Report information is presented only for 2017. The 2017 table below represents remuneration paid by the group consisting of Pengana Holdings Pty Ltd and its subsidiaries for the entire financial year and Hunter Hall International Limited (now known as Pengana Capital Group Limited) for the period from 1 June 2017 to 30 June 2017. The KMP of the group consisted of the Directors of Pengana Capital Group Limited and the following person: • Katrina Glendinning – Chief Financial Officer ANNUAL REPORT 2017 | 23 DIRECTORS’ REPORT – 30 JUNE 2017 (CONTINUED) REMUNERATION REPORT (AUDITED) (CONTINUED) Short-term benefits Post- employment benefits Long- term benefits Share- based payments Cash salary and fees $ Cash bonus $ Non- monetary $ Super- annuation $ Long service leave $ Equity- settled $ 1,012 28,472 651 578 723 – – – – – – – – – – Total $ 11,667 61,919 7,500 6,666 8,333 19,616 9,721 4,906,218 5,519,085 19,616 (3,421) 7,463 357,188 70,668 6,300 4,913,681 5,972,358 – – – – – – – – – – – – – – – – 2017 Non-Executive Directors: Warwick Negus* Robert Barry Jeremy Dunkel Kevin Eley* David Groves* 10,655 33,447 6,849 6,088 7,610 Executive Directors: Russel Pillemer 583,530 Other KMP: Katrina Glendinning 333,530 981,709 * KMP of the group from 1 June 2017 Non-Executive Directors’ remuneration is 100% fixed. The share-based payment incentive relates to the LSP. Name Executive Directors: Russel Pillemer Other KMP: Katrina Glendinning Fixed remuneration 2017 LTI 2017 11% 89% 98% 2% LTI components of Russel Pillemer is skewed for the year ended 30 June 2017 due to the share-based payment expense resulting from loan funded share issued to Russel Pillemer under the LSP. Refer to ‘Share-based compensation’ section below for further details. 24 | PENGANA CAPITAL GROUP ANNUAL REPORTSERVICE AGREEMENTS Remuneration and other terms of employment for group executives are formalised in employment agreements. Details of the employment agreements with KMP are as follows: Name: Title: Russel Pillemer Managing Director and Chief Executive Officer Term of agreement: Ongoing – no fixed minimum term Details: Name: Title: Total fixed salary of $603,146 per annum, which includes statutory superannuation contributions and any salary sacrifice arrangements. Russel Pillemer participates in the LSP. Either party may terminate the employment agreement by providing six months’ notice. Katrina Glendinning Chief Financial Officer Term of agreement: Ongoing – no fixed minimum term Details: Salary: Total fixed salary of $364,173 per annum, which includes statutory superannuation contributions and any salary sacrifice arrangements. Katrina Glendinning participates in the LSP. Either party may terminate the employment agreement by providing six months’ notice. KMP have no entitlement to termination payments in the event of removal for misconduct. SHARE-BASED COMPENSATION Issue of shares under the Loan Share Plan (‘LSP’) Pengana Holdings Pty Ltd (‘Pengana Holdings’) implemented a LSP whereby Pengana Holdings provided limited recourse loans to the CEO and certain employees and fund managers of Pengana Holdings to acquire shares in Pengana Holdings. Under the LSP, Russel Pillemer received two loans totalling $18,905,360 to acquire 15,872,528 shares and Katrina Glendinning received one loan of $503,704 to acquire 422,899 shares. The shares associated with the LSP granted to Russel Pillemer were not subject to a vesting condition and vested on the date the shares were granted. Katrina Glendinning’s shares have a service vesting period of five years. As the share acquisitions are funded by limited recourse loans they are treated for accounting purposes similar to grants of share options and accounted for as equity-settled share-based payments. The shares issued under the LSP are fair valued on the date they are granted and amortised as an expense in profit or loss over the vesting period. The terms and conditions of each grant of shares under the LSP affecting remuneration of Directors and other KMP in this financial year or future reporting years are as follows: Grant date Name: Number of loan shares Expiry date Exercise price 01/03/2017 Russel Pillemer: 5,149,796 01/03/2017 Russel Pillemer: 10,722,732 03/03/2017 Katrina Glendinning: 422,899 28/02/2024 28/02/2024 01/03/2024 $1.49 $1.20 $1.49 Fair value per loan shares at grant date $0.271 $0.328 $0.271 ANNUAL REPORT 2017 | 25 DIRECTORS’ REPORT – 30 JUNE 2017 (CONTINUED) REMUNERATION REPORT (AUDITED)(CONTINUED) The number of shares under the LSP granted to and vested by Directors and other KMP as part of compensation during the year ended 30 June 2017 are set out below: Name Russel Pillemer Katrina Glendinning Number of loan shares granted during the year 2017 Number of loan shares vested during the year 2017 15,872,528 422,899 15,872,528 – There were no options over ordinary shares issued to Directors and other KMP as part of compensation that were outstanding as at 30 June 2017. ADDITIONAL DISCLOSURES RELATING TO KMP Shareholding The number of shares in the company, excluding shares under the LSP, held during the financial year by each Director and other members of KMP of the group, including their personally related parties, is set out below: Balance at the start of the year Additions Disposal/other Shares issued on reverse acquisition Balance at the end of the year Ordinary shares: Warwick Negus Jeremy Dunkel Kevin Eley* David Groves* Peter Hall* Mark Forstmann* ** Wayne Hawkins* ** Russel Pillemer Katrina Glendinning – – 60,000 31,221 12,002,270 60,215 48,000 – – 41,693 – 140,000 312,252 – – – – – – – – – (12,002,270) (60,215) (48,000) 3,358,307 3,400,000 1,803,150 1,803,150 – – – – – 200,000 343,473 – – – – – 10,350,081 10,350,081 2,186,620 2,186,620 12,201,706 493,945 (12,110,485) 17,698,158 18,283,324 * Balance at the start of the year represents original shareholding in Hunter Hall International Limited. ** Disposals/other represents shares held at resignation date and not necessarily physical disposal. 26 | PENGANA CAPITAL GROUP ANNUAL REPORTShares under the Loan Share Plan The number of shares under the LSP in the company held during the financial year by each Director and other members of KMP of the group, including their personally related parties, is set out below: Balance at the start of the year Granted Exercised Shares issued on reverse acquisition* Balance at the end of the year Shares under the Loan Share Plan: Russel Pillemer Katrina Glendinning – – – – – – – – – 15,872,528 15,872,528 422,899 422,899 16,295,427 16,295,427 * Shares under the LSP granted in Pengana Holdings were converted to shares under the LSP in Pengana Capital Group Limited. This concludes the Remuneration Report, which has been audited. SHARES UNDER THE LOAN SHARE PLAN AND SHARES UNDER OPTIONS Shares under the LSP in Pengana Capital Group Limited and reported as treasury shares at the date of this report are as follows: Grant date 01/03/2017 01/03/2017 03/03/2017 Expiry date 28/02/2024 28/02/2024 01/03/2024 Exercise price Number of loan shares $1.49 $1.20 $1.49 5,149,796 10,722,732 6,981,194 22,853,722 Loans attached to the treasury shares total $27,220,000 and are reported as a reduction in issued capital, due to the operability of the LSP being accounted for as share-based payments, similar in nature to options. There were no unissued ordinary shares of Pengana Capital Group Limited under option outstanding at the date of this report. SHARES ISSUED ON THE EXERCISE OF OPTIONS There were no ordinary shares of Pengana Capital Group Limited issued on the exercise of options during the year ended 30 June 2017 and up to the date of this report. INDEMNITY AND INSURANCE OF OFFICERS During the financial year the company and Pengana Holdings Pty Ltd paid premiums in respect of contracts to insure the Directors and executives of the company and group. The contract of insurance prohibits disclosure of the nature of the risks insured and the amount of the premium. INDEMNITY AND INSURANCE OF AUDITOR The company has not, during or since the end of the financial year, indemnified or agreed to indemnify the auditor of the company or any related entity against a liability incurred by the auditor. During the financial year, the company has not paid a premium in respect of a contract to insure the auditor of the company or any related entity. ANNUAL REPORT 2017 | 27 DIRECTORS’ REPORT – 30 JUNE 2017 (CONTINUED) PROCEEDINGS ON BEHALF OF THE COMPANY No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the company is a party for the purpose of taking responsibility on behalf of the company for all or part of those proceedings. NON-AUDIT SERVICES There were no non-audit services provided during the financial year by the auditor. OFFICERS OF THE COMPANY WHO ARE FORMER PARTNERS OF GRANT THORNTON AUDIT PTY LTD There are no officers of the company who are former partners of Grant Thornton Audit Pty Ltd. ROUNDING OF AMOUNTS The company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. AUDITOR’S INDEPENDENCE DECLARATION A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out immediately after this Directors’ Report. AUDITOR Grant Thornton Audit Pty Ltd continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of Directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the Directors, Russel Pillemer Chief Executive Officer 30 August 2017 Sydney 28 | PENGANA CAPITAL GROUP ANNUAL REPORTAUDITOR’S INDEPENDENCE DECLARATION ANNUAL REPORT 2017 | 29 STATEMENT OF PROFIT OR LOSS Revenue Management fees Performance fees Other fee revenue Total revenue Share of profits/(losses) of associates accounted for using the equity method Other income and gains Total revenue and income Expenses Human resources expenses Fund manager profit share expense Fund administration expenses Distribution expenses Distributions paid to unitholders Occupancy expenses Technology and communications expenses Marketing and research expenses Insurance expenses Professional, registry and listing related expenses Reverse acquisition and restructuring costs Depreciation and amortisation expenses Other operating expenses Finance costs Total expenses Profit/(loss) before income tax expense Income tax expense Profit/(loss) after income tax expense for the year Profit/(loss) for the year is attributable to: Non-controlling interest Owners of Pengana Capital Group Limited Basic earnings per share Diluted earnings per share Refer to note 1 for explanation on comparatives. Consolidated 2017 $’000 24,871 11,947 76 2016 $’000 18,764 16,505 82 36,894 35,351 859 7,348 (746) 59 45,101 34,664 (14,725) (14,729) (3,128) (558) (4,230) (1,146) (1,013) (1,052) (224) (769) (4,504) (388) (310) – (9,810) (13,672) (2,896) (1,621) – (953) (1,140) (887) (154) (497) – (203) (259) (201) (46,776) (32,293) (1,675) (1,019) (2,694) 120 (2,814) (2,694) Cents (4.39) (4.39) 2,371 (362) 2,009 23 1,986 2,009 Cents 2.96 2.96 Note 4 5 5 5 5 6 35 35 The above statement of profit or loss should be read in conjunction with the accompanying notes. 30 | PENGANA CAPITAL GROUP ANNUAL REPORTSTATEMENT OF COMPREHENSIVE INCOME Profit/(loss) after income tax expense for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Gain on the revaluation of available-for-sale financial assets, net of tax Other comprehensive income for the year, net of tax Consolidated 2017 $’000 (2,694) 2016 $’000 2,009 3 3 – – Total comprehensive income for the year (2,691) 2,009 Total comprehensive income for the year is attributable to: Non-controlling interest Owners of Pengana Capital Group Limited Refer to note 1 for explanation on comparatives. 120 (2,811) (2,691) 23 1,986 2,009 The above statement of profit or loss should be read in conjunction with the accompanying notes. ANNUAL REPORT 2017 | 31 STATEMENT OF FINANCIAL POSITION Assets Current Assets Cash and cash equivalents Trade and other receivables Investments in financial assets at fair value through profit or loss Derivative financial instruments Income tax refund due Other current assets Total current assets Non-current assets Other receivables Investments accounted for using the equity method Investments in available-for-sale financial assets Property, plant and equipment Intangibles Deferred tax Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Derivative financial instruments Employee benefits Net assets attributable to unitholders Total current liabilities Non-current liabilities Security deposits held Deferred tax Employee benefits Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Equity attributable to the owners of Pengana Capital Group Limited Non-controlling interest Total equity Refer to note 1 for explanation on comparatives. Note Consolidated 2017 $’000 2016 $’000 7 8 9 6 10 11 12 13 14 15 6 16 6 17 18 20,167 4,940 26,768 – 905 802 6,347 7,153 3,620 29 319 511 53,582 17,979 2,258 3,712 7,196 362 65,992 – 79,520 133,102 16,876 – 511 18,768 36,155 5 6,256 569 6,830 42,985 90,117 87,161 28,899 (25,995) 90,065 52 2,777 21,726 – 314 – 813 25,630 43,609 8,971 11 274 2,081 11,337 18 – 240 258 11,595 32,014 25,298 29,867 (23,181) 31,984 30 90,117 32,014 The above statement of profit or loss should be read in conjunction with the accompanying notes. 32 | PENGANA CAPITAL GROUP ANNUAL REPORTSTATEMENT OF CHANGES IN EQUITY Consolidated Balance at 1 July 2015 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Contributed equity $’000 Reserves $’000 Accumulated losses $’000 25,298 29,867 (25,167) – – – – – – 1,986 – 1,986 Balance at 30 June 2016 25,298 29,867 (23,181) Non- controlling interest $’000 7 23 – 23 30 Total equity $’000 30,005 2,009 – 2,009 32,014 Total equity $’000 32,014 Contributed equity $’000 Reserves $’000 Accumulated losses $’000 Non- controlling interest $’000 25,298 29,867 (23,181) 30 Consolidated Balance at 1 July 2016 Profit/(loss) after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (note 17) Treasury shares (note 17) Share-based payments Dividends paid (note 19) – – – 89,083 (27,220) – 3 3 – – – – 5,029 (6,000) (2,814) 120 (2,694) – – 3 (2,814) 120 (2,691) – – – – – – – (98) 52 89,083 (27,220) 5,029 (6,098) 90,117 Balance at 30 June 2017 87,161 28,899 (25,995) Refer to note 1 for explanation on comparatives. The above statement of profit or loss should be read in conjunction with the accompanying notes. ANNUAL REPORT 2017 | 33 STATEMENT OF CASH FLOWS Consolidated Note 2017 $’000 2016 $’000 Cash flows from operating activities Receipts from customers (inclusive of GST) Payments to suppliers, customers and employees (inclusive of GST) Dividends received Interest received Other revenue Interest and other finance costs paid Proceeds from the sale of financial instruments held at fair value Purchase of financial instruments held at fair value through profit or loss Income taxes paid Net cash from operating activities Cash flows from investing activities Cash acquired on acquisition of subsidiaries Cash on disposal of interests in subsidiaries Payments for property, plant and equipment Redemption of non-controlling interest shares Proceeds from security deposits Net cash from/(used in) investing activities Cash flows from financing activities Proceeds from unitholders Payment made towards issue of loan share plan Proceeds from loan repayments Repayment of borrowings 32 28 Dividends paid to company shareholders 19 Dividends paid to non-controlling interests and unitholders Net cash from/(used in) financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents 41,579 (40,255) 1,324 249 94 483 – 26,778 (2,245) (1,032) 38,961 (33,891) 5,070 1,448 80 566 (103) 2,320 (6,929) (2,021) 25,651 431 18,836 (553) (232) (1,121) (5) 16,925 – – (101) – 57 (44) – 4,041 (18,905) 436 – (6,000) (4,249) (28,718) 13,858 6,347 (38) – – (4,000) – – 41 428 5,958 (39) Cash and cash equivalents at the end of the financial year 7 20,167 6,347 Refer to note 1 for explanation on comparatives. The above statement of profit or loss should be read in conjunction with the accompanying notes. 34 | PENGANA CAPITAL GROUP ANNUAL REPORTNOTES TO THE FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies adopted in the preparation of the financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. NEW OR AMENDED ACCOUNTING STANDARDS AND INTERPRETATIONS ADOPTED The group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) that are mandatory for the current reporting period. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the group. Any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. BASIS OF PREPARATION On 1 June 2017, Pengana Capital Group Limited (previously known as Hunter Hall International Limited (‘Hunter Hall’) acquired Pengana Holdings Pty Ltd (‘the legal subsidiary’ or ‘Pengana Holdings’). For accounting purposes, the transaction has been accounted for by applying the principles of reverse acquisition accounting. These financial statements represent a continuation of Pengana Holdings since that entity is deemed the accounting acquirer pursuant to accounting standards, and therefore the comparative results represents that of Pengana Holdings’ operations and not that of Hunter Hall. Therefore, the comparatives will not compare to the consolidated financial statements of Hunter Hall International Limited published in the prior financial reporting period. The current year financial results represent those of the consolidated entity comprising Pengana Holdings for the entire year and the legal parent Hunter Hall from 1 June 2017 to 30 June 2017. These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). Historical cost convention The financial statements have been prepared under the historical cost convention, except for, where applicable, the revaluation of available-for-sale financial assets, financial assets and liabilities at fair value through profit or loss and derivative financial instruments. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. PARENT ENTITY INFORMATION In accordance with the Corporations Act 2001, these financial statements present the results of the group only. Supplementary information about the parent entity is disclosed in note 27. PRINCIPLES OF CONSOLIDATION The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Pengana Capital Group Limited (‘company’ or ‘parent entity’) as at 30 June 2017 and the results of all subsidiaries for the year then ended. Pengana Capital Group Limited and its subsidiaries together are referred to in these financial statements as the ‘group’. Subsidiaries are all those entities over which the group has control. The group controls an entity when the group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the group. They are de-consolidated from the date that control ceases. The acquisition of Pengana Holdings by Hunter Hall has been accounted for by applying the principles of reverse acquisition accounting, and the consolidated financial statements represent a continuation of the financial statements of Pengana Holdings. Refer to ‘Business Combinations’ accounting policy for a further explanation of the accounting for this transaction. ANNUAL REPORT 2017 | 35 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PRINCIPLES OF CONSOLIDATION (CONTINUED) Intercompany transactions, balances and unrealised gains on transactions between entities in the group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the group. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Non-controlling interest in the results and equity of subsidiaries are shown separately in the Statement of Profit or Loss, Statement of Financial Position and Statement of Changes in Equity of the group. Losses incurred by the group are attributed to the non-controlling interest in full, even if that results in a deficit balance. Where the group loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and non- controlling interest in the subsidiary together with any cumulative translation differences recognised in equity. The group recognises the fair value of the consideration received and the fair value of any investment retained together with any gain or loss in profit or loss. OPERATING SEGMENTS Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers (‘CODM’). The CODM are responsible for the allocation of resources to operating segments and assessing their performance. FOREIGN CURRENCY TRANSLATION The financial statements are presented in Australian dollars, which is Pengana Capital Group Limited’s functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at financial year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated into Australian dollars using the exchange rates at the reporting date. The revenues and expenses of foreign operations are translated into Australian dollars using the average exchange rates, which approximate the rates at the dates of the transactions, for the period. All resulting foreign exchange differences are recognised in other comprehensive income through the foreign currency reserve in equity. The foreign currency reserve is recognised in profit or loss when the foreign operation or net investment is disposed of. REVENUE RECOGNITION Revenue is recognised when it is probable that the economic benefit will flow to the group and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Management fees Management fees are recognised on an accruals basis based on the portfolio managed, net of any fund manager rebates. Performance fees Performance fees are recognised when the right to receive payment has been established. Performance fees which are contingent upon performance to be determined at future dates have not been recognised as income or as a receivable at the reporting date as they are not able to be estimated or measured reliably and may change significantly. 36 | PENGANA CAPITAL GROUP ANNUAL REPORTDividends and distributions Dividends and distributions are recognised when received or when the right to receive payment is established. Interest Interest 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. Rental income Rent revenue is recognised on a straight-line basis over the lease term. Lease incentives granted are recognised as part of the rental revenue. Contingent rentals are recognised as income in the period when earned. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. FUND MANAGER PROFIT SHARE EXPENSE Fund manager profit share expense represent a ‘shadow equity’ program for fund managers under which the fund managers receive an agreed percentage of the profits of their respective fund and/or strategy ensuring alignment of interests between shareholders, fund managers and fund investors. INCOME TAX The income tax expense or benefit for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by the changes in deferred tax assets and liabilities attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to be applied when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • When the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or • When the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets are reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Tax consolidated group Pengana Capital Group Limited (the ‘head entity’) and its wholly-owned Australian subsidiaries formed an income tax consolidated group under the tax consolidation regime on 1 July 2003, which Pengana Holdings Pty Ltd and its wholly-owned Australian subsidiaries joined on 1 June 2017. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. ANNUAL REPORT 2017 | 37 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) TAX CONSOLIDATED GROUP (CONTINUED) In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. The head entity and its wholly owned subsidiaries have entered a tax sharing agreement whereby each company in the group contributes to the income tax payable in proportion to their contribution to the net profit before tax of the tax consolidated group. In addition, Pengana Holdings Pty Ltd and its wholly owned subsidiaries have a tax funding agreement that ensures the tax payable is met by Pengana Holdings Pty Ltd. Any difference between the amounts assumed and the amount receivable or payable under the tax funding agreement is recognised as a contribution to, or distribution from, Pengana Holdings Pty Ltd. CURRENT AND NON-CURRENT CLASSIFICATION Assets and liabilities are presented in the Statement of Financial Position based on current and non-current classification. An asset is classified as current when: it is either expected to be realised or intended to be sold or consumed in the group’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is classified as current when: it is either expected to be settled in the group’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as non-current. Deferred tax assets and liabilities are always classified as non-current. CASH AND CASH EQUIVALENTS Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short- term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. TRADE AND OTHER RECEIVABLES Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. These receivables represent management fees that are accrued daily and paid monthly by the funds. They are usually recoverable within 20 business days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Other receivables are recognised at amortised cost, less any provision for impairment. DERIVATIVE FINANCIAL INSTRUMENTS Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. Subsequent changes in fair value are taken to profit or loss as the group does not designate derivatives as hedging instruments. Derivatives are classified as current or non-current depending on the expected period of realisation. 38 | PENGANA CAPITAL GROUP ANNUAL REPORTASSOCIATES Associates are entities over which the group has significant influence but not control or joint control. Investments in associates are accounted for using the equity method. Under the equity method, the share of the profits or losses of the associate is recognised in profit or loss and the share of the movements in equity is recognised in other comprehensive income. Investments in 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 associate. Goodwill relating to the associate is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. Dividends received or receivable from associates reduce the carrying amount of the investment. When the group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured long-term receivables, the group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. The group discontinues the use of the equity method upon the loss of significant influence over the associate and recognises any retained investment at its fair value. Any difference between the associate’s carrying amount, fair value of the retained investment and proceeds from disposal is recognised in profit or loss. INVESTMENTS AND OTHER FINANCIAL ASSETS Investments and other financial assets are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss. They are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on the purpose of the acquisition and subsequent reclassification to other categories is restricted. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the group has transferred substantially all the risks and rewards of ownership. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are carried at amortised cost using the effective interest rate method. Gains and losses are recognised in profit or loss when the asset is derecognised or impaired. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are either: (i) held for trading, where they are acquired for the purpose of selling in the short-term with an intention of making a profit; or (ii) designated as such upon initial recognition, where they are managed on a fair value basis or to eliminate or significantly reduce an accounting mismatch. Fair value movements are recognised in profit or loss. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets, principally equity securities, which are either designated as available-for-sale or not classified as any other category. After initial recognition, fair value movements are recognised in other comprehensive income through the available-for-sale reserve in equity. Cumulative gain or loss previously reported in the available-for-sale reserve is recognised in profit or loss when the asset is derecognised or impaired. Impairment of financial assets The group assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. Objective evidence includes significant financial difficulty of the issuer or obligor; a breach of contract such as default or delinquency in payments; the lender granting to a borrower concessions due to economic or legal reasons that the lender would not otherwise do; it becomes probable that the borrower will enter bankruptcy or other financial reorganisation; the disappearance of an active market for the financial asset; or observable data indicating that there is a measurable decrease in estimated future cash flows. The amount of the impairment allowance for loans and receivables carried at amortised cost 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. If there is a reversal of impairment, the reversal cannot exceed the amortised cost that would have been recognised had the impairment not been made and is reversed to profit or loss. ANNUAL REPORT 2017 | 39 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) IMPAIRMENT OF FINANCIAL ASSETS (CONTINUED) The amount of the impairment allowance for financial assets carried at cost is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the current market rate of return for similar financial assets. Available-for-sale financial assets are considered impaired when there has been a significant or prolonged decline in value below initial cost. Subsequent increments in value are recognised in other comprehensive income through the available-for-sale reserve. PROPERTY, PLANT AND EQUIPMENT Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment over their expected useful lives as follows: Leasehold improvements Furniture and fittings Plant and equipment 5 years 5–10 years 2–4 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements and plant and equipment under lease are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit to the group. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. 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. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to the ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. Finance leases are capitalised. A lease asset and liability are established at the fair value of the leased assets, or if lower, the present value of minimum lease payments. Lease payments are allocated between the principal component of the lease liability and the finance costs, so as to achieve a constant rate of interest on the remaining balance of the liability. Leased assets acquired under a finance lease are depreciated over the asset’s useful life or over the shorter of the asset’s useful life and the lease term if there is no reasonable certainty that the group will obtain ownership at the end of the lease term. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. INTANGIBLE ASSETS Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. 40 | PENGANA CAPITAL GROUP ANNUAL REPORT Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Acquired relationships Relationships acquired in a business combination are amortised on a straight-line basis over the period of their expected benefit, being their finite useful life of between 7 and 13 years. IMPAIRMENT OF NON-FINANCIAL ASSETS Goodwill is not subject to amortisation and is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. TRADE AND OTHER PAYABLES These amounts represent liabilities for goods and services provided to the group prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. BORROWINGS Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Borrowings are removed from the Statement of Financial Position when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount and the consideration received is recognised in profit or loss. NET ASSETS ATTRIBUTABLE TO UNITHOLDERS Net assets attributable to unitholders represent the economic interest in the net assets of consolidated subsidiary trusts that are attributable to non-controlling interests. The funds consider their equity to be unitholders’ funds. The funds manage their net assets attributable to unitholders as capital, notwithstanding net assets attributable to unitholders are classified as a liability in the Statement of Financial Position. FINANCE COSTS Finance costs are expensed in the period in which they are incurred based on the effective interest method. EMPLOYEE BENEFITS Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled wholly within 12 months of the reporting date are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for annual leave, long service leave and other long-term employee benefits not expected to be settled within 12 months of the reporting date are measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to ANNUAL REPORT 2017 | 41 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNT POLICIES (CONTINUED) OTHER LONG-TERM EMPLOYEE BENEFITS (CONTINUED) expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Equity-settled transactions are awards of shares, or options over shares, which are provided to employees in exchange for the rendering of services. The group operates a loan share plan that is accounted for as equity- settled share-based payments similar to options. The cost of equity-settled transactions are measured at fair value on grant date. Fair value is independently determined using Black-Scholes option pricing model that takes into account the exercise price, the term of the option/share under the loan share plan, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option/share under the loan share plan, together with non-vesting conditions that do not determine whether the group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions are recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore any awards subject to market conditions are considered to vest irrespective of whether or not that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. If equity-settled awards are cancelled, it is treated as if it has vested on the date of cancellation, and any remaining expense is recognised immediately. If a new replacement award is substituted for the cancelled award, the cancelled and new award is treated as if they were a modification. FAIR VALUE MEASUREMENT When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified, into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. 42 | PENGANA CAPITAL GROUP ANNUAL REPORTFor recurring and non-recurring fair value measurements, external valuers may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. 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. DIVIDENDS Dividends are recognised when declared during the financial year. BUSINESS COMBINATIONS The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the group assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the group’s operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the group remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of the contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non- controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition- date, but only after a reassessment of the identification and measurement of the net assets acquired, the non- controlling interest in the acquiree, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition- date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Acquisition of Pengana Holdings Pty Ltd During the financial year, Pengana Holdings Pty Ltd’s original shareholders obtained a majority share interest in Hunter Hall International Limited (now known as Pengana Capital Group Limited) after the acquisition transaction. This transaction is accounted by applying the principles of a reverse acquisition accounting in accordance with AASB 3 ‘Business Combinations’. ANNUAL REPORT 2017 | 43 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNT POLICIES (CONTINUED) ACQUISITION OF PENGANA HOLDINGS PTY LTD (CONTINUED) The overall accounting effect is in accordance with AASB 3 with the following principles having been applied: • fair value adjustments arising at acquisition were made to Hunter Hall International Limited’s assets and liabilities and not to those of Pengana Holdings Pty Ltd; • the cost of the acquisition, and amount recognised as issued capital to affect the transaction, is based on the notional amount of shares that Pengana Holdings Pty Ltd would have needed to issue to acquire the same shareholding percentage in Hunter Hall International Limited at the acquisition date; • retained earnings and other equity balances in the consolidated financial statements at acquisition date are those of Pengana Holdings Pty Ltd; • the equity structure in the consolidated financial statements (the number and type of equity instruments) represents the continuation of Pengana Holdings Pty Ltd, including the equity instruments issued to effect the acquisition; • the results for the financial year ended 30 June 2017 comprise the consolidated results for the year of Pengana Holdings Pty Ltd together with the results of Hunter Hall International Limited from 1 June 2017 to 30 June 2017; and • the comparative results represent the consolidated results of Pengana Holdings Pty Ltd only. EARNINGS PER SHARE Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Pengana Capital Group Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. GOODS AND SERVICES TAX (‘GST’) AND OTHER SIMILAR TAXES Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Trade debtors and creditors are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the Statement of Financial Position. All other receivables and payables are stated exclusive of GST recoverable or payable. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. ROUNDING OF AMOUNTS The company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. NEW ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET MANDATORY OR EARLY ADOPTED Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the group for the annual reporting period ended 30 June 2017. The group’s assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the group, are set out below. 44 | PENGANA CAPITAL GROUP ANNUAL REPORTAASB 9 Financial Instruments This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard replaces all previous versions of AASB 9 and completes the project to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’. AASB 9 introduces new classification and measurement models for financial assets. A financial asset shall be measured at amortised cost, if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, which arise on specified dates and solely principal and interest. All other financial instrument assets are to be classified and measured at fair value through profit or loss unless the entity makes an irrevocable election on initial recognition to present gains and losses on equity instruments (that are not held-for-trading) in other comprehensive income (‘OCI’). For financial liabilities, the standard requires the portion of the change in fair value that relates to the entity’s own credit risk to be presented in OCI (unless it would create an accounting mismatch). New simpler hedge accounting requirements are intended to more closely align the accounting treatment with the risk management activities of the entity. New impairment requirements will use an ‘expected credit loss’ (‘ECL’) model to recognise an allowance. Impairment will be measured under a 12-month ECL method unless the credit risk on a financial instrument has increased significantly since initial recognition in which case the lifetime ECL method is adopted. The standard introduces additional new disclosures. The group will adopt this standard from 1 July 2018 but the impact of its adoption is yet to be assessed by the group. AASB 15 Revenue from Contracts with Customers This standard is applicable to annual reporting periods beginning on or after 1 January 2018. The standard provides a single standard for revenue recognition. The core principle of the standard is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard will require: contracts (either written, verbal or implied) to be identified, together with the separate performance obligations within the contract; determine the transaction price, adjusted for the time value of money excluding credit risk; allocation of the transaction price to the separate performance obligations on a basis of relative stand-alone selling price of each distinct good or service, or estimation approach if no distinct observable prices exist; and recognition of revenue when each performance obligation is satisfied. Credit risk will be presented separately as an expense rather than adjusted to revenue. For goods, the performance obligation would be satisfied when the customer obtains control of the goods. For services, the performance obligation is satisfied when the service has been provided, typically for promises to transfer services to customers. For performance obligations satisfied over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognised as the performance obligation is satisfied. Contracts with customers will be presented in an entity’s Statement of Financial Position as a contract liability, a contract asset, or a receivable, depending on the relationship between the entity’s performance and the customer’s payment. Sufficient quantitative and qualitative disclosure is required to enable users to understand the contracts with customers; the significant judgements made in applying the guidance to those contracts; and any assets recognised from the costs to obtain or fulfill a contract with a customer. The group will adopt this standard from 1 July 2018 but the impact of its adoption is yet to be assessed by the group. AASB 16 Leases This standard is applicable to annual reporting periods beginning on or after 1 January 2019. For lessee accounting, the standard eliminates the ‘operating lease’ and ‘finance lease’ classification required by AASB 117 ‘Leases’. Subject to exceptions, a ‘right-of-use’ asset will be capitalised in the Statement of Financial Position, measured as the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and office furniture) where an accounting policy choice exists whereby either a ‘right-of-use’ asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight-line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs). For classification within the Statement of Cash Flows, the lease payments will be separated into both a principal (financing activities) and interest (either operating or financing activities) components. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. Had the standard been adopted from 1 July 2017, and using the transitional rules available, the group would have recognised a lease liability, being the present value of the lease commitments as disclosed in note 25 discounted using the group’s incremental borrowing rate, with a corresponding increase in property, plant and equipment. However, the group will adopt this standard from 1 July 2019 and the actual impact will depend on the operating lease assets held by the group as at 1 July 2019 and the transitional elections made at that time. ANNUAL REPORT 2017 | 45 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 2. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. 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 by using the Black-Scholes model taking into account the terms and conditions upon which the instruments were granted. 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 profit or loss and equity. Fair value measurement hierarchy The group is required to classify all assets and liabilities, measured at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and Level 3: Unobservable inputs for the asset or liability. Considerable judgement is required to determine what is significant to fair value and therefore which category the asset or liability is placed in can be subjective. Goodwill The group tests annually, or more frequently if events or changes in circumstances indicate impairment, whether goodwill has suffered any impairment, in accordance with the accounting policy stated in note 1. The recoverable amount of cash-generating unit has been determined based on fair value less costs of disposal, using external market data. Business combinations As discussed in note 1, business combinations are initially accounted for on a provisional basis. The fair value of assets acquired, liabilities and contingent liabilities assumed are initially estimated by the group taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination accounting is retrospective, where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. Unconsolidated structured entities The group has significant influence over the funds it manages due to its role as responsible entity and investment manager together with direct holdings in the funds. The funds referred to in note 31 are not consolidated by the group, and instead, equity accounted as interests in associates, as the group does not have control or joint control. These investments are managed in accordance with financial risk management practices as set out in note 20. 46 | PENGANA CAPITAL GROUP ANNUAL REPORTNOTE 3. OPERATING SEGMENTS Identification of reportable operating segments The main business activities of the group are the provision of funds management services. The Board of Directors and the Managing Director and Chief Executive Officer, are identified as the Chief Operating Decision Makers (‘CODM’), and they consider the performance of the main business activities on an aggregated basis to determine the allocation of resources. Other activities undertaken by the group, including investing activities, are incidental to the main business activities. Based on the internal reports that are used by the CODM the group has one operating segment being the provision of funds management services with the objective of offering investment funds to high net worth and retail investors in Australia and New Zealand, and offshore investors globally. There is no aggregation of operating segments. The operating segment information is the same information as provided throughout the financial statements and are therefore not duplicated. The information reported to the CODM is on a regular basis. NOTE 4. OTHER INCOME AND GAINS Dividends and distributions Interest Rental income Net change in assets attributable to unitholders Realised and unrealised gains/(losses) on financial instruments held at fair value through profit or loss Realised and unrealised losses on held for trading financial assets Other income Consolidated 2017 $’000 16 91 307 6,599 244 (15) 106 7,348 2016 $’000 29 82 243 45 (345) (56) 61 59 ANNUAL REPORT 2017 | 47 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 5. EXPENSES Profit/(loss) before income tax includes the following specific expenses: Consolidated 2017 $’000 2016 $’000 Depreciation Leasehold improvements Fixtures and fittings Plant and equipment Total depreciation Amortisation Acquired relationships Total depreciation and amortisation Finance costs Interest and finance charges paid/payable Amortisation of borrowing costs Finance costs expensed Net foreign exchange loss Net foreign exchange loss Rental expense relating to operating leases Minimum lease payments Amortisation of deferred lease incentives Total rental expense relating to operating leases Defined contribution superannuation expense Share-based payments expense – included in human resources expenses Share-based payments expense Staff termination payments on termination of Global Resources Fund Reverse acquisition and restructuring costs Professional fees Salaries, redundancies and other employee benefit costs Onerous leases and write downs Other Total reverse acquisition and restructuring costs 48 | PENGANA CAPITAL GROUP 33 39 116 188 200 388 – – – 18 37 148 203 – 203 103 98 201 57 15 938 155 1,093 512 5,029 – 334 3,381 402 387 4,504 902 32 934 473 – 621 – – – – – ANNUAL REPORTNOTE 6. INCOME TAX Income tax expense Current tax Deferred tax – origination and reversal of temporary differences Aggregate income tax expense Deferred tax included in income tax expense comprises: Consolidated 2017 $’000 1,329 (310) 1,019 2016 $’000 238 124 362 (Increase)/decrease in deferred tax assets (310) 124 Numerical reconciliation of income tax expense and tax at the statutory rate (Loss)/profit before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Non-assessable income Permanent differences Share-based payment expense Assessable income not in profit or loss (1,675) 2,371 (503) 711 (370) 165 1,509 218 – (349) – – Income tax expense 1,019 362 Amounts credited directly to equity Deferred tax assets Tax losses not recognised Capital tax losses for which no deferred tax asset has been recognised Potential tax benefit at statutory tax rates (1) – – – 5,028 1,508 The tax benefit for capital losses have been fully recognised during the financial year ended 30 June 2017. ANNUAL REPORT 2017 | 49 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 6. INCOME TAX (CONTINUED) Deferred tax asset/(liability) Deferred tax asset/(liability) comprises temporary differences attributable to: Amounts recognised: Property, plant and equipment Provision Unrealised losses /(gains) Acquired relationships Deferred tax asset /(liability) Movements: Opening balance Credited/(charged) to profit or loss Credited to equity Additions through business combinations (note 28) Closing balance Income tax refund due Income tax refund due NOTE 7. CURRENT ASSETS – CASH AND CASH EQUIVALENTS Cash on hand and at bank Cash on deposit Consolidated 2017 $’000 2016 $’000 82 1,559 (1) (7,896) (6,256) 813 310 1 (7,380) (6,256) 905 14,951 5,216 20,167 91 464 258 – 813 937 (124) – – 813 319 3,776 2,571 6,347 50 | PENGANA CAPITAL GROUP ANNUAL REPORTNOTE 8. CURRENT ASSETS – TRADE AND OTHER RECEIVABLES Trade receivables Accrued income Redemptions receivable Other receivables Consolidated 2017 $’000 25 4,915 – – 4,940 2016 $’000 3,239 293 3,617 4 7,153 Impairment of receivables As at 30 June 2017 and 30 June 2016 there were no impaired receivables or any past due but not impaired. NOTE 9. CURRENT ASSETS – INVESTMENTS IN FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Listed shares – held for trading 26,768 3,620 Reconciliation Reconciliation of the fair values at the beginning and end of the current and previous financial year are set out below: Opening fair value Additions Additions through business combinations (note 28) Disposals Revaluation increments Revaluation decrements Reclassification to investments accounted for using equity method 3,620 3,687 25,518 (2,986) 549 – (3,620) 1,011 4,941 – (2,312) – (20) – Closing fair value 26,768 3,620 Refer to note 21 for further information on fair value measurement. NOTE 10. CURRENT ASSETS – OTHER CURRENT ASSETS Prepayments Security deposits Other deposits Other current assets 569 75 11 147 802 357 71 83 – 511 ANNUAL REPORT 2017 | 51 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 11. NON-CURRENT ASSETS – OTHER RECEIVABLES Other receivables Security deposits Other loans Consolidated 2017 $’000 400 442 1,416 2,258 2016 $’000 400 442 1,935 2,777 NOTE 12. NON-CURRENT ASSETS – INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Investments in associates 3,712 21,726 Refer to note 30 for further information on interests in associates. NOTE 13. NON-CURRENT ASSETS – INVESTMENTS IN AVAILABLE-FOR-SALE FINANCIAL ASSETS Investments in available-for-sale financial assets at fair value 7,196 – Refer to note 21 for further information on fair value measurement. NOTE 14. NON-CURRENT ASSETS – PROPERTY, PLANT AND EQUIPMENT Leasehold improvements – at cost Less: Accumulated depreciation Furniture and fittings – at cost Less: Accumulated depreciation Plant and equipment – at cost Less: Accumulated depreciation 588 (437) 151 238 (166) 72 937 (798) 139 362 448 (407) 41 389 (301) 88 808 (623) 185 314 52 | PENGANA CAPITAL GROUP ANNUAL REPORTReconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2015 Additions Impairment on disposal Depreciation expense Balance at 30 June 2016 Additions Additions through business combinations (note 28) Write-off of assets Depreciation expense Balance at 30 June 2017 NOTE 15. NON-CURRENT ASSETS – INTANGIBLES Goodwill – at cost Acquired relationships – at cost Less: Accumulated amortisation Leasehold improvements $’000 Furniture and fittings $’000 Plant and equipment $’000 19 40 – (18) 41 143 – – (33) 151 124 2 (1) (37) 88 23 254 (254) (39) 72 268 68 (3) (148) 185 66 36 (32) (116) 139 Total $’000 411 110 (4) (203) 314 232 290 (286) (188) 362 Consolidated 2017 $’000 39,672 26,520 (200) 26,320 65,992 2016 $’000 – – – – – Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 July 2015 Balance at 30 June 2016 Additions through business combinations (note 28) Amortisation expense Balance at 30 June 2017 Goodwill $’000 Acquired relationships $’000 – – 39,672 – – – 26,520 (200) Total $’000 – – 66,192 (200) 39,672 26,320 65,992 ANNUAL REPORT 2017 | 53 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 15. NON-CURRENT ASSETS – INTANGIBLES (CONTINUED) Goodwill acquired through the business combination with Hunter Hall amounted to $39,672,000 has been incorporated into the existing cash-generating unit (‘CGU’) of Pengana Capital Group funds management business. The recoverable amount of the CGU to which goodwill has been allocated is greater than the carrying value and therefore not impaired. The recoverable amount is based on fair value less costs of disposal. The remaining amortisation period for the acquired relationships is between 7 and 13 years. NOTE 16. CURRENT LIABILITIES – TRADE AND OTHER PAYABLES Trade payables Accrued expenses Fund manager profit share Due to brokers GST payable Other payables Consolidated 2017 $’000 1,055 12,106 3,219 – – 496 2016 $’000 60 5,362 3,033 62 421 33 16,876 8,971 Refer to note 20 for further information on financial instruments. NOTE 17. EQUITY – CONTRIBUTED EQUITY The number of shares and dollar value represents the continuation of Pengana Holdings Pty Ltd (‘PH’). Consequent to reverse acquisition accounting, with effect from 1 June 2017, the shares were converted into issued capital of Pengana Capital Group Limited (‘PCG’). Ordinary shares – fully paid Less: Treasury shares Movements in ordinary share capital Details Balance Balance Issue of shares in PH under Loan Share Plan Shares in PH relinquished on reverse acquisition New shares issued in PCG on reverse acquisition Consolidated 2017 Shares 101,477,092 (22,853,722) 2016 Shares 558,741 – 78,623,370 558,741 2017 $’000 114,381 (27,220) 87,161 2016 $’000 25,298 – 25,298 Date Shares $’000 1 July 2015 558,741 25,298 30 June 2016 3 March 2017 1 June 2017 1 June 2017 558,741 58,075 (616,816) 74,147,449 25,298 8,315 – – 80,896 (128) Shares to effect the deemed acquisition of Hunter Hall (note 28) Share issue transaction costs, net of tax 1 June 2017 27,329,643 – Balance 30 June 2017 101,477,092 114,381 54 | PENGANA CAPITAL GROUP ANNUAL REPORTMovements in treasury shares Details Balance Balance Shares acquired in PH under Loan Share Plan Issue of shares in PH under Loan Share Plan Shares in PH relinquished on reverse acquisition New shares issued in PCG on reverse acquisition Date 1 July 2015 30 June 2016 1 March 2017 3 March 2017 1 June 2017 1 June 2017 Shares $’000 – – (132,040) (58,075) 190,115 (22,853,722) – – (18,905) (8,315) – – Balance 30 June 2017 (22,853,722) (27,220) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the company does not have a limited amount of authorised capital. On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Treasury shares The company has an equity scheme pursuant to which certain employees and fund managers may access a Loan Share Plan (‘LSP’). The acquisition of shares under this LSP is fully funded by the company through the granting of a limited recourse loan. The LSP shares are subject to escrow and transfer is restricted until the vesting conditions are satisfied and the loan is repaid. Vested and unvested shares are recorded as treasury shares representing a deduction against issued capital. These have been accounted for as a share-based payment. Refer to note 34 for further details. When the loans are settled the treasury shares are reclassified as ordinary shares and the equity will increase by the amount of the loan repaid. Share buy-back There is no current on-market share buy-back. Capital risk management The group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. Capital is regarded as total equity, as recognised in the Statement of Financial Position, plus net debt. Net debt is calculated as total borrowings less cash and cash equivalents. The group has no borrowings as at 30 June 2017 (June 2016: nil) Two wholly owned subsidiaries of the group, Pengana Capital Limited (‘PCL’) and Hunter Hall Investment Management Ltd (‘HHIML’), hold an Australian Financial Services License and are subject to regulatory financial requirements that include maintaining a minimum level of net tangible assets. As at 30 June 2017 both PCL and HHIML were required to maintain $5,000,000 each in liquid assets, of which 50% is held in cash or cash equivalents. The Directors believe the group has adequate capital at 30 June 2017 to maintain the groups existing business activities and facilitate growth. ANNUAL REPORT 2017 | 55 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 18. EQUITY – RESERVES Profits reserve Share-based payments reserve Available-for-sale reserve Consolidated 2017 $’000 23,867 5,029 3 2016 $’000 29,867 – – 28,899 29,867 Profits reserve The profits reserve records the 2013 profit, which has not been offset against accumulated losses from prior years. The reserve is used for distribution of dividends. Share-based payments reserve The reserve is used to recognise the value of equity benefits provided to employees and fund managers as part of their remuneration, and other parties as part of their compensation for services. Available-for-sale reserve The reserve is used to recognise increments and decrements in the fair value of available-for-sale financial assets. Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 1 July 2015 Balance at 30 June 2016 Revaluation – gross Deferred tax Dividends paid Share-based payments Share-based payments reserve $’000 Available-for- sale reserve $’000 Profits reserve $’000 29,867 29,867 – – (6,000) – – – – – – 5,029 Total $’000 29,867 29,867 4 (1) (6,000) 5,029 – – 4 (1) – – Balance at 30 June 2017 23,867 5,029 3 28,899 NOTE 19. EQUITY – DIVIDENDS Dividends paid during the financial year were as follows: Consolidated 2017 $’000 2016 $’000 Final dividend for the year ended 30 June 2016 of $10.74 per Pengana Holdings Pty Ltd ordinary share paid on 18 October 2016 prior to the reverse acquisition 6,000 – On 30 August 2017, an inaugural dividend was declared for the year ended 30 June 2017 of 4.5 cents per ordinary share fully franked with a record date of 14 September 2017 to be paid on 28 September 2017 by Pengana Capital Group Limited. 56 | PENGANA CAPITAL GROUP ANNUAL REPORTHunter Hall International Limited paid the following dividends prior to the reverse acquisition and they are not included in the consolidated results: (i) Final dividend for the year ended 30 June 2016 of 14.6 cents per ordinary share fully franked with a record date of 12 September 2016 and payment date of 26 September 2016. (ii) Interim dividend for the year ended 30 June 2017 of 4.0 cents per ordinary share fully franked with a record date of 7 March 2017 and payment date 21 March 2017. Franking credits Franking credits available for subsequent financial years based on a tax rate of 30% Consolidated 2017 $’000 3,746 2016 $’000 4,822 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: • franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date; • franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and • franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date. NOTE 20. FINANCIAL INSTRUMENTS Financial risk management objectives The group’s activities expose it to a variety of financial risks: market risk (including foreign currency, interest rate and price risk), credit risk and liquidity risk. The group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the group. The group uses different methods to measure different types of risk to which it is exposed, including sensitivity analysis. In particular, the group manages the investments of certain funds and clients where it is entitled to receive management fees and fees contingent upon performance of the portfolio managed, on an annual basis or longer. All fees are exposed to significant risk associated with the funds’ performance, including market risks (interest rate risk and indirectly market risk and foreign exchange risk) and liquidity risk as detailed below. Risk management is carried out by the Board of Directors and discussed at board meetings. Management identifies and evaluates financial risks. Market risk Foreign currency risk Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the entity’s functional currency. The group undertakes certain transactions denominated in foreign currency (mainly US dollar) and the balances at the reporting date are not material and a 10% movement in those balances would not cause a significant fluctuation in profit or loss or equity of the group. ANNUAL REPORT 2017 | 57 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 20. FINANCIAL INSTRUMENTS (CONTINUED) FOREIGN CURRENCY RISK (CONTINUED) Price risk The group is exposed to direct equity price risk on its financial assets that are at fair value. The table below summarises the impact of a 10% movement in the market value of these assets: Average price increase Average price decrease % Change Effect on profit before tax Effect on equity % Change Effect on profit before tax Effect on equity 10% 2,677 1,874 (10%) (2,677) (1,874) Average price increase Average price decrease % Change Effect on profit before tax Effect on equity % Change Effect on profit before tax Effect on equity 10% 362 253 (10%) (362) (253) Consolidated – 2017 Listed shares Consolidated – 2016 Listed shares Interest rate risk The group’s main interest rate risk arises from cash and cash equivalents. Cash and cash equivalents held at variable rates expose the group to interest rate risk. Cash and cash equivalents held at fixed rates expose the group to fair value interest rate risk. As at the reporting date, the group had the following variable rate cash and cash equivalents: Consolidated Cash at bank Cash on deposit Net exposure to cash flow interest rate risk 2017 Weighted average interest rate 0.49% 2.34% Balance $’000 14,951 5,216 20,167 2016 Weighted average interest rate 0.26% 2.88% Balance $’000 3,776 2,571 6,347 The table below summarises the impact of a 50 basis point movement in interest: Basis points increase Basis points decrease Consolidated – 2017 Basis points change Effect on profit/loss before tax Effect on equity Basis points change Effect on profit/loss before tax Effect on equity Net exposure to cash flow interest rate risk 50 101 71 (50) (101) (71) Consolidated – 2016 Net exposure to cash flow interest rate risk 50 32 22 (50) (32) (22) 58 | PENGANA CAPITAL GROUP ANNUAL REPORTAn analysis by remaining contractual maturities is shown in ‘liquidity and interest rate risk management’ below. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the group. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the Statement of Financial Position and notes to the financial statements. The group does not hold any collateral. The group has a credit risk exposure with the cash at bank, redemptions receivable, loans to shareholders and fund managers and funds under management. The funds under management as at 30 June 2017 owed the group 100% (2016: 100%) of trade receivables and accrued income. The balance was within its terms of trade and no impairment was made as at the reporting date. These receivables represent management fees that are accrued daily and paid monthly by the Funds. Other loans receivables amount to $1,416,000 as at 30 June 2017 (2016: $1,935,000). The loans were made to shareholders and used to fund the purchase of shares in Pengana Capital Group Limited. The loans are interest free and secured against the purchased shares in Pengana Capital Group Limited. The timing of these amounts due under these agreements are at the discretion of the group. Liquidity risk Managing liquidity risk requires the group to maintain sufficient liquid assets (mainly cash and cash equivalents and listed investments) to be able to pay debts as and when they become due and payable. The group manages liquidity risk by maintaining adequate cash reserves by monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Remaining contractual maturities The following tables detail the group’s remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the Statement of Financial Position. Consolidated – 2017 Non-derivatives Non-interest bearing Trade payables Other payables Fund manager profit share Security deposits held Net assets attributable to unitholders Total non-derivatives 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 1,055 496 3,219 – 18,768 23,538 – – – 5 – 5 – – – – – – – – – – – – 1,055 496 3,219 5 18,768 23,543 ANNUAL REPORT 2017 | 59 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) REMAINING CONTRACTURAL MATURITIES (CONTINUED) Consolidated – 2016 Non-derivatives Non-interest bearing Trade payables Due to Brokers Other payables Fund manager profit share Security deposits held Net assets attributable to unitholders Total non-derivatives Derivatives Forward equity exchange contract Total derivatives 1 year or less $’000 Between 1 and 2 years $’000 Between 2 and 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 60 62 33 3,033 – 2,081 5,269 11 11 – – – – 18 – 18 – – – – – – – – – – – – – – – – – – – – 60 62 33 3,033 18 2,081 5,287 11 11 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. NOTE 21. FAIR VALUE MEASUREMENT Fair value hierarchy The following tables detail the group’s assets and liabilities, measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2: Observable market data used in valuation techniques to determine the fair value. Level 2 instruments are not traded in an active market; Level 3: Unobservable inputs for the asset or liability. Consolidated – 2017 Assets Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 Listed investments – held for trading Investments in available-for-sale financial assets Total assets 26,768 7,196 33,964 – – – – – – 26,768 7,196 33,964 60 | PENGANA CAPITAL GROUP ANNUAL REPORTConsolidated – 2016 Assets Listed investments – held for trading Derivative financial instruments Total assets Liabilities Derivative financial instruments Total liabilities Level 1 $’000 Level 2 $’000 Level 3 $’000 3,620 – 3,620 – – – 29 29 11 11 – – – – – Total $’000 3,620 29 3,649 11 11 There were no transfers between levels during the financial year. The carrying amounts of cash and cash equivalents, trade and other receivables and trade and other payables approximate their fair values due to their short-term nature. NOTE 22. KEY MANAGEMENT PERSONNEL DISCLOSURES Compensation The aggregate compensation made to Directors and other members of key management personnel of the group is set out below: Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments Consolidated 2017 $ 2016 $ 981,709 1,255,636 70,668 6,300 4,913,681 63,153 – – 5,972,358 1,318,789 Short-term employee benefits consists of cash salaries and fees. NOTE 23. REMUNERATION OF AUDITORS During the financial year the following fees were paid or payable for services provided by Grant Thornton Audit Pty Ltd, the auditor of the company: Audit services – Grant Thornton Audit Pty Ltd (2016: PricewaterhouseCoopers) Audit or review of the financial statements 133,500 121,995 NOTE 24. CONTINGENT LIABILITIES The group had no contingent liabilities at 30 June 2017 and 30 June 2016. ANNUAL REPORT 2017 | 61 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 25. COMMITMENTS Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within one year One to five years More than five years Consolidated 2017 $’000 2016 $’000 801 1,913 73 2,787 734 1,887 – 2,621 The property leases are non-cancellable leases with a maximum six year term, with rent payable monthly in advance. Options exist to renew the leases at the end of the term. NOTE 26. RELATED PARTY TRANSACTIONS Parent entity Pengana Capital Group Limited is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 29. Associates Interests in associates are set out in note 30. Key management personnel Disclosures relating to key management personnel are set out in note 22 and the remuneration report included in the Directors’ Report. Transactions with related parties – managed investment schemes The following transactions occurred with related parties: Sale of goods and services: Management fees Performance fees Other fee revenue received from related parties Payment for goods and services: Purchase of services from other related parties 25,065,271 18,998,244 11,953,010 16,649,295 4,483 – 5,125 2,212,415 62 | PENGANA CAPITAL GROUP ANNUAL REPORTReceivable from and payable to related parties The following balances are outstanding at the reporting date in relation to transactions with related parties: Consolidated 2017 $ 2016 $ Current receivables: Trade receivables and accrued income from other related parties 4,939,857 3,516,024 Receivables from other related parties for year-end redemptions Current payables: Trade payables to other related party – – 3,616,591 2,325,961 Loans to/from related parties There were no loans to or from related parties at the current and previous reporting date. Terms and conditions All transactions were made on normal commercial terms and conditions and at market rates. NOTE 27. PARENT ENTITY INFORMATION Set out below is the supplementary information about the parent entity. Statement of Profit or Loss and other comprehensive income Profit/(loss) after income tax Total comprehensive income Statement of Financial Position Total current assets Total assets Total current liabilities Total liabilities Equity Contributed equity Available-for-sale reserve Retained profits/(accumulated losses) Parent 2017 $’000 (1,052) (1,052) 7,784 240,633 4,369 4,629 238,564 – (2,560) 2016 $’000 6,426 6,749 13,433 26,517 4,796 5,282 18,572 611 2,052 Total equity 236,004 21,235 ANNUAL REPORT 2017 | 63 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 27. PARENT ENTITY INFORMATION (CONTINUED) Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity had no guarantees in relation to the debts of its subsidiaries as at 30 June 2017 and 30 June 2016. Parent entity information Parent entity financial information relates to Pengana Capital Group Limited (formerly known as Hunter Hall International Limited). As detailed in note 1, Pengana Capital Group Limited is ‘the legal parent’ of the consolidated entity with effect from 1 June 2017. The information for the periods represents the standalone financial information of the parent entity. Shares issued on reverse acquisition of Pengana Holdings Pty Ltd During the financial year, the parent entity issued 74,147,449 ordinary shares at their fair value of $219,476,000 on the acquisition of Pengana Holdings Pty Ltd. This amount is included in the total assets and contributed equity above. Contingent liabilities The parent entity had no contingent liabilities as at 30 June 2017 and 30 June 2016. Capital commitments – Property, plant and equipment The parent entity had no capital commitments for property, plant and equipment as at 30 June 2017 and 30 June 2016. Significant accounting policies The accounting policies of the parent entity are consistent with those of the group, as disclosed in note 1, except for the following: • Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. • Investments in associates are accounted for at cost, less any impairment, in the parent entity. • Dividends received from subsidiaries are recognised as other income by the parent entity and its receipt may be an indicator of an impairment of the investment. NOTE 28. BUSINESS COMBINATIONS On 1 June 2017, Hunter Hall International Limited (now renamed Pengana Capital Group Limited) (‘the legal parent’ or ‘Hunter Hall’) acquired all the shares in Pengana Holdings Pty Ltd (‘the legal subsidiary’ or ‘Pengana Holdings’) in return for the issuance of 74,147,449 Hunter Hall shares to the Pengana Holdings shareholders. Hunter Hall shareholders owned 26.9% and the Pengana Holdings shareholders owned 73.1% of the issued shares of Hunter Hall. The transaction has been accounted for as a business combination and the principles of reverse acquisition accounting applied i.e. Pengana Holdings acquiring Hunter Hall. Hunter Hall was an investment management business. 64 | PENGANA CAPITAL GROUP ANNUAL REPORTDetails of the acquisition are as follows: Cash and cash equivalents Trade and other receivables Income tax refund due Investment in financial assets Other investments Other current assets Plant and equipment Acquired relationships Deferred tax liability Trade and other payables Employee benefits Net assets attributable to unitholders Net assets acquired Goodwill Acquisition-date fair value of the total consideration transferred Representing: Hunter Hall International Limited Fair value $’000 18,836 1,787 888 25,518 6,953 277 290 26,520 (7,380) (5,349) (1,358) (25,758) 41,224 39,672 80,896 Notional Pengana Capital Group Limited shares issued to effect the acquisition (note 17)* 80,896 Cash used to acquire business, net of cash acquired: Acquisition-date fair value of the total consideration transferred Less: notional Pengana Capital Group Limited shares issued to effect the acquisition Less: cash and cash equivalents acquired Net cash received 80,896 (80,896) (18,836) (18,836) * Acquisition date fair value of consideration transferred is calculated based on 27,329,643 shares of Hunter Hall International Limited (ASX: HHL) public market price of $2.96 per share on the date of acquisition. The goodwill of $39,672,000 represents expected synergies and future growth prospects that will arise from the acquisition. The business combination brings together two synergistic retail focused, active investment managers to create a funds management business with in excess of $3 billion in funds under management with a strong platform for growth. None of the goodwill recognised is expected to be deductible for income tax purpose. The acquired business contributed revenues of $900,000 and loss after tax of $1,076,000 to the group for the period from 1 June 2017 to 30 June 2017. If the acquisition occurred on 1 July 2016, the contributions for the year 1 July 2016 to 30 June 2017 would have been revenues of $11,944,000 and profit after tax of $1,951,000. The values identified in relation to the acquisition of Hunter Hall are provisional as at 30 June 2017. ANNUAL REPORT 2017 | 65 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 29. INTERESTS IN SUBSIDIARIES The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries with non-controlling interests in accordance with the accounting policy described in note 1: Name Principal place of business / Country of incorporation Pengana Holdings Pty Ltd Australia Pengana Capital Ltd Australia Pengana European Asset Management Pty Limited Pengana Affinity Funds Pty Ltd Pengana International Equities Fund Pengana Singapore Pte. Ltd Hunter Hall Investment Management Pty Ltd Rushcutter Investments Pty Ltd Bennelong Administration Services Pty Ltd Hunter Hall International (UK) Ltd Australia Australia Australia Singapore Australia Australia Australia United Kingdom Hunter Hall High Conviction Equity Trust Australia Principal activities Investment management Investment management Investment management Investment management Investment management Investment management Investment management Investment management Investment management Investment management Investment management Parent Non-controlling interest Ownership interest 2017 % Ownership interest 2016 % Ownership interest 2017 % Ownership interest 2016 % 100.00% – 100.00% 100.00% – – – – 50.00% 50.00% 50.00% 50.00% 70.00% 70.00% 30.00% 30.00% – 99.99% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 32.60% – – – – – – – – – – – 67.40% 0.01% – – – – – – As at 30 June 2016, Pengana Holdings Pty Ltd was the parent entity of the consolidated group (refer to note 2 ‘Business combinations’). Therefore the 2016 percentages in the table above represents Pengana Holdings Pty Ltd’s interest in its subsidiaries. Summarised financial information for subsidiaries that have non-controlling interests, has not been provided as they are not material to the group. 66 | PENGANA CAPITAL GROUP ANNUAL REPORTNOTE 30. INTERESTS IN ASSOCIATES The following interests in associates are accounted for using the equity method of accounting: Name Principal place of business / Country of incorporation Pengana Asia Special Events (Offshore) Fund Cayman Islands Pengana Global Small Companies Fund Pengana Global Resources Fund Pengana International Equities Fund Australia Australia Australia Ownership interest 2017 % 2.21% 5.79% – 3.19% 2016 % 20.19% 16.53% 4.44% – As at 30 June 2016, Pengana Holdings Pty Ltd was the parent entity of the consolidated group (refer to note 2 ‘Business combinations’). Therefore the 2016 percentages in the table above represents Pengana Holdings Pty Ltd’s interest in its associates. Summarised financial information relating to associates that are material to the group are set out below: Summarised financial information Summarised Statement of Financial Position Assets Total assets Liabilities Total liabilities Net assets Summarised Statement of Profit or Loss and Other Comprehensive Income Revenue Expenses Profit/(loss) before income tax Other comprehensive income Total comprehensive income Reconciliation of the group’s carrying amount Opening carrying amount Share of profit/(loss) after income tax Distributions declared Acquisition of interests Redemptions Subsidiary transfer to investments accounted for using the equity method Equalisation loss in 2017 Closing carrying amount Pengana Asia Special Events (Offshore) Fund Other 2017 $’000 55,562 55,562 114 114 2016 $’000 96,639 96,639 186 186 2017 $’000 54,507 54,507 2,728 2,728 2016 $’000 23,174 23,174 34 34 55,448 96,453 51,779 23,140 6,738 (1,219) 5,519 – (6,300) (2,039) (8,339) – 3,261 (678) 2,583 – (1,507) (335) (1,842) – 5,519 (8,339) 2,583 (1,842) 19,894 460 – – (18,838) – 11 20,621 (723) (25) 38,576 (38,555) – – 1,527 19,894 1,832 399 – 2,146 (4,267) 2,075 – 2,185 1,859 (23) (4) – – – – 1,832 The carrying amount of investments in associates is equal to its fair value. ANNUAL REPORT 2017 | 67 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 31. UNCONSOLIDATED STRUCTURED ENTITIES A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity and the relevant activities are directed by means of contractual arrangements. The group has a 99.9% (2016: 99.9%) interest in Pengana Structured Investment Pty Ltd (‘PSIPL’), an entity established to issue financial products to investors. The entity provides investors with a range of investment opportunities through managed investment strategies. PSIPL has not been consolidated because the group has determined the entity is not controlled on the basis that the variability of returns is borne by the third party note holders rather than the group. The entity has acquired funds through the issuance of a number of note instruments. The group is not exposed to significant losses through its interest. As at the reporting date, the carrying amount of the assets of PSIPL is $6,056,000 (2016: $10,148,000). The carrying amount of the liabilities is $6,056,000 (2016: $10,148,000). The group has significant influence over the funds it manages due to its power to participate in the financial and operating policy decisions of the investee through its investment management agreement. The group considers all funds to be structured entities. The group invests in its own managed funds to seed the funds to develop a performance track record prior to external investment being received or provides early stage capital. The funds’ objectives are defined in the offer document and constitution of the respective fund. The funds invest in a number of different financial instruments including equities and debt instruments. The funds’ finance their operations by issuing redeemable units which are puttable at the holder’s option and entitle the holder to a proportional stake in the respective fund’s net assets. The group holds redeemable units in some of its own managed funds. Unless specified otherwise, the group’s maximum exposure to loss is the total of its on-balance sheet positions as at reporting date. There are no additional off balance sheet arrangements which would expose the group to potential loss. NOTE 32. RECONCILIATION OF PROFIT/(LOSS) AFTER INCOME TAX TO NET CASH FROM OPERATING ACTIVITIES Consolidated Profit/(loss) after income tax expense for the year Adjustments for: Depreciation and amortisation Share of loss/(profit) – associates Share-based payments Foreign exchange differences Distributions paid to unitholders – financing activity Unitholder share of profit or loss Impairment loss and write-downs Distributions from associates Net gain on financial assets Other non-cash items Proceeds of investments in financial assets at fair value through profit or loss 2017 $’000 (2,694) 388 (859) 5,029 22 4,230 (6,630) 5 – 100 329 (347) 2016 $’000 2,009 203 746 – 13 – – 3 30 283 (49) – 68 | PENGANA CAPITAL GROUP ANNUAL REPORTChange in operating assets and liabilities: Decrease in trade and other receivables Decrease/(increase) in deferred tax assets Increase in other financial assets at fair value through profit or loss Increase in trade and other payables Increase/(decrease) in provision for income tax Increase in deferred tax liabilities Consolidated 2017 $’000 2016 $’000 307 (250) (2,439) 1,670 302 7,894 4,839 124 10,948 2,344 (1,807) _ Decrease in other financial liabilities at fair value through profit or loss 18,594 (19,255) Net cash from operating activities 25,651 431 NOTE 33. NON-CASH INVESTING AND FINANCING ACTIVITIES Shares issued in relation to business combinations Proceeds from borrowings Purchase of investment into associates Sale of investment in associates Reinvestment of dividends Purchase of property, plant and equipment NOTE 34. SHARE-BASED PAYMENTS 80,896 – (3,644) 3,677 – – – 4,000 (44,099) 43,672 22 (9) 80,929 3,586 Loan Funded Share Plan (‘LSP’) Pengana Holdings Pty Ltd (‘Pengana Holdings’) implemented a LSP whereby Pengana Holdings provided limited recourse loans totalling $27,220,000 to the CEO and certain employees and fund managers of Pengana Holdings to acquire shares in Pengana Holdings. Under the plan the CEO received 15,872,528 shares, employees and fund managers received 6,981,194 shares. The loans are interest bearing and have a maximum term of up to seven years. Recourse on the loans (including associated interest) is limited to the associated shares and any dividend amounts applied to the loan balance. The shares granted under the LSP are subject to a vesting condition, that the employees and fund managers must remain continuously employed for five years from the grant date, except for shares associated with the LSP granted to the CEO which are not subject to a vesting condition and vested on the date the shares were granted. As the share purchases are funded by limited recourse loans they are treated for accounting purposes as grants of share options and accounted for as equity-settled share-based payments. The shares issued under the LSP are fair valued on the date they are granted and amortised as an expense in profit or loss over the vesting period. As the loans and associated shares issued are not recorded on the Statement of Financial Position on grant date, there are no transactions in the Statement of Financial Position relating to the issue of shares under the LSP, however a share-based payment expense of $5,029,000 has been recognised in profit or loss for the year ended 30 June 2017 (2016: nil). ANNUAL REPORT 2017 | 69 NOTES TO THE FINANCIAL STATEMENTS (CONTINUED) NOTE 34. SHARE-BASED PAYMENTS (CONTINUED) LOAN FUNDED SHARE PLAN (‘LSP’) (CONTINUED) Set out below are summaries of shares granted under the LSP: 2017 Grant date Expiry date 01/03/2017 28/02/2024 01/03/2017 28/02/2024 03/03/2017 01/03/2024 Exercise price* Balance at the start of the year Granted* Exercised Expired / forfeited / other Balance at the end of the year $1.49 $1.20 $1.49 – – – – 5,149,796 10,722,732 6,981,194 22,853,722 – – – – – – – – 5,149,796 10,722,732 6,981,194 22,853,722 Weighted average exercise price $0.00 $1.35 $0.00 $0.00 $1.35 * Exercise price and shares granted under the LSP in Pengana Holdings have been adjusted for shares issued in Pengana Capital Group Limited as detailed in note 17. Set out below are the shares granted under the LSP exercisable at the end of the financial year: Grant date Expiry date 01/03/2017 28/02/2024 01/03/2017 28/02/2024 2017 Number 5,149,796 10,722,732 15,872,528 2016 Number – – – The weighted average remaining contractual life of shares granted under the LSP outstanding at the end of the financial year was 6.67 years. For the shares granted under the LSP during the current financial year, the Black-Scholes valuation model inputs used to determine the fair value at the grant date, are estimated as follows: Grant date Expiry date 01/03/2017 28/02/2024 01/03/2017 28/02/2024 03/03/2017 01/03/2024 Share price at grant date Exercise price Estimated volatility* Dividend yield Risk-free interest rate Fair value at grant date $1.19 $1.19 $1.19 $1.49 $1.20 $1.49 38.66% 38.66% 38.66% 3.75% 3.75% 3.75% 2.31% 2.31% 2.31% $0.271 $0.328 $0.271 *The expected price volatility is based on a period of observed historic volatility of a range of peer group companies. 70 | PENGANA CAPITAL GROUP ANNUAL REPORTNOTE 35. EARNINGS PER SHARE Profit/(loss) after income tax Non-controlling interest Profit/(loss) after income tax attributable to the owners of Pengana Capital Group Limited Weighted average number of ordinary shares used in calculating basic earnings per share Weighted average number of ordinary shares used in calculating diluted earnings per share Basic earnings per share Diluted earnings per share Consolidated 2017 $’000 (2,694) (120) 2016 $’000 2,009 (23) (2,814) 1,986 Number Number 64,067,308 67,166,253 64,067,308 67,166,253 Cents (4.39) (4.39) Cents 2.96 2.96 The weighted average number of ordinary shares for year ended 30 June 2017 does not include 22,853,722 treasury shares. The weighted average number of ordinary shares for the year ended 30 June 2016 has been adjusted to give effect to capital reorganisation which occurred during the financial year. NOTE 36. GENERAL INFORMATION Pengana Capital Group Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 12 167 Macquarie Street Sydney NSW 2000 A description of the nature of the group’s operations and its principal activities are included in the Directors’ Report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of Directors, on 30 August 2017. The Directors have the power to amend and reissue the financial statements. NOTE 37. EVENTS AFTER THE REPORTING PERIOD Apart from the dividend declared as disclosed in note 19, no other matter or circumstance has arisen since 30 June 2017 that has significantly affected, or may significantly affect the group’s operations, the results of those operations, or the group’s state of affairs in future financial years. ANNUAL REPORT 2017 | 71 DIRECTORS’ DECLARATION In the Directors’ opinion: • the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; • the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 1 to the financial statements; • the attached financial statements and notes give a true and fair view of the group’s financial position as at 30 June 2017 and of its performance for the financial year ended on that date; and • there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. The Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors, Warwick Negus Chairman 30 August 2017 Sydney Russel Pillemer Chief Executive Officer 72 | PENGANA CAPITAL GROUP ANNUAL REPORTINDEPENDENT AUDITOR’S REPORT ANNUAL REPORT 2017 | 73 INDEPENDENT AUDITOR’S REPORT (CONTINUED) 74 | PENGANA CAPITAL GROUP ANNUAL REPORTANNUAL REPORT 2017 | 75 INDEPENDENT AUDITOR’S REPORT (CONTINUED) 76 | PENGANA CAPITAL GROUP ANNUAL REPORTSHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 28 August 2017. DISTRIBUTION OF EQUITABLE SECURITIES Analysis of number of equitable security holders by size of holding: 1 to 1,000 1,001 to 5,000 5,001 to 10,000 10,001 to 100,000 100,001 and over Holding less than a marketable parcel EQUITY SECURITY HOLDERS Twenty largest quoted equity security holders The names of the twenty largest security holders of quoted equity securities are listed below: Number of holders of ordinary shares 559 817 348 296 42 2,062 156 WHSP Pengana Pty Ltd RC Pillemer Pty Ltd (RC Pillemer Family A/C) WHSP Hunter Hall Pty Ltd Washington H Soul Pattinson and Company Farnworth House Pty Ltd DJG Services Pty Limited (DKI Account) Roxtrus Pty Limited (Roxanne Dunkel No. 2 A/C) Damian Crowley Julie Crowley (Damian C Crowley Family Fund) Radd Holdings Pty Limited (Myers Family A/C) DBR Corporation Pty Ltd Russel Craig Pillemer Tark Family Holdings Pty Ltd (Tark Family A/C) Steve Black Ed Prendergast Mr Andrew Stanley Hall Steve Black (Black Family A/C) Meg O'Hanlon (O'Hanlon Family A/C) WHSP Hunter Hall Pty Ltd Katrina Elizabeth Glendinning Mr Frederick Bruce Wareham Ordinary shares Number held % of total shares issued 27,176,596 24,960,404 6,641,522 5,434,653 3,358,307 2,079,994 1,803,150 1,789,325 1,341,904 1,300,260 1,262,205 1,100,162 973,701 973,701 690,000 672,335 672,335 575,133 529,525 520,000 26.78 24.60 6.54 5.36 3.31 2.05 1.78 1.76 1.32 1.28 1.24 1.08 0.96 0.96 0.68 0.66 0.66 0.57 0.52 0.51 83,855,212 82.62 ANNUAL REPORT 2017 | 77 SHAREHOLDER INFORMATION (CONTINUED) Unquoted equity securities There are no unquoted equity securities. SUBSTANTIAL HOLDERS Substantial holders in the company are set out below: Washington H Soul Pattinson and Company, WHSP Hunter Hall Pty Ltd and WHSP Pengana Pty Ltd Russel Craig Pillemer* Ordinary shares Number held % of total shares issued 39,827,904 37,217,013 39.25 36.68 * The substantial notice lodged for Russel Pillemer discloses that he has a relevant interest in 37,217,013 ordinary shares in the company. These relevant interests are as follows: • 1,262,205 shares held by Russel Pillemer; • 24,960,404 shares held by RC Pillemer Pty Ltd (which Russel Pillemer controls). 37,217,013 shares held by Pengana staff or their related parties (including the 26,222,609 shares referred to above held by Russel Pillemer and RC Pillemer Pty Ltd). As Russel Pillemer has voting power in the company above 20% pursuant to section 608(3)(a) of the Corporations Act 2001 he is deemed to have a relevant interest in these shares as the company has the power to prevent the disposal of each of these shares pursuant to a voluntary escrow agreement between the company and the relevant holder. VOTING RIGHTS The voting rights attached to ordinary shares are set out below: Ordinary shares On a show of hands every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. There are no other classes of equity securities. SECURITIES SUBJECT TO VOLUNTARY ESCROW Class Expiry date Ordinary shares Until 15 February 2023 (portions to be released annually) Ordinary shares 1 June 2022 Ordinary shares Until 15 February 2020 (portions to be released annually) Number of shares 26,222,609 6,981,194 4,013,210 37,217,013 78 | PENGANA CAPITAL GROUP ANNUAL REPORTWWW.PENGANA.COMPENGANA CAPITAL GROUP LIMITED ABN 30 103 800 568 AFSL 226566 Level 12, 167 Macquarie Street, Sydney, NSW 2000 T: +61 2 8524 9900 F: +61 2 8524 9901 PENGANA.COM 

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