ANNUAL REPORT 2017 Contents 00 Glossary 01 Chairman’s letter 02 Overview, Operating and Financial Report 03 Community 04 Directors’ profiles 05 Directors’ Report 06 Auditor’s independence declaration 07 Financial Statements 08 Directors’ Declaration 09 Independent Auditor’s Report 10 Shareholder Information 11 Corporate Directory Page 1 3 5 13 14 17 40 42 100 101 107 108 Financial calendar Final dividend record date Final dividend payment date Annual General Meeting Interim Results announcement Full Year Results announcement The Company reserves the right to change these dates. 22 September 2017 6 October 2017 23 November 2017 23 February 2018 28 August 2018 Annual General Meeting The 2017 Annual General Meeting will be held at 11am on 23 November 2017 at the Company’s Sydney office at Level 35, 60 Margaret Street, Sydney. Notice of the Annual General Meeting will be forwarded to all shareholders separately. Corporate Governance The corporate governance statement for PNI can be found at https://www.pinnacleinvestment.com/shareholders-investor-centre/ 00 Glossary Term Meaning 2016 Annual Report the Group’s annual report for the 2016 financial year. 2016 financial year the period 1 July 2015 to 30 June 2016. 2017 Annual Report this document. 2017 financial year the period 1 July 2016 to 30 June 2017. Affiliates or Pinnacle Affiliates Pinnacle’s eight affiliated investment managers, being Antipodes, Hyperion, Palisade, Plato, Resolution Capital, Solaris, Spheria and Two Trees. Antipodes ASX Principles Auditor Board Board Committees Chairman Company Company Secretary Antipodes Partners Limited. the Corporate Governance Principles and Recommendations, 3nd Edition, published by the ASX Corporate Governance Council. PricewaterhouseCoopers. the board of directors of the Company. the Audit, Compliance and Risk Management Committee and the Remuneration and Nominations Committee. Alan Watson, the Chairman of the Board. Pinnacle Investment Management Group Limited. Eleanor Padman, who held the position during the 2017 financial year and who resigned from the position on 22 June 2017. Calvin Kwok was appointed to the role of Company Secretary on 22 June 2017. Corporations Act Corporations Act 2001 (Cth). Deutsche Australia EOSP Foundation FUM Deutsche Australia Limited, which held an 18.8% shareholding in the Company at the start of the 2016 financial year. As at the date of this report, Deutsche Australia no longer has any shareholding in the Company. Pinnacle Investment Management Group Employee Option Share Plan. the Pinnacle Charitable Foundation. funds under management. Group or Pinnacle Group Pinnacle and the entities that it controlled during the 2017 financial year. Hyperion Hyperion Asset Management Limited. Key Management Personnel the individuals identified as such on page 21 of the 2017 Annual Report. LTI long-term incentives offered to individuals who are staff of the Group. Managing Director from 17 August 2016, Ian Macoun, who was appointed as an executive director on 25 August 2016. New Loans is a reference to the loans more fully described at page 35. NLAT NPAT NTA Palisade net loss after tax. net profit after tax. net tangible assets. Palisade Investment Partners Limited. 1 Annual Report 2017 00 Glossary 00 Term PIML PIML Acquisition PIML LTI scheme Meaning Pinnacle Investment Management Limited, the principal operating subsidiary of the Group. the transaction approved by shareholders on 16 August 2016, pursuant to which the Company acquired the 24.99% equity stake in PIML it did not already own. the long-term incentive scheme described on pages 23 and 24 of the 2017 Annual Report. Pinnacle or PNI Pinnacle Investment Management Group Limited. Plan Rules Plato Principal Investments Priority Funds the rules governing the Company’s EOSP. Plato Investment Management Limited. investments made by the Group in listed and unlisted equities and unit trusts on its own behalf and for its own benefit. means each of Wilson Group Priority Growth fund and Wilson Group Priority Core fund, being two proprietary funds managed by Priority Investment Management Pty Ltd during the 2016 financial year. On 1 July 2016, Spheria Asset Management Pty Ltd was appointed as the new investment manager. Resolution Capital Resolution Capital Limited. Securities business Sellers the corporate finance, equity capital markets, institutional sales, research and private wealth management businesses previously owned by the Company and now known as Wilsons Advisory. each of Macoun Superannuation Fund Pty Ltd as trustee for the Macoun Superannuation Fund, Macoun Generation Z Pty Ltd as trustee for the Macoun Generation Z Family Trust, Usinoz Pty Ltd as trustee for the Ihlenfeldt Family Trust, AJF Squared Pty Ltd as trustee for the AJF Squared Family Trust, Andrew Chambers and Fleur Chambers as trustee for the Andrew C Chambers Family Trust, Adrian Whittingham as trustee for the Whittingham Family Trust, Mark Cormack and Melanie Cormack as trustee for the Cormack Family Trust and Dellreid Pty Limited as trustee for the Dell Family Trust. Solaris Spheria STI Two Trees Solaris Investment Management Limited. Spheria Asset Management Pty Limited. short-term incentive. Two Trees Investment Management Pty Limited. Annual Report 2017 2 01 Chairman’s letter Dear Shareholders The 2017 financial year marks the first year of the Pinnacle Group’s operation as a pure listed funds management business. As a result, for the majority of this year shareholders have enjoyed access to 100% of PIML’s cash flows and increased efficiencies from the consolidation of the businesses within the Group. This delivered NPAT from continuing operations of $12.0 million, representing earnings per share of 8.1 cents, up 56% from the 2016 financial year. Group NPAT was $13.1 million, or 8.9 cents per share, up 117% from the 2016 financial year. Total dividends declared for the year rose 112% to 7.0 cents per share, compared with ordinary dividends of 3.3 cents per share in 2016 (excluding the 5 cents special dividend declared as part of the ‘roll-up’ transaction). During the year, Pinnacle enjoyed continued robust financial performance, driven principally by ongoing sound investment performance across the Affiliates and very strong fund inflows. Performance fees were 13.0% of Affiliates’ revenues this year, down from 19.2% in 2016. This was not unexpected, as the investment styles pursued consistently by our Affiliates are intended to deliver excess returns over the medium term, and therefore year to year performance may vary somewhat. In this regard, all of the Affiliates’ strategies and products that have a track record of at least 5 years again outperformed their benchmarks over the 5 years to 30 June 2017. Details of funds flows are included within the report but, in summary, net funds inflows totalled $4.9 billion, including $2.5 billion of retail net inflows, and overall Group Funds Under Management increased by $6.8 billion or 34.3% to $26.5 billion at the end of the year. The retail net inflows include the $307 million raised for Antipodes Global Investment Company Limited, net of expenses, in October 2016 and the $319 million raised for Plato Income Maximiser Limited, net of expenses, in May 2017. Our two newest operating Affiliates, Antipodes and Spheria, achieved very strong early success and demonstrated the benefits of Pinnacle’s strong commitment to partnering with high quality fund managers. Antipodes, for example, grew its FUM from $450m to $3.8 billion during the year, which was just its second year of operation, and has delivered strong investment performance since inception. Towards the end of the year, we also commenced a new Affiliate, Two Trees Investment Management. The Two Trees partners together have extensive experience in systematic global macro funds management. The most important part of our business is our people, within both the Affiliates and our Company. These are exceptional individuals who have chosen to work within our business model and culture, which we hold fundamental to creating and delivering value both for shareholders and for investors in our funds. The Board thanks all of the respective teams for their commitment to the business and the success that they have achieved to date and remains determined to sustain the environment that will allow the continuation of that success. Throughout both the Company and the Affiliates we believe we have now built a high quality platform which can accommodate substantial growth over the years to come. We have entered the 2018 financial year with strong momentum. Throughout this year we will be striving to continue our sound investment performance; to continue to achieve strong net fund inflows in both the retail and the institutional markets in Australia, as well as continuing to develop our early distribution efforts in offshore markets, particularly the UK/Europe, the United States and New Zealand; and to add new affiliates and new investment strategies at a measured pace. As we have previously stated, we will continue to invest in activities which we believe will bring substantial benefits over the medium term, whilst recognising that such investment may restrain 3 Annual Report 2017 01 Chairman’s letter 01 our profits to some degree in the short-term. In addition, we will continue to adhere to our ‘high hurdle’ criteria in evaluating Horizon 3 opportunities. Finally, we thank you, our shareholders, for the continued support and encouragement that you have shown to us throughout the year, including in the equity capital raising that was undertaken in January 2017. We are pleased to note that the company’s share price doubled during the year, from $1.45 at 30 June 2016 to $2.90 at 30 June 2017. We look forward to welcoming you to the Group’s Annual General Meeting, which will be held in Sydney on 23 November 2017. Yours sincerely Alan Watson 29 August 2017 Annual Report 2017 4 02 Overview, Operating and Financial Report Nature of operations and principal activities Pinnacle is a leading Australian-based “multi-affiliate” investment management firm. Our mission is to establish, grow and support a diverse stable of world-class investment management firms. Established in its current form in 2006, Pinnacle currently consists of eight investment affiliates that collectively manage approximately A$26.5 billion in assets across a diverse range of asset classes. Pinnacle provides its Affiliates with: equity, seed capital and working capital; superior distribution services, business support and responsible entity services to allow fund managers to focus on delivering fund outperformance; independence, including separate management reporting structures and boards of directors, whilst still offering the economies of scale and financial support inherent in being part of a larger investment group. The principal activities of the Group during the 2017 financial year were: developing and operating investment management businesses; and providing distribution services, business support and responsible entity services to the Pinnacle Affiliates. The diagram below shows the Pinnacle Affiliates and Pinnacle’s ownership stake in each as at the date of this report: 23.57% 49.99% 43.96% 35.15% 40% 46.64% 40% 42% 5 Annual Report 2017 02 Key financial highlights $128.3 million Affiliate revenues NPAT of $12.0 million $26.5 billion in FUM 8.1c earnings per share 7.0c fully franked dividend During the 2017 financial year, the Group held shareholdings (through its principal operating subsidiary, PIML) of between 23.5% and 49.9% in each of the Pinnacle Affiliates which together have $26.5 billion in FUM as at 30 June 2017. In the 2017 financial year: Pinnacle Affiliates generated aggregate revenues of $128.3 million, up 38.3 %. Of this, $16.7 million was performance fees Pinnacle generated NPAT from continuing operations attributable to shareholders of $12.0 million, up 108% from $5.8 million in the prior year Pinnacle’s share of NPAT from Pinnacle Affiliates was $17.6 million, up 10.5 % on the prior year. The table below outlines the performance of the Pinnacle Group for the 2017 and 2016 financial years. Pinnacle Affiliates (100% aggregate basis) FUM ($billion) Revenue ($million) Net profit before tax Tax expense Net profit after tax Pinnacle Revenue Expenses Share of Pinnacle Affiliates net profit after tax Net profit before tax (NPBT) from continuing operations Minority interests NPBT from continuing operations attributable to shareholders Taxation NPAT from continuing operations attributable to shareholders Discontinued operations Total profit attributable to shareholders Earnings per share: From continuing operations Total attributable to shareholders FY2017 FY2016 26.5 128.3 62.7 (19.1) 43.6 19.8 92.8 51.5 (14.9) 36.7 FY2017 FY2016 10.9 (16.4) 17.6 12.1 (0.1) 12.0 - 12.0 1.1 13.1 8.1 8.9 8.4 (15.8) 15.9 8.5 (2.6) 5.9 (0.1) 5.8 (1.3) 4.5 5.2 4.1 Annual Report 2017 6 02 Overview, Operating and Financial Report Pinnacle Affiliates – FUM Growth1 % 0 0 1 t a – ) n o i l l i ( b $ M U F 28.00 26.00 24.00 22.00 20.00 18.00 16.00 14.00 12.00 30.00 28.00 26.00 24.00 22.00 0.00 26.5 19.8 16.1 10.3 10.0 10.9 12.3 8.0 4.4 3.5 1.7 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Jun 17 Pinnacle Affiliates – Revenue Growth2 ) n o i l l i m $ ( e u n e v e R Affiliate performance fees – 100% Affiliate revenues – 100% (excl. performance fees) 140 120 100 80 60 40 20 Jun 07 Jun 08 Jun 09 Jun 10 Jun 11 Jun 12 Jun 13 Jun 14 Jun 15 Jun 16 Jun 17 1 Pinnacle FUM includes 100% of FUM managed by Pinnacle Affiliates. 2 Revenue shown is 100% of all Pinnacle Affiliates’ revenue. This is shown to indicate trend and excludes revenue derived by Pinnacle itself. 7 Annual Report 2017 02 Pinnacle Affiliates Pinnacle’s focus during the year was on continuing to support each of the Pinnacle Affiliates and assisting them to grow their business and profitability. The quality of the Pinnacle Affiliates was affirmed and demonstrated in many ways during the year, including by the investment returns they produced and the strength of market interest and support for their investment offerings. Following is an overview of each of the Pinnacle Affiliates during the 2017 financial year: Antipodes Partners Antipodes Partners is a global asset manager offering a pragmatic value approach across long only and long-short strategies. Antipodes aspires to grow client wealth over the long-term by generating absolute returns in excess of the benchmark, at below market levels of risk. The investment approach seeks to take advantage of the market’s tendency for irrational extrapolation, to identify investments that offer a high margin of safety and build portfolios with a capital preservation focus. Antipodes experienced strong inflows in the 2017 financial year from investors attracted to the team’s pedigree, differentiated approach and strong results since inception. In October 2016 Antipodes completed the successful IPO of the Antipodes Global Investment Company Limited, an ASX-listed version of its flagship global long-short strategy. As at 30 June 2017 Antipodes had $3.8 billion in funds under management. Hyperion Asset Management Hyperion is a specialist manager of Australian and global equities following a concentrated quality growth style. Hyperion ended the financial year with $5.9 billion in funds under management. Approximately $330 million of that amount comprised global equities raised from existing and new clients as a result of the commencement of marketing of Hyperion’s latest portfolio, the Hyperion Global Growth Companies Strategy. The returns of the global portfolio have been very strong, returning 20.2% p.a. for the three years since inception. This equates to an outperformance over benchmark of 6.8% p.a. The Hyperion Australian Growth Companies Fund ended the year with an absolute performance of 5.3% after fees and the Hyperion Small Growth Companies Fund ended the year with an absolute performance of 5.6%. The Hyperion Global Growth Companies Fund produced a 20% gross return for the year. Palisade Investment Partners Palisade is a specialist manager of unlisted infrastructure assets with pooled funds and separately managed portfolios for wholesale investors. As at 30 June 2017, funds under management and investor commitments totalled approximately $2.4 billion. Palisade’s flagship fund, Palisade’s Diversified Infrastructure Fund, generated a gross return of 15.7% during the year. Palisade continues to enjoy support of asset consultants, is raising further capital for investment and has a strong pipeline of investment opportunities. During the year, Palisade launched a new pooled fund for wholesale investors, Palisade’s Renewable Energy Fund, a portfolio of existing operating assets, assets under construction and a number of development assets. Annual Report 2017 8 02 Overview, Operating and Financial Report Plato Investment Management Plato is a specialist manager of Australian and global equities following a systematic quantitative style, with a focus on after tax investing for pension phase and accumulation phase superannuation. During the year all of Plato’s beta one strategies outperformed or matched their benchmarks. Plato’s lower risk strategy did, however, struggle during the year, but is still up strongly since inception. Plato continues to have very significant interaction with consultants and prospective investors, including financial advisers. During the year Plato successfully launched a listed investment company – Plato Income Maximiser Limited – raising $326m making it the third largest LIC IPO in Australia. This, together with other inflows, lifted FUM to $4 billion at the end of the financial year. Resolution Capital Resolution Capital is a dedicated global listed property securities investment manager. Resolution Capital’s long-term investment track record remains pleasing. During the year the global real estate investment strategy marked its 10 year performance anniversary with industry leading results. The business continues to make good progress on its ambition to diversify its client base with endorsement from a number of major asset consultants, research houses and institutional investors. Funds under management grew to $6.0 billion during the year, representing a year on year growth of 30.1%. Solaris Investment Management Solaris is a specialist manager of listed Australian equities following a neutral style. Solaris had $5.1 billion in funds under management as at 30 June 2017 with incremental funds coming from new and existing clients and investment performance. Solaris’ clients benefited from solid investment out-performance in the year with the Core strategy outperforming the S&P/ASX200 by 2.0%. Solaris’ core strategy has outperformed the S&P/ASX 200 Index by 2.1% per annum since inception on 9 January 2008 (to 30 June 2017). The information ratio for the strategy is notably strong over 1 year, 3 year, 5 year, and since inception. During the 2017 financial year, Solaris launched the Solaris Australian Equity Long Short Fund for which performance has been strong in the short period since inception. In the forthcoming year, Solaris seeks to continue to provide its clients in all strategies with consistent investment performance. Spheria Asset Management Spheria Asset Management is a fundamental-based investment manager specialising in small and microcap companies. Spheria commenced operations in April 2016 and has a bottom-up focus to achieve strong investment returns for clients with an emphasis on risk management. Assessing risk is fundamental to Spheria’s investment philosophy. Explicit risk controls include a preference for companies with low or no balance sheet gearing. When the company does have debt, Spheria ensures that free cash flow can support the level of gearing and is appropriate for the nature of the business. At 30 June 2017 Spheria had $211 million in funds under management. 9 Annual Report 2017 02 Two Trees Investment Management Two Trees Investment Management is a specialist systematic global macro investment firm based in Sydney, Australia. Two Trees combines a deep understanding of financial economics, quantitative techniques, and cutting edge risk management to construct liquid, diversified, absolute return multi-asset portfolios that exhibit low correlations to traditional asset classes. The firm will be launched by the end of 2017. Business strategies and prospects for future financial years The Group’s strategy is to continue to pursue excellence in its investment management business and to support the growth of the Pinnacle Affiliates. Pinnacle will seek to strengthen its portfolio of affiliated asset managers through investment and service provision including high quality distribution, responsible entity and investment management infrastructure services. As part of its growth, Pinnacle will consider assisting experienced and talented investment professionals to establish new affiliates in investment strategies where we know demand to be strong and special talent to be needed. Pinnacle anticipates further strong growth, underpinned by expectations that the investment management industry will continue to expand over the coming decade and beyond. Economic Conditions and Material Business Risks The material business risks facing the Group are equity market conditions and regulatory risk. Equity market conditions The Group’s results and outlook are influenced by prevailing equity market conditions and, to a lesser extent, by broader economic trends and investor sentiment. Broadly, the global economy performed strongly during the 2017 financial year, particularly in the first half, which drove strong gains across equity markets. The rate of growth slowed during the second half of the year and there remain numerous global and domestic risks. The majority of the Pinnacle Affiliates delivered positive returns against their respective benchmarks for the year, in challenging conditions. Importantly, long-term performance remains excellent across all Affiliates. Regulatory risk The Group operates within a highly regulated environment. The Group remains vigilant in regards to regulatory requirements which are continually evolving. Annual Report 2017 10 02 Overview, Operating and Financial Report Review of Group Results Group net profit after tax from continuing operations attributable to shareholders for the 2017 financial year is $12.0 million. Total profit attributable to shareholders is $13.1 million, after accounting for a gain from discontinued operations of $1.1 million. The Group delivered a $12.0 million net profit from continuing operations attributable to shareholders for the 2017 financial year, a 108% improvement. This was underpinned by a 10.5% increase to $17.6 million in Pinnacle’s share of net profits from the Pinnacle Boutiques. FUM increased by 34% to $26.5 billion in the 2017 financial year. Group net tangible assets have increased by 51.7% to $75.2 million with earnings per share of 8.1 cents up 56% from 5.2 cents from continuing operations. The Board has declared a fully franked final dividend of 4.8 cents per share payable on 6 October 2017. Statement of Comprehensive Income The following commentary provides an analysis of revenues and expenses for the 2017 financial year for continuing operations in comparison to the prior comparative period. During the 2017 financial year, the Group’s revenues and expenses were derived from Pinnacle and its controlled entities, which excludes the revenues and expenses of the Pinnacle Affiliates, the effect of which is reflected through Pinnacle’s share of the equity accounted net profits. Revenue from Continuing Operations Revenue from continuing operations increased $2.5 million to $10.9 million, from $8.4 million in the prior period. Further information regarding revenues are provided below and at note 1 of the financial statements. Performance Fees Performance fees for Pinnacle Affiliates are included in the equity accounted net profits attributable to Pinnacle Affiliates and are not separately included in the Group’s financial statements. Gains/(losses) on financial assets at fair value through profit or loss This reflects the mark-to-market gains or losses on the Group’s Principal Investments. During the year to 30 June 2017, the Group earned a net $1.2 million on its Principal Investments, on a ‘marked to market’ basis. Expenses from Continuing Operations Employee benefits expense decreased by $0.5 million to $7.4 million. The decrease is largely as a result of efficiencies gained within the business following the PIML Acquisition in August 2016. Legal and professional fees are down $0.1 million during the year. There were a number of one-off costs arising from the PIML Acquisition incurred during FY16, while the spend for the current year includes expenditure relating to the set-up of new Affiliates and the Group’s strengthening of its offshore distribution capabilities. Share of net profit of jointly controlled entities accounted for using the equity method relates to the Group’s share of the profits of the Pinnacle Affiliates which are equity accounted. Net profits after tax from Pinnacle Affiliates are up 10.5% or $1.7 million on the prior comparative period. Pinnacle Affiliates’ FUM, which underpins the share of Pinnacle Affiliates’ profits, increased by 34.3 % to $26.5 billion during the 2017 financial year. Underlying base management fees within the Pinnacle Affiliates also increased 49.1% on the prior comparative period. Further information is provided on page 71 in note 21 to the financial statements. 11 Annual Report 2017 02 Discontinued Operations Discontinued operations contributed $0.6 million to total comprehensive income, and a $1.1 million increase to NPAT. This represents $0.2 million of expenditure in relation to legacy items, plus the recycling of the balance received from the Securities business for use of the deferred tax asset transferred on separation, of $1.3 million. This balance was recognised within other comprehensive income in the prior comparative period, and was reclassified to form part of NPAT on receipt of the funds during the current financial year. Further information is provided at note 23 of the financial statements. Consolidated Statement of Financial Position The following commentary provides an analysis of assets and liabilities for the 2017 financial year for continuing operations. Cash. Cash and cash equivalents reduced by $2.6 million to $10.9 million at year-end compared to $13.5 million at the end of the prior year. Cash outflows from operating activities were $17.4 million, which included net outflows of $20.7 million relating to purchases and sales of financial assets during the year, including Principal Investments. Further information is provided at notes 6 and 24. Trade and other receivables. The value of trade and other receivables decreased slightly by $0.6 million during the year. Financial assets at fair value through profit or loss were $31.6 million, an increase of $20.7 million on the prior period. On 30 January 2017 Pinnacle completed a placement of $30 million (pre expenses) via an underwritten placement to institutional and sophisticated investors at $2.40 per share, a discount of 2% on the then trade price. Pinnacle intends to utilise the additional capital to support its strategy to grow FUM and profitability through organic growth from its existing investment affiliates, supporting the creation of new investment managers, and making acquisitions when attractive opportunities which satisfy its criteria arise. Until required, additional capital is being invested in order to maximise returns and support Pinnacle’s existing affiliates. Of the $31.6 million, $29.9 million is held in strategies managed by the Pinnacle Affiliates. The Group has hedged approximately 65% of its total exposure to movements in the underlying indices. Other current assets reduced by $1.7 million to $0.9 million at year end. This balance includes loans to entities under joint control. Further information is provided at note 9 of the financial statements. Investments accounted for using the equity method reflects the carrying value Pinnacle’s investments in the Pinnacle Affiliates. This increased by $8.1 million during the period to $32.6 million. The change is attributable to the equity accounted profits of $17.6 million from Pinnacle Affiliates, less the dividends received from the Pinnacle Affiliates of $11.4 million, plus additional capital contributed to the Pinnacle Affiliates during the year of $1.9 million. Further information is provided at note 21 of the financial statements. Trade and other payables decreased by $1.2 million to $5.0 million, relating largely to decreases in accrued incentive payments. Further information is provided at note 11 of the financial statements. Provisions. The value of current and non-current provisions remained steady compared with the prior year. Further information is provided at note 13 of the financial statements. Annual Report 2017 12 03 Community Pinnacle Charitable Foundation Pinnacle is a strong believer in the importance of actively contributing to the broader community and to selecting charitable partners which align with the interests of key stakeholders including employees and client groups. In addition to partnering with its Affiliates in assisting them to further their commitment to ESG principles, Pinnacle actively engages in supporting the community through the Pinnacle Charitable Foundation. Recently rebranded and refocussed, the Foundation traces its origins back to 1987. During the year, Pinnacle has directly contributed to the Foundation’s corpus, and has active representation on its Board. Pinnacle and its Affiliates also provide a range of pro bono services to the Foundation, including investment management and reporting. Pinnacle executives have encouraged Affiliates to engage with the Foundation, which has subsequently entered into discussions with each of them and their employees. Jointly funded partnerships which address causes of importance to their business strategies and employee interests have been researched, with the aim of establishing and nurturing relationships with innovative and progressive charitable organisations. Affiliates have agreed to rebate fees for Foundation investments, further demonstrating their commitment to its long-term sustainability. Future plans Pinnacle is also expanding its Community Investment activities through the introduction of a Workplace Giving program for employees based on matched funding, in conjunction with its Affiliates. The Company also seeks collaborative opportunities with them, and across the wider funds management industry, in support of community initiatives which have strategic relevance to Pinnacle’s business operations. During the course of the 2017 financial year, the Foundation made donations to charities totalling $165,000 and the detailed activities of the Pinnacle Charitable Foundation and its current charity partners can be found at http://www.pinnacleinvestment.com/foundation/ 13 Annual Report 2017 04 Directors’ profiles 04 Alan Watson (Non-executive Independent Chairman and Chairman of Remuneration and Nominations Committee) BSc, GAICD Mr Watson joined the board on 15 July 2013 and became Chairman on 23 October 2015. Mr Watson had a 30 year investment banking career, during which he had been Managing Director of several Australian, American and UK based investment banks. During this period he worked in the Securities markets of the UK, Australia, Canada, China and Japan. Immediately prior to his retirement Mr Watson was with Macquarie Group, where he had been recruited to establish its European Securities business. ASX Listed Company Directorships held in last 3 years (current & recent): Interests in shares and options 125,000 ordinary shares Director of Australis Oil & Gas Director of Aurora Oil and Gas Ian Macoun (Managing Director) CFA, B Com, MFM, Dip FinSer (FP), FCPA, FAICD Mr Macoun was appointed as Managing Director of the Company on 17 August 2016 and an executive director on 25 August 2016, having been the managing director and chairman of Pinnacle since 2006. Mr Macoun’s career to date has included more than 20 years as the CEO and chief investment officer of investment management firms, including the establishment of Australia’s first “multi-boutique” funds management firm (Perennial Investment Partners – founding Managing Director from 1998), building a major new investment corporation (Queensland Investment Corporation; inaugural Chief Executive from 1988), and the management of a major Australian bank’s investment operation (Westpac Investment Management; Managing Director from 1993). Mr Macoun’s early experience, in more than 10 years at Queensland Treasury, included extensive involvement with many major Australian and International financial market participants, and the Queensland Government’s commercial participation in many major industrial development projects during the late 1970’s and the 1980’s. He was a First Assistant Under Treasurer when he moved to build and lead QIC. Mr Macoun is also a director of the following Pinnacle Affiliates: Hyperion, Palisade, Plato, Resolution Capital and Solaris. ASX Listed Company Directorships held in last 3 years (current & recent) None Interests in shares and options 25,983,596 ordinary shares in the Company 750,000 options Annual Report 2017 14 Deborah Beale (Non-executive Independent Director and member of the Audit Compliance and Risk Management Committee and Remuneration and Nominations Committee) B Comm, Grad Dip App Fin, MBA Ms Beale began her working career in the finance industry where she was employed by Merrill Lynch for over a decade. She then moved to Ernst & Young where she specialised in risk management, governance and public and government relations. Ms Beale also served and continues to serve on a number of government, public, private and not-for-profit boards. Her broad experience includes the areas of finance, corporate governance, risk management, government and public relations. Ms Beale is currently the Chair of Hyperion Asset Management Ltd one of the Company’s most successful affiliated fund managers. Ms Beale is also the Chair of Federation Square Pty Ltd and a director of Tourism Victoria, Victorian Ports Corporation (Melbourne), The Production Company and Western Chances. ASX Listed Company Directorships held in last 3 years (current & recent): Interests in shares and options 62,500 ordinary shares in the Company None Gerard Bradley (Non-executive Independent Director, Chairman of the Audit Compliance and Risk Management Committee and member of the Remuneration and Nominations Committee) B Com, Dip Adv Acc Mr Bradley is Chairman of Queensland Treasury Corporation and related companies, having served for 14 years as Under Treasurer and Under Secretary of the Queensland Treasury Department. He has extensive experience in public sector finance in both the Queensland and South Australian Treasury Departments. Mr Bradley has substantial board experience, including 10 years as Chair of QSuper, and a wide range of directorships of major Government financial and commercial corporations. Since 2012, he has worked in non-executive director roles in the public and private sectors. Mr Bradley is also a Fellow of the Australian Institute of Company Directors, CPA Australia, Australian Institute of Chartered Accountants and Institute of Managers and Leaders. ASX Listed Company Directorships held in last 3 years (current & recent): Star Entertainment Group Limited Interests in shares and options 50,000 ordinary shares in the Company 15 Annual Report 2017 04 Andrew Chambers (Executive Director) MSc, B Arts, Grad Dip App Fin Mr Chambers has been with Pinnacle since 2009. Prior to this, Mr Chambers commenced his career in investment management in 2001 when he joined Legg Mason, one of the world’s largest pure play, multi-affiliate investment management firms. Since then, Mr Chambers has developed extensive multi-channel investment management distribution skills and a proven track record of raising significant capital for new and existing affiliate firms, from institutional and retail markets in Australia and offshore. ASX Listed Company Directorships held in last 3 years (current & recent): None Interests in shares and options 4,647,214 ordinary shares in the Company 750,000 options Adrian Whittingham (Executive Director) B Bus Prior to joining the Company in 2008, Mr Whittingham was Director, Head of Retail Sales with Schroder Investment Management in Sydney, from 2002 to April 2008. At Schroders Mr Whittingham was responsible for leading the business’ direction and engagement with researchers, consultants, dealer groups and private clients. Prior to Schroders, Mr Whittingham spent 8 years at Zurich in product, research and business development roles. ASX Listed Company Directorships held in last 3 years (current & recent): None Interests in shares and options 4,447,214 ordinary shares in the Company 750,000 options Steve Wilson AM (Non-executive director and member of the Audit Compliance and Risk Management Committee and Remuneration and Nominations Committee) B Com, LLB, Hon PhD, FAICD, SF Fin, MSAA Mr Wilson has over 35 years of professional investment experience, including 4 years with Cazenove & Co. in London before joining Wilson & Co in 1984. Since then he has spent 25 years as either Executive Chairman, Managing Director or Joint Managing Director of the Company. Under his leadership, Hyperion was established in 1996, Priority Funds in 2005 and Pinnacle in 2006. Mr Wilson has substantial board experience including as Chairman of Southbank Corporation, Racing Queensland and Hyperion Flagship and non-executive directorships of Telstra and Tourism Queensland. ASX Listed Company Directorships held in last 3 years (current & recent): None Interests in shares and options 20,020,000 ordinary shares in the Company Annual Report 2017 16 05 Directors’ Report Your directors present their report on the Group, consisting of the Company and the entities it controlled at the end of, or during, the year ended 30 June 2017. Directors The directors of the Company during the whole of the financial year and up to the date of this report were: Mr A Watson Mr I Macoun (appointed on 25 August 2016) Ms D Beale (appointed on 1 September 2016) Mr G Bradley (appointed on 1 September 2016) Mr A Chambers (appointed on 1 September 2016) Mr A Whittingham (appointed on 1 September 2016) Mr S M Wilson AM Mr A Grant served as a director until his resignation on 16 August 2016 and Mr S M Skala AO served as a director until his resignation on 26 August 2016. Information on the qualifications, experience and responsibilities of the directors is included in the directors’ profiles on pages 14 to 16 of the 2017 Annual Report. Earnings per share From continuing operations Basic earnings per share Diluted earnings per share Total attributable to shareholders Basic earnings per share Diluted earnings per share Dividends 2017 Cents 2016 Cents 8.1 7.6 8.9 8.2 5.2 5.2 4.1 4.1 In the 2017 financial year, the following dividends were paid: a fully franked special dividend of 5 cents per share on 9 September 2016. a fully franked final dividend of 1.9 cents per share on 3 October 2016. a fully franked interim dividend of 2.2 cents per share on 17 March 2017. Since the end of the financial year, the Company has declared: a fully franked final dividend of 4.8 cents per share, to be paid on 6 October 2017. Operating and Financial Review The Operating and Financial Review can be found at pages 5 to 12 of the 2017 Annual Report. Significant changes in the state of affairs On 25 August 2016 the Group completed the PIML Acquisition (refer note 15(c) of the financial statements at page 59 for further information). Apart from this, there were no significant changes in the state of affairs of the Group during the reporting period. 17 Annual Report 2017 05 Matters subsequent to the end of the financial year Other than as outlined in note 29 of the financial statements at page 84, there has not arisen in the interval between the end of the financial year and the date of this directors’ report any item, transaction or event of a material and unusual nature likely, in the opinion of the directors of the Company, to significantly affect: the Group’s operations in future financial years; or the results of those operations in future financial years; or the Group’s state of affairs in future financial years. Remuneration Report The Group’s 2017 Remuneration Report sets out remuneration information for the Group’s non-executive directors and Key Management Personnel. The Remuneration Report contains the following sections: 1 Letter from the Chair of the Remuneration and Nominations Committee 2 Key Management Personnel 3 Role of Remuneration and Nominations Committee 4 Executive remuneration policy and framework for the Company 5 Links between performance and outcomes 6 Details of Executive Key Management Personnel remuneration 7 Executive service agreements 8 Non-executive director remuneration 9 Share based payment compensation 10 Equity instrument disclosures relating to Key Management Personnel 11 Loans to Key Management Personnel 12 Other transactions with former Key Management Personnel 13 Equity Capital Information in this Remuneration Report has been audited as required by section 308(3C) of the Corporations Act. Annual Report 2017 18 05 Directors’ Report 1 Letter from the Chair of the Remuneration and Nominations Committee Dear Shareholders The Board is pleased to present shareholders with the 2017 Remuneration Report. Over the past twelve months, we have been joined by a good number of new shareholders. In addition this is the first Remuneration Report prepared since the PIML Acquisition, which resulted in the Board assuming responsibility for the remuneration of all former PIML employees. Recognising these two important changes, we thought it would assist shareholders if we summarise the key features and underlying philosophy behind our remuneration structures and practices. Responsibility The Board is responsible for the remuneration of the directors and employees of Pinnacle and its controlled entities. The Board does not set the remuneration of the senior executives or employees of our eight Affiliates, as these arrangements are the responsibility of their respective boards, are negotiated prior to the establishment of each Affiliate and are subject to formal agreements in each case. The board of each Affiliate includes at least one representative of Pinnacle. Philosophy The Board strongly believes that Pinnacle’s past and continued financial success is totally bound to the maintenance of a consistent high quality management team, operating in a flexible and entrepreneurial environment, within which individual behaviours and interests of the leadership of our executive group are directly aligned with external long- term shareholders through common long-term equity ownership. This philosophy has been applied to Pinnacle since its foundation in 2006. Whilst this has been delivered to executives in a combination of base salary, short-term incentive and long-term incentive, it is worth noting that the LTI arrangements that Pinnacle established in 2009 required executives to stay with us for 6 years to earn the full equity awards. Similarly, the current Pinnacle LTI Scheme requires our senior executives (with the exception of Mr Macoun, who must remain employed until 31 January 2020) to be employed by Pinnacle until the end of 2020 to get the full benefit of these arrangements. As a consequence of the long-term nature of these provisions, shareholders should expect there will be years when little or no new LTI will be awarded, and there may be years when a more substantial LTI will be required, amongst other things, to accommodate new significant hires, promote and retain existing high performing employees and reset provisions that are expiring. Applying our philosophy to 2017 financial year results The outcome for the 2017 financial year can be summarised as follows: there have been no increases in fixed remuneration for KMP there have been no new LTIs issued to KMP STIs were paid to KMP in relation to the 2017 financial year. In considering these, the Board noted: • growth in earnings per share from continuing operations of 56% • growth in NPAT from continuous operations attributable to shareholders for the 2017 financial year of 108% • growth in funds under management of 34% • net funds under management inflows of $4.9bn (2016 : $2.1bn) • retail net inflows of funds under management of $2.5bn (2016 : $0.6bn) Further detail on the remuneration policy and framework for the 2017 financial year adopted by the Remuneration and Nominations Committee can be found at pages 23 to 24. 19 Annual Report 2017 05 Historical Remuneration Outcomes New shareholders in particular may not be familiar with the circumstances that have driven certain historical remuneration outcomes, and we felt it would be helpful to give some background to three specific matters. These are: the PIML LTI Scheme various related party loans a 2006 loan to Mr Ian Macoun Shareholder approval for these matters has been previously sought and granted, hence these matters appear in the Remuneration Report as a matter of historical record. PIML LTI Scheme Shareholders approved the participation of certain KMP in the LTI on 26 June 2015. Under this approval, executives received a combination of PIML equity and options in the Company. The options, which remain in place, were issued at a strike price which was at a premium to the prevailing share price. Further details are set out at pages 23 to 24. No new options have been issued since the inception of the PIML LTI Scheme. Related party loans As shareholders will recall, the PIML Acquisition, which involved a “swap” of equity held by a number of PIML senior executives for newly issued equity in the Company, was approved by shareholders on 16 August 2016. As part of the acquisition, the Company re-issued existing loans to PIML executives which had previously allowed executives’ prior purchases of PIML equity, and issued the New Loans to PIML senior executives totalling $3 million for the express purpose of acquiring additional equity from Deutsche Bank. The key terms of the aforementioned loans are set out at pages 27 to 28. 2006 Loan to I Macoun In 2006, whilst setting up PIML, the Company advanced Mr Macoun a loan of $1.1 million to acquire shares in PIML and agreed to pay, at the time of repayment of the loan (being the time of sale of the shares in PIML by Mr Macoun) a bonus to Mr Macoun with a net value equal to the outstanding balance of the loan. The PIML Acquisition triggered repayment of this loan, which occurred on 25 August 2016. Specific shareholder approval for the repayment of this loan was granted on 16 August 2016. As the loan was a long standing obligation dating back to 2006, the liability was expensed in prior years. The Company’s approach to remuneration will be regularly reviewed to ensure continued alignment with the Company’s strategy and growth. We hope you find the Remuneration Report that follows to be instructive and helpful. Alan Watson Chair of Remuneration and Nominations Committee Annual Report 2017 20 05 Directors’ Report 2 Key Management Personnel This Remuneration Report provides details of the remuneration of the Key Management Personnel of the Group for the year ended 30 June 2017. The Key Management Personnel for this period are listed in the tables below: Executive Key Management Personnel Name Ian Macoun Andrew Chambers Adrian Whittingham Alex Ihlenfeldt Position Managing Director (from 17 August 2016) and Executive Director (from 25 August 2016) Executive Director (from 1 September 2016) Executive Director (from 1 September 2016) Chief Operating Officer and Chief Financial Officer Non-executive Key Management Personnel Current Name Alan Watson Steve Wilson AM Deborah Beale Gerard Bradley Former Name Alexander Grant Steven Skala AO Position Chairman Non-executive Director Non-executive Director (from 1 September 2016) Non-executive Director (from 1 September 2016) Position Managing Director (until his resignation on 16 August 2016) Non-executive Director (until his resignation on 26 August 2016) In accordance with the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act 2011 (Cth)), the Key Management Personnel of the Group for the year ended 30 June 2017 comprised: each non-executive director of the Company; Ian Macoun, Andrew Chambers and Adrian Whittingham, each being executive directors of the Company; Alex Ihlenfeldt as Chief Operating Officer and Chief Financial Officer of the Company. 21 Annual Report 2017 05 3 Role of Remuneration and Nominations Committee The Remuneration and Nominations Committee is a committee of the Board. The Committee performs its role consistent with the overall objective of ensuring maximum shareholder benefit from the retention of a high quality, high performing Board and executive team. Its responsibilities during the 2017 financial year included the following: reviewing and making recommendations in relation to the Group’s remuneration policies and practices to ensure that the Group provides a competitive and flexible remuneration structure, fairly and responsibly rewards employees, recognises categories of financial and non-financial performance, links reward to the creation of shareholder value, adopts an appropriate balance between fixed remuneration, short-term incentives and long- term incentives and limits payments on termination to statutory or pre-agreed contractual amounts; reviewing executive remuneration and incentives and making recommendations to the Board in relation to share option schemes and equity participation plans; setting the terms and conditions of the employment of the Managing Director, advising the Board on the Managing Director’s remuneration package, reviewing the performance of the Managing Director at least annually including progress made towards achieving the Group’s strategic goals; reviewing the remuneration of non-executive directors for serving on the Board or any committee (both individually and in total) and recommending to the Board the remuneration and retirement policies for non-executive directors having regard to market trends and shareholder interests; setting the entitlements and expenses policy for the Chairman, non-executive directors and the Managing Director; ensuring the Group’s remuneration policies and practices comply with the provisions of the ASX Listing Rules and the Corporations Act and have regard to the ASX Principles; facilitating the review of individual directors’ performance and of the Board annually; making recommendations to the Board concerning the appointment of new directors and, to the extent delegated to it by the Board, the Managing Director; identifying individuals who, by virtue of their experience, expertise, skills, qualifications, backgrounds, contacts or other qualities, are suitable candidates for appointment to the Board or to any relevant management position and recommending individuals accordingly for consideration by the Board; preparing, recommending for approval by the Board and overseeing the implementation of the Company’s diversity policy; and on an annual basis, reviewing the proportion of women who are employed by the Company and submitting a report to the Board outlining its findings. During the 2017 financial year, the Remuneration and Nominations Committee received recommendations on the remuneration for employees from Mr Macoun, the Managing Director. These recommendations were reviewed and in turn recommended to the Board. The Charter for the Remuneration and Nominations Committee is incorporated in the Company’s Corporate Governance Board Charters which can be found on the Company’s website at http://www.pinnacleinvestment.com/shareholders-investor-centre/ Annual Report 2017 22 05 Directors’ Report 4 Executive remuneration policy and framework for the Company The Board remains focused on achieving sustainable growth and returns for investors in the medium to long-term. During the 2017 financial year, it has adopted a remuneration framework consisting of base salary, short-term incentives and long-term incentives and a remuneration policy which is aimed to motivate and retain highly skilled executives and align their interests with shareholders. Base salary Base salary is structured as a package, which may be delivered as a combination of cash and prescribed non-financial benefits and includes superannuation contributions. Executives are offered a competitive base salary that comprises a fixed component of pay and rewards. An executive’s base salary is reviewed on promotion or a substantial change in responsibilities. There are no guaranteed base salary increases included in any executive’s contract. During the 2017 financial year, no Executive Key Management Personnel received any increase to their base salary. Short-term incentives (STI) STI is a discretionary ‘at risk’ cash incentive payment which is paid to executives and employees on an annual basis and in accordance with remuneration policies and the terms and conditions of employment. The Remuneration and Nominations Committee is responsible for reviewing recommendations from the Managing Director for STI and recommending them to the Board for approval. Long-term incentives (LTI) Options component The Company’s employee option share plan (EOSP) is designed to encourage alignment of the interests of staff with increased value to shareholders in the long-term. Participants are granted options, which only vest subject to specific conditions being met at the end of the vesting period. Participation in the EOSP is at the Board’s discretion. Options granted under the EOSP carry no dividend or voting rights. The rules of the EOSP contain restrictions on removing the ‘at-risk’ aspect of the instruments granted to executives, including to Key Management Personnel. In December 2014, the Company negotiated the PIML LTI Scheme with the senior executive shareholders of PIML. In July 2015, and as part of the PIML LTI Scheme, the Company issued 4.25 million options in the Company to senior executives under the EOSP at a strike price of 98.6 cents per share, calculated as the Company’s NTA as at 1 January 2015 and a premium of 20% of the volume weighted average price of the Company’s fully paid ordinary shares from 1 December 2014 to 31 March 2015. The options vest in two equal tranches on 1 January 2018 and 1 January 2020 with a six month exercise period. Any options that remain unexercised at the end of the exercise period will lapse. The options are subject to claw back arrangements and bad leaver provisions. The participation of certain Key Management Personnel in this scheme was approved by shareholders on 26 June 2015. 23 Annual Report 2017 05 Equity component As part of the PIML LTI Scheme, in May 2015 the Company sold 4.29% of its equity in PIML to senior executives, subject to claw back arrangements. As part of the PIML Acquisition, this equity was ‘swapped’ for equity in the Company and a deed of acknowledgment was put in place, the effect of which is to roll over and preserve the long- term retentive elements of the PIML LTI scheme by creating service conditions. In particular, should the relevant executives of the Group cease employment prior to certain dates ranging from March 2017 to December 2020, they will be required to forfeit and repay any increases in the value of certain equity holdings based on a pre-agreed formula. The PIML Acquisition, including the terms of these equity arrangements for senior executives, was approved by shareholders on 16 August 2016. 5 Links between performance and outcomes During the 2017 financial year, the Managing Director conducted performance reviews of senior executives and made recommendations to the Remuneration and Nominations Committee in respect of their STIs. In making those recommendations, regard was had to the group, team and individual performance relative to expectations (both financial and non-financial) over the period. The table below shows key financial performance indicators which described the progress of the Group’s performance over the last five financial years. Net profit/(loss) after tax attributable to shareholders ($m) Closing share price ($) Dividend per share (cents) Diluted earnings per share (cents) Net profit/(loss) after tax attributable to shareholders ($m) before derecognition of DTA* Diluted earnings per share (cents) before derecognition of DTA 2017 2016 2015 2014 2013 13.1 2.90 7.00 8.1 13.1 8.1 4.5 1.45 3.30 4.1 4.5 4.1 (9.0) 1.20 1.60 (8.5) 0.4 0.4 4.8 0.61 2.75 4.5 4.8 4.5 (1.6) 0.19 Nil (1.6) (1.6) (1.6) * In the 2015 year NPAT from continuing operations was reduced by $9.4 million relating to the de-recognition of deferred tax assets. Key indicators of the Company’s progress towards achieving its medium term objectives included: growth in earnings per share from continuing operations of 56% in the 2017 financial year growth in NPAT from continuing operations attributable to shareholders from $5.8m in the 2016 financial year to $12.0m in the 2017 financial year increase in FUM from $19.8bn as at 30 June 2016 to $26.5bn as at 30 June 2017 net FUM inflows of $4.9bn during the 2017 financial year net retail FUM inflows of $2.5bn during the 2017 financial year 100% of Affiliate strategies and products that have a track record of at least 5 years outperformed their benchmarks over the 5 years to 30 June 2017 a new affiliate, Two Trees Investment Management, being commenced during 2017. Annual Report 2017 24 05 Directors’ Report 6 Details of Executive Key Management Personnel remuneration The relative weightings of the three remuneration components for Key Management Personnel are set out in the table below for the year to 30 June 2017. % of total remuneration Fixed remuneration 47% 41% 41% 45% Performance-based remuneration STI 46% 49% 49% 44% LTI 7% 10% 10% 11% Ian Macoun Andrew Chambers Adrian Whittingham Alex Ihlenfeldt Ian Macoun In the 2017 financial year, Mr Macoun’s base salary remained unchanged at $600,000 per annum (inclusive of superannuation) and he earned an STI of $600,000 (inclusive of superannuation). STI is a performance incentive of up to 100% of base salary awarded on the basis of meeting business and strategic objectives. Mr Macoun’s salary and STI remained unchanged from the 2016 financial year, having been determined by the Board of PIML and then contracted to remain unchanged as part of the PIML Acquisition which was approved by shareholders on 16 August 2016. In addition and in accordance with the terms of the PIML LTI scheme described on page 23, on 1 July 2015 the Company granted 750,000 options over its ordinary shares to Mr Macoun. This grant of options was subject to shareholder approval given at an extraordinary general meeting on 26 June 2015. Andrew Chambers In the 2017 financial year, Mr Chambers’s base salary remained unchanged at $400,000 per annum (inclusive of superannuation) and he earned an STI of $400,000 (inclusive of superannuation). STI is a performance incentive of up to 100% of base salary awarded on the basis of meeting business and strategic objectives. In addition and in accordance with the terms of the PIML LTI scheme described on page 23, on 1 July 2015 the Company granted 750,000 options over its ordinary shares to Mr Chambers. Adrian Whittingham In the 2017 financial year, Mr Whittingham’s base salary remained unchanged at $400,000 per annum (inclusive of superannuation) and he earned an STI of $400,000 (inclusive of superannuation). STI is a performance incentive of up to 100% of base salary awarded on the basis of meeting business and strategic objectives. In addition and in accordance with the terms of the PIML LTI scheme described on page 23, on 1 July 2015 the Company granted 750,000 options over its ordinary shares to Mr Whittingham. Alex Ihlenfeldt In the 2017 financial year, Mr Ihlenfeldt’s base salary remained unchanged at $300,000 per annum (inclusive of superannuation) and he earned an STI of $300,000 (inclusive of superannuation). STI is a performance incentive of up to 100% of base salary awarded on the basis of meeting business and strategic objectives. In addition and in accordance with the terms of the PIML LTI scheme described on page 23, on 1 July 2015 the Company granted 425,000 options over its ordinary shares to Mr Ihlenfeldt. This grant of options was subject to shareholder approval given at an extraordinary general meeting on 26 June 2015. 25 Annual Report 2017 05 % 7 % 1 - % 0 1 % 0 1 - % 1 1 % 2 - % 2 1 % 6 4 % 9 4 - % 9 4 - % 9 4 % 4 4 % 8 4 - - , 6 7 8 6 0 3 1 , , 5 3 0 0 3 2 1 , - - , 3 1 1 3 2 8 , 3 1 1 3 2 8 , 2 4 2 0 8 6 , 5 2 4 0 2 6 1 5 3 2 5 , - - - - - - - - - 5 4 7 7 9 , 1 3 1 9 , 3 4 4 8 , 2 9 5 1 2 , - - 9 0 7 4 8 , 1 7 0 5 , - - 9 0 7 4 8 , 1 7 0 5 , 8 7 6 5 7 , 4 6 5 4 , 9 0 5 5 1 , 6 1 9 4 , - 4 4 8 , 1 2 6 8 2 5 0 0 0 5 8 , 9 0 7 5 6 , ) 8 8 0 2 2 ( , , 5 9 6 5 8 6 3 , , 1 8 0 9 7 3 2 , 0 0 0 5 8 , 1 6 6 9 8 , 0 2 4 4 , - , 1 4 8 2 4 3 0 8 6 4 2 , - - - - - - - - - - - - 0 0 0 5 3 , 0 0 0 5 3 , - 6 1 2 4 2 , - 6 1 2 4 2 , 0 0 0 0 3 , 0 0 0 0 3 , 9 6 4 4 , 0 0 0 5 3 , 1 0 9 7 1 1 , 0 0 0 0 0 1 , - - - - - - - - - - - f o n o i t r o P f o n o i t r o P n o i t a r e n u m e r n o i t a r e n u m e r I % T L – k s i r t a I % T S – k s i r t a l $ a t o T s $ t i f e n e b n o i t a n m r e T i I ) $ T L ( s n o i t p O s t h g R & i e $ v a e l g n o L e c i v r e s t n e m e r i t e R - r e p u S s $ t i f e n e B n $ o i t a u n n a - n o N y r a t e n o m s $ t i f e n e b h s a C s u n o b I ) $ T S ( s $ e e f & l y r a a s h s a C 0 0 0 0 0 6 , 0 0 0 5 6 5 , 0 0 0 0 0 6 , 0 0 0 5 6 5 , 7 1 0 2 6 1 0 2 : r o t c e r i D g n i g a n a M n u o c a M n a I e m a N - - 6 1 0 2 0 0 0 0 0 4 , , 7 1 1 9 0 3 7 1 0 2 * s r e b m a h C w e r d n A l e n n o s r e P t n e m e g a n a M y e K r e h t O 0 0 0 0 0 4 , , 7 1 1 9 0 3 7 1 0 2 * m a h g n i t t i h W n a i r d A - - 7 2 0 6 9 2 , , 3 7 9 3 7 2 7 2 0 6 9 2 , , 3 7 9 3 7 2 6 1 0 2 7 1 0 2 6 1 0 2 l t d e f n e h I x e A l l - - 7 2 0 6 9 8 , , 7 2 0 6 9 6 1 , 8 3 0 7 4 , 7 1 0 2 # t n a r G r e d n a x e A l 0 0 0 5 6 3 , , 5 4 2 4 0 5 1 , , 3 7 9 3 0 2 1 , 6 1 0 2 7 1 0 2 6 1 0 2 s l a t o T 6 1 0 2 r e b m e t p e S 1 m o r f P M K * 6 1 0 2 t s u g u A 6 1 l i t n u P M K # Annual Report 2017 26 s t n e m y a p s t i f e n e b s t i f e n e b e r a h S d e s a b - g n o L m r e t t n e m y o l p m e t s o P m r e t - t r o h S s t i f e n e b e e y o l p m e t u o t e s e r a ) s d r a d n a t s g n i t n u o c c a e b a c i l l p p a h t i w e c n a d r o c c a n i d e t a l u c l a c ( l e n n o s r e P t n e m e g a n a M y e K e v i t u c e x E r o f s l i a t e d n o i t a r e n u m e R . l l w o e b e b a t e h t n i 05 Directors’ Report 7 Executive service agreements Remuneration and other terms of employment for Executive Key Management Personnel are formalised in service agreements. Ian Macoun During the 2017 financial year, and as part of the PIML Acquisition that was approved by shareholders on 16 August 2016, Ian Macoun was appointed Managing Director of the Company and entered into a new service agreement, the terms of which are substantially similar to his previous contract as Managing Director of PIML. Mr Macoun’s contract provides for termination by either party upon giving three months’ notice except where termination is due to misconduct. In addition, as part of the PIML Acquisition, shareholders voted to approve the payment of termination benefits to Mr Macoun in an amount of $900,000 or 12 months’ salary (whichever is higher), should Mr Macoun’s employment be terminated in certain circumstances and consistent with his previous terms of employment. The termination provisions were agreed between Mr Macoun and PIML as part of his employment agreement in 2006 when he was initially employed by the Group. Termination benefits are not payable in the event of misconduct. No termination benefits were paid during the 2017 financial year. In 2006, the Group advanced shareholding entities associated with Mr Macoun a loan of $1.119 million to acquire shares in PIML and agreed to pay, at the time of repayment of the loan (being the time of sale of PIML shares by interests associated with Mr Macoun) a bonus with a net value equal to the outstanding balance of the loan. The loan was unsecured, limited in recourse to the shares in PIML and interest free. As part of the PIML Acquisition, and following the approval of shareholders on 16 August 2016, the Company paid Mr Macoun the bonus which was in turn applied to repay the loan. As the loan was a long standing obligation dating back to 2006, the liability was expensed in prior years. In May 2015, PIML advanced to shareholding entities associated with Mr Macoun a loan of $547,293 to acquire shares in PIML. The loan was unsecured, limited recourse and interest free. As part of the PIML Acquisition, this loan has been repaid and new loans reissued by the Company under the EOSP on substantially the same terms, save that it is now subject to a share mortgage. In August 2016, as part of the PIML Acquisition which was approved by shareholders on 16 August 2016, the Company advanced to Mr Macoun’s nominated shareholding entity a loan of $500,000 for the express purpose of acquiring shares in the Company in the secondary market from Deutsche Australia. This loan is interest bearing and subject to a 5 year term, limited recourse and secured by way of a share mortgage. Repayment will occur at the earlier of the end of the 5 year term, the date on which any of the underlying shares are sold or within 6 months’ of the cessation of Mr Macoun’s employment. Events of default under the loan include cessation of employment. Andrew Chambers Andrew Chambers, an executive director of the Company, is engaged under an employment agreement dated 9 March 2008 and subsequently amended on 7 May 2015 and 25 August 2016. The contract provides for termination by either party on at least three months’ notice except where termination is due to misconduct. In June 2009, July 2011 and January 2012, PIML advanced to Mr Chambers’ nominated shareholding entity, three unsecured, limited recourse and interest free loans totalling $234,354 to acquire shares in PIML. The loans were immediately repayable if Mr Chambers ceased employment with the Company or sold some or all of his shares. In May 2015, and as part of the PIML LTI Scheme, PIML advanced to Mr Chambers’ nominated shareholding entity, an unsecured, limited recourse and interest free loan of $547,293 to acquire shares in PIML. The loan included clawback and share cancellation arrangements if Mr Chambers ceased employment with the Company prior to certain key dates. As part of the PIML Acquisition which was approved by shareholders on 16 August 2016, all of the aforementioned loans were repaid and new loans reissued by the Company under the EOSP on substantially the same terms, save that they are now subject to various share mortgages. 27 Annual Report 2017 05 In August 2016, as part of the PIML Acquisition, the Company advanced to Mr Chambers’ nominated shareholding entity a loan of $500,000 for the express purpose of acquiring shares in the Company in the secondary market from Deutsche Australia. This loan is interest bearing and subject to a 5 year term, limited recourse and secured by way of a share mortgage. Repayment will occur at the earlier of the end of the 5 year term, the date on which any of the underlying shares are sold or within 6 months’ of the cessation of Mr Chambers’ employment. Events of default under the loan include cessation of employment. Adrian Whittingham Adrian Whittingham, an executive director of the Company, is engaged under an employment agreement dated 28 April 2008 and subsequently amended on 7 May 2015 and 25 August 2016. The contract provides for termination by either party on at least three months’ notice except where termination is due to misconduct. In June 2009, July 2011 and January 2012, PIML advanced to Mr Whittingham’s nominated shareholding entity, three unsecured, limited recourse and interest free loans totalling $234,354 to acquire shares in PIML. The loans were immediately repayable if Mr Whittingham ceased employment with the Company or sold some or all of his shares. In May 2015, and as part of the PIML LTI Scheme, PIML advanced to Mr Whittingham’s nominated shareholding entity, an unsecured, limited recourse and interest free loan of $547,293 to acquire shares in PIML. The loan included clawback and share cancellation arrangements if Mr Whittingham ceased employment with the Company prior to certain key dates. As part of the PIML Acquisition which was approved by shareholders on 16 August 2016, all of the aforementioned loans were repaid and new loans were reissued by the Company under the EOSP on substantially the same terms, save that they are now subject to various share mortgages. In August 2016, as part of the PIML Acquisition, the Company advanced to Mr Whittingham’s nominated shareholding entity a loan of $500,000 for the express purpose of acquiring shares in the Company in the secondary market from Deutsche Australia. This loan is interest bearing and subject to a 5 year term, limited recourse and secured by way of a share mortgage. Repayment will occur at the earlier of the end of the 5 year term, the date on which any of the underlying shares are sold or within 6 months’ of the cessation of Mr Whittingham’s employment. Events of default under the loan include cessation of employment. Alex Ihlenfeldt Alex Ihlenfeldt, the Chief Operating Officer and Chief Financial Officer, is engaged under an employment agreement dated 1 February 2011 and subsequently amended on 30 January 2012, 7 May 2015 and 25 August 2016. The contract provides for termination by either party on one month’s notice except where termination is due to misconduct. In January 2012, PIML advanced to Mr Ihlenfeldt’s nominated shareholding entity, an unsecured, limited recourse and interest free loan of $416,070 to acquire shares in PIML. The loan was immediately repayable if Mr Ihlenfeldt ceased employment with PIML or sold some or all of his shares. In May 2015, PIML advanced to interests associated with Mr Ihlenfeldt a loan of $309,522 to acquire shares in PIML. The loan was interest free and limited recourse with various repayment terms on cessation of employment if before 31 December 2018 or following a sale of equity. As part of the PIML Acquisition, both of the aforementioned loans have been repaid and loans on substantially similar terms reissued by the Company under the EOSP, save that they are now subject to share mortgages. In August 2016, as part of the PIML Acquisition which was approved by shareholders on 16 August 2016, the Company advanced to Mr Ihlenfeldt’s nominated shareholding entity a loan of $500,000 for the express purpose of acquiring shares in the Company in the secondary market from Deutsche Australia. This loan is interest bearing and subject to a 5 year term, limited recourse and secured by way of a share mortgage. Repayment will occur at the earlier of the end of the 5 year term, the date on which any of the underlying shares are sold or within 6 months’ of the cessation of Mr Ihlenfeldt’s employment. Events of default under the loan include cessation of employment. Alexander Grant Alexander Grant resigned as Managing Director on 16 August 2016. Annual Report 2017 28 05 Directors’ Report 8 Non-executive director remuneration The structure of non-executive director remuneration is separate and distinct from that of executive remuneration. The Board seeks to set aggregate remuneration at a level that provides the Group with the ability to attract and retain non-executive directors with the appropriate skills and experience while incurring a cost that is acceptable to shareholders and other stakeholders. Non-executive directors’ fees are determined within an aggregate non-executive directors’ fee pool limit, with any increase in the fee pool requiring approval by shareholders. The current aggregate fee pool currently stands at $600,000 per annum and was approved by shareholders at the Company’s annual general meeting on 24 October 2006. No changes were proposed or made to the aggregate fee pool during the 2017 financial year. On 12 October 2015, the Board resolved to suspend the payment of fees for the Chair of the Remuneration and Nomination Committee in recognition of the Committee’s more limited duties following the sale of the Securities business. On 6 December 2016, fees for the Chair of the Remuneration and Nominations Committee were reinstated following completion of the PIML Acquisition and now that the Remuneration and Nominations Committee has assumed responsibility for oversight of the Company’s remuneration policy and practices. The fees paid to non-executive directors from 16 December 2016 for Board and Committee positions are set out in the table below: Chairman Non-executive Director Audit Compliance and Risk Management Committee – Chair – Member Remuneration and Nominations Committee – Chair – Member Subsidiary Boards Base fees $100,000 $70,000 $10,000 $0 $10,000 $0 $0 Non-executive directors are not eligible to receive STI but may be eligible to participate in the EOSP. There are currently no outstanding grants to non-executive directors under the EOSP and during the 2017 financial year, no non-executive directors participated in the EOSP. Further details concerning the EOSP are set out on page 23. 29 Annual Report 2017 n o i t a r e n u m e r n o i t a r e n u m e r e e f n o n f o n o i t r o P f o n o i t r o P i g n d u l c x e I % T L – k s i r t a I % T S – k s i r t a n $ o i t a r e n u m e r l $ a t o T l a t o T s $ t i f e n e b n o i t a n m r e T i I ) $ T L ( e $ v a e l s $ t i f e n e B n $ o i t a u n n a s $ t i f e n e b I ) $ T S ( s t n e m y a p s t i f e n e b s t i f e n e b e r a h S d e s a b - g n o L m r e t l t n e m y o p m e t s o P m r e t - t r o h S s t i f e n e b e e y o p m e l s n o i t p O s t h g R & i g n o L e c i v r e s t n e m e r i t e R - r e p u S y r a t e n o m s u n o b l y r a a s h s a C - n o N h s a C r a e y l a i c n a n i f 7 1 0 2 e h t r o f s e i r a i d i s b u s d n a s n o i t i s o p e e t t i m m o C , y n a p m o C e h t o t n o i t a l e r n i s r o t c e r i d e v i t u c e x e - n o n e h t r o f n o i t a r e n u m e r l a t o T : l l w o e b e b a t e h t n i n w o h s d n a s d r a d n a t s g n i t n u o c c a e b a c i l l p p a h t i w e c n a d r o c c a n i d e t n e s e r p s i , d n a 7 0 8 1 1 3 $ s a w - - - - - - - - - - - - - - n o i t i d d a n i y t i c a p a c s i h t n i 4 3 8 5 0 1 , 4 3 8 5 0 1 , - 4 8 2 2 9 , 3 3 3 8 5 , - 4 8 2 2 9 , 3 3 3 8 5 , 7 6 6 6 6 , 7 6 6 6 6 , - 5 5 7 9 6 , 8 4 1 4 8 , 8 1 2 1 1 , - 5 5 7 9 6 , 8 4 1 4 8 , 8 1 2 1 1 , - - 4 8 0 7 0 1 , 4 8 0 7 0 1 , 0 0 5 6 1 , 0 0 5 6 1 , 7 0 8 1 1 3 , 7 0 8 1 1 3 , , 5 1 0 0 0 3 , 5 1 0 0 0 3 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 6 7 6 8 , 3 1 5 4 1 , 1 6 0 5 , - - 3 7 9 4 4 8 7 , 0 1 7 4 1 , 8 5 3 2 2 , - - - - - - - - - - - - - - - - - - - - - - - - - - - - s $ e e f & - 8 5 1 7 9 , 1 7 7 7 7 , 2 7 2 3 5 , s r o t c e r i d e v i t u c e x e - n o N e m a N 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 ) i ( n o s t a W n a l A ) i i ( e l a e B h a r o b e D 7 6 6 6 6 , 7 1 0 2 ) i i i ( l y e d a r B d r a r e G - - 5 5 7 9 6 , 8 4 1 4 8 , 5 4 2 0 1 , 9 3 2 9 9 , 0 0 5 6 1 , 6 1 0 2 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 7 1 0 2 6 1 0 2 7 9 0 7 9 2 , 7 1 0 2 7 5 6 7 7 2 , 6 1 0 2 ) v i ( n o s l i W n e v e t S ) v ( a l a k S n e v e t S ) i v ( l l a v r a D m u h C s l a t o T 05 . e e t t i m m o C t n e m t s e v n I s d n u F y t i r o i r P e h t f o r i a h c s a e o r s i h o t n o i t a e r n l l i , 8 4 1 8 $ d n a , i i e l c a n n P f o p h s r o t c e r i d s i h o t n o i t a e r n l i 3 3 3 7 $ , , ’ s e e f s r o t c e r i d s a 6 6 6 8 6 $ d e v e c e r n o s l i i , W r : M 6 1 0 2 i d e v e c e r d n a 6 1 0 2 e n u J 0 3 n o n o i t a n g i s e r s i h i l i t n u e l c a n n P f o r o t c e r i d a s a w l l a v r a D r . M 5 1 0 2 t s u g u A 1 3 n o n o i t a n g i s e r s i h l i t n u d e t i i m L p u o r G n o s l i W f o r o t c e r i d a s a w l l a v r a D r : M 6 1 0 2 . e v o b a s e e f e h t o t n o i t i d d a n i y t i c a p a c s i h t n i 0 0 0 5 8 $ , , i . t r o p p u s e v i t a r t s i n m d a f o y a w y b 7 6 6 6 1 $ f o m u s a s u p 7 1 4 0 9 $ f o s e e f s r o t c e r i d l ’ , i d e v e c e r a a k S r l M . l r a e y e h t f o e c n a a b e h t r o f r o t c e r i d a d n a , 5 1 0 2 r e b o t c O 3 2 l i t n u n a m r i a h C s a w a a k S r l : M 6 1 0 2 . 6 1 0 2 t s u g u A 6 2 n o n o i t a n g i s e r s i h l i t n u r o t c e r i D a s a w a a k S r l : M 7 1 0 2 , 6 1 4 0 5 $ d e v e c e r d n a i , e t a i l i f f A e l c a n n P a i , d e t i i m L t n e m e g a n a M t e s s A n o i r e p y H f o r i a h C o s l a s i e h S . 6 1 0 2 r e b m e t p e S 1 n o r o t c e r i D a d e t n o p p a s a w e a e B s i l : M 7 1 0 2 . 6 1 0 2 r e b m e t p e S 1 n o r o t c e r i D a d e t n o p p a s a w y e d a r B r i l : M 7 1 0 2 . e v o b a s e e f e h t o t . n a m i r i a h C d e t n o p p a s a w e h e m i t h c i h w t a , l 5 1 0 2 r e b o t c O 3 2 o t 5 1 0 2 y u J 1 m o r f r o t c e r i d a s a w n o s t a W r : M 6 1 0 2 ) i ( ) i i ( ) i i i ( ) v i ( ) v ( ) i v ( Annual Report 2017 30 05 Directors’ Report Retirement allowances for non-executive directors The Company does not provide retirement allowances for non-executive directors, which is consistent with the guidance contained in the ASX Principles. Superannuation contributions required under the Australian superannuation guarantee legislation are deducted from the relevant directors’ overall fee entitlements where their fees are paid through payroll. New non-executive director appointments On appointment to the Board, new non-executive directors are provided with a letter of appointment setting out the Company’s expectations, their responsibilities, rights and the terms and conditions of their engagement. All new non-executive directors participate in an induction process, which covers the operation of the Board and its committees and financial, strategic, operational and risk management issues. For further detail, refer to the Corporate Governance Statement on the Company’s website. 9 Share based payment compensation Options The terms and conditions of each grant of options affecting remuneration in the previous, this or future reporting periods as at 30 June 2017 are as follows: Grant Date Category Expiry date Exercise period Exercise price Value per right / option at grant date Number of rights / options granted during the year Number of rights / options exercised during the year Number of rights / options forfeited during the year Number of rights / options at end of financial year % Vested 1 July 2015 Options 30 Jun 18 124 Days $0.99 $0.30 2,125,000 1 July 2015 Options 30 Jun 20 125 Days $0.99 $0.32 2,125,000 0 0 0 2,125,000 0 2,125,000 0% 0% 31 Annual Report 2017 05 Details of options provided as remuneration to Executive Key Management Personnel are set out below. These options form part of the PIML LTI Scheme and were approved for Mr Macoun and Mr Ihlenfeldt by shareholders on 26 June 2015. Mr Chambers and Mr Whittingham were not Key Management Personnel at the date of grant and accordingly their participation did not require shareholder approval. Number of options / rights granted Value ($) of options / rights granted (i) Number of options/ rights vested (ii) Value ($) of options/ rights vested (iii) Vesting date Number of options/ rights forfeited/ lapsed/ sold Value ($) of options/ rights forfeited/ lapsed/ sold Name Date of grant Key Management Personnel of the Group Ian Macoun Options Options Sub-Total 1-Jul-15 375,000 $110,663 1-Jan-18 1-Jul-15 375,000 $120,525 1-Jan-20 750,000 Andrew Chambers Options Options Sub-Total 1-Jul-15 375,000 $110,663 1-Jan-18 1-Jul-15 375,000 $120,525 1-Jan-20 750,000 Adrian Whittingham Options Options Sub-Total Alex Ihlenfeldt Options Options Sub-Total 1-Jul-15 375,000 $110,663 1-Jan-18 1-Jul-15 375,000 $120,525 1-Jan-20 750,000 1-Jul-15 213,000 $62,856 1-Jan-18 1-Jul-15 212,000 $68,137 1-Jan-20 425,000 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (i) Fair values at grant date are calculated using a black-scholes option pricing model that takes into acount the exercise price, the terms of the right or option, the impact of dilution, the share price at grant date and expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the right or option. Model inputs for the grants made are set out in note 27 to the financial statements. (ii) On the vesting of each option/right, the holder becomes entitled to receive one fully paid ordinary share in the Company on exercise of the option/right. (iii) The amount is based on the intrinsic value of the option or right at vesting date. Annual Report 2017 32 05 Directors’ Report Loan Shares The terms and conditions of each grant of equity and associated loan to Key Management Personnel is provided at pages 27 to 28. Details of the loan arrangements affecting remuneration in the previous, this or future reporting periods as at 30 June 2017 are as follows: Name Date of grant Number of loan shares Loan value at date of grant Share based payments value (i) Vesting date Number of shares vested Value ($) of shares vested (ii) Number of shares forfeited/ lapsed/sold Value ($) of shares forfeited/ lapsed/sold Key Management Personnel of the Group Ian Macoun Loan Shares 25-Aug-16 288,210 273,799 $30,799 31-Dec-18 Loan Shares 25-Aug-16 287,888 273,494 $33,846 31-Jan-20 - - - - Loan Shares 25-Aug-16 1,111,112 500,000 $14,162 25-Aug-16 1,111,112 1,955,555 Sub-Total 1,687,210 1,047,293 $78,807 1,111,112 1,955,555 Andrew Chambers Loan Shares 25-Aug-16 133,509 126,834 $1,221 21-Mar-17 133,509 311,076 Loan Shares 25-Aug-16 288,210 273,799 $30,799 31-Dec-18 Loan Shares 25-Aug-16 287,888 273,494 $36,392 31-Dec-20 - - - - Loan Shares 25-Aug-16 1,111,112 500,000 $14,162 25-Aug-16 1,111,112 1,955,555 Sub-Total 1,820,719 1,174,127 $82,575 1,244,621 2,266,631 Adrian Whittingham Loan Shares 25-Aug-16 133,509 126,834 $1,221 21-Mar-17 133,509 311,076 Loan Shares 25-Aug-16 288,210 273,799 $30,799 31-Dec-18 Loan Shares 25-Aug-16 287,888 273,494 $36,392 31-Dec-20 - - - - Loan Shares 25-Aug-16 1,111,112 500,000 $14,162 25-Aug-16 1,111,112 1,955,555 Sub-Total 1,820,719 1,174,127 $82,575 1,244,621 2,266,631 Alex Ihlenfeldt Loan Shares 25-Aug-16 437,968 416,070 $74,503 30-Jan-18 Loan Shares 25-Aug-16 163,083 154,929 $17,428 31-Dec-18 Loan Shares 25-Aug-16 162,761 154,623 $20,575 31-Dec-20 - - - - - - Loan Shares 25-Aug-16 1,111,112 500,000 $14,162 25-Aug-16 1,111,112 1,955,555 Sub-Total 1,874,924 1,225,622 $126,667 1,111,112 1,955,555 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - (i) Fair values are calculated using a black-scholes option pricing model that takes into account the exercise price, the terms of the arrangement, 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 arrangement. (ii) The amount is based on the intrinsic value of the option or right at vesting date. 33 Annual Report 2017 05 10 Equity instrument disclosures relating to Key Management Personnel Options and rights holdings The number of options and rights over ordinary shares in the Company held during the 2017 financial year by the directors of the Company and other Key Management Personnel of the Group, including personally related parties, are set out below. Balance at start of year Granted as compensation Exercised Expired and other changes* Balance at end of the year 2017 2016 1,175,000 600,000 0 0 1,175,000 (600,000) 1,500,000 0 2,675,000 1,175,000 * Includes changes due to staff commencing or ceasing to be Key Management Personnel during the year. Shareholdings The numbers of shares in the Company held during the financial year by each Director of the Company and other Key Management Personnel of the Group, including their related parties, are set out below. Balance at start of year Granted during reporting year as compensation Received during the year on the exercise of options and rights Other changes during the year* Balance at the end of the year Name Non-executive directors Alan Watson Steve Wilson Deborah Beale Gerard Bradley Former non-executive director Steven Skala Executive directors Ian Macoun Andrew Chambers Adrian Whittingham - 20,003,000 - - 683,753 100,000 - - Key Management Personnel Alex Ihlenfeldt 1,458,498 Former Key Management Personnel Alexander Grant 6,228,738 * includes changes resulting from commencing or ceasing to be KMP - - - - - - - - - - - - - - - - - - - - 125,000 125,000 17,000 20,020,000 62,500 50,000 62,500 50,000 (683,753) - 25,883,596 25,983,596 4,647,214 4,647,214 4,447,214 4,447,214 3,231,198 4,689,696 (6,228,738) - Annual Report 2017 34 05 Directors’ Report 11 Loans to Key Management Personnel Details of loans made to Directors of the Company and other Key Management Personnel of the Group, including their related parties, are set out below. (i) Aggregates for Key Management Personnel Balance at start of year $ Loan issued during year $ Other changes during the year (i) $ Interest paid and payable for the year $ Repayments made $ Interest not charged $ Balance at end of year $ Number in Group at end of year 2017 2,391,917 2,000,000 1,563,096 (1,203,220) 42,632 166,670 4,794,426 4 (ii) Individuals with loans above $100,000 during the financial year Balance at start of year $ Loan issued during year $ Other changes during the year (i) $ Interest paid and payable for the year $ Interest not charged $ Repayments made $ Highest indebtedness during the year $ Balance at end of year $ Ian Macoun 1,666,293 500,000 - (1,142,620) 10,658 41,328 1,034,331 1,666,293 Andrew Chambers Adrian Whittingham - - 500,000 781,548 (23,620) 10,658 42,720 1,268,586 1,282,983 500,000 781,548 (23,620) 10,658 42,720 1,268,586 1,282,983 Alex Ihlenfeldt 725,624 500,000 - (13,360) 10,658 39,901 1,222,922 1,227,059 The loans referenced in the above table comprise: loans originally advanced by PIML and were for the purpose of acquiring shares in PIML the New Loans. As part of the PIML Acquisition, shareholders approved the repayment of the original loans with the proceeds of loans reissued by the Company on 25 August 2016, as well as the advance of the New Loans. See pages 27 to 28 for further detail on the terms of the loans. The amounts shown for interest not charged in the tables above represents the difference between the amount paid and payable for the year and the amount of interest that would have been charged on an arms’ length basis. 12 Other transactions with former Key Management Personnel Steven Skala AO Mr Skala was a non-executive director of the Company, is Vice Chairman of Deutsche Bank AG Australia and New Zealand and was a director of Deutsche Australia. During the 2016 financial year, Deutsche Bank AG was a substantial shareholder of the Company through Deutsche Australia, which held an 18.55% interest in the Company’s shares (2015 – 18.55%) until 18 May 2016 and a 9.27% interest from 18 May 2016 to 30 June 2016. On 25 August 2016, Deutsche Australia ceased to be a shareholder. On 26 August 2016, Mr Skala resigned as a director of the Company. Chum Darvall AM Chum Darvall was a non-executive director of PIML until 30 June 2016 and was a vice chairman of Deutsche Bank AG Australia and New Zealand until 1 July 2014. Mr Darvall is a member of Palisade’s advisory board for which he is paid $60,000 per annum plus GST. Mr Darvall was also the chairman of Metrics Credit (until December 2016), which has a distribution agreement with, and pays fees to, the Group on normal commercial terms. 35 Annual Report 2017 05 13 Equity Capital Shares under option/rights Unissued ordinary shares of the Company under option at 30 June 2017 are as follows: Date options granted Expiry date Exercise price of options Number under option 1 July 2015 1 July 2015 TOTAL 30 June 2018 30 June 2020 $0.99 $0.99 2,125,000 2,125,000 4,250,000 Under the terms of the transaction documents in respect of the PIML Acquisition, approved by shareholders on 16 August 2016, in the event that the Company conducts a placement prior to 30 June 2020 in respect of the options set out above, the Sellers are entitled to subscribe in the placement for up to 1,416,667 ordinary shares at the subscription price of the options. The Sellers will be entitled to subscribe in the placement in proportions that are pro-rata to their unvested options. Shares issued under the EOSP As part of the PIML Acquisition, on 25 August 2016, 37,043,917 ordinary shares were issued under the EOSP to the Sellers as consideration for the sale of their equity in PIML. This allocation was approved by shareholders on 16 August 2016. End of Remuneration Report Annual Report 2017 36 05 Directors’ Report Meetings of Board and Board Committees The number of meetings of the Company’s Board and of each Board committee held during the year ended 30 June 2017 and the number of meetings attended by each director were as follows: Meetings of Board and Board Committees Board Audit, Compliance and Risk Committee Remuneration and Nominations Committee Attended Eligible to Attend Attended Eligible to Attend Attended Eligible to Attend 19 18 15 16 17 17 18 19 18 17 17 17 17 19 4 4 4 4 - - 5 - - 4 4 - - 5 3 3 3 3 - - 3 3 - 3 3 - - 3 A Watson I Macoun D Beale G Bradley A Chambers A Whittingham S Wilson AM Committee Membership As at the date of this report, the Company had an Audit, Compliance and Risk Management Committee and a Remuneration and Nominations Committee. Members acting on the committees of the Board are: Audit, Compliance and Risk Committee Remuneration and Nominations Committee G Bradley (Chairman) A Watson (Chairman) D Beale S Wilson AM Company Secretary D Beale G Bradley S Wilson AM During the 2017 financial year, the role of Company Secretary was performed by Mrs Eleanor Padman until 22 June 2017. From 22 June 2017 to the end of the 2017 financial year, the role of Company Secretary was performed by Mr Calvin Kwok. Mr Kwok is also legal counsel of the Company with prior experience at Herbert Smith Freehills, UBS Global Asset Management and Deutsche Bank. Mr Kwok holds a Master of Applied Finance, a Bachelor of Laws and a Bachelor of Commerce. Environmental regulation The Group is not affected by any significant environmental regulation in respect of its operations. 37 Annual Report 2017 05 Insurance of officers The Company has paid a premium for a contract insuring all directors and executive officers of the Company and certain related bodies corporate against all liabilities and expenses arising as a result of work performed in their respective capacities, to the extent permitted by law. The directors have not included in this report details of the nature of the liabilities covered or the amount of the premium paid in respect of the directors and executive officers insurance liability contract as disclosure is prohibited under the terms of the contract. The Company has agreed to indemnify each person who is, or has been a director, officer or agent of the Company and/or of certain of its related bodies corporate against all liabilities to another person (other than the Company or a related body corporate) that may arise from their position as director, officer or agent, except where the liability arises out of conduct involving a lack of good faith. The Company is required to meet the full amount of any such liabilities, including costs and expenses for a period of seven years. No liability has arisen since the end of the previous financial year which the Company would, by operation of the above indemnities, be required to meet. Non-audit services The Company may decide to employ the Auditor on assignments additional to their statutory audit duties. Details of the amounts paid or payable to the Auditor for audit and non-audit services provided during the year are set out below. The Board has considered the position and, in accordance with the advice received from the Audit Compliance and Risk Management Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act. The directors are satisfied that the provision of non-audit services by the Auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act for the following reasons: all non-audit services have been reviewed by the Audit Compliance and Risk Management Committee to ensure they do not impact the impartiality and objectivity of the Auditor none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, including reviewing or auditing the Auditor’s own work, acting in a management or a decision making capacity for the Company, acting as advocate for the Company or jointly sharing economic risk and rewards. Annual Report 2017 38 05 Directors’ Report During the 2017 financial year the following fees were paid or are payable for services provided by the Auditor, its related practices and non-related audit firms: (i) Audit and other assurance services Audit and review of financial statements Other assurance services: Audit of regulatory returns Audit of compliance plan – Responsible entity * Other assurance services Total remuneration for audit and other assurance services (ii) Taxation services Tax services Total remuneration for taxation services (iii) Other services Other services Total remuneration of PricewaterhouseCoopers Australia Total remuneration of auditors 2017 $ 2016 $ 212,491 364,115 20,085 52,178 - 284,754 26,000 26,395 59,765 476,275 42,968 42,968 128,588 128,588 - 327,722 327,722 - 604,863 604,863 * Compliance plan audit charges are on-charged to managed funds to which responsible entity services are provided. Auditor’s independence declaration A copy of the Auditor’s independence declaration as required under section 307C of the Corporations Act is set out on page 40 of the 2017 Annual Report. Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the ‘’rounding off’’ of amounts in the directors’ report. Amounts in this report have been rounded off in accordance with that Instrument to the nearest thousand dollars, or in certain cases, to the nearest dollar. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act. This report is made in accordance with a resolution of directors. A Watson Chairman Pinnacle Investment Management Group Limited Sydney 29 August 2017 39 Annual Report 2017 06 Auditor’s independence declaration 06 Auditor’s Independence Declaration As lead auditor for the audit of Pinnacle Investment Management Group Limited for the year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been: 1. 2. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Pinnacle Investment Management Group Limited and the entities it controlled during the period. Craig Thomason Partner PricewaterhouseCoopers Sydney 29 August 2017 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: 1300 799 615, F: 1300 799 618, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. Annual Report 2017 40 41 Annual Report 2017 07 Financial Statements 07 Pinnacle Investment Management Group Limited ABN 22 100 325 184 Financial Report – 30 June 2017 Consolidated statement of profit or loss Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the consolidated financial statements Directors’ declaration Independent auditor’s report to the members Page 43 44 45 46 47 48 100 101 These financial statements are the consolidated financial statements of the consolidated entity consisting of Pinnacle Investment Management Group Limited and its subsidiaries. The financial statements are presented in Australian currency. Pinnacle Investment Management Group Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office is Level 19, 307 Queen St, Brisbane QLD 4000 and its principal place of business is Level 35, 60 Margaret St, Sydney NSW 2000. A description of the nature of the consolidated entity’s operations and its principal activities is included in the Director’s report, which is not part of these financial statements. These financial statements were authorised for issue by the Directors on 29 August 2017. The Directors have the power to amend and reissue the financial statements. Through the use of the internet, we have ensured that our corporate reporting is timely and complete. All press releases, financial reports and other information are available at the ‘about us’ and investor relations pages on our website: www.pinnacleinvestment.com/ shareholders-investor-centre/ Annual Report 2017 42 Pinnacle Investment Management Group Limited 07 Consolidated statement of profit or loss For the year ended 30 June 2017 Revenue from continuing operations Fair value gains/(losses) on financial assets at fair value through profit or loss Employee benefits expense Incentives expense Professional services expense Property expense Travel and entertainment expense Technology and communications expense Other expenses from operating activities Notes 1 2 2 Share of net profit of jointly controlled entities accounted for using the equity method 21(d) Profit before income tax Income tax expense Profit from continuing operations Profit/(loss) from discontinued operations Profit for the year Profit for the year is attributable to: Owners of Pinnacle Investment Management Group Limited Non-controlling interests 3 23(b) 2017 $’000 10,976 (636) (7,413) (4,087) (1,555) (533) (441) (373) (1,361) 17,598 12,175 - 12,175 1,082 13,257 13,098 159 13,257 2016 $’000 8,384 344 (7,901) (3,851) (1,704) (721) (468) (559) (871) 15,920 8,573 (133) 8,440 (1,248) 7,192 4,537 2,655 7,192 Earnings per share: Cents Cents From continuing operations attributable to owners of Pinnacle Investment Management Group Limited Basic earnings per share Diluted earnings per share Total profit attributable to owners of Pinnacle Investment Management Group Limited Basic earnings per share Diluted earnings per share 5 5 5 5 8.1 7.6 8.9 8.2 5.2 5.2 4.1 4.1 The above consolidated statement of profit or loss should be read in conjunction with the accompanying notes. 43 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Consolidated statement of comprehensive income For the year ended 30 June 2017 Profit for the year Other comprehensive income: Items that may be reclassified to profit or loss Notes 2017 $’000 13,257 2016 $’000 7,192 Changes to the fair value of available-for-sale financial assets 23(c) Total comprehensive income/(loss) for the year Total comprehensive income for the year is attributable to: Owners of Pinnacle Investment Management Group Limited Non-controlling interests Total comprehensive income for the year attributable to owners of Pinnacle Investment Management Group Limited arises from: Continuing operations Discontinued operations 23(b) (495) 12,762 12,603 159 12,762 11,521 1,082 12,603 943 8,135 5,480 2,655 8,135 5,785 (305) 5,480 The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. Annual Report 2017 44 07 Pinnacle Investment Management Group Limited 07 Consolidated statement of financial position For the year ended 30 June 2017 ASSETS Current assets Cash and cash equivalents Trade and other receivables Financial assets at fair value through profit or loss Other current assets Total current assets Non-current assets Notes 2017 $’000 2016 $’000 6 7 8 9 10,945 5,079 31,571 933 48,528 13,544 5,670 10,918 2,661 32,793 Investments accounted for using the equity method 21 32,627 24,528 Property, plant and equipment Intangible assets Available-for-sale financial assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Provisions Other current liabilities Total current liabilities Non-current liabilities Provisions Total non-current liabilities Total liabilities Net assets EQUITY Contributed equity Reserves Accumulated losses Capital and reserves attributable to owners of Pinnacle Investment Management Group Limited Non-controlling interests Total equity 23(c) 11 13 12 13 14 15(a) 15(b) 15(c) 139 10 448 33,224 81,752 5,021 1,000 - 6,021 71 71 6,092 75,660 148,834 (54,383) (18,791) 75,660 - 75,660 135 14 943 25,620 58,413 6,206 979 1,572 8,757 73 73 8,830 49,583 61,946 1,167 (19,982) 43,131 6,452 49,583 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 45 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Consolidated statement of changes in equity For the year ended 30 June 2017 Attributable to owners of Pinnacle Investment Management Group Limited Contributed equity $’000 Reserves $’000 Accumulated losses $’000 Notes Non- controlling interests $’000 Total $’000 Total equity $’000 Balance at 1 July 2015 61,466 (307) (20,486) 40,673 3,797 44,470 Total comprehensive income for the year - 943 4,537 5,480 2,655 8,135 Transactions with owners in their capacity as owners: Share-based payments Dividends paid to shareholders Issue of shares on exercise of options 15(a) 16 Balance at 30 June 2016 Balance at 1 July 2016 Total comprehensive income for the year - - 480 480 61,946 61,946 531 - - 531 1,167 1,167 - 531 (4,033) (4,033) - 480 (4,033) (3,022) - - - - 531 (4,033) 480 (3,022) (19,982) 43,131 6,452 49,583 (19,982) 43,131 6,452 49,583 - (495) 13,098 12,603 159 12,762 Transactions with owners in their capacity as owners: 15(a) 16 - - 575 - - 575 (11,907) (11,907) - - 575 (11,907) Share-based payments Dividends paid to shareholders Acquisition of non-controlling interests 15(c) 65,197 (59,603) Share placement, net of issue costs 14 28,527 - Employee loan arrangements 14, 15(a) (6,836) 3,973 - - - 5,594 (6,611) (1,017) 28,527 (2,863) - - 28,527 (2,863) Balance at 30 June 2017 148,834 (54,383) (18,791) 75,660 - 75,660 86,888 (55,055) (11,907) 19,926 (6,611) 13,315 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. Annual Report 2017 46 07 Pinnacle Investment Management Group Limited 07 Consolidated statement of cash flows For the year ended 30 June 2017 Notes 2017 $’000 2016 $’000 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Dividends and distributions received Interest received Finance and borrowings costs paid Proceeds from sale of financial assets at fair value through profit or loss Payments to purchase financial assets at fair value through profit or loss Net cash (outflow) from operating activities 24 Cash flows from investing activities Payments for property, plant and equipment Payments for intangible assets Proceeds from sale of investments in subsidiaries Payments for investments accounted for using the equity method Loan advances to shareholders Loan repayments from shareholders Loan repayments from related parties Loan advances to related parties Net cash inflow/(outflow) from investing activities Cash flows from financing activities Dividends paid to shareholders Proceeds from issue of shares, net of issue costs Net cash inflow/(outflow) from financing activities Net (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at end of year 6 9,344 (17,539) 11,400 126 (94) 10,652 (31,307) (17,418) (55) - 975 (615) (3,000) 145 1,500 (751) (1,801) (11,907) 28,527 16,620 (2,599) 13,544 10,945 7,325 (16,902) 13,691 198 (197) 1,117 (5,407) (175) (124) (9) 4,000 (3,150) - - 3,474 (366) 3,825 (4,033) 357 (3,676) (26) 13,570 13,544 The consolidated statement of cash flows includes cash flows from continuing and discontinued operations. The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 47 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 Group Results 1 2 3 4 5 Revenue Expenses Income tax Segment information Earnings per share Operating Assets and Liabilities 6 7 8 9 10 11 12 13 Cash and cash equivalents Trade and other receivables Financial assets at fair value through profit or loss Other current assets Net deferred tax assets Trade and other payables Other current liabilities Provisions Capital and Financial Risk Management 14 15 16 17 18 19 Contributed equity Reserves and accumulated losses Dividends Financing arrangements Financial risk management Contingencies and Commitments Group Structure 20 21 22 23 Subsidiaries Investments accounted for using the equity method Parent Entity financial information Discontinued operations Other Information 24 25 26 27 28 29 30 31 Additional cash flow information Related party transactions Key Management Personnel Share-based payments Remuneration of auditors Events occurring after the reporting period Critical accounting estimates and judgements Summary of significant accounting policies Page 49 49 50 51 52 53 53 54 54 54 55 55 55 56 58 60 61 62 69 70 71 74 74 77 78 81 82 84 84 85 86 Annual Report 2017 48 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) Group Results This section provides information regarding the results and performance of the group during the year, including further detail regarding revenue and expenses, income tax, segment reporting and earnings per share. 1 Revenue Services revenue Fund management fees Performance fee income Service charges to entities under joint control Interest income on structured products Other revenue Directors fees Interest received or due Dividends and distributions Other revenue 2 Expenses 2017 $’000 2016 $’000 - - 8,915 - 8,915 44 136 1,840 41 2,061 10,976 914 1,105 5,704 15 7,738 44 189 195 218 646 8,384 Profit before income tax includes the following specific expenses: 2017 $’000 2016 $’000 Finance cost expense Interest and finance charges – corporate Total finance cost expense Rental expense relating to operating leases Minimum lease payments Total rental expense relating to operating leases Depreciation and amortisation expense Depreciation – property, plant and equipment Amortisation – intangible assets Total depreciation and amortisation expense Impairment Impairment expense – loans to related parties and investments accounted for using the equity method Reversal of impairment expense – loans to related parties and investments accounted for using the equity method Total impairment (reversal) / expense 49 Annual Report 2017 94 94 425 425 51 3 54 - - - 97 97 549 549 36 2 38 941 (1,148) (207) Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 3 Income tax (a) Income tax expense Income tax expenses is attributable to: Continuing operations Discontinued operations Total income tax expense Current tax Deferred tax Adjustments for tax in respect of prior periods Deferred income tax expense included in income tax expense comprises: Decrease in deferred tax assets Increase in deferred tax liabilities (b) Numerical reconciliation of income tax expense to prima facie tax payable Profit from continuing operations before income tax Profit/(loss) from discontinued operations before income tax Profit before income tax Tax at the Australian tax rate of 30% (2016: 30%) Tax effect of amounts which are not deductible (taxable) in calculating taxable income: Share of profits of entities under joint control Impairment Non-deductible expenditure Sundry items Adjustments for tax in respect of prior periods Deferred tax assets not recognised Total income tax expense 2017 $’000 2016 $’000 - - - (1,394) 1,394 - - 1,394 - 1,394 2017 $’000 12,175 1,082 13,257 3,977 133 76 209 (2,414) 2,410 213 209 2,228 182 2,410 2016 $’000 8,573 (1,172) 7,401 2,220 (5,279) (4,776) - 202 (272) 282 187 (171) (1,372) (2,258) - 1,372 1,372 - 213 2,254 2,467 209 Annual Report 2017 50 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 3 Income tax (continued) (c) Tax losses not recognised Unused tax losses for which no deferred tax asset has been recognised Potential tax benefit at 30% 2017 $’000 59,607 17,882 2016 $’000 54,553 16,366 A deferred tax asset in relation to tax losses is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as probable that there will be suitable taxable profits against which to recover the losses and from which the future reversal of underlying timing differences can be deducted. The deferred tax assets of the consolidated entity are currently not recognised under this criteria. (d) Tax consolidation legislation Pinnacle Investment Management Group Limited and its wholly-owned Australian controlled entities implemented the tax consolidation legislation from 1 July 2003. Next Financial Limited and its subsidiaries joined the tax consolidated group on 1 April 2009. Pinnacle Investment Management Limited and its subsidiaries joined the tax consolidated Group on 25 August 2016. The accounting policy in relation to this legislation is set out in note 31(f) and further information is provided at note 31(z). 4 Segment information During the period, the group re-assessed its business segmentation, identifying one business segment being the funds management operations of Pinnacle. Previously, two business segments were identified, being Pinnacle and Wilson Group. The Wilson Group segment consisted of specialty funds management through the Priority Funds, holding selected investments as principal, and servicing structured products for clients via Next Financial Limited. The investment management of the Priority Funds was transferred to Spheria Asset Management Pty Limited on 1 July 2016, and the Australian Financial Services License of Next Financial Limited was cancelled effective 8 July 2016. Therefore Wilson Group is no longer identified as a segment and the results of principal investments are included within the broader Group results. The funds management business of Pinnacle is conducted in one geographic location, being Australia. 51 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 5 Earnings per share (a) Basic earnings per share Attributable to the ordinary equity shareholders of the Company From continuing operations From discontinued operations From total operations (b) Diluted earnings per share Attributable to the ordinary equity shareholders of the Company From continuing operations From discontinued operations From total operations (c) Reconciliations of earnings used in calculating earnings per share Basic and diluted earnings per share Profit/(loss) attributable to the ordinary owners of the Company used in calculating basic and diluted earnings per share: From continuing operations From discontinued operation Profit/(loss) used in calculating basic and diluted earnings per share (d) Weighted average number of shares used as the denominator Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Weighted average Treasury stock (see note 14(d)) Weighted average options Weighted average number of ordinary and potential ordinary shares used as the denominator in calculating diluted earnings per share (e) Information concerning the classification of securities 2017 Cents 2016 Cents 8.1 0.8 8.9 5.2 (1.1) 4.1 2017 Cents 2016 Cents 7.6 0.5 8.1 5.2 (1.1) 4.1 2017 Cents 2016 Cents 12,016 1,082 13,098 5,785 (1,248) 4,537 2017 Number 2016 Number 147,598,707 110,580,932 9,191,633 - 2,226,861 1,129,086 159,017,201 111,710,018 Options granted to employees under the employee share schemes are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent to which they are dilutive. The options have not been included in the determination of basic earnings per share. Annual Report 2017 52 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) Operating assets and liabilities This section provides information regarding the assets and liabilities of the business and includes more detailed breakdowns of individual balance sheet items. 6 Cash and cash equivalents Available cash at bank and on hand Fixed-term deposits Other committed cash at bank and on hand (a) Risk exposure 2017 $’000 2016 $’000 10,634 13,238 310 1 305 1 10,945 13,544 The Group’s exposure to interest rate risk is discussed in note 18. The maximum exposure to credit risk at the end of each reporting period is the carrying amount of each class of cash and cash equivalents mentioned above. (b) Fixed term and at call deposits Fixed-term and at-call deposits bear floating interest rates between 1.45% and 2.43% (2016: 1.7% and 3.25%). At-call deposits have an average maturity of 30 days. Fixed-term deposits have a maturity ranging from 90 days to 1 year. 7 Trade and other receivables Trade receivables Income receivable Other receivables Prepayments 2017 $’000 2,200 2,413 338 128 5,079 2016 $’000 3,235 476 1,696 263 5,670 (a) Effective interest rates and credit risk All of the Group’s receivables are classified as current and are non-interest bearing. There is no significant concentration of credit risk with relation to current receivables. Refer to note 18 for more information on the financial risk management policy of the Group. (b) Fair value and credit risk Information about the Group’s exposure to credit risk and about the methods and assumptions used in determining fair value is provided in note 18(b) and 18(d). 53 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 8 Financial assets at fair value through profit or loss Australian listed securities Other unlisted equity securities Derivative financial assets Unlisted unit trusts 2017 $’000 12,551 364 1,208 17,448 31,571 2016 $’000 285 231 - 10,402 10,918 Risk exposure and fair value measurements Information about the Group’s exposure to price risk and the methods and assumptions used in determining fair value is provided in note 18. 9 Other current assets Loans to entities under joint control Capitalised transaction costs 2017 $’000 933 - 933 2016 $’000 1,766 895 2,661 Loans to entities under joint control includes accumulated equity accounted losses where the associated equity investment value is less than zero as a result of accumulated losses being greater than the cost of the investment. As outlined in note 30(a) loans to entities under joint control are assessed at least annually for possible indicators of impairment. Where indicators of impairment exist, the recoverability of these loans is determined. This relies on assumptions regarding the future profitability of the jointly controlled entities and their ability to service the loans. 10 Net deferred tax assets Deferred tax assets (a) Deferred tax liabilities (b) Net deferred tax assets (a) Deferred tax assets The deferred tax asset balance comprises temporary differences attributable to: Unrealised loss on fair value assets Other Total deferred tax assets Set-off of deferred tax liabilities pursuant to set-off provisions Net deferred tax assets 2017 $’000 15 (15) - 2016 $’000 425 (425) - 2017 $’000 2016 $’000 15 - 15 (15) - 260 165 425 (425) - Annual Report 2017 54 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 10 Net deferred tax assets (continued) (a) Deferred tax assets (continued) A deferred tax asset in relation to tax losses is regarded as recoverable and therefore recognised only when, on the basis of all available evidence, it can be regarded as probable that there will be suitable taxable profits against which to recover the losses and from which the future reversal of underlying timing differences can be deducted. The deferred tax assets of the consolidated entity are currently not recognised under this criteria – refer note 3(c). (b) Deferred tax liabilities The deferred tax liabilities balance comprises temporary differences attributable to: Financial assets at fair value through profit or loss Receivables Total deferred tax liabilities 11 Trade and other payables Trade payables Accrued expenses Accrued bonuses Other payables 12 Other current liabilities Payables to disposal group 13 Provisions Current Employee benefits – annual leave and long service leave Non-Current Employee benefits – long service leave 55 Annual Report 2017 2017 $’000 2016 $’000 11 4 15 2017 $’000 1,097 1,569 2,145 210 5,021 2017 $’000 - - 425 - 425 2016 $’000 319 2,168 3,229 490 6,206 2016 $’000 1,572 1,572 2017 $’000 2016 $’000 1,000 1,000 71 71 979 979 73 73 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 13 Provisions (continued) (a) Movements in provisions Movements in each class of provision during the financial year, are set out below: Current Carrying amount at the start of the year Additional provisions recognised Carrying amount at end of year Non-Current Carrying amount at the start of the year Amounts utilised during the year Carrying amount at end of year Employee Benefits $’000 979 21 1,000 73 (2) 71 Capital and financial risk management This section provides information about the capital structure of the consolidated entity and dividends paid to shareholders during the year, discusses the Group’s exposure to various financial risks and how these risks are managed, and outlines the Group’s contingent assets and liabilities and its financial commitments. 14 Contributed equity (a) Share capital Ordinary shares: Fully paid contributed equity – Company Total contributed equity (b) Movements in ordinary share capital 2017 Shares 2016 Shares 2017 $’000 2016 $’000 149,818,238 111,131,752 149,818,238 111,131,752 148,834 148,834 61,946 61,946 Date Details 1 July 2015 Opening balance Exercise of employee options – Nov 2015 grant Transfer from share-based payments reserve 30 June 2016 Balance Issue of ordinary shares as consideration for acquisition of non- controlling interests of Pinnacle Investment Management Limited (refer note 15(c)) Share placement, net of issue costs Treasury stock at year-end 30 June 2017 Balance Number of shares Issue price 110,531,752 600,000 $0.60 - 111,131,752 37,043,917 $1.76 12,500,000 $2.40 (10,857,431) 149,818,238 $’000 61,466 357 123 61,946 65,197 28,527 (6,836) 148,834 Annual Report 2017 56 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 14 Contributed equity (continued) (c) Ordinary shares Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy is entitled to one vote and upon a poll each share is entitled to one vote. Ordinary shares have no par value and the Company does not have a limited amount of authorised capital. (d) Treasury stock Treasury stock are shares in Pinnacle Investment Management Group Limited that are subject to share mortgage under employee loans used for the purposes of acquiring interests in the Company (refer note 15(c)). The value ascribed to treasury stock is the value of the loans secured by share mortgage at period end. (e) Employee share plans Information relating to the Pinnacle Investment Management Group Employee Option Share Plan, including details of options issued, exercised and lapsed during the financial year and options outstanding at the end of the financial year, is set out in note 27. (f) Capital risk management The Group’s objective when managing capital is to safeguard its ability to continue as a going concern, so it can continue to provide returns for shareholders, benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets. The Group monitors capital on the basis of both Group liquidity and capital and liquidity ratios required under various licenses held by subsidiaries. There have been no material instances of non-compliance with externally imposed capital requirements in the current period. 57 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 15 Reserves and accumulated losses (a) Reserves Share-based payments reserve Transactions with non-controlling interests reserve Available-for-sale financial assets reserve Movements: Share-based payments reserve Balance at 1 July Share-based payments expense Employee loans subject to share-based payments arrangements (refer note 15(c)) Balance at 30 June Transactions with non-controlling interests reserve Balance at 1 July Acquisition of non-controlling interests of Pinnacle Investment Management Limited (refer note 15(c)) Balance at 30 June Available-for-sale financial assets reserve Balance at 1 July Changes in fair value of available-for-sale financial assets (refer note 23) Balance at 30 June The share-based payments reserve is used to recognise: • the grant date fair value of options issued to employees but not exercised; • the grant date fair value of shares issued to employees; • the issue of shares held by employee share plans to employees; and 2017 $’000 4,772 (59,603) 448 (54,383) 224 575 3,973 4,772 - (59,603) (59,603) 943 (495) 448 2016 $’000 224 - 943 1,167 (307) 531 - 224 - - - - 943 943 • the grant date fair value of reissued loans under the Pinnacle Long-term Employee Incentive Plan. The available-for-sale financial assets reserve is used to recognise changes in the fair value of available-for-sale financial assets. The transactions with non-controlling interests reserve is used to recognise the excess of the consideration paid to acquire non-controlling interests above the carrying value of the non-controlling interest at time of acquisition. Annual Report 2017 58 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 15 Reserves and accumulated losses (continued) (b) Accumulated losses Movements in accumulated losses were as follows: Balance at 1 July Profit/(loss) for the year attributable to owners of Pinnacle Investment Management Group Limited Dividends paid to shareholders Balance at 30 June (c) Acquisition of non-controlling interest 2017 $’000 2016 $’000 (19,982) (20,486) 13,098 (11,907) (18,791) 4,537 (4,033) (19,982) Following approval by shareholders of the Company at an extraordinary general meeting held on 16 August 2016, on 25 August 2016 the Company acquired the remaining 24.99% interest in its subsidiary Pinnacle Investment Management Limited that it did not already own from Executive shareholders (“Vendors”). As a consequence of the transaction the Company: • issued 37,043,917 shares in the Company to the Vendors in exchange for their shareholdings in Pinnacle Investment Management Limited; • provided loans to the Vendors to assist them to acquire shares in the Company from Deutsche Australia (refer note 25(d)(i)); • re-issued existing loans in respect of shares in Pinnacle Investment Management Limited that were being exchanged for the shares in the Company (refer note 25(d)(ii)); • took security in respect of the various loans described above by way of Share Mortgage; • made a bonus payment to facilitate the repayment of a loan of $1,119,000 on behalf of Mr Ian Macoun in accordance with contractual arrangements entered into in 2006 (refer note 25(d)(iii)); • appointed Mr Ian Macoun as Managing Director, Mr Adrian Whittingham and Mr Andrew Chambers as Executive Directors, and Mr Gerard Bradley and Ms Deborah Beale as Non-executive Directors; and • changed the name of the Company from Wilson Group Limited to Pinnacle Investment Management Group Limited. The share price of the Company at the date of acquisition was $1.76, giving a fair value of the 37,043,917 shares issued of $65,197,000. The carrying value of the non-controlling interest to the Group at the date of acquisition was $6,611,000. The difference between the fair value of the consideration paid and the carrying value of the non- controlling interest of $58,586,000, plus applicable transaction costs of $1,017,000, has been recognised in equity in the Transactions with Non-Controlling Interests Reserve (refer note 15(a)). Loans provided to the Vendors, and loans re-issued to the Vendors represent share based payments arrangements and are accounted for in share based payments reserve (refer note 15 (b) and note 27). Shares issued to the Vendors that are subject to share mortgage are regarded as treasury stock (refer note 14(a) and (d)). Further detail of the transaction was provided in the notice of meeting dated 13 July 2016 provided for the extraordinary general meeting regarding the purchase of non-controlling interests of Pinnacle Investment Management Limited. 59 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 16 Dividends (a) Ordinary shares 2017 $’000 2016 $’000 Special dividend of 5.0 cents per fully paid ordinary share paid on 9 September 2016 (2016: 2.25 cents paid on 18 September 2015) Fully franked based on tax paid @ 30.0% 5,557 2,487 Final ordinary dividend for the year ended 30 June 2016 of 1.9 cents per fully paid ordinary share paid on 3 October 2016 (2016 – $nil) Fully franked based on tax paid @ 30.0% 2,815 - Interim dividend for the year ended 30 June 2017 of 2.2 cents per fully paid share paid on 17 March 2017 (2016 – 1.4 cents paid on 31 March 2016) Fully franked based on tax paid @ 30.0% Total dividends paid 3,535 11,907 1,546 4,033 (b) Dividends not recognised at the end of the reporting period Since year end the directors have declared the payment of a final dividend of 4.8 cents per fully paid ordinary share fully franked based on tax paid at 30%. The aggregate amount of the dividend expected to be paid on 6 October 2017 but not recognised as a liability at year end, is $7,712,432 (2016 – 1.9 cent ordinary dividend and 5.0 cent special dividend totalling $8,372,000 not recognised as a liability at year-end). (c) Franked dividends The franked portions of final dividends recommended after 30 June 2017 will be franked out of existing franking credits. Franking credits available for subsequent financial years based on a tax rate of 30% (2016: 30%) 2017 $’000 2016 $’000 26,361 26,578 The above amounts represent the balance of the franking account as at the end of the reporting period, adjusted for: (a) franking credits that will arise from the payment of the amount of the provision for income tax; (b) franking debits that will arise from the payment of dividends recognised as a liability at the reporting date; and (c) franking credits that will arise from the receipt of dividends recognised as receivables at the end of each reporting date. The consolidated amounts include franking credits that would be available to the Company if distributable profits of subsidiaries were paid as dividends. Annual Report 2017 60 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 17 Current liabilities – Financing arrangements (a) Secured liabilities and assets pledged as security The Group has a bank facility subject to annual review which is secured by a general security deed over the assets of a subsidiary of the Group, Ariano Pty Ltd, and guarantees provided by the Company and other Group entities (excluding entities within the Pinnacle Investment Management Limited and Next Financial Limited groups). The facility’s next anniversary date is 30 June 2018. Details of the facility are as follows: Bank guarantee (amount used at balance date – $5,050,000) Corporate credit card (amount used at balance date – $28,000) 2017 $’000 5,500 100 5,600 2016 $’000 5,500 100 5,600 The bank facility is supported by a negative pledge that states that (subject to certain exceptions) the Group will not provide any security over its assets and that the Group’s consolidated tangible net assets must not be less than 60% of its total tangible assets. Ongoing compliance with covenants is reviewed on a regular basis and compliance has been maintained during the period. Assets pledged as security The carrying amounts of assets pledged as security at balance date in relation to the corporate loan facilities are set out below: Current Cash and cash equivalents Receivables Other current assets Total current assets pledged as security Non-current Other non-current assets Plant and equipment Total non-current assets pledged as security Total assets pledged as security (b) Interest rate risk exposure Information about the Group’s exposure to interest rate changes are provided in note 18. 2017 $’000 2016 $’000 23 493 - 516 - 57 57 573 78 420 1,119 1,617 176 70 246 1,863 61 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 18 Financial risk management The Group’s activities expose it to a variety of financial risks: market risk (including interest rate risk and price risk), credit risk and liquidity risk. A core focus of the Group’s overall risk management program focuses on the volatility of the financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. Risk governance is managed through the Board’s Audit, Compliance and Risk Management Committee, which provides direct oversight of the Group’s risk management framework and performance. The Board approves written principles for risk management covering areas such as principal investments, including the use of appropriate hedging strategies, and cash flow management. The management of risk throughout the Group is achieved through the procedures, policies, people competencies and risk monitoring functions that form part of the overall Group risk management framework. This is achieved through regular updates in the form of targeted risk management analysis and reporting functions that provide an assessment of the Group’s risk exposure levels and performance to benchmarks / tolerance limits. The Group holds the following financial instruments: Financial assets Cash and cash equivalents Trade and other receivables Financial assets at fair value through profit or loss Available for sale financial assets Loans to entities under joint control (current) Financial liabilities Trade and other payables Other current liabilities (a) Market risk (i) Foreign exchange risk 2017 $’000 2016 $’000 10,945 4,951 31,571 448 933 13,544 5,407 10,918 943 1,766 48,848 32,578 5,021 - 5,021 6,206 1,572 7,778 The Group is not materially exposed to foreign exchange risk. (ii) Price risk Through its business transactions and investments, the Group is exposed to equity securities price risk. This risk is the potential for losses in Group earnings as a result of adverse market movements and arises from investments held by the Group that are classified on the consolidated statement of financial position as financial assets at fair value through profit or loss. The Group manages the price impact of market risk through an established risk management framework. This includes the procedures, policies and functions undertaken by the business to manage market risk within tolerances set by the Board. Equity derivatives are used as an active risk mitigation function and the Group currently utilises such derivatives to reduce market risk of its equity exposures. The performance of the Group’s direct equity exposures and market risk mitigants are monitored on a regular basis. The majority of the Group’s equity investments are Australian listed equity securities and unlisted unit trusts. Annual Report 2017 62 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 18 Financial risk management (continued) (a) Market risk (continued) Sensitivity The table below summarises the impact of increases/decreases in equity securities prices on the Group’s after tax profit for the year and on equity. The analysis is based on the assumption that equity securities prices had increased/ decreased by +/- 15% (2016: +/- 15%) with all other variables held constant and all the Group’s equity investments included in financial assets at fair value through profit and loss moved in correlation with the index. Impact on after-tax profit Impact on equity 2017 $’000 2016 $’000 2017 $’000 2016 $’000 Group +2,034/-2,034 +1,637/-1,637 +2,034/-2,034 +1,637/-1,637 (iii) Interest rate risk The Group’s main interest rate risk arises from holding cash and cash equivalents. During 2017 and 2016, the Group’s cash and cash equivalents were denominated in Australian dollars. The Group reviews its interest rate exposure as part of the Group’s cash flow management and takes into consideration the yields, duration and alternative financing options as part of the renewal of existing positions. As at the reporting date, the Group had the following cash and cash equivalents: Cash and cash equivalents Exposure to cash flow interest rate risk 30 June 2017 30 June 2016 Weighted average interest rate % 1.15% Weighted average interest rate % 1.96% Balance $’000 10,945 10,945 Balance $’000 13,544 13,544 The Group’s loans to entities under joint control are subject to fixed interest rates and carried at amortised cost. They are therefore not subject to interest rate risk as defined in AASB 7. Sensitivity At 30 June 2017, if interest rates had changed by -/+100 basis points from the year end rates with all other variables held constant, after tax profit and equity for the year would have been $77,000 lower/higher (2016: change of 100 basis points: $95,000 lower/higher). 63 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 18 Financial risk management (continued) (b) Credit risk Credit risk arises from cash and cash equivalents, financial assets at fair value through profit or loss, loans to entities under joint control, loans to shareholders and outstanding receivables. Credit risk is managed on a Group basis. Credit risk relates to the risk of a client or counterparty defaulting on their financial obligations resulting in a loss to the Group. These obligations primarily relate to distribution and management fees. The Group does not carry material trade receivable exposure to either a single counterparty or a group of counterparties. For banks and financial institutions, only independently rated parties with a minimum rating of BBB+ / A-1 are accepted as counterparties. As at the reporting date, the Group held the following credit risks: Cash and cash equivalents Trade and other receivables Financial assets at fair value through profit or loss Available-for-sale financial assets Loans to entities under joint control (current) 2017 $’000 10,945 4,951 31,571 448 933 2016 $’000 13,544 5,407 10,918 943 1,766 48,848 32,578 The Group records trade receivables and loans in the following classifications: Neither past due nor impaired trade receivables and loans are those that are within their relevant contractual payment terms and there is no evidence to suggest that the client or counterparty will fail to meet their obligations. Past due but not impaired trade receivables and loans are those that have fallen outside of their contractual settlement terms. However there remains an expectation of full recovery based on the value of the underlying equities and the financial position of the client or counterparty. Past due and impaired trade receivables and loans are those that have fallen outside of the prescribed settlement terms and/or there is evidence to suggest that the client or counterparty will fail to meet their obligations. Refer to note 31(k) for more information on the trade receivables policy of the Group. Trade and other receivables Neither past due nor impaired Past due but not impaired Loans Neither past due nor impaired Total trade and loan receivables 2017 $’000 2016 $’000 4,951 - 4,951 933 5,884 5,394 13 5,407 1,766 7,173 Impaired trade and loan receivables As at 30 June 2017 receivables of the Group with a nominal value of $nil (2016: $nil) were impaired. Annual Report 2017 64 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 18 Financial risk management (continued) (b) Credit risk (continued) Past Due but not impaired As of 30 June 2017, trade receivables of $nil (2016: $13,000) were past due but not impaired. These relate to customers for whom there is no recent history of default. The ageing of these receivables is as follows: 1 to 3 months Credit quality 2017 $’000 - - 2016 $’000 13 13 The credit quality of financial assets can be assessed by reference to external credit ratings. These credit ratings are only available for cash assets, Australian listed debt securities and non-exchange traded derivative financial assets: Cash at bank and short-term bank deposits AA- Australian listed debt securities AA- BBB (c) Liquidity risk 2017 $’000 2016 $’000 10,945 10,945 13,544 13,544 51 - 51 135 150 285 The Group manages liquidity risk by continuously monitoring actual and forecast cash flows. Due to the dynamic nature of the underlying businesses, the Group aims at maintaining flexibility in funding through available cash and readily liquefiable investments in the Group’s Principal Investments portfolio. At 30 June 2017 the Group has $42.5 million in available cash and Principal Investments. Subsidiaries of the Company, Pinnacle Funds Services Limited, Pinnacle Investment Management Limited and Pinnacle RE Services Limited hold Australian Financial Services Licences and hold amounts in liquid assets in accordance with relevant ASIC regulations on the basis of expected cash flows. This is generally carried out at a local level in the operating companies of the Group in accordance with practice and limits set by the Group. In addition, the Group’s liquidity management policy involves projecting cash flows and considering the level of liquid assets necessary to meet these, monitoring liquidity ratios against internal and external regulatory requirements and maintaining debt financing plans. 65 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 18 Financial risk management (continued) (c) Liquidity risk (continued) Maturities of financial liabilities The table below analyses the Group’s financial liabilities. The financial liabilities are broken down into maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Contractual maturities of financial liabilities At 30 June 2017 Trade and other payables Total financial liabilities At 30 June 2016 Trade and other payables Other current liabilities Total financial liabilities (d) Fair value measurements 1 to 30 days $’000 30 days to 90 days $’000 90 days to 1 year $’000 Total contractual cash flows $’000 Carrying amount $’000 2,826 2,826 3,399 - 3,399 2,195 2,195 2,807 1,572 4,379 - - - - - 5,021 5,021 6,206 1,572 7,778 5,021 5,021 6,206 1,572 7,778 The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. AASB 13 Fair Value Measurement requires disclosure of fair value measurements by level of the following fair value measurement hierarchy: (a) quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1); (b) inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (level 2); and (c) inputs for the asset or liability that are not based on observable market data (unobservable inputs) (level 3). Annual Report 2017 66 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 18 Financial risk management (continued) (c) Fair value measurements (continued) The following table presents the Group’s assets measured and recognised at fair value: 30 June 2017 Assets Australian listed equity securities Australian listed debt securities Other unlisted equity securities Unlisted unit trusts Derivative financial instruments – futures Contingent consideration from disposal of discontinued operation Total assets No liabilities were held at fair value at 30 June 2017. 30 June 2016 Assets Australian listed debt securities Other unlisted equity securities Unlisted unit trusts Contingent consideration from disposal of discontinued operation Total assets No liabilities were held at fair value at 30 June 2016. Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 12,500 51 - 17,448 1,208 - 31,207 - - - - - - - - - 364 - - 448 812 12,500 51 364 17,448 1,208 448 32,019 Level 1 $’000 Level 2 $’000 Level 3 $’000 Total $’000 285 - 10,402 - 10,687 - - - - - - 231 - 943 1,174 285 231 10,402 943 11,861 There were no transfers between levels for recurring fair value measurements during the current year. The Group’s policy is to recognise transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period. The fair value of Australian listed securities and exchange traded options is based on quoted market prices at the end of the reporting period. The quoted price used for Australian listed securities and exchange traded options held by the Group is the current bid price. The quoted market price used for unlisted unit trusts is the current exit unit price. These instruments are included in level 1. The fair value of unlisted equity securities and contingent consideration from disposal of discontinued operation is determined using valuation techniques. The Group uses a variety of methods and makes assumptions that are based on market conditions existing at the end of each reporting period. In the circumstances where a valuation technique for these instruments is based on significant unobservable inputs, such instruments are included in level 3. The carrying amounts of cash and cash equivalents, trade receivables and payables, loans to entities under joint control and loans to shareholders are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities for disclosure purposes is estimated by discounting the future contractual cash flows at the current market interest rate that is available to the Group for similar financial instruments. 67 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 18 Financial risk management (continued) (c) Fair value measurements (continued) Fair value measurements using significant unobservable inputs (level 3) Level 3 items include unlisted equity securities held by the Group, and contingent consideration from disposal of discontinued operations. The following table presents the changes in level 3 instruments for the years ended 30 June 2017 and 30 June 2016: Contingent consideration $’000 Unlisted equity securities $’000 - - 943 943 - (495) 448 358 (127) - 231 133 - 364 Opening balance 1 July 2015 Unrealised losses recognised in fair value gains/(losses) on financial assets at fair value through profit or loss Fair value adjustments recognised in other comprehensive income Closing balance 30 June 2016 Unrealised gains recognised in fair value gains/(losses) on financial assets at fair value through profit or loss Fair value adjustments recognised in other comprehensive income Closing balance 30 June 2017 (i) Transfer between levels 1 and 3 There were no transfers between levels 1 and 3 during the year. (ii) Valuation process Unlisted equities valued under Level 3 are investments in unlisted companies. Where possible, the investments are valued based on the most recent transaction involving the securities of the company. Where there is no recent information or the information is otherwise unavailable, the value is derived from calculations based on the value per security of the underlying net tangible assets of the investee company. Contingent consideration valued under Level 3 relates to the disposal of discontinued operations (refer note 23(c)). The fair value of contingent consideration from disposal of the Securities business is determined based on forecasts of profits, taxable income and deferred tax asset utilisation using the latest financial information available for the business at balance date. Annual Report 2017 68 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 19 Contingencies and Commitments (a) Contingent assets and liabilities (i) Guarantees The Group has provided guarantees in relation to Australian Financial Services License Net Tangible Asset obligations (via bank guarantee) in respect of: (i) Pinnacle Funds Services Limited – $5,000,000 (2016: $5,000,000) (ii) Pinnacle RE Services Limited – $50,000 (2016: $50,000) The unused bank guarantee facility available at balance date was $450,000 (30 June 2016: $450,000). The Group has also provided guarantees in relation to its corporate credit card facility (facility limit of $100,000 of which $72,000 was unused at balance date). These guarantees may give rise to liabilities in the Company if the related entities do not meet their obligations that are subject to the guarantees. No material losses are anticipated in respect of any of the above contingent liabilities. (ii) Disposal of Securities Business The group has contingent liabilities and assets in respect to its historical ownership of the Wilson HTM Securities business prior to its disposal on 1 July 2015 (refer note 23). (iii) Acquisition of non-controlling interests of Pinnacle Investment Management Limited The group has contingent liabilities in respect to warranties provided to the vendors of the non-controlling interests of Pinnacle Investment Management Limited, acquired on 25 August 2016 (refer note 15(c)). (b) Commitments (i) Capital commitments There were no capital expenditure commitments at balance sheet date. (ii) Lease commitments: Group as lessee Commitments in relation to leases contracted for at the reporting date but not recognised as liabilities are payable as follows: Within one year Later than one year but not later than five years Non-cancellable operating leases 2017 $’000 622 1,449 2,071 2,071 2016 $’000 598 2,070 2,668 2,668 69 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 19 Contingencies and Commitments (continued) (c) Other expenditure commitments Commitments contracted for at reporting date but not recognised as liabilities are payable as follows: Within one year Later than one year and not later than five years (d) Other commitments 2017 $’000 117 29 146 2016 $’000 123 145 268 The Group has previously entered into agreements whereby it has agreed to advance sufficient funds to entities under joint control to cover their operating expenses until such time as the entity becomes profitable on a monthly basis and is generating positive cash flows. Further information in relation to these balances is provided in note 25. Group Structure This section provides information regarding the group’s subsidiaries and associates, and detail regarding discontinued operations. 20 Subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following significant subsidiaries in accordance with the accounting policy described in note 31(b). The country of incorporation of all subsidiaries is also their principal place of business. Name of entity Pinnacle Investment Management Limited Pinnacle Funds Services Limited Pinnacle Services Administration Pty Ltd Pinnacle RE Services Limited Priority Funds Management Pty Ltd Priority Investment Management Pty Ltd Ariano Pty Ltd Next Financial Holdings Pty Ltd PNI Option Plan Managers Pty Ltd Plato Global Shares Income Fund (Managed Risk) Country of incorporation Class of security Equity holding 2017 % 2016 % Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Ordinary share Ordinary share Ordinary share Ordinary share Ordinary share Ordinary share Ordinary share Ordinary share Ordinary share Units 100 100 100 100 100 100 100 100 100 - 75 75 75 75 100 100 100 100 100 100 Annual Report 2017 70 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 21 Investments accounted for using the equity method (a) Carrying amounts The Group holds investments in entities under joint control that undertake funds management activities. Information relating to these entities under joint control is set out below. Name of company Unlisted Principal Activity Ownership interest Carrying Value 2017 % 2016 % 2017 $’000 2016 $’000 Plato Investment Management Limited Funds Management Palisade Investment Partners Limited Funds Management Hyperion Holdings Limited Foray Enterprises Pty Limited Funds Management Funds Management Solaris Investment Management Ltd Funds Management Spheria Asset Management Pty Ltd Funds Management Antipodes Partners Holdings Pty Ltd Funds Management Two Trees Investment Management Pty Ltd Funds Management 47.94 35.15 49.99 42.00 40.00 40.00 23.57 43.96 49.92 35.71 49.99 1,680 3,606 5,533 566 2,279 4,239 40.00 14,362 12,741 40.00 40.00 23.57 - 3,763 1,067 2,616 - 2,786 632 1,285 - 32,627 24,528 Each of the above entities under joint control is incorporated and has their principal place of business in Australia and are accounted for using the equity method. 71 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 21 Investments accounted for using the equity method (continued) (b) Summarised financial information for joint ventures Hyperion Holdings Limited Foray Enterprises Pty Limited Solaris Investment Management Limited 2017 $000 2016 $000 2017 $000 2016 $000 Summarised statement of financial position Total current assets Total non-current assets Total current liabilities Total non-current liabilities Net Assets Group share in % 11,761 2,661 (3,385) (139) 10,898 49.99% 9,041 3,205 (3,808) (187) 8,251 49.99% Reconciliation to carrying amounts: Opening net assets 1 July Total comprehensive income Dividends paid Closing net assets Group’s share of net assets Excess consideration over share of net assets Carrying amount 8,251 15,208 8,316 20,454 (12,561) (20,519) 10,898 5,448 85 5,533 8,251 4,125 114 4,239 37,293 20,454 - Summarised statement of comprehensive income Revenue Profit for the year Other comprehensive income 30,577 15,208 - Total comprehensive income 15,208 20,454 2017 $000 9,961 648 2016 $000 7,182 707 (3,025) (2,801) (166) 7,418 40.0% 4,957 5,619 (131) 4,957 40.0% 4,426 2,981 10,432 3,014 (4,728) (44) 8,674 40.0% 5,768 5,143 (2,237) (3,158) (2,450) 8,674 3,470 9,271 12,741 18,018 5,143 - 5,143 7,417 2,967 796 3,763 15,410 5,619 - 5,619 4,957 1,983 803 2,786 11,877 2,962 - 2,962 13,514 3,379 (6,428) (138) 10,327 42.0% 8,674 7,630 (5,977) 10,327 4,337 10,026 14,363 23,279 7,630 - 7,630 Dividends received from joint venture entities (6,280) (10,259) (2,400) (900) (1,280) (980) Individually immaterial jointly controlled entities In addition to the interests disclosed above, the Group also has interests in a number of individually immaterial entities under joint control that are accounted for using the equity method. Aggregate carrying amount of individually immaterial joint ventures Aggregate amounts of the Group’s share of: Profit for the year Other comprehensive income Total comprehensive income 2017 $’000 8,968 2016 $’000 7,548 4,944 3,702 - - 4,944 3,702 Annual Report 2017 72 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 21 Investments accounted for using the equity method (continued) (c) Movements in carrying amounts 2017 $’000 2016 $’000 24,528 1,900 17,598 - (11,399) 32,627 2017 $’000 51,073 (25,653) 25,420 (7,822) 17,598 2017 $’000 27,540 4,354 31,894 12,557 176 12,733 19,161 19,408 2,140 15,920 556 (13,496) 24,528 2016 $’000 38,070 (15,184) 22,886 (6,966) 15,920 2016 $’000 18,398 3,255 21,653 9,057 576 9,633 12,020 Carrying amount at the beginning of the financial year Purchase of shares in entities under joint control Share of profit after income tax Recovery of impairment Dividends received/receivable Carrying amount at the end of the financial year (d) Share of entities revenue, expenses and results Revenues Expenses Profit before income tax Income tax expense Profit after income tax (e) Summary of entities under joint control Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets 73 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 22 Parent Entity financial information (a) Summary financial information The individual financial statements for the Parent Entity show the following aggregate amounts: Statement of financial position Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets Shareholders’ equity Contributed equity Reserves Accumulated losses Total equity Profit/(loss) for the year Total comprehensive income/(loss) 2017 $’000 2016 $’000 54,286 14,353 68,639 28,174 - 28,174 40,465 148,834 (64,570) (43,799) 40,465 6,904 6,409 36,559 13,777 50,336 25,768 1 25,769 24,567 61,946 1,417 (38,796) 24,567 12,794 13,737 (b) Guarantees entered into by the Parent Entity Details of guarantees entered into by the Group are provided at note 19. 23 Discontinued Operations (a) Description On 15 May 2015 the Company entered into transaction documents with Craigs Investment Partners, Deutsche Australia and staff representatives of the Securities business for the purchase of 100% of the issued shares of entities comprising the Securities business. On 26 June 2015 shareholders approved the sale, with completion of the transaction occurring on 1 July 2015. Under the terms of the sale agreement the Company: • transferred its shareholdings in the subsidiaries comprising its Securities business to the purchasers; • received cash consideration of $4,000,000, and provided vendor finance with a fair value of $868,000; • may receive a future profit share for the first two years post completion (i.e. to 30 June 2017) of 50% of the profit before tax of the Securities business exceeding $3,000,000, but capped at $1,000,000 each year*; • may receive additional value for deferred tax assets if the amount utilised by the Securities business exceeds $350,000 during the first three years post completion; • has contingent liabilities relating to its historical ownership of the business which will run off over time; • committed to pay certain staff related costs, run-off insurances and other items. *This was not achieved in either FY16 or FY17. Annual Report 2017 74 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 23 Discontinued Operations (continued) (a) Description (continued) Following completion of the transaction, the Company and the purchasers further agreed to provide various services to each other to ensure a smooth transition of the ownership of business. Further detail of the transaction was provided in the notice of meeting provided for the extraordinary general meeting dated 20 May 2015. (b) Financial performance and cash flows The profit/(loss) for the current and prior corresponding period related to the discontinued operations were as follows: Other income* Expenses Results from operating activities Loss on disposal of discontinued operation Profit/(loss) before tax from discontinued operations Income tax expense Profit/(loss) from discontinued operation attributable to owners of Pinnacle Investment Management Group Limited Changes in fair value of contingent consideration Total comprehensive income/(loss) attributable to discontinued operation 2017 $’000 1,590 (508) 1,082 - 1,082 - 1,082 (495) 587 2016 $’000 - (1,134) (1,134) (38) (1,172) (76) (1,248) 943 (305) * Other income includes contingent consideration received during the year of $1,284,000 (2016 – $nil) – refer note 23(c). The cash-flows for the current and prior corresponding period related to the discontinued operations were as follows: Net cash (outflow) from operating activities Net cash inflow from investing activities Net cash inflow from financing activities Net cash flow for the year 2017 $’000 (140) 975 - 835 2016 $’000 (161) 4,000 - 3,839 75 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 23 Discontinued Operations (continued) (c) Details of the disposal The carrying amounts of assets and liabilities as at the date of disposal (1 July 2016) were: Current Assets Cash Trade and other receivables Other current assets Non-Current Assets Deferred tax Assets Total Assets Current Liabilities Trade and other payables Provisions Other current liabilities Non-Current Liabilities Provisions Other non-current liabilities Total Liabilities Net assets Consideration received / receivable in cash and cash equivalents Contingent consideration Other consideration Disposal consideration Carrying value of net assets disposed of Gain on disposal before changes in fair value of contingent consideration Changes in fair value of contingent consideration recognised in other comprehensive income Gain/(loss) on disposal $’000 10,246 2,987 1,634 14,867 2,715 17,582 (5,299) (3,563) (104) (8,966) (605) (1,868) 11,439 6,143 2016 $’000 5,237 943 868 7,048 (6,143) 905 (943) (38) 2017 $’000 1,284 - - 1,284 - 1,284 (495) 789 The agreement for the disposal included items of contingent consideration relating to a profit-share over the first two years post disposal, and utilisation of deferred tax assets in the first 3 years following disposal. During the year ended 30 June 2017 $1,284,000 was received from the purchaser in relation to the contingent consideration. At 30 June 2017 the fair value of remaining contingent consideration has been assessed at $448,000 (2016: $943,000). This carrying value has been included in available-for-sale financial assets in the statement of financial position. Annual Report 2017 76 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) Other information This section contains information on other items that require disclosure under Australian Accounting Standards or other regulatory pronouncements, and includes details of the critical accounting estimates and judgements and significant accounting policies adopted by the Group. 24 Additional cash flow information (a) Reconciliation to cash at the end of the year For the purposes of the consolidated statement of cash flows, cash and cash equivalents include cash at bank and on hand, deposits at call and cash held in trust net of outstanding bank overdrafts. Cash and cash equivalents at the end of the reporting period as shown in the consolidated statement of cash flows can be reconciled to the related items in the consolidated statement of financial position as follows: Cash and cash equivalents Balances per statement of cash flows (b) Reconciliation of net cash flow from operating activities to profit Profit for the year Depreciation and amortisation Impairment Equity settled share-based payments Net losses/(gains) on financial assets at fair value through profit or loss Discontinued operations Change in operating assets and liabilities, net of effects from acquisition and disposal of businesses: Trade and other receivables Investments accounted for using the equity method Financial assets Trade and other payables Provisions Net cash (outflow) from operating activities 2017 $’000 10,945 10,945 2017 $’000 13,257 212 - 574 372 (851) (685) (7,557) (21,025) (1,734) 19 (17,418) 2016 $’000 13,544 13,544 2016 $’000 7,192 195 360 531 (343) - (1,446) (2,795) (4,291) 418 4 (175) The reconciliation of net cash flow from operating activities to profit/(loss) includes both continuing and discontinued operations. 77 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 25 Related party transactions (a) Parent Entity The Parent Entity of the Group is Pinnacle Investment Management Group Limited (refer note 22). (b) Subsidiaries and jointly controlled entities Interests in subsidiaries are set out in note 20. Interests in jointly controlled entities are set out in note 21. Details of the disposal of a controlled entity are set out in note 23. Details of service charges to jointly controlled entities are provided in note 1. Details of dividend payments from entities under joint control are provided in note 21. (c) Key Management Personnel Disclosure relating to Key Management Personnel is set out in note 26. Disclosure relating to share-based payments is set out in note 27. (d) Transactions with other related parties The following transactions occurred with related parties: (i) Issue of new loans approved at extraordinary general meeting on 16 August 2016 As a result of negotiations concluded in May 2016 and approved by shareholders at an extraordinary general meeting held on 16 August 2016, on 25 August 2016 the Company provided senior executives of its subsidiary Pinnacle Investment Management Limited (PIML) with loans totalling $3,000,002, the proceeds of which were used to partially fund the acquisition of shares from Deutsche Australia. This included loans of $500,000 each to Mr Ian Macoun, Mr Alex Ihlenfeldt, Mr Adrian Whittingham and Mr Andrew Chambers who are key management personnel of the Group. The key terms of the loans are as follows: (a) The loans have a five year term, are limited recourse and are interest bearing; (b) They are secured by way of a share mortgage (see further detail below); (c) Repayment will occur at the earlier of the end of the five year term, the date on which any shares are sold or within six months of cessation of employment; (d) Events of default include cessation of employment, insolvency or any representation or warranty or statement of the borrower being incorrect or misleading. As security for the loans, the Company has obtained a first ranking mortgage over 1,111,111 shares held by each executive. In the occasion of any event of default under the loans, the Company can exercise its rights to enforce its security including by the appointment of a receiver. The balance of each loan at 30 June 2017 including capitalised interest was $510,658. Annual Report 2017 78 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 25 Related party transactions (continued) (d) Transactions with other related parties (continued) (ii) Re-issue of existing loans approved at extraordinary general meeting on 16 August 2016 As a consequence of the transaction to acquire non-controlling interests of PIML, and as approved by shareholders at an extraordinary general meeting held on 16 August 2016, existing loans amounting to $4,303,485 issued by PIML in prior years to its senior executives were re-issued by the Company on 25 August 2016 (refer note 15(c)). This included existing loans to Mr Ian Macoun, Mr Alex Ihlenfeldt, Mr Adrian Whittingham and Mr Andrew Chambers who are key management personnel of the Group. The loans date from 2009, 2011, 2012 and 2015 and were used to assist the executives to acquire equity in PIML. The loans are interest free and repayable on termination of employment or when the underlying equity is sold, whichever event occurs earlier. The re-issued loans are also secured by share mortgages with limited recourse to the shares. The value of re-issued loans for each of the key management personnel and repayments made during the year were as follows: Key Management Personnel Ian Macoun Alex Ihlenfeldt Adrian Whittingham Andrew Chambers Value of re- issued loans $ Repayments made $ 30 June 2017 Loan balance $ 547,293 725,622 781,547 781,547 (23,620) (13,360) (23,620) (23,620) 523,673 712,262 757,927 757,927 (iii) Repayment of Ian Macoun loan approved at extraordinary general meeting on 16 August 2016 In 2006, and as part of the arms’ length commercial negotiations in relation to the establishment of PIML, the WIG Group advanced Mr Ian Macoun a loan of $1,119,000 to acquire shares in PIML and agreed to pay, at the time of repayment of the loan (being the time of sale of the PIML Shares by Mr Macoun) a bonus to Mr Macoun with a net value equal to the outstanding balance of the loan. The loan was unsecured and interest free. (iv) Funds managed by subsidiaries Management fees and performance fees received from investments in unlisted unit trusts managed by subsidiaries 2017 $ 2016 $ - 2,018,969 All transactions were made on normal commercial terms and conditions and at market rates. A subsidiary of the Company, Priority Investment Management Pty Ltd ceased to be the investment manager of the Wilson Group Priority Funds on 1 July 2016 and was replaced by Spheria Asset Management Pty Limited, an entity under joint control. As a result, the group earned no management fees or performance fees in relation to managed funds managed by subsidiaries during the current year. At 30 June 2017 management fees of $nil (30 June 2016: $84,685) and performance fees of $nil (30 June 2016: $1,104,778) were included in trade and other receivables. 79 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 25 Related party transactions (continued) (d) Transactions with other related parties (continued) (v) Deutsche Australia Deutsche Australia was a substantial shareholder of the Company until 25 August 2016. Part of its shareholding was sold to the vendors of the non-controlling interests of Pinnacle Investment Management Limited at the time of completion of the transaction (refer note 15(c) and 25(d)(i)). Mr Steven Skala AO was a non-executive director of the Company until his resignation on 26 August 2016 and is a director of Deutsche Australia Limited and Vice Chairman Australia and New Zealand of Deutsche Bank AG. Deutsche Australia participated in the purchase of the Wilsons Advisory business from the Company on 1 July 2015 (refer note 23(a)). (e) Loans to/from related parties Loans with entities under joint control Balance at 1 July Loans advanced Loans repaid Impairment Balance at 30 June (f) Investments in funds managed by subsidiaries Balance at 1 July Additions Revaluation Other changes* Balance at 30 June 2017 $ 2016 $ 1,766,002 4,148,478 751,010 300,000 (1,500,000) (3,000,000) (84,746) 317,524 932,266 1,766,002 2017 $ 2016 $ 7,420,971 4,769,470 - - 2,000,000 651,501 (7,420,971) - - 7,420,971 * Includes changes resulting from subsidiaries ceasing to be the investment manager of managed funds – refer note 25(d)(iv) (g) Guarantees The Group has provided guarantees to subsidiaries as described in note 19. Annual Report 2017 80 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 26 Key Management Personnel (a) Key Management Personnel compensation Short-term employee benefits Post-employment benefits Long-term benefits Termination benefits Share-based payments 2017 $ 2016 $ 3,200,273 2,377,657 117,901 24,680 - 342,841 122,358 4,420 85,000 89,661 3,685,695 2,679,096 * The increase in KMP compensation arises due to the increase in the number of individuals defined as Key Management Personnel by virtue of Board appointments made during the year. Certain Key Management Personnel are party to the long-term employee incentive arrangement described in note 31(r)(vii). During the year, loans provided under the arrangement were re-issued as a result of the acquisition of the non-controlling interest in Pinnacle Investment Management Limited (PIML) from executives (refer note 15(c)). At 30 June 2017, the balance of loans issued to Key Management Personnel was $2,751,790 (2016: $1,272,917) relating to 2,985,272 shares issued in the Company (2016: 5,160 shares in PIML). Detailed remuneration disclosures for Key Management Personnel are provided in the Remuneration Report. (b) Loans to Key Management Personnel Details of loans made to Directors of Pinnacle Investment Management Group Limited and other Key Management Personnel of the Group, including their related parties, are set out below. (i) Aggregates for Key Management Personnel Balance at the start of the year $ Interest paid and payable for the year $ Loans advanced during the year $ Loan repayments received $ Other Changes* $ Balance at the end of the year $ Interest not charged $ Number in Group at the end of the year 2017 2016 2,391,917 42,632 2,000,000 (1,203,220) 1,563,096 4,794,426 166,670 2,391,917 - - - - 2,391,917 135,144 4 2 *includes changes due to commencing or ceasing to be Key Management Personnel during the year. The amounts shown for interest not charged in the table above represents the difference between the amount paid and payable for the year and the amount of interest that would have been charged on an arm’s length basis. 81 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 27 Share-based payments (a) Pinnacle Investment Management Group Employee Option Share Plan The establishment of the Pinnacle Investment Management Group Employee Option Share Plan (EOSP) was approved by the Board during the 2007 financial year. The EOSP is designed to provide long-term incentives for staff (including executive and non-executive directors) to deliver long-term shareholder returns. Under the plan, participants are granted options which only vest if certain service conditions are met. Participation in the plan is at the Board’s discretion and no individual has a contractual right to participate in the plan or to receive any guaranteed benefits. Set out below are summaries of options granted under the plan. Exercise price Balance at start of the year Granted during the year Exercised during the year Forfeited during the year Balance at end of the year Vested and exercisable at end of the year Grant date Expiry date 2017 1 July 2016 (A) 30 June 2018 $0.986 2,125,000 1 July 2016 (B) 30 June 2020 $0.986 2,125,000 Weighted average exercise price 4,250,000 $0.99 - - - - - - - - - - - - 2,125,000 2,125,000 4,250,000 $0.99 - - - - Exercise price Balance at start of the year Granted during the year Exercised during the year Forfeited during the year Balance at end of the year Vested and exercisable at end of the year Grant date Expiry date 2016 26 Nov 2014 30 June 2016 $0.595 600,000 - 600,000 1 July 2016 (A) 30 June 2018 $0.986 1 July 2016 (B) 30 June 2020 $0.986 - 2,125,000 - 2,125,000 - - 600,000 4,250,000 600,000 Weighted average exercise price $0.60 $0.99 $0.60 - - - - - - 2,125,000 2,125,000 4,250,000 $0.99 - - - - - No options were exercised during the current year. In the prior year, the weighted average share price at the date of exercise of options exercised during the year was $1.47. The weighted average remaining contractual life of share options outstanding at the end of the year was 2.0 years (2016: 2.6 years). Under the plan, participants are granted options which vest if the employees are still employed by the Group at the end of the vesting period. The Board may elect to waive the continuing service condition (for example in cases of redundancy) and allow options to continue. Options granted under the plan carry no dividend or voting rights. The plan is consolidated into the Group’s financial statements in accordance with note 31(b)(ii). Annual Report 2017 82 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 27 Share-based payments (continued) (a) Pinnacle Investment Management Group Employee Option Share Plan (continued) Fair value of interests granted – 1 July 2016 (A) Options were granted for no consideration and vest based on fulfilment of specified service conditions. Vested options are exercisable for a period of 6 months after vesting. The fair value of options were determined using a Black-Scholes pricing model taking into account the exercise price, the term of the option, 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 instrument. • Fair value at grant date: $0.30 per option • Exercise price: $0.986 • Grant date: 1 July 2016 • Vesting date: 1 January 2018 • Share price at grant date: $1.20 • Expected price volatility of the Company’s shares: 31% • Expected dividend yield: 3.63% • Risk-free interest rate: 2.03% Fair value of interests granted – 1 July 2016 (B) Options were granted for no consideration and vest based on fulfilment of specified service conditions. Vested options are exercisable for a period of 6 months after vesting. The fair value of options were determined using a Black-Scholes pricing model taking into account the exercise price, the term of the option, 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 instrument. • Fair value at grant date: $0.32 per option • Exercise price: $0.986 • Grant date: 1 July 2016 • Vesting date: 1 January 2020 • Share price at grant date: $1.20 • Expected price volatility of the Company’s shares: 31% • Expected dividend yield: 3.63% • Risk-free interest rate: 2.31% (b) Pinnacle Long-term Employee Incentive Plan Information regarding the Pinnacle Long-term Employee Incentive Plan is provided in notes 31(r)(vii) and 26(a). (c) Expenses arising from share-based payment transactions Total expenses arising from share-based payment transactions recognised during the period as part of incentive expenses were as follows: Pinnacle Investment Management Group Employee Option Share Plan Pinnacle Long-term Employee Incentive Plan 2017 $’000 403 172 575 2016 $’000 468 63 531 83 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 28 Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the Company and its related practices: (i) Audit and other assurance services Audit and review of financial statements Other assurance services: Audit of regulatory returns Audit of compliance plan – Responsible entity * Other assurance services Total remuneration for audit and other assurance services (ii) Taxation services Tax services Total remuneration for taxation services (iii) Other services Other services Total remuneration of PricewaterhouseCoopers Australia Total remuneration of auditors 2017 $ 2016 $ 212,491 364,115 20,085 52,178 - 26,000 26,395 59,765 284,754 476,275 42,968 42,968 128,588 128,588 - 327,722 327,722 - 604,863 604,863 * Compliance plan audit charges are on-charged to managed funds to which responsible entity services are provided. 29 Events occurring after the reporting period No matter or circumstance has occurred subsequent to year end that has significantly affected, or may significantly affect, the operations of the Group, the results of those operations or the state of affairs of the Group or economic entity in subsequent financial years. Annual Report 2017 84 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 30 Critical accounting estimates and judgements Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the Group and that are believed to be reasonable under the circumstances. (a) Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future in the preparation of the financial statements. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. (i) Estimated impairment of assets The Group tests at least annually whether assets have suffered any impairment, in accordance with the accounting policy stated in note 31(i). Where required, the recoverable amounts of assets have been determined based on value-in-use calculations. These calculations require the use of assumptions. (ii) Income taxes The Group can recognise deferred tax assets relating to carried forward tax losses and deductible timing differences to the extent that it is considered probable that there will be future taxable profits relating to the same taxation authority against which the carried forward tax losses and deductible timing differences will be utilised. As at the reporting date the deferred tax assets of the consolidated entity have not been recognised on the basis that their recovery is not considered probable. (b) Critical judgements in applying the Group’s accounting policies (i) Fair value of financial assets The fair value of financial assets that are not traded in an active market is determined by using valuation techniques. The Group uses its judgement to select a variety of methods and make assumptions that are mainly based on market conditions existing at each reporting date (refer to note 18(d) for further details). (ii) Entities subject to joint control Entities subject to joint control are not considered controlled entities for the purposes of AASB 10 on the basis that all key strategic and operational decisions require a unanimous vote by the Board of directors (refer to note 31(b) for further details). (iii) Share-based payments The Group measures equity settled share-based payment transactions by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by management using option pricing models that use estimates and assumptions. Management exercises judgement in preparing the valuations and these may affect the value of any share-based payments recorded in the financial statements (refer to notes 31(r)(iv) and 27 for further details). (iv) Contingencies The Group has made certain judgements and estimates relating to the contingent assets and liabilities outlined in note 19(a). These assumptions are based on all existing information available at the signing date of the Financial Report. 85 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies The principal accounting policies adopted in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. The financial statements are for the consolidated entity consisting of Pinnacle Investment Management Group Limited and its subsidiaries (“the Group”) – refer to note 20. (a) Basis of preparation These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board and the Corporations Act 2001. The Group is a for profit entity for the purpose of preparing the financial statements. (i) Compliance with IFRS The consolidated financial statements of the Group also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). (ii) New and amended standards adopted by the Group A number of new or amended standards became applicable for the current reporting period, however, the Group did not have to change its accounting policies or make retrospective adjustments as a result of adopting these standards. (iii) Early adoption of standards The Group has elected not to apply any of the pronouncements before their operative date in the annual reporting period beginning 1 July 2016. (iv) Historical cost convention These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available for sale financial assets, and financial assets (including derivative instruments) at fair value through profit or loss. (v) Critical accounting estimates and judgements The preparation of financial statements requires the use of accounting estimates. It also requires management to exercise its judgement in 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 30. (vi) Adjustment of prior period balances Prior period balances have been adjusted where changes in the business have resulted in additional or altered disclosures in the current period. (b) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Pinnacle Investment Management Group Limited as at 30 June 2017 and the results of all subsidiaries for the year then ended. Pinnacle Investment Management Group Limited and its subsidiaries together are referred to in these financial statements as the “Group” or the “consolidated entity”. Subsidiaries are all entities (including structured 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. Annual Report 2017 86 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (b) Principles of consolidation (continued) Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are deconsolidated from the date that control ceases. The acquisition method of accounting is used to account for business combinations by the Group (refer to note 31(h)). Intercompany transactions, balances and unrealised gains on transactions between Group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of financial position, respectively. (ii) Employee share trust The Group has formed a trust to administer the Group’s employee share plans. Where the substance of the relationship is that control rests with the Group, the employee share trust is consolidated and any shares held by the trust are disclosed as treasury stock and deducted from contributed equity (refer to note 14 and note 27(a)). (iii) Entities under joint control Entities under joint control are all entities over which the Group has a shareholding of between 20% and 49.99% of the voting rights, which have been assessed to meet the classification of joint venture under AASB 11 Joint arrangements, due to the requirement for unanimous decision making in relation to a number of strategic matters contained in the shareholders agreements. Further, the Group does not have direct rights to the assets, and obligations for the liabilities of the entities. Investments in entities under joint control are accounted for in the consolidated financial statements using the equity method of accounting, after initially being recognised at cost. The Group’s investment in entities under joint control includes goodwill (net of any accumulated impairment loss) identified on acquisition (refer to note 21). The Group’s share of the post-acquisition profits or losses and other comprehensive income of entities under joint control is recognised in the consolidated statement of comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends received or receivable from entities under joint control are recognised as a reduction in the carrying amount of the investment in the consolidated statement of financial position. When the Group’s share of losses in an entity under joint control equals or exceeds its interest in the entity under joint control, including any other unsecured long-term receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the entity under joint control. Unrealised gains on transactions between the Group and entities under joint control are eliminated to the extent of the Group’s interest in the entities under joint control. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of entities under joint control have been changed where necessary to ensure consistency with the policies adopted by the Group. The carrying amounts of investments in entities under joint control is tested for impairment in accordance with the policy described in note 31(i). 87 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (b) Principles of consolidation (continued) (iv) Changes in ownership interests The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognised in a separate transactions with non-controlling interests reserve within equity attributable to owners of Pinnacle Investment Management Group Limited. When the Group ceases to consolidate or equity account for an investment because of a loss of control, joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognised in the consolidated statement of comprehensive income. This fair value becomes the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, entity under joint venture or financial asset. In addition, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to the consolidated statement of comprehensive income. If the ownership interest in an entity under joint control is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognised in other comprehensive income is reclassified to profit or loss where appropriate. (c) Segment reporting Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. (d) Foreign currency translation (i) Functional and presentation currency Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is also the functional currency of all entities in the Group. (ii) Transactions and balances Foreign currency transactions are translated into the functional currency 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 year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of comprehensive income. (e) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable net of the amount of Goods and Services Tax (GST). The Group recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of the Group’s activities as described below. The Group bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement. Annual Report 2017 88 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (e) Revenue recognition (continued) Revenue is recognised for the major business activities as follows: (i) Management fees Management fee income is recognised when the Group has performed the related service and the amount of revenue can be reliably measured. (ii) Performance fees Performance fee income is recognised when the Group has met the relevant performance benchmarks and the performance fees have crystallised. (iii) Interest income Interest income is recognised using the effective interest method. When a receivable is impaired, the Group reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at the original effective interest rate of the loan, and continues unwinding the discount as interest income. Interest income on impaired loans is recognised using the original effective interest rate. (iv) Dividends Dividends are recognised as revenue when the right to receive payment is established. This applies even if they are paid out of pre-acquisition profits. However, the investment may need to be tested for impairment as a consequence (refer to note 31(l)). (v) Service charges to entities under joint control Service charges to entities under joint control are recognised when the relevant services are performed. (f) Income tax The income tax expense or benefit for the period is the tax payable or receivable on the current period’s taxable income based on the national income tax rate adjusted by changes in deferred tax assets and liabilities attributable to temporary differences and to unused tax losses. The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the end of the reporting period in the countries where the Company’s subsidiaries and entities under joint control operate and generate taxable income. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions where appropriate on the basis of amounts expected to be paid to the tax authorities. Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognised if they arise from the initial recognition of goodwill. Deferred income tax is also not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the end of the reporting period and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. 89 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (f) Income tax (continued) Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the Company is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. (i) Tax consolidation legislation Pinnacle Investment Management Group Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. As a consequence, these entities are taxed as a single entity and the deferred tax assets and liabilities of these entities are set off in the consolidated statement of financial position. The head entity, Pinnacle Investment Management Group Limited, and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a standalone taxpayer in its own right. In addition to its own current and deferred amounts, Pinnacle Investment Management Group Limited also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. Details about the tax funding agreement are disclosed in note 31(z)(ii). (g) Leases Leases in which a significant portion of the risks and rewards of ownership are not transferred to the Group as lessee are classified as operating leases (note 19). Payments made under operating leases (net of any incentives received from the lessor) are charged to the consolidated statement of comprehensive income on a straight-line basis over the period of the lease. (h) Business combinations The acquisition method of accounting is used to account for all business combinations, including business combinations involving entities or businesses under common control, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisition of a subsidiary comprises the fair values of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred also includes the fair value of any contingent consideration arrangement and the fair value of any pre-existing equity interest in the subsidiary. Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are, with limited exceptions, measured initially at their fair values at the acquisition date. On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s net identifiable assets. Annual Report 2017 90 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (h) Business combinations (continued) The excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the Group’s share of the net identifiable assets acquired is recorded as goodwill. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised directly in the consolidated statement of comprehensive income as a bargain purchase. Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the Group’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions. Contingent consideration for a business combination is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in the consolidated statement of comprehensive income. (i) Impairment of assets Assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered an impairment are reviewed for possible reversal of the impairment at the end of each reporting period. (j) Cash and cash equivalents For the purpose of presentation in the consolidated statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, and 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. Cash held in trust for clients is reported as other cash and cash equivalents and is included within trade payables. (k) Trade receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables are generally due 30 days from the date of recognition. They are presented as current assets unless collection is not expected for more than 12 months after the reporting date. Collectibility of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used 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 re-organisation and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is 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. 91 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (k) Trade receivables (continued) The amount of the impairment loss is recognised in the consolidated statement of comprehensive income within other expenses. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in the consolidated statement of comprehensive income. (l) Investments and other financial assets Classification The Group classifies its investments in the following categories: financial assets at fair value through profit or loss, loans and receivables, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. The classification of investments is determined at initial recognition. (i) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category if acquired principally for the purpose of selling in the short-term. Derivatives are classified as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are expected to be settled within 12 months, otherwise they are classified as non-current. (ii) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They are included in current assets, except for those with maturities greater than 12 months after the reporting period, which are classified as non-current assets. Loans and receivables are included in trade and other receivables (note 7) and other current assets (note 9). (iii) Available-for-sale financial assets Financial assets that are not classified into any of the other categories are included in the available-for-sale category. Recognition and derecognition Regular purchases and sales of financial assets are recognised on trade-date, being the date on which the Group commits to purchase or sell the asset. At initial recognition financial assets are initially recognised at fair value plus transaction costs for all financial assets not carried at fair value through profit or loss. Financial assets carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the consolidated statement of comprehensive income. 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. Measurement Loans and receivables are subsequently carried at amortised cost using the effective interest method. Available for sale financial assets and financial assets at fair value through profit and loss are subsequently carried at fair value. Gains or losses arising from changes in fair value are recognised as follows: For financial assets at fair value through profit and loss – in fair value gains/(losses) on financial assets at fair value through profit and loss; For other monetary and non-monetary securities classified as available for sale – in other comprehensive income. Annual Report 2017 92 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (l) Investments and other financial assets (continued) Fair value The fair values of quoted investments are based on current bid prices. Units in managed funds are valued at the pre-distribution exit price at year end. If the market for a financial asset is not active (and for unlisted securities) the Group establishes fair value by using valuation techniques. These include reference to recent arm’s length transactions or to other instruments that are substantially the same, discounted cash flow analysis and option pricing models making maximum use of market inputs and relying as little as possible on entity-specific inputs. Impairment The Group assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Assets carried at amortised cost If there is objective evidence of impairment for any of the Group’s financial assets carried at amortised cost, the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the loss recognised in the consolidated statement of comprehensive income. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised (such as an improvement in the debtor’s credit rating), the reversal of the previously recognised impairment loss is recognised in the consolidated statement of comprehensive income. Assets classified as available-for-sale If there is objective evidence of impairment for available-for-sale financial assets, the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses on equity instruments that were recognised in profit or loss are not reversed through profit or loss in a subsequent period. If the fair value of a debt instrument classified as available-for-sale increases in a subsequent period and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through profit or loss. (m) Derivative financial instruments – futures and options Derivative instruments 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. Derivative instruments include equity futures, interest rate futures and equity options. 93 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (n) Property, plant and equipment All property, plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. Depreciation is calculated using the straight-line method to allocate their cost, net of their residual values, over their estimated useful lives or in the case of leasehold improvements, the shorter lease term as follows: Plant and equipment Furniture and fittings Leasehold improvements 2–5 years 2–5 years 3–10 years The assets residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount (note 31(i)). Gains and losses on disposal are determined by comparing proceeds with carrying amount. These are included in the consolidated statement of comprehensive income. (o) Intangible assets IT development and software Costs incurred in developing products or systems and acquiring software and licences that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to software and systems. The costs capitalised are external direct costs of materials and services, and where applicable the direct payroll and payroll related costs of employees’ time spent on the project. Amortisation is calculated on a straight-line basis over periods generally ranging from 3 to 5 years from the point at which the asset is ready to use. IT development costs include only those costs directly attributable to the development phase that can be reliably measured and are only recognised following completion of technical feasibility and where the Group has an intention and ability to use the asset. (p) Trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method. Annual Report 2017 94 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (q) Provisions Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of each reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense. (r) Employee benefits (i) Short-term obligations Liabilities for wages and salaries, including non-monetary benefits, and annual leave expected to be settled within 12 months after the end of each reporting period in which the employees render the related service are recognised in respect of employees’ services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables. (ii) Other long-term employee benefit obligations The liabilities for long service leave and annual leave which are not expected to be settled wholly within 12 months after the end of the reporting period in which the employees render the related service are recognised in the provision for employee benefits. They are measured as the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the end of the reporting period on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Remeasurement as a result of experience adjustments and changes in assumption are recognised in the consolidated statement of comprehensive income. The obligations are presented as current liabilities in the consolidated statement of financial position if the Group does not have an unconditional right to defer settlement for at least 12 months after the reporting period, regardless of when the actual settlement is expected to occur. (iii) Retirement benefit obligations Contributions to defined contribution funds are recognised as an employee benefits expense as they become payable. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in the future payments is available. The Group has no further payment obligations once the contributions have been paid. 95 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (r) Employee benefits (continued) (iv) Share-based payments Share-based compensation benefits are provided to certain employees via the Pinnacle Investment Management Group Employee Option Share Plan and where applicable, WHIG long-term incentive share plan and Pinnacle long- term employee incentive agreements. Information relating to these schemes is set out in note 27. The fair value of options and rights granted under the plans is recognised as an employee benefits expense with a corresponding increase in share based payments reserve. The total amount to be expensed is determined by reference to the fair value of the options and rights granted, which includes any market performance conditions and the impact of any non-vesting conditions but excludes the impact of any service and non-market performance vesting conditions. Non-market performance vesting conditions are included in assumptions about the number of options that are expected to vest. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. At the end of each period, the entity revises its estimates of the number of options and rights that are expected to vest based on the non-market vesting conditions. It recognises the impact of the revision to original estimates, if any, in the consolidated statement of comprehensive income, with a corresponding adjustment to the share based payment reserve. The plan is administered by AET Structured Finance Services Pty Ltd, see note 31(b)(ii). When the options are exercised, the trust transfers the appropriate amount of shares to the employee. The proceeds received net of any directly attributable transaction costs are credited directly to equity. The fair value at grant date of the plans is determined using option pricing models that take into account the exercise price, the vesting period, the vesting and performance criteria, the impact of dilution, the share price at grant date, expected price volatility of the underlying share, the expected dividend yield, and the risk-free interest rate for the vesting period. (v) Profit-sharing and bonus plans The Group recognises a liability and an expense for bonuses and profit-sharing based on a formula that takes into consideration the profit attributable to the Company’s shareholders after certain adjustments. The Group recognises a provision where contractually obliged or where there is a past practice that has created a constructive obligation. (vi) Termination benefits Termination benefits may be payable when employment is terminated otherwise than in accordance with the employment contract, or when an employee accepts voluntary redundancy in exchange for these benefits. The group recognises termination benefits at the earlier of the following dates: (a) when the group can no longer withdraw the offer of those benefits; and (b) when the entity recognises costs for a restructuring that is within the scope of AASB 137 and involves the payment of terminations benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value. Annual Report 2017 96 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (r) Employee benefits (continued) (vii) Long-term employee incentive agreements The Group has a long-term employee incentive scheme which enables certain employees of the Group, under full recourse and limited recourse loan arrangements, to acquire PNI shares. The scheme is designed to align the interests of the employees with those of shareholders. The fair value of the limited recourse loan arrangements under the long-term employee incentive scheme is recognised as an employee benefits expense with a corresponding increase in share-based payment reserve. The total amount to be expensed is determined by reference to the fair value of the limited recourse loan arrangements, which includes any market performance conditions and the impact of any non-vesting conditions but excludes the impact of any service and non-market performance vesting conditions. The total expense is recognised over the vesting period, which is the period over which all of the specified vesting conditions are to be satisfied. The inflows and outflows associated with these arrangements are accounted for on a net basis, as the arrangements are expected to be settled net. Certain entities under joint control have similar incentive schemes and Pinnacle may provide cash funding to certain employees of these entities in order for the employees to acquire shares in the entities. Pinnacle accounts for these contributions as investments in entities under joint control. Remuneration of the employees is recorded in the entities under joint control and Pinnacle records its share of the profits or losses of these entities upon equity accounting. A liability is recorded to the extent that Pinnacle has a net obligation to the employee of a jointly-controlled entity under the employee contract. (s) Contributed equity Ordinary shares are classified as equity (note 14). 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. (t) Dividends Provision is made for the amount of any dividend declared being appropriately authorised and no longer at the discretion of the Group, on or before the end of the reporting period but not distributed at the end of the reporting period. (u) Earnings per share (i) Basic earnings per share Basic earnings after tax per share is calculated by dividing: the profit attributable to owners of the Company, excluding any costs of servicing equity other than ordinary shares by; the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year and excluding treasury shares. (ii) Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares; and the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares. 97 Annual Report 2017 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (v) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included with other receivables or payables in the consolidated statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to, the taxation authority, are presented as operating cash flows. (w) Disposal group held for sale and discontinued operations The assets and liabilities of the disposal group are classified as held-for-sale and stated at the lower of carrying amount and fair value less costs of disposal if their carrying amount is to be recovered principally through a sale transaction rather than continuing use. Assets of the disposal group classified as held-for-sale are presented separately from other assets in the consolidated statement of financial position. The liabilities of the disposal group classified as held-for-sale are presented separately from other liabilities in the consolidated statement of financial position. A discontinued operation is a component of the Group’s business that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single coordinated plan to dispose of such line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately in the consolidated statement of comprehensive income. (x) Rounding of amounts The Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Director’s Reports) Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the financial statements. Amounts in the financial statements have been rounded off in accordance with that instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. (y) New accounting standards and interpretations not yet adopted Certain new accounting standards and interpretations have been published which are not mandatory for 30 June 2017 reporting periods and have not been early adopted by the Group. The Group’s assessment of the impact of these new standards and interpretations is set out below. (i) AASB 9 Financial Instruments (effective from 1 January 2018) AASB 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities and introduces new rules for hedge accounting. In December 2015, the AASB made further changes to the classification and measurement rules and also introduced a new impairment model. These latest amendments now complete the new financial instruments standard. The standard is not applicable until 1 January 2018 but is available for early adoption. Annual Report 2017 98 07 Pinnacle Investment Management Group Limited 07 Notes to the consolidated financial statements 30 June 2017 (continued) 31 Summary of significant accounting policies (continued) (y) New accounting standards and interpretations not yet adopted (continued) There will be no impact on the Group’s accounting for financial liabilities, as the new requirements only affect the accounting for financial liabilities that are designated at fair value through profit or loss and the Group does not have any such liabilities. The new hedging rules will also have no impact as the Group does not undertake hedge accounting. The new impairment model is an expected credit loss (ECL) model which may result in the earlier recognition of credit losses. The Group does not expect its impairment provisions to be significantly impacted by the new rules. The Group may, however, be required to make additional disclosures in the financial statements. The Group does not intend to adopt the standard ahead of the mandatory date. (ii) AASB 15 Revenue from Contracts with Customers (effective from 1 January 2018) The AASB has issued a new standard for the recognition of revenue. This will replace AASB 118 which covers contracts for goods and services and AASB 111 which covers construction contracts. The new standard is based on the principal that revenue is recognised when control of a good or services transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. The standard permits a modified retrospective approach for the adoption. Under this approach entities will recognise transitional adjustments in retained earnings on the date of initial application (e.g. 1 January 2018), i.e. without re-stating the comparative period. They will only need to apply the new rules to contracts that are not completed as of the date of initial application. Management does not anticipate the new rules having a material impact on when its revenues are recognised, however, further disclosure may be required. The Group does not intend to adopt the standard before its effective date. There are no other standards that are not yet effective that are expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions. (z) Parent Entity financial information The financial information for the Parent Entity, Pinnacle Investment Management Group Limited, disclosed in note 22 has been prepared on the same basis as the consolidated financial statements, except as set out below. (i) Investments in subsidiaries Investments in subsidiaries are accounted for at cost in the financial statements of Pinnacle Investment Management Group Limited. (ii) Tax consolidation legislation Pinnacle Investment Management Group Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation – refer note 31(f)(i). The entities have entered into a tax funding agreement under which the wholly-owned entities fully compensate Pinnacle Investment Management Group Limited for any current tax payable assumed and are compensated by Pinnacle Investment Management Group Limited for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to Pinnacle Investment Management Group Limited under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements. The amounts receivable/payable under the tax funding agreement are due upon receipt of the funding advice from the head entity. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. (iii) Share based payments The grant by the Parent Entity of options over its equity instruments to the employees of subsidiaries in the Group is treated as a capital contribution to that subsidiary. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investments in subsidiaries, with a corresponding credit to share based payment reserve. 99 Annual Report 2017 08 Directors’ Declaration 08 In the directors’ opinion: (a) the financial statements and notes set out on pages 42 to 99 are in accordance with the Corporations Act, including: (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements, and (ii) giving a true and fair view of the consolidated entity’s financial position as at 30 June 2017 and of its performance for the year ended on that date, and (b) there are reasonable grounds to believe that Pinnacle Investment Management Group Limited will be able to pay its debts as and when they become due and payable. Note 1(a) confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The directors have been given the declarations by the Managing Director and Chief Financial Officer required by section 295A of the Corporations Act. This declaration is made in accordance with a resolution of the directors. A Watson Chairman Sydney 29 August 2017 Annual Report 2017 100 09 Independent Auditor’s Report 30 June 2017 Independent auditor’s report To the shareholders of Pinnacle Investment Management Group Limited Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Pinnacle Investment Management Group Limited (the Company) and its controlled entities (together, the Group) is in accordance with the Corporations Act 2001, including: a) giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its financial performance for the year then ended b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: • • • • • • • the consolidated statement of financial position as at 30 June 2017 the consolidated statement of comprehensive income for the year then ended the consolidated statement of profit or loss for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of cash flows for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. 101 Annual Report 2017 09 Independent Auditor’s Report 30 June 2017 (continued) 09 Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. The Group’s operations include eight boutique fund managers (“the Pinnacle Affiliates”) with differing investment styles and offerings. The Group also provides distribution services, business support and responsible entity services to the boutique fund managers and external parties via subsidiaries. The Group has minority shareholdings in the Pinnacle Affiliates and has assessed them to be joint ventures due to the requirement for unanimous decision making in relation to a number of strategic matters contained in the shareholders agreements. The financial results of the Group consolidate the subsidiaries and apply equity accounting to the Pinnacle Affiliates. Materiality • For the purpose of our audit we used overall Group materiality of $608,700, which represents 5% of the Group’s profit before tax from continuing operations. • We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. • We chose Group profit before tax from continuing operations because, in our view, it is the metric against which the performance of the Group is most commonly measured. We selected 5% based on our professional judgement noting that it is also within the range of commonly acceptable profit related thresholds. Audit scope • Our audit focused on where the Group has made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. • We audited the most financially significant subsidiaries within the Group, being Pinnacle Investment Management Limited, Pinnacle Funds Services Limited and Pinnacle RE Services Limited. We performed targeted audit procedures over the remaining significant balances and we performed further audit procedures over the consolidation process. • We performed an audit of each of the eight Pinnacle Affiliates on a stand-alone basis. • We audited the Group’s equity accounting for the Pinnacle Affiliates, including the Group’s share of net profit of jointly controlled entities accounted for using the equity method and the Group’s investments accounted for using the equity method recognised in the Group financial statements. • Our team included relevant valuation experts to assist us to evaluate the key assumptions and methodology used by management. Annual Report 2017 102 09 Independent Auditor’s Report 30 June 2017 (continued) Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit and Risk Committee. Key audit matter How our audit addressed the key audit matter Our testing involved assessing a sample of calculated performance fees by: • Verifying that the calculation methodologies utilised by management were in accordance with contractual arrangements • Ensuring the hurdle rates and accumulated deficiency clauses were appropriately considered • Validating key inputs (for e.g. net asset values and fund returns) to relevant external sources • Recalculating the performance fees and tracing them to subsequent cash receipts. In evaluating the accounting for the acquisition of the non-controlling interest, we: • Read the relevant contracts and agreements. • Evaluated the accounting treatment of the transaction with reference to the requirements of Australian Accounting Standards, including the following: • the consideration paid by the Group in the scrip-for-scrip offer the classification of the transaction costs incurred. • • We also assessed the adequacy of the related disclosures in Note 15(c) to the consolidated financial statements in light of the requirements of Australian Accounting Standards. Performance fee revenue (Refer to note 31(e) Summary of significant accounting policies) Performance fee arrangements require the assessment of the performance of the relevant investments in comparison to a specific benchmark. These benchmarks are agreed between Affiliates and their clients, and set out in relevant Product Disclosure Statements. This was a key audit matter because the performance fee revenues recognised by Pinnacle Affiliates was material in nature and the variability of returns which impacted the Group’s share of net profit of jointly controlled entities accounted for using the equity method. Acquisition of non-controlling interest (Refer to note 15(c)) Following approval by the shareholders at an extraordinary general meeting held on 16 August 2016, on 25 August 2016 the Group acquired the remaining 24.99% interest in its subsidiary, Pinnacle Investment Management Limited, that it did not already own from Executive Shareholders. This was a key audit matter given the significance of the transaction. 103 Annual Report 2017 09 Independent Auditor’s Report 30 June 2017 (continued) 09 Other information The directors are responsible for the other information. The other information includes the Overview, Operating and Financial Review, Shareholder information, Corporate Governance, Directors’ Report and Remuneration Report included in the Group’s annual report for the year ended 30 June 2017 but does not include the financial report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor’s report. Annual Report 2017 104 09 Independent Auditor’s Report 30 June 2017 (continued) Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in the directors’ report for the year ended 30 June 2017. In our opinion, the remuneration report of Pinnacle Investment Management Group Limited, for the year ended 30 June 2017 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Craig Thomason Partner Sydney, 29 August 2017 105 Annual Report 2017 10 Shareholder Information The shareholder information set out below is correct as at 25 August 2017. 10 Shares on issue Distribution of securities Range 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 – 9,999,999,999 Rounding Total Unmarketable parcels No. of shareholders 403 495 214 377 122 No. of shares 256,030 1,500,997 1,679,856 12,780,620 144,458,166 1,611 160,675,669 % of issued shares 0.16 0.93 1.05 7.95 89.91 0.00 100.00 Minimum parcel size No. of shareholders No. of shares Minimum $500 parcel at $3.28 per unit 153 62 1,116 Twenty largest shareholders (as at 25 August 2017) Rank Name 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Macoun Generation Z Pty Ltd J P Morgan Nominees Australia Limited Warragai Investments Pty Ltd HSBC Custody Nominees (Australia) Limited RBC Investor Services Australia Nominees Pty Ltd Macoun Superannuation Pty Ltd Kinauld Pty Ltd Mr Alexander William Macdonald Grant Andrew Chambers & Fleur Chambers National Nominees Limited Mr Adrian Whittingham AJF Squared Pty Ltd Usinoz Pty Ltd Earlston Nominees Pty Ltd Mr David Francis Cleary Mr David Noel Groth BNP Paribas Noms Pty Ltd Mark Cormack + Melanie Cormack Mr Robert James Wilson Cibaw Pty Ltd No. of shares 20,243,592 11,320,191 10,050,000 8,745,746 8,217,436 5,640,004 4,750,000 4,670,090 4,647,214 4,507,870 4,447,214 4,232,214 4,021,610 3,120,000 2,905,925 2,875,000 1,610,561 1,585,435 1,551,000 1,496,337 % of issued shares 12.60 7.05 6.25 5.44 5.11 3.51 2.96 2.91 2.89 2.81 2.77 2.63 2.50 1.94 1.81 1.79 1.00 0.99 0.97 0.93 Annual Report 2017 106 10 Shareholder Information Substantial shareholdings The names of the shareholders who have notified the Company of a substantial holding in accordance with section 671B of the Corporations Act are: Substantial shareholder Ian Macoun and associates Steve Wilson and associates Wilson Asset Management Group1 1 Date of last substantial holder notice lodged on 27 June 2017. Voting rights No. of shares % of shares 25,983,596 20,020,000 8,071,439 16.17% 12.46% 5.02% On a show of hands every member present in person or by proxy shall have one vote and upon a poll each share shall have one vote. Options and performance rights on issue Distribution of securities There are 4,250,000 options on issue as at 25 August 2017. The options are held by A&T Structured Finance Services Pty Ltd as trustee for the Pinnacle Investment Management Group Employee Option Share Plan. The options are not listed. Voting rights There are no voting rights attaching to the options. 107 Annual Report 2017 11 Corporate Directory Pinnacle Investment Management Group Limited Queensland 11 Brisbane Registered Office Level 19, 307 Queen Street Brisbane QLD 4000 Telephone 1300 651 577 New South Wales Sydney Level 35, 60 Margaret Street Sydney NSW 2000 Telephone 1300 651 577 Victoria Melbourne Level 26, 140 William Street Melbourne VIC 3000 Website address www.pinnacleinvestment.com Incorporated in Queensland on 23 April 2002 ABN 22 100 325 184 Directors Alan Watson, Chairman Ian Macoun, Managing Director (from 17 August 2016; executive director from 25 August 2016) Deborah Beale Gerard Bradley Andrew Chambers Adrian Whittingham Steven Wilson AM Company Secretary Eleanor Padman (until 22 June 2017) Calvin Kwok (from 22 June 2017) Chief Financial Officer and Chief Operating Officer Alex Ihlenfeldt Share Registry Computershare Investor Services Pty Limited 117 Victoria Street West End QLD 4101 Telephone 1300 552 270 ASX Code PNI Shares are listed on the Australian Securities Exchange Bankers Commonwealth Bank of Australia Auditor PricewaterhouseCoopers Annual Report 2017 108 pinnacleinvestment.com