Reckon Limited Annual Report ABN 14 003 348 730 for the Financial Year Ended 31 December 2009 Contents Our results at a glance Message to shareholders from the Chairman and the Group CEO Directors’ Report Remuneration Report Corporate Governance Report Auditor’s Report Financial Report Directors’ Declaration Statement of Comprehensive Income Statement of Financial Position Statement of Changes in Equity Statement of Cash Flows Notes to the Financial Statements Additional Information 2 3 6 10 17 21 24 24 25 26 27 29 30 64 Our results at a glance Revenue Operating revenue was up 42% to $85.3 million from $60.0 million $m % Growth EBITDA Group EBITDA was up 38% to $26.1 million from $19.0 million. (before acquisition restructure costs). $m % Growth NPBT Group NPBT was up 27% to $19.0 million from $15.1 million. (before acquisition restructure costs). $m % Growth 90 80 70 60 50 40 30 20 10 - 30 25 20 15 10 5 - 20 16 12 8 4 - 2 2005 2006 2007 2008 2009 85.3 8% 23% 8% 42% 26.1 29% 26% 15% 38% 19.0 19% 21% 14% 27% Message to shareholders from the Chairman and Group CEO The overall results were positively impacted by the efficient integration of the Corporate Services and Billback businesses, together with organic growth in existing businesses. The Operating Revenue in the Business Division from the underlying business was down on the prior year by 2%, because of substantially lower sales to the retail channel (-35%). A significant part of the reduced sales to the retail channel was due to the one-off impact of de-stocking by the bigger retailers. However, this was markedly set off by strong positive growth (+ 20%) in Enterprise and Elite product sales and 7% growth on the previous year in the direct core business. This revenue result together with cost reductions has resulted in a pleasing underlying EBITDA growth of 9% in the Business Division. The Operating Revenue in the Professional Division from underlying business grew by 9%, and EBITDA by 13% (before a negative foreign exchange impact of 2%) on the back of healthy growth in maintenance revenue. nQueue Billback has proved to be a profitable business with operating revenues of $7.3 million and EBITDA of $2.4 million. Professional Division The Professional Division continues to enjoy the benefits of being a market leader in the provision of practice management systems to accounting practices. The Division’s product extension and integration strategies continue to resonate with existing clients and prospects alike. The product suite comprises 14 accounting products, and following the Billback acquisition, now includes 7 legal products. The Professional Division has focused predominantly on the Top 300 accounting firms market and has conducted its business on the basis of a one-to-one highly relationship based offering of the best of breed technology into that market. Overview It is with pleasure that we present the Reckon Limited results for the year ending 31 December 2009. 2009 was once again an excellent result for the Company. The table below sets out the key indicators for 2009 compared to 2008. 2009 2008 % Change $85.3 million $60.0 million 42% up $26.1 million $19.0 million 38% up Operating Revenue Group EBITDA* Group NPAT* EPS* $14.4 million $11.3 million 10.5 cents 8.5 cents 27% up 24% up * Excludes business acquisition restructure costs. Dividend On 9 February 2010 the board declared a final dividend for 2009 of 4 cents per share, fully franked. The interim dividend for 2009, declared on 14 August 2009 was 3 cents per share, fully franked, for a combined dividend total for 2009 of 7 cents per share. The final dividend for 2008 was 3.5 cents per share. Operations The Reckon Group operations are currently divided into three main divisions: Professional, Business and nQueue Billback all of which contributed to the strong growth experienced by Reckon in 2009. The table below illustrates the performance of each division. Operating Revenue % change on 2008 Revenue EBITDA* % change on 2008 EBITDA $28.1 million 32% up $11.6 million 26% up $49.9 million 29% up $15.9 million 29% up $7.3 million - $2.4 million - Professional Division Business Division nQueue Billback Division *Excludes business acquisition restructure costs. 3 Message to shareholders from the Chairman and Group CEO continued As a result of its strong reputation as a supplier of best of breed products and services, demand from smaller sized accounting firms for compliance products now compels this Division to expand its market to the next tier of accounting firms beyond the Top 300. With the acquisition of the Corporate Services business, an opportunity has presented itself for sales of the Group’s company formation and compliance products and services to the wider professional accountancy market. In addition the launch of QuickBooks Online has opened an opportunity to cross-sell these products to accountants and their clients. Equally the acquisition of Billback solutions, especially once fully integrated into the APS suite of products, also presents a new opportunity in the wider accountancy market. In addition as touched upon below it is anticipated that the Group as a whole will look to implementing strategies that take advantage of the growing complementarity between our Divisions as they move outside of their traditional markets. This will be achieved by the further integration of our product offerings across business divisions, for example our Professional Division expanding into QuickBooks Enterprise, QuickBooks Online and compliance solutions for its customers. Business Division The Business Division once again experienced many successes in the 2009 financial year. In product development we saw the successful launch of QuickBooks 2009/10 QBi series; Quicken 2009-2010, and the rest of the wide product range, as well the launch of Reckon Docs Desktop, an all in one simple and convenient desktop application for company registration, searches and ASIC compliance management. Sales in Enterprise products and Elite products were good contributors to performance. The highly scalable QuickBooks Enterprise product is proving to be a solution that easily meets the demands of growing businesses. Elite sales growth in turn shows acceptance of quality practice management and compliance technology at good value for the professional accounting market outside the Top 2000 accounting firms. A new Elite Enterprise version with an SQL database will allow us to move up into mid-size accounting practices. We also paid special attention to growing our partner network. The attraction of the ease of use and efficiency gains possible from QuickBooks, saw growth in new accountants joining our network. Significantly, QuickBooks Online is also attracting attention from accountants who see the value in a SaaS product. We concentrated on closer liaison with our partners through regular representative forums and greater participation of our partners in presenting products to other partners at our annual conference. Marketing efforts were focused on increasing the brand awareness of the Reckon Group products through improving uptake in professional partner membership, partner conference attendance, road shows, master classes, webinars, in store product demonstrations and product promotions; as well as the creation of a new dedicated sales team for the partner channel. Finally, the soft launch of QuickBooks Online in the last quarter of 2009 was very successful with over 1000 users signed up. In 2010 the Business Division will build on its performance in 2009 by: • Maintaining focus on product strength; • Growing cross-selling opportunities across the Group; • Exploring opportunities in online applications; • Exploring opportunities in Enterprise sales; • Building on existing partner relationships and increasing our relevance to them; • Focusing on market share growth. Billback and nQueue Billback The acquisition of the Billback business, as mentioned below, has added a new dimension to the product offering of the Group, not only as a profitable business, but also because it provides an opportunity to widen the territories and markets into which the Group sells. As far as the USA operations are concerned, effective 1 July 2009, the Company entered into an agreement with nQueue Inc and launched nQueue Billback LLC with an ownership share of 67%. The strategic aim of the creation of nQueue Billback was to create a business with scale, totally focused on the USA legal market and thereby cementing market share, and obtaining committed management on the ground with a direct financial interest. 4 Acquisitions Partners Every year it is important to acknowledge the support of Reckon’s network of partners amongst accountants, bookkeepers and business and IT consultants. We also extend our thanks to the support of all our employees, customers and suppliers who contributed to our success in 2009. John Thame Chairman Clive Rabie Group CEO In January 2009 we announced the completion of the acquisition of the Corporate Services and Billback businesses from Espreon Limited. These businesses were integrated into existing Group infrastructures during 2009. Billback operations were progressively integrated into our Professional Division in Australia and the UK. From 1 July 2009 the Company created nQueue Billback as the vehicle for its USA operations. Corporate Services was merged into our existing Reckon Shelco business. We have derived some benefit from the efficiency of these integrations. Corporate Services is being gradually re-branded to be brought to market under the banner of Reckon Docs. We have been traditionally conservative in our approach to acquisitions and continue to take that approach. Future Outlook The success for 2009 was based on the execution of our acquisition strategy and organic growth. It is our intention to stick to our strategies while keeping an eye on market dynamics and adapting as needs may dictate. We recognise untapped potential in both our products and customer base which prompts a focus on organic growth for 2010. 5 Clive Rabie Age 50, Group Chief Executive Officer Clive was Chief Operating Officer of Reckon from 2001 until February 2006 and in that time played a pivotal role in its turn-around. In February 2006 Clive was appointed to the position of Group Chief Executive Officer. He has extensive management and operational experience in the IT and retail sectors as both an owner and Director of companies. Myron Zlotnick LLM, GCertAppFin Age 45, General Counsel and Company Secretary Myron Zlotnick has 20 years experience as a legal practitioner, general and corporate counsel, and as a Director of companies in the information, communications and technology sector. Myron also assumes responsibility for some aspects of the management and operations of the Reckon Docs and nQueue Billback businesses. Marianne Kopeinig LLM, GDipApplCorpGov Age 48, Legal Counsel and Assistant Company Secretary Marianne has over 15 years experience as a private practitioner and corporate counsel for private and ASX listed companies and broad industry experience in commercial, risk management and compliance functions. directors' Report The Directors of Reckon Limited submit these financial statements for the financial year ended 31 December 2009 BOARd Of diRECtORs John Thame AAIBF FCPA Age 68, Non-Executive Chairman John Thame has over 30 years’ experience in the retail financial services industry. He was Managing Director of Advance Bank Limited from 1986 until it merged with St George Bank Limited in January 1997 and held a variety of senior positions in his career with Advance. John was Chairman of St George Bank Limited until April 2008 and a member of the St George Bank Limited board until 1 July 2008. He is also Chairman of Abacus Property Trust Group Limited, where he has been a Director since 2002. John was appointed to the Board on 19 July 1999. Ian Ferrier FCA Age 69, Non-Executive Director Ian Ferrier is the founder of Ferrier Hodgson. He is a Fellow of the Institute of Chartered Accountants in Australia. He has more than 40 years experience in company corporate recovery and turnaround practice. He is also a Director of a number of private and public companies. Ian was appointed Chairman of InvoCare Limited in 2001 and was Chairman of Port Douglas Reef Resorts Limited until April 2006. Ian is a Director of McGuigan Simeon Wines Limited since 1991, Goodman Limited since 2003 and Australian Oil Company Limited since 2005. He has significant experience in property and development, tourism, manufacturing, retail, hospitality and hotels, infrastructure and aviation and service industries. Ian joined the Board on 17 August 2004. In January 2008 Ian assumed the Chair of a new accounting practice, Ferrier Green Krejci & Silvia, which after merging with insolvency practice BRI, now trades as BRI Ferrier. Greg Wilkinson Age 54, Deputy Executive Chairman Greg Wilkinson has over 20 years experience in the computer software industry. Greg entered the industry in the early 1980s in London where he managed Caxton Software, which became one of the UK’s leading software publishers. Greg co-founded Reckon in 1987 and was the Chief Executive Officer until February 2006. He was appointed to the position of Deputy Chairman in February 2006 and became a member of the Board of the listed entity on 19 July 1999. 6 Principal Activities Reckon Limited conducts business predominantly across the following areas: (1) the sales and support of small and enterprise business accounting and personal wealth management software under the QuickBooks and Quicken brands; the sales and support of corporate services such as company incorporations, SMSF documentation and ASIC compliance management under the Reckon Docs brand, (2) the sales and support of accounting practice management and allied software, including the newly acquired modules for revenue and expense management, under the APS brand to larger professional accounting firms, and to smaller professional accounting firms under the Reckon Elite brand; (3) supplying software solutions to legal firms in the main areas of revenue management, expense management, print solutions, business process automation, business intelligence, document service automation, and document management. Through strategic acquisition of businesses and technology, Reckon continues to broaden its scope of operations to provide complementary products and services across these business areas. The main products and services are principally organised into three operating units, the Business Division; the Professional Division and nQueue Billback Division. In the Business Division, under the QuickBooks and Quicken brands, Reckon develops, localises, distributes and provides after sales technical support for the accounting software needs of small to medium sized and enterprise businesses and in the personal finance and wealth management sector. In addition, Reckon independently develops and distributes a payroll and point of sale solution. Under the Reckon Tools brand, Reckon develops applications that enhance these products, for example: electronic data interchange (“EDI”) functionality, bill payment solutions, super choice management solutions, on-line backup, and on-line trading. Reckon has also recently developed QuickBooks Online. This offers end user and accountants a convenient secure online version accessible from anywhere that effectively very closely mimics the traditional desktop package. Reckon operates its QuickBooks and Quicken business under an exclusive evergreen licence from Intuit Inc. Intuit is the leading US-based accounting software house with over 25 million customers worldwide, annual sales of over US$2 billion and a market capitalisation of close to US$10 billion. Intuit’s annual research and development budget exceeds US$300 million. Reckon is able to leverage off this extensive research and development spend without the usual associated development risk. The licence from Intuit has an effective continuing rolling term of 10 years. Reckon continues to maintain an excellent working relationship with Intuit Inc. The Reckon Elite business develops and distributes tax return preparation tools, practice management tools and related solutions for accountants and tax agents in public practice. Reckon Elite focuses on sales to smaller accounting firms compared to APS which focuses on the larger firms. Through its New Zealand subsidiary Reckon distributes QuickBooks and Quicken products as well as IBankData; Intrepid Payroll, Bit Defender and IBackup solutions. Espreon Corporate Services, which was acquired by Reckon in January 2009, increases Reckon’s presence and market share in the corporate services (company registrations and compliance) market and presents growth opportunities in the data supply market. Espreon Corporate Services also adds depth to the product offering in the market for documentation for trusts and self managed superannuation funds. Espreon Corporate Services is gradually being re-branded and will be merged under the Reckon Docs banner. The Reckon Docs services business comprises the technology and established client base for the registration of companies and other business structures using the traditional full service method. This business provides clients with an on-line company registration service available 24 hours a day, seven days a week. It also provides services for the establishment of unit trusts and family trusts (discretionary trusts), as well as services for constitution updates, domain name registrations and self- managed super funds. The Reckon Docs data business provides comprehensive accredited business name and ASIC information electronically combined with a highly personalised client relationship. A full range of sophisticated information services to assist customers with the provision of financial, corporate and statutory information is also offered. Reckon has now also developed a desktop utility called Reckon Docs Desktop (RDD) that is a simple and convenient desktop application for company registration, searches, and ASIC compliance management. The same product is being developed for integration into the Practice Management suite of APS and will be known as Advance Company Registers (ACR). In the Professional Division, the APS business develops, distributes and supports a suite of solutions for professional service firms in Australia, New Zealand and the United Kingdom. For professional accountants these solutions also include tax and accounts production. APS also delivers a wide range of complementary applications to practice management. 7 Principal Activities continued. Dividends The APS business continues to be considered a market leader in the provision of its products and services to professional accounting firms. This is reflected in the market share that APS enjoys in Australia and New Zealand. APS has committed several years of research and development to delivering unique integrated practice software to work off a single platform, offering all its solutions under the collective “Advance” suite. The Advance suite comprises several integrated modules for several business critical functions in professional firms: Practice Management (PM); Reporting (PIQ); Document and E-mail Management (DM); Taxation (Tax); Client Accounting (XPA); Client Relationship Management (CRM); Resource Planning (RP); Superannuation (DS); Corporate Secretarial (ACR) Workpaper Management (WM); and others. With the acquisition of BillBack by Reckon in January 2009, APS commenced integrating technologies for revenue management, expense management, print solutions, document service automation, and document management into its practice management suite. APS is also adapting accounting solutions for sale into the legal professional market. In July 2009, Reckon entered into an agreement with nQueue Inc for a more efficient and competitive means of delivering legal products in the USA. The nQueue Billback business assists USA law firms by enhancing the automation and processing of any operational and administrative expenses, including print, copy, scan, telephone, online searches, emails, court fees, car services, credit card charges, courier costs and more. nQueue Billback’s software offerings can be embedded directly into multi-function devices or reside on tablet computers or terminals to provide clients with the knowledge required to run their businesses more profitably. Review of Operations Overview of financial performance • • • • • • • Operating revenue was up 42% to $85.3 million from $60.0 million. Group EBITDA was up 38% to $26.1 million from $19.0 million (before business acquisition restructure costs). Group NPAT was up 27% to $14.4 million from $11.3 million (before business acquisition restructure costs). Basic EPS was up 24% to 10.5 cents per share from 8.5 cents (before business acquisitions restructure costs). Final dividend of 4 cents per share – 100% franked with a full year dividend payout ratio of 71%. Operating cash flow was up 16% to $18.9 million resulting in zero net debt at 31 December 2009. Cash utilised in the acquisition of Espreon Corporate Services and BillBack was $18.4 million. Growth in revenue, strong management of costs, and the benefits of a sustainable customer base has resulted in strong Group performance from all Divisions. On 9 February 2010, the Board declared a final dividend of 4 cents per share (100% franked) payable to shareholders recorded on the Company’s Register as at the record date of 20 February 2010. Reckon does not have a dividend re- investment plan currently in operation. On 11 August 2009, the Board declared an interim dividend of 3 cents per share (100% franked) payable to shareholders recorded on the Company’s Register at record date of 25 August 2009. The Future As we have previously stated Reckon’s overall strategy continues to involve: • expanding the product and service offering to its customer base, • leveraging cross selling opportunities across its customer base, • generating recurring revenue streams through subscription products, • generating repeat revenue through consulting and technical support, • enhancing relationships with sales channels, including retailers and professional partners, and • maintaining operating efficiencies resulting in increasing margins. In the Business Division: • the QuickBooks 2010/11 QBi series release will show attractive new capabilities and offerings; • we propose to leverage the scalability of QuickBooks Enterprise Editions; • we will expand the QuickBooks Online offering; • we will expand the Reckon Elite customer base with a broader product offering; • we aim to grow Reckon Docs market share; and • take advantage of an expanded direct sales team. In the Professional Division: • we will continue to rollout an integrated compliance and practice management suite; • leverage our expanded legal product suite; • explore and expand cross-selling opportunities presented by company formations and QuickBooks Online; and • present new products for Expense Management, Print Solutions, Digital Imaging, Workpaper Management, and Resource Planning. nQueue Billback will continue to pursue market growth in the USA legal market and take advantage of the greater product suite offered by the rest of the Group. It also is anticipated that 2010 and beyond will show some structural changes to the businesses to obtain the maximum efficiency in pursuing Reckon’s tactics and strategies. For example, we propose equipping the Professional Division sales team to offer QuickBooks, QuickBooks Online and compliance solutions to their customers. 8 Significant Changes in State of Affairs Future Developments Other than as outlined above, disclosure of information regarding likely developments in the operations of the consolidated entity in future financial years and the expected results of those operations is likely to result in unreasonable prejudice to the consolidated entity. Accordingly, this information has not been disclosed in this report. Directors’ Shareholdings As at the date of this report, the directors held shares in Reckon Limited as set out in the Remuneration Report immediately below. Options, if any, were granted under the Executive Share Option Plan. None of the directors hold any options in Reckon Limited. Apart from the acquisition of the Corporate Services and Billback businesses referred to above, there were no other events in 2009 that represented material changes to the state of affairs of the Company. Matters Subsequent to the End of the Financial Year On 9 February 2010 the Company announced a buy-back of shares which under the provisions of the Corporations Act 2001 permits the Company to buy back up to 10% of its shares on the open market. It is anticipated to keep the buy back in place until 31 December 2010. Dividend A final dividend for 2009 was declared on 9 February 2010 as disclosed above. Options Since balance date 10,344 shares were issued after exercise of options under Share Option Plan 2. See Note 19 for the details of this plan. Since 31 December 2009 no options have lapsed. Effective 31 December 2005, the Company terminated Share Option Plan 2. Going forward the Board will continue to assess the merits of incentive based schemes pursuant to the share scheme approved at the Special General Meeting on 20 December 2005 or such other plan that the Company may lawfully put in place from time to time. The Remuneration Report in the Directors’ Report contains details of the relevant long-term incentive plans approved by shareholders at the Special General Meeting of the Company held on 20 December 2005. Other matters Other than as disclosed in this Directors’ Report no other matter or circumstance has arisen since 31 December 2008 that has significantly affected, or may significantly affect: • • • the consolidated entity’s operations in future financial years, or the results of those operations in future financial years, or the consolidated entity’s state of affairs in future financial years 9 Remuneration Report Key management The key management personnel include the directors and Group executives who have responsibility for planning, directing and controlling the activities of the Company and the consolidated entity. Key management personnel details are set out on page 12 below. Policy for determining remuneration of key management personnel Policy for determining remuneration of key management personnel, including the directors, Group CEO, Group CFO, Divisional CEO’s and other Company officers is the ultimate responsibility of a remuneration committee comprising the Chairman of the Board and the other independent non-executive director. The Chairman of the remuneration committee is Ian Ferrier. There is no formal charter for the remuneration committee. Policy is set with due consideration for the need to motivate directors and management to pursue the long-term growth and success of the Company as well as to tie remuneration in with performance as contemplated in the ASX Corporate Governance Principles and Recommendations (“ASX Guidelines”). It is the view of the Board that the Company complies with the substance of the aims and aspirations of the ASX Guidelines in the context of the size of the Company, the size of the Board, the size of the senior management team and the size of the business. Policy for determining remuneration of other management personnel has been delegated to the Group CEO, Group CFO and Divisional CEO’s by the Board to be exercised in accordance with the same broad principles as apply for the Group CEO, Group CFO, other Company officers and Divisional MD’s. The Board reviews all remuneration in its consideration of the Company’s annual budget process. The Board, through the remuneration committee will consider for approval the levels of remuneration set in the annual budget, taking into account the relevant performance budgeted as well as compared with historical performance. The policy is to pay the relevant officers and employees’ remuneration consistent with applicable market comparisons suited to the unique features of the Company, the competitive landscape, the scale of the business, the responsibilities of the individual directors and employees, internal relativities and performance. The Board is conscious of the need to attract and retain talent. The remuneration policy takes account of striking the right balance between short term benefits and long term incentives. All remuneration is reviewed annually. Generally increases, if justified, will not exceed comparable market increases. 10 Terms of employment for key management personnel Executive directors and Group executives are all appointed on standard employment terms that are not fixed term contracts. These contracts include a notice period of between 1 – 3 months to be provided by either the executive or the Company. No contract provides for termination payments except where the employee is to receive payment in lieu of notice. For 2009, remuneration for key management personnel including the Group CEO, Group CFO, other Company officers, Divisional CEOs and other senior executives, comprises a fixed element, a short-term incentive element and a long-term incentive element. Fixed component The fixed component of remuneration is determined in preparing the annual budget for the year and then subjected to the approval of the Board through the remuneration committee. Short term incentive payments The short-term incentive component of remuneration is dependent on satisfaction of performance conditions. Each annual budget fixes a pool representing the total potential amount in which the relevant employees can share if the performance conditions are met. There are three weighted elements to the performance conditions, viz: a revenue target, a net profit after tax (NPAT) target, and earnings per share (EPS) target measured against the budgeted performance of the Company. The Board retains a discretion regarding the allocation of the pool between employees as well as regarding weightings. Short term incentives are paid in cash as bonuses usually in about February or March of the following year. If the relevant performance targets are exceeded, then the amount of short term incentive can be increased by an amount not exceeding 10% of the total pool. Long term incentive payments The long-term incentive component is the last of the mix of the components comprising remuneration packages. It is aimed at retaining the long term services of the key management personnel to whom it applies and to align their remuneration with the longer term performance of the Company. The substance of the long- term incentive component for key management was approved by Special General Meeting on 20 December 2005. In general terms, the long-term incentive component comprises three possible methods of participation: an option plan, a performance share plan and a share appreciation plan. The Board has discretion to approve the making of offers to applicable employees to participate in any of these plans. Options granted and/or performance shares awarded (all in respect of the Company’s ordinary shares) and/or share appreciation rights do not vest before three years after their grant date. Vesting is also conditional upon the Company achieving defined performance criteria. The performance criteria are based upon a total shareholder return (TSR) target. A TSR is the return to shareholders over a prescribed period, based upon the growth in the Company’s share price plus dividends or returns of capital for that period. The Company’s initial TSR target will be the Company achieving a median or higher ranking against the TSR position of individual companies within a ‘comparator group’ of companies (i.e. a group of comparable ASX listed companies pre-selected by the Board) over the same period. The initial comparator group (and indeed the entire design of the long term incentive component) was determined after taking advice from independent advisers and was set out in the Chairman’s speech at the Special General Meeting on 20 December 2005. The Board will review the suitability of the comparator group on an ongoing basis. During 2009 some of the entities comprising the comparator group were delisted either as part of merger and acquisition activity or for other reasons. This was factored into the calculation of the Company’s performance by the independent valuers who undertook the exercise on behalf of the Company. Where companies were de-listed for example, it was assumed that the Company out-performed that company. The comparator group of companies used in the performance period for assessment included (1) Adacel Technologies Limited, (2) Firstfolio Limited (previously listed as AFS), (3) Altium Limited, (4) Amcom Telecommunications Limited, (5) ASG Group Limited, (6) CPT Global Limited, (7) Eftel Limited, (8) Eservglobal Limited, (9) Hansen Technologies Limited, (10) Infomedia Ltd, (11) Integrated Research Limited, (12) Melbourne IT Limited, (13) Lifestyle Communities Limited (previously listed as NMB), (14) MYOB Limited (no longer listed), (15) Newsat Limited, (16) Objective Corporation Limited, (17) Oakton Limited, (18) Powerlan Limited, (19) Queste Communications Limited, (20) Rea Group Ltd, , (21) Sirius Corporation Limited, (23) Asian Pacific Limited (previously listed as TMO, no longer listed), (24) Technology One Limited and (25) Talent2 International Limited, (26) Chariot Limited (no longer listed), and (27) Citect Corporation Limited (no longer listed). Only 50 percent of options or performance shares become exercisable or vest if the initial performance criterion is satisfied. The extent to which the balance of options or performance shares become exercisable or vest will depend on the extent to which the initial performance criterion is exceeded (i.e., the extent to which the Company exceeds a median ranking against the TSR position of the comparator group of companies). The share appreciation right plan represents an alternative remuneration component (to offering options or performance shares) under which the Board can invite relevant employees to apply for a right to receive a cash payment from the Company equal to the amount (if any) by which the market price of the Company’s shares at the date of exercise of the right exceeds the market price of the Company’s shares at the date of grant of the right. The right may only be exercised if performance criteria are met. The performance criteria are fixed by the Board in the exercise of its discretion. At present these are the same as the TSR target set for the right to exercise options or for performance shares to vest. Balance between salary, short term and long term incentives It is the Board’s opinion that an adequate balance is struck between the three components comprising the relevant remuneration. For short term incentives, the performance targets reflect, in part, the key factors that the Company pursues in measuring its performance: volume of sales; profit generated; and value returned to shareholders in terms of EPS. The targets also represent a measure of an incentive to encourage commitment to the business and to its growth. The audited financial results for the year are used to assess whether the performance conditions are satisfied. Audited results represent an independent accurate method of determining the attainment of the conditions. For long-term incentives, the additional targets comprising TSR reflect a further assessment of value to shareholders before the remuneration is earned. As stated above the comparator group to which reference will be had will be subject to review. The remuneration committee is satisfied that to date, the remuneration of the relevant employees accords with the general upward trend of the performance of the Company and returns to shareholders, as set out in the table below; and also takes into account the imperative to retain their services so as to avoid the business and opportunity costs associated with replacing them as well as the need to be commensurate with market rates. Consequence of performance on shareholder wealth NPAT EPS Reduction of Capital Dividend Changes in Share Price between the beginning and the end of the year Beginning of January End of December 2005 2006 2007 2008 2009* $’000 7,034 8,169 9,893 11,312 14,425 *Before business acquisition restructure costs. 5.1 6.2 7.5 8.5 10.5 (cents per share) (cents) 4 - - - - 2 4.5 5.5 6.0 7.0 85 76 102 139 105 76 102 139 105 184 The Company’s “Trading Policy” prohibits directors, key management personnel and employees from entering into a transaction with securities which limit the economic risk of any unvested entitlements awarded under any Reckon equity-based remuneration scheme. Prior to presenting full-year results Reckon equity plan participants are required to confirm that they have not entered into any transactions which would contravene the Company’s “Trading Policy”. 11 Remuneration Report continued Remuneration 2009 Fixed Short term Incentive Other component component compensation Long term incentive component 2009 Office Salary Bonus1 term benefits2 Superannuation Other short Equity settled Cash settled share based share based payments- payments- Performance shares3 9 Appreciation rights4 7 Total remuneration Directors8 John Thame Chairman, Non- executive Director $90,000 Greg Wilkinson Deputy Chairman, Executive Director $78,000 0 $0 Clive Rabie Ian Ferrier Executives8 Group CEO, Executive Director Non-executive Director $500,000 $181,884 $75,000 0 Brian Armstrong CEO, Professional Division $340,000 $103,934 Chris Hagglund CFO $305,000 $79,250 Paul James GM, Professional Division Australia $203,029 $40,560 Myron Zlotnick General Counsel & Company Secretary $250,000 $51,967 $188,307 $45,000 Brian Coventry Gavin Dixon Grant Linton Nigel Boland Richard Hellers5 MD, Professional Division United Kingdom CEO, Business Division GM, Professional Division New Zealand GM Development, Professional Division President and CEO, nQueue Billback Division 0 0 0 0 0 0 0 0 0 $8,100 $7,020 $45,000 $6,750 0 0 0 0 $30,600 $83,109 $27,450 $73,472 $21,902 $3,506 $22,500 $40,017 $9,010 $4,908 0 0 $98,100 $85,020 $661,8437 $1,388,727 0 0 0 0 0 0 0 0 0 0 0 0 $81,750 $557,643 $485,172 $268,997 $364,484 $247,225 $539,328 $171,126 $200,687 $203,628 $230,550 $220,014 $340,000 $88,344 0 $30,600 $80,384 $105,696 $20,032 $29,928 $11,964 $163,346 $20,032 0 $12,401 $126,263 $63,131 $7,380 $6,854 $3,506 $4,908 0 0 0 Russell Scott GM, Reckon Docs $195,000 Andrew Moon6 GM, Billback $57,340 $0 $0 $18,000 $17,550 $157,514 $5,160 TOTAL $3,016,981 $694,134 $212,822 $262,861 $293,810 $661,843 $5,142,451 1 2 3 4 The potential amounts payable for the short term cash performance bonuses are determined at the beginning of the year and are earned based upon the performance criteria for the year described in more detail on pages 10 and 11. For Mr Linton this represents a sales commission. For Mr Hellers this represents a contribution to life and medical insurance. For Mr Scott this represents a motor vehicle allowance. For Mr Moon this represents terminations benefits. Mr Armstrong (80,952 shares), Mr Hagglund (72,619 shares), Mr James (9,524 shares), Mr Zlotnick (47,619 shares), Mr Coventry, (13,333 shares), Mr Dixon (80,952 shares), Mr Linton (9,524 shares) and Mr Boland (13,333 shares) are participants in the 2009 performance share plan. The date of grant for each of these participants was 1 January 2009. The value of the long term incentive is obtained by reference to the market price of the shares on the grant date allocated over each year of the 3 year performance period. If the performance criteria are met, then the shares are released at no consideration. The fair value of the performance shares at grant date was $1.05. The performance shares are exercisable on 31 December 2011 at zero cents. The fair value of performance shares which vested and were forfeited during the financial year are set out in the table below. Mr Rabie is a participant in the share appreciation plan. 888,324 rights were issued under the plan on 1 January 2009. The value of the rights was $0.197 determined using a Monte Carlo simulation with a Black Scholes based valuation model to determine the value as at hurdle dates. The fair value of appreciation rights which vested and were forfeited during the financial year are set out in the table below. 5 Appointed 1 July 2009. 6. Employment ended on 31 March 2009. 7. The amount is calculated based on the difference between the Company share price at vesting and the share price at date of issue spread over the three year performance period. The share based remuneration earned by Mr Rabie relative to share price movement is as follows: Share based remuneration Share price movements 2007 2008 2009 $284,833 $34,088 $661,843 +36% -24% +75% 2009 reflects a catch up of share based payment expense following the strong re-bound of the share price in 2009. 8. To the extent that any of the above are directors of any wholly owned subsidiaries of the Company listed on page 52, no additional remuneration is paid. 9. No options were granted to any person during the year as part of their remuneration. No options vested during the financial year. All options issued in previous years as set out in Note 27 in the financial statements were fully vested in prior years. 47,500 options were exercised during 2009. 12 Remuneration Report continued 2009 Directors John Thame Greg Wilkinson Clive Rabie Ian Ferrier Executives Brian Armstrong Chris Hagglund Paul James Myron Zlotnick Brian Coventry Gavin Dixon Grant Linton Nigel Boland Richard Hellers Russell Scott Andrew Moon TOTAL Percentage of total remuneration that is performance related Percentage of available bonus which vested in the year Percentage of available bonus which was forfeited during the year No of performance shares vested in 2009 Value of Performance shares vested in 2009 Value of Performance shares forfeited in 2009 Value of Appreciation rights vested in 2009 Value of Appreciation rights forfeited in 2009 0% 0% 61% 0% 34% 31% 16% 25% 20% 31% 31% 12% 31% 0% 0% n/a n/a 100% n/a 100% 100% 100% 100% 100% 100% 100% 100% 100% 0% 0% n/a n/a 0 n/a 0 0 0 0 0 0 0 0 0 0 0 n/a n/a n/a n/a n/a n/a n/a n/a 72,451 $86,937 63,630 $76,350 0 $0 28,204 $33,843 9,823 $11,788 67,539 $81,042 0 $0 9,823 $11,788 0 0 0 $0 $0 $0 n/a n/a n/a n/a 0 0 0 0 0 0 0 0 0 0 0 n/a n/a $477,528 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 251,470 $301,748 $0 $477,528 n/a n/a 0 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a $0 13 Remuneration Report continued Remuneration 2008 Fixed component Short term Incentive component Other compensation Long term incentive component 2008 Office Salary Bonus1 benefits2 Superannuation Other short term Equity settled share based payments- Performance shares3 8 Cash settled share based payments- Appreciation rights4 Total remuneration Directors7 John Thame Chairman, Non- Executive Director $86,000 Greg Wilkinson Deputy Chairman, Executive Director $75,000 0 0 Clive Rabie Group CEO, Executive Director $460,000 $164,095 Ian Ferrier Non-executive Director $66,000 0 Executives7 Brian Armstrong CEO, APS $320,000 $109,400 Chris Hagglund CFO $280,000 $70,900 Paul James GM, APS Australia $193,806 $21,448 Myron Zlotnick Brian Coventry General Counsel & Company Secretary MD, APS United Kingdom $210,540 $31,400 0 0 0 0 0 0 0 0 $7,740 $6,750 $41,400 $5,940 0 0 0 0 $31,488 $65,828 $25,200 $52,576 $19,373 $9,124 $18,949 $27,005 $194,003 $34,117 $17,794 $9,649 $9,124 Gavin Dixon CEO, Quicken Australia $310,000 $75,200 Michael Donnelley5 MD, APS New Zealand $172,501 $68,160 0 0 $27,900 $50,584 $17,107 $9,124 Grant Linton6 GM, APS New Zealand $36,277 0 $11,497 $4,051 0 Nigel Boland GM Development, APS $161,366 $20,047 0 $12,103 $9,124 0 $93,740 $5,000 $86,750 $34,088 $699,583 0 0 0 0 0 0 0 0 0 0 $71,940 $526,716 $428,676 $243,751 $287,894 $264,687 $463,684 $266,892 $51,825 $202,640 TOTAL $2,565,493 $594,767 $29,291 $227,650 $232,489 $39,088 $3,688,778 1 The potential amounts payable for the short term cash performance bonuses are determined at the beginning of the year and are earned based upon the performance criteria for the year described in more detail on pages 10 and 11. 2 For Mr Coventry and Mr Linton this reflects a sales commission. 3 Mr Armstrong (58,656 shares), Mr Hagglund (51,324 shares), Mr Dixon (56,823 shares), Mr Zlotnick (27,018 shares), Mr Donnelley (7,332 shares), Mr James (7,332 shares), Mr Coventry, (7,332 shares), and Mr Boland (7,332 shares) are participants in the 2008 performance share plan. The date of grant for each of these participants was 1 January 2008. The value of the long term incentive is obtained by reference to the market price of the shares on the grant date allocated over each year of the 3 year performance period. If the performance criteria are met, then the shares are released at no consideration. The fair value of the performance shares at grant date was $1.36. The performance shares are exercisable on 31 December 2010 at zero cents. The fair value of performance shares which vested and were forfeited during the financial year are set out in the table below. 4 Mr Rabie is a participant in the share appreciation plan. 495,356 rights were issued under the plan on 1 January 2008.The value of the rights was 32.3 cents determined using a Monte Carlo simulation with a Black Scholes based valuation model to determine the value as at hurdle dates. The fair value of appreciation rights which vested and were forfeited during the financial year are set out in the table below. 5 Mr Donnelley resigned effective 15 October 2008 and Mr Linton was appointed MD on 1 September 2008. Mr Donnelley’s salary includes accrued leave paid out on resignation. 6 Mr Linton received remuneration of: salary $55,544, commission $61,901 and superannuation of $9,956 in the period 1 January 2008 – 31 August 2008. 7 To the extent that any of the above are directors of any wholly owned subsidiaries of the Company listed on page 52, no additional remuneration is paid. 8 No options were granted to any person during 2008 as part of their remuneration. No options vested during the financial year. All options issued in previous years as set out in Note 27 in the financial statements are fully vested. 82,333 options were exercised during 2008. 14 Remuneration Report continued Percentage of total remuneration that is performance related Percentage of available bonus which vested in the year Percentage of available bonus which was forfeited during the year No of performance shares vested in 2008 Value of Performance shares vested in 2008 Value of Performance shares forfeited in 2008 Value of Appreciation rights vested in 2008 Value of Appreciation rights forfeited in 2008 2008 Directors John Thame Greg Wilkinson 0% 6% 0 0 Clive Rabie 28% 100% Ian Ferrier Executives Brian Armstrong Chris Hagglund Paul James Myron Zlotnick Brian Coventry Gavin Dixon Michael Donnelley Grant Linton Nigel Boland TOTAL 0% 0 33% 29% 13% 20% 23% 27% 29% 22% 14% 100% 100% 100% 100% 100% 100% 75% 0 100% 0 0 0 0 0 0 0 0 0 0 25% 0 0 0 0 0 0 0 0 0 0 46,762 $37,557 21,802 $17,511 0 0 16,873 $13,551 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 $20,912 0 0 0 $18,750 $93,750 0 0 0 0 0 0 0 0 0 0 85,437 $68,619 $20,912 $112,500 Options and shareholding for directors and relevant employees can be found at Note 27 to the accounts. 0 0 0 0 0 0 0 0 0 0 0 0 0 0 15 Remuneration Report continued Indemnification of Directors and Officers and Auditors During the financial year, the Company paid a premium in respect of a contract insuring the directors of the Company (as named above), the Company Secretary and all executive officers of the Company, and of any related body corporate, against a liability incurred as a Director, secretary or executive officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. In addition, Rule 12 of the Company’s constitution obliges the Company to indemnify on a full indemnity basis and to the full extent permitted by law, every Director, officer or former officer for all losses or liabilities incurred by the person as an officer. This obligation continues after the person has ceased to be a Director or an officer of the Company or a related body corporate, but operates only to the extent that the loss or liability is not covered by insurance. The Company has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer or auditor of the Company, or any related body corporate, against a liability incurred as an officer or auditor. Directors’ Meetings The following table sets out the number of directors’ meetings held during the financial year and the number of meetings attended by each Director. Directors Board Audit Committee Remuneration Committee Reckon Limited - Attendance Tables Meetings A 10 10 10 10 B 10 10 8 10 A 2 2 n/a n/a B 2 2 n/a n/a A 2 2 n/a n/a B 2 2 n/a n/a Key: A – number of meetings eligible to attend; B - number of meetings attended JM Thame I Ferrier GJ Wilkinson C Rabie Non audit fees Details of the non-audit services can be found in Note 4 to the financial statements. Rounding of Amounts ASIC Class Order 98/0100 applies to the Company, and in accordance with that Class Order, amounts in the Directors’ Report and the financial statements have been rounded off to the nearest thousand dollars, except where otherwise indicated. Auditors’ Independence Declaration The auditors independence declaration for the year ended 31 December 2009 has been received and can be found on page 21 of the Directors Report. Signed in accordance with a resolution of the directors made pursuant to Section 298 of the Corporations Act 2001. On behalf of the directors Mr J Thame Chairman Sydney, 24 March 2010 16 Corporate Governance Report The Company is committed to a system of relationships, policies and processes which align with the ASX Corporate Governance Principles and Recommendations, 2nd Edition (“the ASX Governance Principles”). It is a priority of the board to ensure the Company’s governance framework and support processes uphold these principles. The board is of the opinion that the Company’s existing policies and processes effectively achieve the objectives of the relevant Recommendations. The few departures from the Recommendations in the ASX Governance Principles are generally justified on the basis that the formal requirements of the Recommendations are not applicable to the size of the Company and the resources available. Where appropriate, the board seeks opportunities to adopt these Recommendations to suit the circumstances of the Company and continue to improve the Company’s governance policies and processes. 1. Management and Oversight The Company is governed on behalf of the shareholders by its Board of Directors who in turn oversee the Company’s management team. The responsibilities and duties of the board are set out in the Constitution. The board is responsible for ensuring appropriate risk management, accountability and control mechanisms. The board also provides advice and input into development of the businesses generally, overall corporate strategy, performance objectives, and appointment of senior executives. The board monitors and reviews the performance of the Company, financial reporting and implementation of strategy. The board approves the annual budget, material capital expenditure and large acquisitions. The Company has adopted each of the Recommendations relating to Principle 1 of the ASX Governance Principles, except for the requirement in Recommendation 1.1, only to the extent that there is no formal charter. The board is of the opinion, given the relatively small size of the composition of the board, the relatively flat structure of management, the size of the management team and open and frequent channels of communication between management and the board, that there is adequate definition and understanding of the functions and responsibilities of the board and management. The board maintains sufficiently close oversight of operations and has close input to material decisions to ensure compliance with principles of good corporate governance. The board recognises that with the growth and evolution of the Company, it is important to review the division of matters and responsibilities reserved to the board or delegated to senior executives regularly and where needed, to formalise these by way of a charter. The board is able to efficiently deal with issues which, in other larger enterprises, may normally be delegated to committees because of the size of the Company and the management team. The Audit & Risk Committee and Remuneration Committee are the only committees of the board. The Company undertakes an annual performance evaluation of key management personnel. The nature of the review process is as follows: • • In the case of key management personnel other than head of divisions the review process is managed and administered by the Group Human Resources Manager. It generally involves a 360 degree feedback review in which selected peers and reporting staff assess the performance of relevant executives and managers according to a set of questions benchmarked against key performance indicators. The process also includes a series of reviews with the Divisional CEO’s in which the 360 degree feedback review is discussed with the relevant executive or manager and remedial steps and coaching, if applicable, are implemented. There may be further additional reviews undertaken through the year if necessary. In the case of head of divisions and head office management (CEO, General Counsel and Company Secretary) the review process is managed and administered by the Group Chief Executive Officer. The review involves a one-on-one interview in which performance against key performance indicators is assessed and discussed and feedback from peers (where relevant) is reviewed. Where necessary remedial steps are identified and coaching is implemented. There may be additional reviews undertaken through the year if necessary. In addition, a portion of remuneration for key management personnel is tied into the financial performance of the Company as set out in more detail in the Remuneration Report. Performance evaluation for key management personnel was undertaken in 2009 and it was in accordance with the processes disclosed in this report. The independent non-executive directors also generally informally monitor and review the ongoing performance of senior executives. The Group Human Resources Manager is also responsible for managing and administering an induction process for newly appointed senior executives. In addition the Group CEO and divisional CEO’s undertake a rigorous process of briefing new senior executives. 17 Corporate Governance Report continued 2. The Board At present, the board comprises four members: John Thame, Ian Ferrier, Greg Wilkinson and Clive Rabie. Mr Thame is Chairman of the board and he, together with Mr Ferrier, are independent non-executive directors. Further details of the directors, including a summary of their skills and experience and period of office, are set out in the Directors’ Report. The Company has adopted each of the Recommendations relating to Principle 2 of the ASX Governance Principles, except for the requirements in Recommendation 2.1 and 2.4 due to the size and circumstances of the board. However in the opinion of the board, the existing structure and processes are appropriate for the Company and still meet the objectives of the Recommendations and Principle 2. While there is not strictly an independent majority in the sense described in Recommendation 2.1, as there are only four directors, the non-executive directors ensure that all issues that come before the board are considered in an impartial manner and from a variety of perspectives to meet the objectives of Recommendation 2.1. Mr Wilkinson, although still a substantial shareholder, has occupied a non-executive position for more than three years since he resigned from the management of the Company. The Chairman, who is independent, has a casting vote where necessary. The independent non-executive directors oversee the nomination of any potential directors. The criteria for directorship and the election process are set out in the Company’s constitution. The directors periodically review the composition of the board to ensure that members have the desired breadth of experience and expertise to govern the Company effectively. The size of the board dictates that there is no efficiency obtained in establishing a formal nomination committee. Accordingly, the Company departs from this requirement in Recommendation 2.4. Directors are entitled to seek independent professional advice at the Company’s expense to assist them in fulfilling their duties in order to comply with all applicable laws and regulations. There is no formal procedure for the board to agree when to take independent advice at the expense of the Company, but given the size of the board there is no efficiency to be obtained in formalising this process. The independent non-executive directors exercise their judgment to call for such advice when they deem appropriate. The Chairman also has frequent contact with internal legal counsel to assess the need for external advice. The board met ten times during 2009. The details of attendance at these meetings are set out in the Directors’ Report. 18 The independent non-executive directors monitor and review the ongoing performance of the executive directors and key executives. The independent non-executive directors occasionally meet informally without management being present to generally discuss the affairs of the Company and the overall performance of key executives. The independent non-executive directors are subject to the Company’s constitution and their continuity of tenure is dependent on re-election by shareholders in accordance with the constitution. Any decision regarding the appointment of new directors is taken cognizant of the need to appoint someone who is technically qualified and as far as possible familiar with the Company’s market sector. While there is no formal induction process in place, the Chairman, Deputy Chairman and Group CEO will appropriately brief new board members, if and when appointed. Given the size of the Company there is also direct informal communication on a regular basis between the Chairman and the Company Secretary on governance matters. 3. Ethical and Responsible Decision Making The Company’s governance policies and processes incorporate all the Recommendations relating to Principle 3 of the ASX Governance Principles. The board’s policy is that the Company, the directors and employees in addition to their legal obligations must maintain high ethical standards in their dealings with the public and other members of the industry. The initial Directors’ Code of Conduct adopted in 2003 was reviewed and updated in 2007 to apply to all employees. The Company’s Human Resources Policy and Procedures, binding on all employees, also collectively embrace the substance of the ASX Governance Principles in a Code of Conduct, including expectations regarding behaviour in the workplace, disciplinary processes, grievance processes, discrimination and harassment, occupational health and safety, ethical business practices, conflict of interest, corporate opportunity and the like. The Trading Policy is accessible to employees and the public at the Company web site. The Company is committed to training employees and maintaining employees’ relevant technical expertise and understanding of their ethical and legal obligations, for example by way of trade practices training from time to time for relevant staff. Corporate Governance Report continued 4. Integrity in Financial Reporting 5. Timely and Balanced Disclosure The board assumes the responsibility to ensure the integrity of the Company’s financial reporting and has established the Audit & Risk Committee to focus on the issues relating to the integrity of the financial reporting of the Company and oversight and review of the Company’s risk management. The terms of reference for the Audit & Risk Committee, to review and monitor all financial, risk management and compliance policies, were formalised in a Charter in 2003 to meet the requirements of the ASX Governance Principles. The Audit & Risk Committee consists of John Thame and Ian Ferrier, independent, non- executive directors, and Greg Wilkinson (from 8 February 2010), to ensure independent review of financial reporting over and above formal audit processes. Details of their experience and qualifications are set out in the Directors’ Report. The Audit & Risk Committee also meets informally to discuss matters including risk management and reporting. Due to the size of the board, where only two of the four members meet the criteria in Recommendation 4.2, the Audit & Risk Committee only had two members in 2009, as such the Company was not in a position to fully adopt all of Recommendation 4.2. The board is of the opinion that the existing structure of the Committee, with the independent non-executive directors and its considerable technical expertise in the market sector of the Company and financial literacy, enable it to discharge it functions effectively and in accordance with the objectives of Principle 4, Recommendation 4.2. With the appointment of Greg Wilkinson to the Audit and Risk Committee in February 2010, the Company will have fully adopted Recommendation 4.2. Deloitte Touche Tohmatsu, the Company’s auditors, report directly to the Audit & Risk Committee on the appropriateness of the Company’s internal accounting policies and practices. The board reviews the adequacy of existing external audit arrangements each year, with particular emphasis on the scope and quality of the audit. At each Audit & Risk Committee meeting, the independent non-executive directors meet separately with the auditors, without management being present, to review any concerns that the auditors may have regarding the financial management of the Company. The Audit & Risk Committee met twice during 2009. The Audit & Risk Committee reports back to the board after each Audit & Risk Committee meeting. The details of attendance at these meetings are set out in the Directors’ Report. The board is aware of its obligations to ensure the appropriate selection and rotation of external auditors and the external audit engagement partners and closely monitors and reviews the engagement of the Company’s external auditors. The Company has adopted each of the Recommendations relating to Principle 5 of the ASX Governance Principles. The board remains conscious of the Company’s disclosure obligations under the Corporations Act 2001, the ASX listing rules and the ASIC guidance principles. These obligations are reflected in the Continuous Disclosure Policy. All required disclosures are also made in accordance with the Continuous Disclosure policy which is accessible to the public at the Company web site. A review of operations and commentary on the financial results is provided in the Annual Report 2009 and the Finance Report. 6. Rights of Shareholders The board is conscious of the requirements of Principle 6 of the ASX Governance Principles and takes into account the rights and needs of shareholders to balanced and understandable information about the Company and acts in accordance with this Principle. The Company communicates with shareholders through its ASX disclosures to the market. The Company also communicates with shareholders through the posting of statutory notices to shareholders and at the general and special meetings of the Company. The Company keeps recent announcements and general Company information on its web site with a dedicated investor relations section which is accessible to the public. The web site contains a link to the ASX web site for older announcements. Given the size and circumstances of the Company, there is no formally documented communications strategy, and in this respect the Company has not adopted Recommendation 6.1. The Company’s auditor attends the Annual General Meeting and is available to answer shareholder questions about the conduct of the audit and the preparation and content of the Auditor’s Report at the meeting. 7. Recognise and Manage Risk As stated above in paragraph 1, the board is responsible for ensuring appropriate risk management, accountability, and control mechanisms. It constantly monitors the operational and financial aspects and material risks of the Company’s activities and, through the Audit & Risk Committee, considers the recommendations and advice of the auditors and other external advisers on the operational and financial risks that face the Company. The Group CEO and Group CFO monitor and review the financial performance of the Company and monitor any potential risk virtually on a daily basis. The board has received assurance from the CEO and the CFO that the S295A Declaration provided in the Financial Report is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to 19 Corporate Governance Report continued 8. Remunerate Fairly and Responsibly The Company remunerates directors and key executives in accordance with the aspirations set out in ASX Governance Principle 8. Accordingly the board has adopted a remuneration policy designed to attract and maintain talented and motivated directors and senior employees so as to encourage enhanced performance of the Company. There is a clear relationship between performance and remuneration and a desire to strike the correct balance between the various components making up remuneration. The Remuneration Committee consists of the independent, non-executive directors, John Thame and Ian Ferrier. Details of their experience and qualification are set out in the Directors’ Report. The Remuneration Committee ensures independent review of financial reporting over and above formal audit processes. The Remuneration Committee supervises the development and implementation of the Company’s remuneration policy including the operation of option plans, and reviews the performance of the executive directors and senior executives. There is no formal charter for the remuneration committee, but it does fix policy and reward in accordance with ASX Governance Principle 8. The full detail of the policy and remuneration is contained in the Remuneration Report. The Remuneration Committee met twice during 2009. The details of attendance at these meetings are set out in the Directors’ Report. financial reporting risks. The board is of the opinion that there is substantial compliance with the ASX Governance Principle 7 although Recommendations 7.1 and 7.2 have not yet been fully adopted. As described above, the size of the Company and the management team enables the board to have effective oversight of the overall risk management of the Company. In the board’s opinion, especially with the existence of an Audit & Risk Committee, there is no efficiency for the Company to establish a separate risk management committee. The board is provided with a declaration from the Group CEO and the Group CFO under section 295A of the Corporations Act 2001, that due consideration is given to budgets, cash flows, realisation of current assets, continuity of terms of trade, and consideration of contingencies in the day to day operations of the Company and in the monthly management financial reporting and statutory reporting of the Company. At present the nature of operations and scope of the business is reasonably well established and understood by management and the board. The decision making and reporting processes in the Company incorporate an assessment of the relevant material risks, for example in the planning, budget, HR, product development, R&D, legal and compliance activities and, where relevant, any material risk issues are reported to and considered by the board. The planning and budget process involves both the executive and senior management, which means all of these employees have a more than adequate understanding of the issues, activities and opportunities across the Company. In turn this enables them to manage operational, planning, strategic and risk issues in the Company. In addition, the Company regularly conducts reviews of the material risks in the context of the annual insurance renewals and, in relation to acquisitions through due diligence. Relevant risk factors are included in the various management and financial reports to the board and are then considered by the board. The reporting, identification and management of risk are now effectively a standing board agenda item. Due to the effectiveness of the existing processes and the size of the business, business risk management systems, policies and procedures have not been comprehensively formalised. With a view to fully adopting Recommendations 7.1 and 7.2, the Company’s risk management systems, policies and processes are under consideration to be formalised and documented, if necessary. 20 Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au 24 March 2010 The Board of Directors Reckon Limited 35 Saunders Street Pyrmont NSW 2009 Dear Board Members RECKON LIMITED In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Reckon Limited. As lead audit partner for the audit of the financial statements of Reckon Limited for the financial year ended 31 December 2009, I declare that to the best of my knowledge and belief, there have been no contraventions of: (i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (ii) any applicable code of professional conduct in relation to the audit. Yours sincerely DELOITTE TOUCHE TOHMATSU Michael Kaplan Partner Chartered Accountants Liability limited by a scheme approved under Professional Standards Legislation. 21 Deloitte Touche Tohmatsu ABN 74 490 121 060 Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au independent Auditor’s Report to the Members of Reckon Limited Report on the Financial Report We have audited the accompanying financial report of Reckon Limited, which comprises the statement of financial position as at 31 December 2009, and the statement of comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 24 to 63. Directors’ Responsibility for the Financial Report The directors of the company are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards. Auditor’s Responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. Liability limited by a scheme approved under Professional Standards Legislation. 22 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Auditor’s Independence Declaration In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s Opinion In our opinion: (a) the financial report of Reckon Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company’s and consolidated entity’s financial position as at 31 December 2009 and of their performance for the year ended on that date; and (ii) complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; and (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1. Report on the Remuneration Report We have audited the Remuneration Report included in pages 10 to 16 of the directors’ report for the year ended 31 December 2009. 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. Auditor’s Opinion In our opinion the Remuneration Report of Reckon Limited for the year ended 31 December 2009, complies with section 300A of the Corporations Act 2001. DELOITTE TOUCHE TOHMATSU Michael Kaplan Partner Chartered Accountants Sydney, 24 March 2010 23 financial Report Directors’ Declaration The directors of the Company declare that: 1. the financial statements and notes as set out on pages 25 to 63, are in accordance with the Corporations Act 2001, and: • comply with Accounting Standards; and • give a true and fair view of the financial position as at 31 December 2009 and of the performance for the year ended on that date of the Company and the consolidated Group; 2. the Chief Executive Officer and the Chief Finance Officer have each declared that: • the financial records of the Company for the financial year have been properly maintained in accordance with s 286 of the Corporations Act 2001; • the financial statements and notes for the financial year comply with the Accounting Standards, and • the financial statements and notes for the financial year give a true and fair view; 3. in the directors’ opinion there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and This declaration is made in accordance with a resolution of the Board of Directors. On behalf of the directors Mr J Thame Chairman Sydney, 24 March 2010 24 statement of Comprehensive income for the year ended 31 December 2009 Note Consolidated Parent Continuing operations Revenue Product and selling costs Royalties Employee benefits expenses Share-based payments expenses Marketing expenses Premises and establishment expenses Depreciation and amortisation of other non-current assets Telecommunications Legal and professional expenses Finance costs Other expenses Profit before business acquisition restructure costs Business acquisition restructure costs Profit before income tax Income tax expense Profit for the year Other comprehensive income 2 2 3 2009 $’000 85,389 (14,623) (4,204) 2008 $’000 60,775 (5,358) (4,211) 2009 $’000 46,016 (3,480) (4,079) 2008 $’000 44,788 (3,728) (4,200) (26,913) (20,051) (11,320) (11,027) (1,027) (3,106) (2,683) (6,897) (995) (889) (303) (301) (4,467) (1,771) (4,663) (809) (441) - (1,028) (2,297) (1,473) (5,364) (569) (571) (438) (301) (3,736) (1,144) (4,511) (530) (350) (93) (4,761) (3,580) (1,735) (1,991) 18,988 (1,176) 17,812 (4,210) 15,123 13,662 13,177 - - - 15,123 (3,811) 13,662 (1,413) 13,177 (2,214) 13,602 11,312 12,249 10,963 Exchange difference on translation of foreign operations 21 (258) (194) - - Total comprehensive income for the year 13,344 11,118 12,249 10,963 Profit attributable to: Owners of the parent Minority interest Total comprehensive income attributable to: Owners of the parent Minority interest 22 13,226 11,312 12,249 10,963 376 - - - 13,602 11,312 12,249 10,963 12,968 11,118 12,249 10,963 376 - - - 13,344 11,118 12,249 10,963 Basic Earnings per Share Alternative Basic Earnings per Share (excluding after tax effect of restructure costs) Diluted Earnings per Share 23 23 23 Cents Cents 9.9 10.5 9.9 8.5 8.5 8.5 The above statement of comprehensive income should be read in conjunction with the accompanying notes. 25 statement of financial Position as at 31 December 2009 Note Consolidated Parent 2009 $’000 2008 $’000 2009 $’000 2008 $’000 ASSETS Current Assets Cash and cash equivalents Trade and other receivables Inventories Other assets Total Current Assets Non-Current Assets Receivables Financial assets Property, plant and equipment Deferred tax assets Intangible assets Other assets Total Non-Current Assets Total Assets LIABILITIES Current Liabilities Trade and other payables Borrowings Current tax payables Provisions Deferred revenue Deferred rent contribution Total Current Liabilities Non-Current Liabilities Borrowings Deferred tax liabilities Provisions Deferred rent contribution Total Non-Current Liabilities Total Liabilities Net Assets Equity Issued capital Reserves Retained earnings Equity attributable to owners of the parent Minority interest Total Equity 28 6 5 7 6 8 9 10 11 12 13 14 15 16 17 15 20 21 22 29 2,350 9,152 1,159 1,164 16,134 4,993 440 855 712 1,540 235 466 14,889 1,161 280 401 13,825 22,422 2,953 16,731 617 64 3,768 586 45,270 192 50,497 64,322 6,022 375 813 1,899 6,048 250 - 629 2,543 426 24,088 905 28,591 51,013 4,918 - 1,742 808 2,863 213 15,407 10,544 2,023 1,972 850 795 5,640 21,047 43,275 18,037 239 24,625 42,901 374 43,275 - 640 605 841 2,086 12,630 38,383 17,566 816 20,003 38,385 (2) 2,203 33,566 1,823 - 15,019 192 52,803 55,756 2,883 4,412 632 940 2,072 142 11,081 2,012 594 665 591 3,862 14,943 40,813 18,037 639 22,137 40,813 - 1,029 15,069 1,613 - 13,062 905 31,678 48,409 3,036 3,052 1,569 351 1,868 142 10,018 - 210 432 733 1,375 11,393 37,016 17,566 958 18,492 37,016 - The above statement of financial position should be read in conjunction with the accompanying notes. 26 38,383 40,813 37,016 statement of Changes in Equity for the year ended 31 December 2009 Consolidated Balance at 1 January 2009 Profit for the year Exchange differences on translation of foreign operations Total comprehensive income for the year Share based payments expense Dividends paid Treasury shares vested/lapsed Transfer to share capital Treasury shares acquired Contributions of equity, net of transaction costs Issued capital $’000 17,566 - - - - - 498 132 (415) 256 Foreign currency translation reserve Share- based payments reserve Retained earnings Attributable to owners of the parent Minority interest Total $’000 (142) - (258) (258) - - - - - - - - $’000 $’000 $’000 $’000 $'000 958 20,003 13,226 38,385 13,226 (2) 38,383 376 13,602 - (258) - (258) 13,226 12,968 376 13,344 311 - 311 - (8,604) (8,604) (498) (132) - - - - - - - - (415) 256 - - - - - - 311 (8,604) - - (415) 256 Balance at 31 December 2009 18,037 (400) 639 24,625 42,901 374 43,275 Balance at 1 January 2008 18,203 Profit for the year Exchange differences on translation of foreign operations Total comprehensive income for the year Dividends paid Share based payments expense Transfer to share capital Treasury shares acquired Contributions of equity, net of transaction costs - - - - - 62 (812) 113 52 - (194) (194) - - - - - 461 15,938 - - - - 559 (62) - - 11,312 - 11,312 (7,247) - - - - 34,654 11,312 (194) 11,118 (7,247) 559 - (812) 113 (2) 34,652 - - - - - - - - 11,312 (194) 11,118 (7,247) 559 - (812) 113 Balance at 31 December 2008 17,566 (142) 958 20,003 38,385 (2) 38,383 The above statement of changes in equity should be read in conjunction with the accompanying notes. 27 statement of Changes in Equity for the year ended 31 December 2009 Parent Issued capital Share-based payments reserve Retained earnings Balance at 1 January 2009 Profit for the year Total comprehensive income for the year Share based payments expense Dividends paid Treasury shares vested/lapsed Transfer to share capital Treasury shares acquired Contributions of equity, net of transaction costs Balance at 31 December 2009 Balance at 1 January 2008 Profit for the year Total comprehensive income for the year Dividends paid Share based payments expense Transfer to share capital Treasury shares acquired Contributions of equity, net of transaction costs $’000 17,566 - - - - 498 132 (415) 256 18,037 18,203 - - - - 62 (812) 113 $’000 958 - - 311 - (498) (132) - - 639 461 - - - 559 (62) - - Total $’000 37,016 12,249 12,249 311 (8,604) - - (415) 256 $’000 18,492 12,249 12,249 - (8,604) - - - - 22,137 40,813 14,776 10,963 10,963 (7,247) - - - - 33,440 10,963 10,963 (7,247) 559 - (812) 113 Balance at 31 December 2008 17,566 958 18,492 37,016 The above statement of changes in equity should be read in conjunction with the accompanying notes. 28 statement of Cash flows for the year ended 31 December 2009 Cash Flows From Operating Activities Receipts from customers Note Consolidated Parent Inflows/(Outflows) Inflows/(Outflows) 2009 $’000 2008 $’000 2009 $’000 2008 $’000 93,451 65,180 39,374 41,236 Payments to suppliers and employees (69,701) (46,548) (24,482) (27,312) Interest received Interest paid Dividends received Income taxes paid 81 (303) - 804 - - 71 (438) 4,952 626 (93) 3,312 (4,647) (3,137) (1,966) (1,942) Net cash inflow from operating activities 28(c) 18,881 16,299 17,511 15,827 Cash Flows From Investing Activities Payment for purchase of business, net of cash acquired 28(b) (18,394) Payments for purchase of intellectual property Payment for deferred acquisition costs 28(b) Payment for capitalised development costs Payment for property, plant and equipment Increase/(decrease) in loans from subsidiaries Proceeds/(payments) for security deposits (164) - (6,485) (1,822) - 565 (366) (40) (905) (18,165) (46) - (366) (40) (905) (4,634) (6,723) (4,841) (664) - (249) (762) (72) 573 (309) 2,183 (249) Net cash outflow from investing activities (26,300) (6,858) (25,195) (4,527) Cash Flows From Financing Activities Proceeds from issues of equity securities Proceeds from borrowings Payment for treasury shares Dividends paid 256 2,398 (415) 113 - (314) 256 2,270 (415) 113 - (314) (8,604) (7,247) (8,604) (7,247) Net cash outflow from financing activities (6,365) (7,448) (6,493) (7,448) Net Increase/(Decrease) in cash and cash equivalents (13,784) 1,993 (14,177) Cash and cash equivalents at the beginning of the financial year 16,134 14,141 14,889 3,852 11,037 Cash and cash equivalents at the end of the financial year 28(a) 2,350 16,134 712 14,889 The above statement of cash flows should be read in conjunction with the accompanying notes. 29 Notes to the financial statements for the year ended 31 December 2009 (c) Depreciation and Amortisation Depreciation is provided on plant and equipment. Depreciation is calculated on a straight-line basis. Leasehold improvements are amortised over the period of the lease or the estimated useful life, whichever is the shorter, using the straight-line method. The following estimated useful lives are used in the calculation of depreciation and amortisation: Plant and equipment Leasehold improvements 3 - 5 years 3 - 6 years (d) Employee Benefits Provision is made for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave, when it is probable that settlement will be required and they are capable of being measured reliably. Provisions made in respect of wages and salaries, annual leave, and other employee entitlements expected to be settled within 12 months are measured at the amounts expected to be paid when the liabilities are settled. Provisions made in respect of long service leave which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the consolidated entity in respect of services provided by employees up to the reporting date, using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. The Group recognises a liability and an expense for the long- term incentive plan for selected executives based on a formula that takes into consideration the ranking of total shareholder return measured against a comparator group of companies. Contributions are made by the Group to defined contribution employee superannuation funds and are charged as expenses when incurred. (e) Contributed Equity Transaction Costs on the Issue of Equity Instruments Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued. 1. Summary of Significant Accounting Policies The principal accounting policies adopted in the preparation of the financial report are set out below. Unless otherwise stated, the accounting policies adopted are consistent with those of the previous year. The financial report includes separate financial statements for Reckon Limited as an individual entity and the consolidated entity consisting of Reckon Limited and its subsidiaries. Basis of preparation This general purpose financial report has been prepared in accordance with Australian Accounting Standards and Interpretations and the Corporations Act 2001, and complies with the other requirements of the law. Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the consolidated financial statements and notes of Reckon Limited, comply with International Financial Reporting Standards (IFRSs). The financial report has been prepared in accordance with the historical cost convention, except for the revaluation of certain non-current assets and financial instruments. Significant Accounting Policies (a) Trade Payables These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. These amounts are unsecured and are usually paid within 30 days of the month of recognition. Trade payables are recognised initially at fair value, and subsequently at amortised cost. (b) Acquisition of Assets Assets acquired are recorded at the cost of acquisition, being the fair value of the purchase consideration determined as at the date of acquisition plus costs incidental to the acquisition. Where equity instruments are issued in an acquisition, the value of the instruments is the weighted average of their closing market price for the total of the five business days either side of the acquisition date. In the event that settlement of all or part of the consideration given in the acquisition of an asset is deferred, the fair value of the purchase consideration is determined by discounting the amounts payable in the future to their present value as at the date of acquisition. However, where the deferred component is subject to certain criteria being met, the amount deferred is recognised based on an estimate where it is probable that the relevant criteria will be met. If the amount is not probable or cannot be reliably measured, no amount is recognised. 30 Notes to the financial statements for the year ended 31 December 2009 (f) Foreign Currency Translation (g) Goods and Services Tax 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 Reckon Limited’s functional and presentation currency. Transactions and balances All foreign currency transactions during the financial year have been brought to account in the functional currency using the exchange rate in effect at the date of the transaction. Foreign currency monetary items at reporting date are translated at the exchange rate existing at that date. Exchange differences are brought to account in the profit or loss in the period in which they arise. Group companies The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency of the consolidated entity as follows: • • Assets and liabilities are translated at the closing rate at the date of the statement of financial position; Income and expenses are translated at average rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and • All resulting exchange differences are recognised as a separate component of equity. On consolidation, exchange differences arising from the translation of monetary items forming part of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken directly to reserves. When a foreign operation is sold or borrowings repaid, a proportionate share of such exchange differences are recognised in the income statement as part of the gain or loss on sale. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity at the closing rate. Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except: i. where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or ii. for receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. (h) Intangible Assets Goodwill Where an entity or operation is acquired, the identifiable net assets acquired are measured at fair value. Goodwill represents the excess of the fair value of the cost of acquisition over the fair value of the identifiable net assets acquired. Goodwill is not amortised, and is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired. Following initial recognition goodwill is measured at cost less any accumulated impairment losses. If an impairment has been identified, the goodwill is written down and an expense recognised in profit or loss. Impairment losses recognised for goodwill are not subsequently reversed. Intellectual Property Acquired Intellectual Property is recognised at cost, less accumulated amortisation and any impairment losses, and is amortised on a straight line basis between 3-5 years. Research and development costs Research and development expenditure is recognised as an expense when incurred, except in the undernoted instances. Development costs in respect of enhancements on existing Professional Division and Elite suites of software applications are capitalised and written off over a 3 to 4 year period. Development costs on technically and commercially feasible new Professional Division and Elite products are capitalised and written off on a straight line basis over a period of 3 to 4 years commencing at the time of commercial release of the new product. Development costs include cost of materials, direct labour and appropriate overheads. At each balance sheet date, a review of the carrying value of the capitalised development costs being carried forward is undertaken to ensure the carrying value is recoverable from future revenue generated by the sale of that software. 31 Notes to the financial statements for the year ended 31 December 2009 (i) Income Tax The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities, and their carrying amounts in the financial statements, and to unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or liability. No deferred tax asset or liability is recognised in relation to those temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss. 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. All deferred tax liabilities are recognised. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity. Reckon Limited, and its wholly owned Australian controlled entities have formed a tax consolidated group. Under the tax consolidation regime, the parent Company is responsible for recognising the current tax assets and liabilities both for itself and its underlying subsidiaries. Therefore any current tax assets or liabilities attributable to the underlying subsidiaries are assumed by the parent Company. Deferred tax is recognised by each entity within the Group, with the exception of deferred tax assets arising from available tax losses and tax credits, which are assumed by the parent Company. Both current and deferred tax assets and liabilities are calculated as if each entity were a standalone taxpayer. All the wholly-owned Australian subsidiaries in the Group have entered into a tax funding agreement, which requires that all balances assumed by the head entity are settled in full. Furthermore, in the event that the head entity defaults in its obligations under the tax consolidation system, each entity in the Group is limited in its obligation to fund the income tax obligation of the head entity to the proportion that the tax liability to which the entity would have been liable had the Group not elected to become a tax consolidated entity bears to the total taxation liability of the head entity. (j) Inventories Inventories are stated at the lower of cost and net realisable value. Costs are assigned to inventory on hand on a weighted average cost basis. (k) Investments in subsidiaries Investments in subsidiaries are recorded at cost. Dividend revenue is taken to income on a receivable basis. (l) Leased Assets A distinction is made between finance leases which effectively transfer from the lessor to the lessee substantially all the risks and benefits incident to ownership of leased assets, and operating leases under which the lessor effectively retains substantially all the risks and benefits. Operating lease payments are recognised on a straight line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred. Lease incentives are initially recognised as a liability and are amortised over the term of the lease on a straight line basis. (m) Principles of Consolidation The consolidated financial statements have been prepared by combining the financial statements of all the entities that comprise the consolidated entity, being the Company (the parent entity) and its subsidiaries. Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies. The consolidated financial statements include the information and results of each subsidiary from the date on which the Company obtains control and until such time as the Company ceases to control the entity. In preparing the consolidated financial statements, all inter- company balances and transactions, and unrealised profits arising from transactions within the consolidated entity are eliminated in full. 32 Notes to the financial statements for the year ended 31 December 2009 (n) Receivables Trade receivables and other receivables are recorded at amortised cost, less impairment. (o) Impairment of assets Assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). (p) Revenue Recognition Sale of Goods and Disposal of Assets Revenue from the sale of goods and disposal of other assets is recognised when the consolidated entity has passed control of the goods or other assets to the buyer, the fee is fixed or determinable and collectability is probable. Professional Division software licence fee revenue is recognised at the point when the customer is in agreement for a “live operation” (i.e. when the customer accepts that all users can use the system on a fully functional basis). Rendering of Services Revenue from a contract to provide services is recognised by reference to the stage of completion of the contract or on a time and materials basis depending upon the nature of the contract. Support and maintenance revenue is recognised on a straight-line basis over the period of the contract, unless the cost of providing the technical support is insignificant. Under those circumstances the revenue and the associated cost of providing the technical support is accrued upon shipment of the goods. In multiple element arrangements where goods and services are sold as a bundled product, the fair value of the services is recognised as revenue over the period during which the service is performed, unless cost of providing those services is insignificant. Under those circumstances the revenue and the associated cost of providing the services is accrued upon shipment of the goods. Royalty Income Royalty income is recognised on an accruals basis in accordance with the substance of the relevant agreement. Interest and Other Revenue Interest revenue is recognised on a time proportional basis taking into account the effective interest rates applicable to the financial assets. Other revenue is recognised when the right to receive the revenue has been established. (q) Deferred Revenue Revenue earned from maintenance and support services provided on sales of certain products by the consolidated entity are deferred and then recognised in the income statement over the contract period as the services are performed, normally 12 months. Refer Note 1(p) for further detail. (r) Earnings per share Basic earnings per share is determined by dividing net profit after income tax attributable to members of the Company by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year. Diluted earnings per share adjusts the figures in the determination of basic earnings per share by taking 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 dilutive potential ordinary shares. (s) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with financial institutions and bank overdrafts. (t) Other financial assets Other financial assets represent security deposits held as rental guarantees. They are valued at amortised cost. (u) Provisions Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that the outflow can be reliably measured. (v) Fair Value estimation The fair value of financial instruments and share based payments that are not traded in an active market is determined using valuation techniques. The Group uses a variety of methods and assumptions that are based on existing market conditions. Other techniques, such as estimated discounted cash flows, are used to determine fair value for the remaining instruments. The directors consider that the nominal value less estimated credit adjustments of trade receivables and payables approximate their fair values. 33 Notes to the financial statements for the year ended 31 December 2009 (w) Rounding of amounts The parent entity has applied the relief available to it under ASIC Class Order 98/100, and accordingly, amounts in the financial report have been rounded off to the nearest thousand dollars, except where otherwise indicated. (x) Significant accounting judgments, estimates and assumptions Significant accounting judgments In applying the Group’s accounting policies, management has made the following judgments which have the most significant effect on the financial statements: Capitalisation of development costs – the Group has adopted a policy of capitalising development costs only for products for which an assessment is made that the product is technically feasible and will generate definite economic benefits for the Group going forward. The capitalised costs are subsequently amortised over the expected useful life of the product. Revenue recognition - in multiple element arrangements where goods and services are sold as a bundled product, the fair value of the services is recognised as revenue over the period during which the service is performed. Significant accounting estimates and assumptions The carrying amount of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of certain assets and liabilities are: Impairment of goodwill – the Group determines whether goodwill is impaired on an annual basis. This requires an estimation of the recoverable amount of the cash-generating unit to which the goodwill is allocated. The assumptions used in this estimation, and the effect if these assumptions change, are disclosed in Note 11. Share based payments – the Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date on which they are granted. The fair value has been determined using the Binomial Option Pricing Model, and the assumptions related to this can be found in Note 19. 34 Notes to the financial statements for the year ended 31 December 2009 (y) New accounting standards not yet effective At the date of authorisation of the financial report, a number of Standards and Interpretations were in issue but not yet effective. Initial application of the following Standards will not affect any of the amounts recognised in the financial report, but will change the disclosures presently made in relation to the Group and the Company’s financial report. Standard/Interpretation Effective for annual reporting periods beginning on or after Expected to be initially applied in the financial year ending • AASB 3 ‘Business Combinations’ (revised), AASB 127 ‘Consolidated and Separate Financial Statements’ (revised) and AASB 2008-3 ‘Amendments to Australian Accounting Standards arising from AASB 3 and AASB 127’ Business combinations occurring after the beginning of annual reporting periods beginning 1 July 2009 31 December 2010 • AASB 2008-6 ‘Further Amendments to Australian Accounting Standards arising from the Annual Improvements Project’ 1 July 2009 31 December 2010 • AASB 2008-8 ‘Amendment to Australian Accounting Standards - Eligible Hedged Items’ • AASB 2009-4‘Amendment to Australian Accounting Standards arising from the Annual Improvements Process’ • AASB 2009-5‘Further Amendments to Australian Accounting Standards arising from the Annual Improvements Process’ 1 July 2009 31 December 2010 1 July 2009 31 December 2010 1 January 2010 31 December 2010 • AASB 2009-7 ‘Amendment to Australian Accounting Standards’ 1 July 2009 31 December 2010 • AASB 1 ‘First-time Adoption of Australian Accounting Standards’ 1 July 2009 31 December 2010 • AASB Interpretation 17 ‘Distributions of Non-cash Assets to Owners’, AASB 2008-13 ‘Amendments to Australian Accounting Standards arising from AASB Interpretation 17 – Distributions of Non-cash Assets to Owners’ • AASB 2009-8 ‘Amendments to Australian Accounting Standards – Group Cash-settled Share-based Payment Transactions’ • AASB 124 ‘Related Party Disclosures (2009)’, AASB 2009-12 ‘Amendments to Australian Accounting Standards’ • AASB 9 ‘Financial Instruments’, AASB 2009-11 ‘Amendments to Australian Accounting Standards arising from AASB 9’ • AASB 2009-9 ‘Amendments to Australian Accounting Standards – Additional Exemptions for First-time Adopters’ • AASB 2009-10 ‘Amendments to Australian Accounting Standards – Classification of Rights Issues’ • AASB 2009-14 ‘Amendments to Australian Interpretation – Prepayments of a Minimum Funding Requirement’ • AASB Interpretation 19 ‘Extinguishing Liabilities with Equity Instruments’ • AASB 2010-1 – 'Amendments to Australian Accounting Standards – Limited Exemption from Comparative AASB 7 Disclosures for First-time Adopters' 1 July 2009 31 December 2010 1 January 2010 31 December 2010 1 January 2011 31 December 2011 1 January 2013 31 December 2013 1 January 2010 31 December 2010 1 February 2010 31 December 2011 1 January 2011 31 December 2011 1 July 2010 31 December 2011 1 July 2010 31 December 2011 35 Notes to the financial statements for the year ended 31 December 2009 2. Profit for the year Profit before income tax includes the following items of revenue and expense: Revenue Sales revenue Consolidated Parent 2009 $’000 2008 $’000 2009 $’000 2008 $’000 Sale of goods and rendering of services 85,231 59,871 36,031 37,026 Other Revenue Other income Interest revenue – Bank deposits Royalty revenue Dividend income Expenses Cost of Sales Bad debt expense: Other Entities Finance costs expensed: Wholly-owned controlled entities Bank loans and overdraft Net transfers to/(from) provisions: Sales returns and rebates Employee benefits Allowance for doubtful debts Depreciation of non-current assets: Property, plant and equipment Amortisation of non-current assets: Leasehold improvements Intellectual property Development costs Foreign exchange losses/(gains) Research and Development costs 77 81 - - 158 85,389 100 804 - - 904 60,775 108 71 4,854 4,952 9,985 163 626 3,661 3,312 7,762 46,016 44,788 18,827 9,569 7,559 7,928 103 - 303 149 796 47 871 425 1,529 4,072 (59) 2,190 - - - 55 32 23 552 196 602 3,313 (155) 2,342 54 135 303 149 630 1 399 153 605 4,207 1 2,001 - 93 - 55 (19) 43 346 119 602 3,444 4 2,260 Minimum lease payments 2,362 1,718 1,075 1,015 Business acquisition restructure costs 1,176 - - - Business acquisition restructure costs relate predominantly to surplus premises and staff redundancies. 36 Notes to the financial statements for the year ended 31 December 2009 3. Income Tax (a) Income tax expense Current tax Deferred tax Under /(over) provided in prior years (b) The prima facie income tax expense on pre-tax accounting profit reconciles to the income tax expense/(income tax revenue) in the financial statements as follows: Consolidated Parent 2009 $’000 4,215 733 (738) 4,210 2008 $’000 4,169 (133) (225) 3,811 2009 $’000 1,820 384 (791) 1,413 2008 $’000 2,540 (92) (234) 2,214 Profit before income tax Income tax expense calculated at 30% of profit 17,812 5,344 15,123 4,537 13,662 4,099 13,177 3,953 Tax Effect of: Effect of higher tax rates on overseas income Tax effect of non-deductible/non-taxable items: Dividends Minority interest component Research and development claims Sundry items Under/(over) provision in prior years – R&D claims Under/(over) provision in prior years - other Income tax expense attributable to profit (c) Future income tax benefits not brought to account as an asset: not probable of recovery Tax losses: Revenue Capital 60 - (113) (389) 46 4,948 (791) 53 4,210 - 2,295 2,295 - - - (530) 29 4,036 - (225) 3,811 - 2,261 2,261 - - (1,486) - (389) (20) 2,204 (791) - 1,413 - 2,295 2,295 (994) - (530) 19 2,448 - (234) 2,214 - 2,261 2,261 37 Notes to the financial statements for the year ended 31 December 2009 4. Remuneration of Auditors (a) Deloitte Touche Tohmatsu During the year, the auditors of the parent entity earned the following remuneration: Consolidated Parent 2009 $ 2008 $ 2009 $ 2008 $ Auditing and reviewing of financial reports 184,851 164,777 134,851 135,915 Due diligence and other assurance services Tax compliance and consulting services 14,850 56,767 42,750 80,914 14,850 56,767 42,750 80,914 (b) Other Auditors Auditing and reviewing of financial reports Tax compliance services 5. Inventories Finished goods: 256,468 288,441 206,468 259,579 56,842 19,766 76,608 32,181 25,139 57,320 - - - - - - 333,076 345,761 206,468 259,579 Consolidated Parent 2009 $’000 2008 $’000 2009 $’000 2008 $’000 At lower of cost and net realisable value 1,159 440 235 280 38 Notes to the financial statements for the year ended 31 December 2009 6. Trade and Other Receivables Current: Trade receivables (i) Allowance for doubtful debts Other receivables Non current: Unsecured loans to subsidiaries (ii) Other receivables (i) The ageing of past due receivables at year end is detailed as follows: Past due 0-30 days Past due 31-60 days Past due 61+ days The movement in the allowance for doubtful accounts in respect of trade receivables is detailed below: Balance at beginning of the year Amounts written off during the year Increase in allowance recognised in the profit and loss Balance at end of year Consolidated Parent 2009 $’000 8,552 (261) 8,291 861 9,152 - 617 617 1,271 988 1,474 3,733 317 (103) 47 261 2008 $’000 4,670 (317) 4,353 640 4,993 - - - 982 466 504 1,952 294 - 23 317 2009 $’000 1,301 (179) 1,122 418 1,540 2008 $’000 912 (233) 679 482 1,161 2,203 1,029 - - 2,203 1,029 105 118 80 303 233 (55) 1 179 168 107 - 275 190 - 43 233 The average credit period on provision of services is 30 days. No interest is charged on trade or other receivable balances overdue. The Group has used the following basis to assess the allowance loss for trade receivables and as a result is unable to specifically allocate the allowance to the ageing categories shown above: the general economic conditions; • a general provision based on historical bad debt experience; • • an individual account by account specific risk assessment based on past credit history; and • any prior knowledge of debtor insolvency or other credit risk. Included in the Group’s trade receivable balance are debtors with a carrying amount of $3,472 thousand (2008: $1,635 thousand) which are past due at the reporting date which the Group has not provided for as there has been no significant change in credit quality and the Group believes that the amounts are still considered recoverable. Furthermore, the above balances are partially offset by amounts included in deferred revenue in current liabilities. The Group does not hold any collateral over these balances. (ii) The loans to wholly owned subsidiaries have no fixed repayment terms. The loans are interest free and at call. 39 Notes to the financial statements for the year ended 31 December 2009 7. Other Assets Prepayments Other 8. Other Financial Assets Security deposits Shares in controlled entities - at cost (Note 26) 9. Property, Plant And Equipment Leasehold Improvements At cost Less: Accumulated amortisation Total leasehold improvements Plant and equipment At cost Less: Accumulated depreciation Total plant & equipment Reconciliations Consolidated Parent 2009 $’000 820 344 1,164 64 - 64 2,472 858 1,614 5,382 3,228 2,154 3,768 2008 $’000 740 115 855 629 - 629 2,329 1,119 1,210 5,417 4,084 1,333 2,543 2009 $’000 466 - 466 56 33,510 33,566 1,093 349 744 2,174 1,095 1,079 1,823 2008 $’000 401 - 401 629 14,440 15,069 1,732 835 897 4,234 3,518 716 1,613 Reconciliations of the carrying amounts of each class of property, plant and equipment at the beginning and end of the financial year are set out below. Consolidated Carrying amount at 1 January 2009 Additions Depreciation/amortisation expense Balance at 31 December 2009 Parent entity Carrying amount at 1 January 2009 Additions Depreciation/amortisation expense Balance at 31 December 2009 40 Leasehold Improvements Plant and Equipment $’000 $’000 1,210 829 (425) 1,614 897 - (153) 744 1,333 1,741 (920) 2,154 716 762 (399) 1,079 Total $’000 2,543 2,570 (1,345) 3,768 1,613 762 (552) 1,823 Notes to the financial statements for the year ended 31 December 2009 Consolidated Carrying amount at 1 January 2008 Additions Depreciation/amortisation expense Balance at 31 December 2008 Parent entity Carrying amount at 1 January 2008 Additions Depreciation/amortisation expense Balance at 31 December 2008 10. Deferred Tax Asset Leasehold Improvements Plant and Equipment $’000 $’000 431 975 (196) 1,210 47 969 (119) 897 1,283 647 (597) 1,333 764 298 (346) 716 Total $’000 1,714 1,622 (793) 2,543 811 1,267 (465) 1,613 Consolidated Parent 2009 $’000 2008 $’000 2009 $’000 2008 $’000 The balance comprises temporary differences attributable to: Doubtful debts Employee benefits Deferred revenue Other provisions Details of unrecognised deferred tax assets can be found in Note 3(c) Reconciliation: Opening balance at 1 January Credited/(charged) to the income statement Acquisition of businesses Balance at 31 December 22 319 65 180 586 426 (955) 1,115 586 22 314 - 90 426 387 39 - 426 - - - - - - - - - - - - - - - - - - 41 Notes to the financial statements for the year ended 31 December 2009 Consolidated Parent 11. Intangibles Intellectual property – at cost Accumulated amortisation Development costs – at cost Accumulated amortisation 2009 $’000 12,588 (6,667) 5,921 23,107 (12,397) 2008 $’000 6,270 2009 $’000 6,316 2008 $’000 6,270 (5,138) (5,743) (5,138) 1,132 16,573 (8,325) 573 23,978 (12,934) Goodwill – at cost 28,639 14,708 3,402 10,710 8,248 11,044 1,132 17,255 (8,727) 8,528 3,402 Impairment test for goodwill Goodwill is allocated to the Group’s Cash Generating Units (CGUs) identified according to the business entities acquired, as follows: 45,270 24,088 15,019 13,062 Professional Division Australia Professional Division New Zealand Professional Division United Kingdom nQueue Billback Division Elite Corporate Services 10,361 1,742 426 2,449 2,536 11,125 28,639 9,564 1,742 - - 2,536 866 14,708 The recoverable amount of a CGU is determined based on value-in-use calculations. Management has based the value in use calculations on the most recently completed Board approved budget for the forthcoming one year (2010) period. Subsequent cash flows between years two and five are projected using forecast EBITDA growth rates of 10% per annum based on recent historical performance and managements expectation of continued organic growth during this period. Thereafter growth rates are projected at a constant growth rate of 3% (based on historical industry averages) into perpetuity. An average post-tax discount rate of 13.4% (2008: 13.4%) (2009 pre-tax rate: 17.5%) reflecting assessed risks associated with CGU’s have been applied to determine the present value of future cash flow projections. No impairment write-offs have been recognised during the year (2008: nil). Should the projected EBITDA growth rates of 10% per annum in years two to five reduce to 0%, an impairment would still not arise. 42 Notes to the financial statements for the year ended 31 December 2009 Consolidated movements in intangibles Goodwill Intellectual Property Development Costs At 1 January 2009 Additions (Note 28(b)) Amortisation charge At 31 December 2009 At 1 January 2008 Additions Adjustment to purchase price Amortisation charge $’000 14,708 13,931 $’000 1,132 6,318 - (1,529) 28,639 14,750 - (42) - 5,921 1,694 40 - (602) $’000 8,248 6,534 (4,072) 10,710 6,882 4,679 - (3,313) Total $’000 24,088 26,783 (5,601) 45,270 23,326 4,719 (42) (3,915) At 31 December 2008 14,708 1,132 8,248 24,088 Parent movements in intangibles Goodwill Intellectual Property Development Costs At 1 January 2009 Additions Amortisation charge At 31 December 2009 At 1 January 2008 Additions Adjustment to purchase price Amortisation charge $’000 3,402 - - 3,402 3,444 - (42) - $’000 1,132 46 (605) 573 1,694 40 - (602) $’000 8,528 6,723 (4,207) 11,044 7,131 4,841 - (3,444) Total $’000 13,062 6,769 (4,812) 15,019 12,269 4,881 (42) (4,046) At 31 December 2008 3,402 1,132 8,528 13,062 12. Other Assets Prepayments – deferred acquisition costs Prepayments - other Consolidated Parent 2009 $’000 - 192 192 2008 $’000 905 - 905 2009 $’000 - 192 192 2008 $’000 905 - 905 43 Notes to the financial statements for the year ended 31 December 2009 13. Trade and Other Payables Current: Trade payables and sundry accruals (i) Employee benefits (Note 19) Consolidated Parent 2009 $’000 4,683 1,339 6,022 2008 $’000 3,885 1,033 4,918 2009 $’000 2,356 527 2,883 2008 $’000 2,466 570 3,036 (i) The credit period for the majority of goods purchased is 30 days. No interest is charged. The Group has policies in place to ensure payables are paid within the credit periods. 14. Borrowings Current: Bank overdraft (i) Unsecured loans from subsidiaries (ii) Other borrowings Consolidated Parent 2009 $’000 2008 $’000 258 - 117 375 - - - - 2009 $’000 258 4,154 - 4,412 2008 $’000 - 3,052 - 3,052 (i) During the year the consolidated entity secured bank facilities totaling $23.0 million. The facility comprises a bank overdraft facility, and a multi option facility (which includes a bill facility and bank guarantee/transactional facility). The facility covers a 3 year term, except for $1.0 million which is subject to annual review. The facility is secured over the Australian net assets of the Group ($38.6 million at 31 December 2009). The balance drawn down to date has been used to fund a portion of the Corporate Services and Billback acquisitions. 2009 Bank overdraft Bill facility Bank guarantee facility $’000 $’000 $’000 The available, used and unused components of the facility at year end is as follows: Available Used Unused 1,000 258 742 19,000 2,012 16,988 The remaining contractual maturity for the facility (including both interest and principal) is as follows: 0-12 months 12-24 months Weighted average interest rate 258 - 7.08% - 2,192 4.33% (ii) Loans from related parties are interest bearing at 5% (2008: 7%) on normal commercial terms with no fixed terms of repayment. 3,000 1,078 1,922 - - - 44 Notes to the financial statements for the year ended 31 December 2009 15. Provisions Current: Sales returns, volume rebates Employee benefits (Note 19) Commissions and sundry provisions Non-current: Employee benefits (Note 19) Movement in provisions Movements in each class of provision during the financial year, excluding employee benefits, are set out below: 2009 Consolidated Carrying amount at the start of the year Additional provisions recognised Released to profit or loss Carrying amount at the start of the year 2009 Parent Carrying amount at the start of the year Additional provisions recognised Released to profit or loss Carrying amount at the end of the year Consolidated 2009 $’000 339 1,052 508 1,899 850 2008 $’000 190 343 275 808 605 Parent 2009 $’000 339 601 - 940 665 2008 $’000 190 161 - 351 432 Sales returns, volume rebates Commissions and sundry Total $’000 $’000 $’000 190 149 - 339 190 149 - 339 275 233 - 508 - - - - 465 382 - 847 190 149 - 339 45 Notes to the financial statements for the year ended 31 December 2009 16. Borrowings Borrowings Non–current: Bank loans (Note 14) Other borrowings 17. Deferred tax liabilities The temporary differences are attributable to: Withholding tax payable in event of distribution of pre-acquisition dividend Doubtful debts Employee benefits Sales returns and volume rebates Deferred revenue Difference between book and tax value of non-current assets Other provisions Details of unrecognised deferred tax assets can be found in Note 3(c) Reconciliation: Opening balance at 1 January Charged (credited) to profit or loss Acquisition of businesses Balance at 31 December 18. Working capital deficiency Consolidated 2009 $’000 2,012 11 2,023 430 (54) (600) (101) (762) 3,387 (328) 1,972 640 (222) 1,554 1,972 2008 $’000 - - - 430 (70) (260) (57) (560) 1,634 (477) 640 732 (92) - 640 Parent 2009 $’000 2008 $’000 2,012 - 2,012 - (54) (254) (101) (619) 1,954 (332) 594 210 384 - 594 - - - - (70) (260) (57) (560) 1,634 (477) 210 302 (92) - 210 The statement of financial position indicates an excess of current liabilities over current assets of $1,582 thousand in respect of the consolidated entity and $8,128 thousand in respect of the parent. This arises due to the cash management structure adopted by management, whereby surplus funds are used to repay long-term debt. The consolidated entity and the Company had available unused long-term bank facilities at year end totaling $19,652 thousand. Furthermore, included in current liabilities is deferred revenue of $6,048 thousand for the consolidated entity and $2,072 thousand for the Company, settlement of which liabilities will involve substantially lower cash flows. 46 Notes to the financial statements for the year ended 31 December 2009 19. Employee Benefits The aggregate employee benefit liability recognised and included in the financial statements is as follows: Accrued annual leave: Current (Note 13) Long term incentive: Current (Note 15) Non-current (Note 15) Provision for long service leave: Current (Note 15) Non-current (Note 15) Long-term incentive plan Consolidated 2009 $’000 2008 $’000 Parent 2009 $’000 1,339 1,033 492 407 560 443 3,241 119 176 224 429 1,981 527 492 407 109 258 1,793 2008 $’000 570 119 176 42 256 1,163 The long-term incentive plan was approved at the Special General Meeting on 20 December 2005, and comprises three possible methods of participation: an option plan, a performance share plan and a share appreciation plan. The Board has discretion to make offers to applicable employees to participate in any of these plans. Options granted and/or performance shares awarded (all in respect of the Company’s ordinary shares) and/or share appreciation rights do not vest before three years after their grant date. Vesting is also conditional upon the Company achieving defined performance criteria. The performance criteria are based upon a total shareholder return (TSR) target. A TSR is the return to shareholders over a prescribed period, being the growth in the Company’s share price plus dividends or returns of capital for that period. The Company’s initial TSR target will be the Company achieving a median or higher ranking against the TSR position of individual companies within a ‘comparator Group’ of companies (i.e. a group of comparable ASX listed companies pre-selected by the Board) over the same period. The initial comparator group was determined by independent advisers and was set out in the Chairman’s speech at the Special General Meeting on 20 December 2005. The Board will review the suitability of the comparator group on an on going basis. Only 50% of options or performance shares become exercisable or vest if the initial performance criterion is satisfied. The extent to which the balance of options or performance shares become exercisable or vest will depend on the extent to which the initial performance criterion is exceeded (i.e. the extent to which the Company exceeds a median ranking against the TSR position of the comparator group of companies). The performance shares are held in trust after vesting. The share appreciation rights plan represents an alternative remuneration element (to offering options or performance shares) under which the Board can invite relevant employees to apply for a right to receive a cash payment from the Company equal to the amount (if any) by which the market price of the Company’s shares at the date of exercise of the right exceeds the market price of the Company’s shares at the date of grant of the right. The right may only be exercised if performance criteria are met. The performance criteria are fixed by the Board in the exercise of its discretion. At present these are the same as the TSR target set for the right to exercise options or for performance shares to vest. No options were issued during the year (2008: Nil). 888,324 (2008: 495,356) appreciation rights and 375,475 (2008: 252,477) performance shares were issued during the year. The fair value of these rights was 19.7 cents (2008: 32.3 cents) and the shares were $1.05 (2008: $1.36), using market price for the shares, and a model that incorporates the Black Scholes model for the rights. The expense recognised in 2009 for appreciation rights/ performance shares was $1,027,823 (2008: $300,666). 47 Notes to the financial statements for the year ended 31 December 2009 Set out below are summaries of performance shares and appreciation rights granted under the long-term incentive plan: Performance Shares Grant Date Expiry Date Shares Granted Shares lapsed during the year Shares vested during the year Shares available at the end of the year 2009 2008 2009 2008 2009 2008 85,437 300,590 252,477 375,475 - 9,823 7,332 - - - - - - 85,437 290,762 - - - - - - - - 300,585 245,145 252,477 375,475 - Jan’06 Jan’07 Jan’08 Jan’09 Dec’08 Dec’09 Dec’10 Dec’11 Appreciation Rights Grant Date Expiry Date Rights Granted Rights lapsed during the year Rights vested during the year Rights available at the end of the year Jan’06 Jan’07 Jan’08 Jan’09 Dec’08 Dec’09 Dec’10 Dec’11 401,785 561,798 495,356 888,324 Reckon Limited Employee Option Plans 2009 2008 2009 2008 2009 2008 - - - - - - - - - 401,785 561,798 - - - - - - - - 561,798 495,356 495,356 888,324 - The Company has previously had two ownership-based remuneration schemes: Executive share option plan The executive share option plan has been terminated. Executive share option plan No. 2 The Reckon Limited Executive Share Option Plan No. 2 was established on 19/7/2000. Under the provisions of the plan, the directors may grant options over unissued shares in the Company to executives and directors of the Company (or their associates) or subsidiaries of the Company selected by the directors from time to time, subject to the ASX Listing Rules and the Corporations Act 2001. Options are granted for a five-year period and 50% of each new tranche becomes exercisable after each of the first two anniversaries of the grant date. The entitlements are vested as soon as they are exercisable (i.e. they are not conditional on future employment). Each option entitles the holder to one ordinary share. Amounts receivable on exercise of any options are recognised as share capital. Options exercised during the year were exercised with an average exercise price of $0.67. No further options will be issued under either of these plans. The plans have been replaced by the employee incentive plans approved by the Special General Meeting on 20 December 2005. Options are valued using the Binomial Option Pricing Model, taking into account the exercise price, the expected life of the options (estimated at 4.5 years), the price of the underlying shares (range is between $0.65 and $0.82), the expected volatility of those shares based on historical volatility, the expected dividends and the risk-free rate of interest. The weighted average share price during the year was $1.34. 48 Notes to the financial statements for the year ended 31 December 2009 Set out below are summaries of options granted under the Executive Share Option Plan No. 2. Grant date Expiry date Exercise Price Options Initially Granted Options lapsed during the year 2009 2008 Feb 01 Mar 01 Jun 03 Sep 03 Dec 03 Jan 04 Mar 04 Jun 04 Sep 04 Dec 04 Mar 05 Jul 05 Sep 05 Dec 05 Feb 06 Mar 06 Jun 08 Sep 08 Dec 08 Jan 09 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jul 10 Sep 10 Dec 10 $0.198 1,123,334 $0.162 $0.270 $0.505 $0.619 22,145 58,891 115,002 48,890 - - - 8,339 10,555 $0.551 1,061,159 217,076 $0.789 $0.960 $0.823 $0.796 $0.743 $0.741 $0.779 $0.722 56,110 76,668 151,166 250,554 75,555 79,999 113,887 144,445 35,889 45,389 45,441 78,281 - - - - - - 19,001 50,407 24,808 - - - - - - - - - Options exercised and shares issued during the year Options vested and available at the end of the year 2008 2009 2009 9,340 5,937 - 18,050 7,298 - - - 7,387 3,789 161,168 176,806 - 24,278 42,223 80,315 - - 31,139 - - - - - - - - - 2008 9,340 5,937 - 26,389 19,272 378,244 35,889 69,667 87,664 158,596 57,527 49,876 84,180 81,809 - - - - 1,419 - - - - - 57,527 49,876 53,041 81,809 Number of shares that can be issued for unexercised options 243,672 1,064,390 440,970 94,216 379,748 187,982 243,672 1,064,390 20. Issued Capital Fully Paid Ordinary Share Capital 2009 No. $’000 2008 No. Balance at beginning of financial year 132,937,807 18,378 132,749,825 Transfer from share-based payments reserve for options exercised during the year Issue of shares - 379,748 132 256 - 187,982 $’000 18,203 62 113 Balance at end of financial year 133,317,555 18,766 132,937,807 18,378 Less Treasury shares Balance at beginning of financial year Shares purchased in prior periods Shares purchased in current period Shares lapsed Shares vested Balance at end of financial year 717,319 - 375,475 (17,155) (455,019) 620,620 812 - 415 (20) (478) 729 - 464,842 252,477 - - 717,319 Balance at end of financial year net of treasury shares 132,696,935 18,037 132,227,820 - 498 314 - - 812 17,566 Fully paid ordinary shares carry one vote per share and carry the right to dividends. Changes to the then Corporations Law abolished the authorised capital and par value concepts in relation to share capital from 1 July 1998. Therefore the Company does not have a limited amount of authorised capital and issued shares do not have a par value. 379,748 (2008; 187,982) Options were exercised during the year with an average exercise price of $0.67. Details of the options that were exercised and further details in respect of the share option plans are contained in Note 19 to the financial statements. Total consideration for options exercised during the year is $255,419. 49 Notes to the financial statements for the year ended 31 December 2009 21. Reserves Foreign currency translation reserve Balance at beginning of financial year Translation of foreign operations Balance at end of financial year Share-based payments reserve Balance at beginning of financial year Treasury share expense Treasury shares vested/lapsed Transfer to share capital (options exercised) Balance at end of financial year Nature and purpose of reserves (a) Foreign currency translation reserve Consolidated 2009 $’000 2008 $’000 Parent 2009 $’000 2008 $’000 (142) (258) (400) 958 311 (498) (132) 639 239 52 (194) (142) 461 559 - (62) 958 816 - - - 958 311 (498) (132) 639 639 - - - 461 559 - (62) 958 958 Exchange differences arising on translation of the financial reports of foreign subsidiaries are taken to the foreign currency translation reserve, as described in Note 1(f) (b) Share-based payments reserve The share-based payments reserve is for the fair value of options granted and recognised to date but not yet exercised, and treasury shares purchased which have not yet vested. 22. Retained Earnings Balance at beginning of financial year Net profit Dividends Balance at end of financial year Consolidated Parent 2009 $’000 20,003 13,226 (8,604) 24,625 2008 $’000 15,938 11,312 (7,247) 20,003 2009 $’000 18,492 12,249 (8,604) 22,137 2008 $’000 14,776 10,963 (7,247) 18,492 50 Notes to the financial statements for the year ended 31 December 2009 23. Earnings Per Share Basic earnings per share Diluted earnings per share 2009 2008 ¢ 9.9 9.9 ¢ 8.5 8.5 Weighted average number of ordinary shares used in the calculation of basic earnings per share 133,115,106 132,786,989 Weighted average number of ordinary shares and potential ordinary shares used in the calculation of diluted earnings per share 133,358,778 133,833,461 Earnings per share calculations are based on profit for the year as set out in the statement of comprehensive income of $13,226 thousand (2008: $11,312 thousand). Alternative earnings per share is based on profit for the year, adjusted for the after tax impact of business acquisition restructure costs of $814 thousand (i.e. adjusted profit of $14,040 thousand). Potential ordinary shares of 243,672 (2008: 1,064,390) are options issued but not exercised as disclosed in note 19. 24. Contingent Liabilities There are no material contingent liabilities as at 31 December 2009. 25. Commitments For Expenditure (a) Capital Expenditure Commitments Consolidated 2009 $’000 2008 $’000 Parent 2009 $’000 2008 $’000 The consolidated entity has capital expenditure commitments of $nil as at 31 December 2009 (2008: $53,000). (b) Lease Commitments Operating Leases Within 1 year Later than 1 year and not longer than 5 years Later than 5 years 1,976 7,344 1,949 11,269 1,720 4,736 1,111 7,567 985 3,835 159 4,979 1,021 3,803 1,111 5,935 Operating leases relate to office and warehouse premises with lease terms of between 1 to 7 years. All operating lease contracts contain market review clauses in the event that the consolidated entity exercises its option to renew. The consolidated entity does not have an option to purchase the leased asset at the expiry of the lease period. 51 Notes to the financial statements for the year ended 31 December 2009 26. Subsidiaries Name of Entity Country of Incorporation Ownership Interest 2009 % 2008 % Parent Entity Reckon Limited Subsidiaries Reckon.com.au Pty Limited Reckon Australia Pty Limited Reckon Investment Centre Limited Reckon Online Holdings Pty Limited Reckon Pacrim Pty Limited Reckon Training Pty Limited Reckon Limited Performance Share Plan Trust Reckon New Zealand Pty Limited Advanced Professional Solutions Pty Limited1 Advanced Professional Solutions Limited1 Australia Australia Australia Australia Australia Australia Australia Australia New Zealand Australia New Zealand Advanced Professional Solutions Limited1 United Kingdom Reckon Docs Pty Limited Independent Corporate Services Pty Limited Quickdocs.com.au Pty Limited Recount Expense Management Pty Limited1 Billback Systems (UK) Limited1 Billback LLC2 nQueue Billback LLC2 All shares held are ordinary shares. 1 Professional Division subsidiaries. 2 nQueue Billback Division subsidiaries. Australia Australia Australia Australia United Kingdom United States of America United States of America 100 100 100 100 100 90 100 100 100 100 100 100 100 100 100 100 100 67 100 100 100 100 100 90 100 100 100 100 100 - - - - - - - 52 Notes to the financial statements for the year ended 31 December 2009 27. Related Party Disclosures (a) Key Management Personnel Remuneration Short term benefits Post-employment benefits Share based payments Consolidated 2009 $ 2008 $ Parent 2009 $ 2008 $ 3,923,937 3,189,551 2,039,445 1,829,135 262,861 955,653 227,650 271,577 147,420 855,716 133,879 169,253 5,142,451 3,688,778 3,042,581 2,132,267 The names of and positions held by the key management are set out in Note 27(e). Further details of the remuneration of key management are disclosed in the Directors’ Report. (b) Other Transactions with Key Management Personnel There were no transactions with directors apart from those disclosed in this note. (c) Transactions within the Wholly-Owned Group During the financial year, Reckon Limited provided management, accounting and administration services, at no cost, to other entities in the wholly-owned Group. During the financial year, Reckon Limited charged royalties on intellectual property at market rates to the Professional and nQueue Billback Divisions of $4,854,368 (2008; $3,660,961), and was charged interest at normal commercial rates on the inter-company loan with Advanced Professional Solutions Limited in New Zealand of $134,954 (2008; $93,289). The Professional Division has also provided development services to Reckon Limited at market rates and has charged fees for these services of $6,722,251 (2008; $4,541,519). The Professional Division and Reckon Docs Pty Limited paid dividends to Reckon Limited of $4,951,626 (2008; $3,311,804). Receivables/payables from entities within the wholly-owned Group include amounts arising under the Group’s tax funding arrangement. These loans are interest free and repayable on demand. The Professional and nQueue Billback Division subsidiaries are as set out in Note 26. (d) Other Related Party Transactions Intuit Ventures Inc Intuit Ventures Inc, a significant shareholder (11.1%) in Reckon Limited provides the rights for Reckon to market and distribute Intuit software throughout Australasia and parts of South-East Asia. In return for this, Intuit receives a royalty payment based on sales made throughout the territory. These royalties amounted to $4,056,227 (2008; $4,209,212) which is expensed in the month that the associated product was sold. The balance due at 31 December 2009 is $161,238 (2008; $150,843). 53 Notes to the financial statements for the year ended 31 December 2009 27. Related Party Disclosures continued (e) Directors’ and Key Management Equity Holdings Options and Shareholding 2009 Shareholding Shareholding Performance Performance Performance Performance at start of at end of Options at start Options at end shares at start shares vested shares issued shares held at 2009 20092 of 2009 of 20091 of 2009 in 2009 2009 end of 2009 Office Deputy Chairman, Executive Director Greg Wilkinson Clive Rabie Brian Armstrong CEO, Professional Division Brian Coventry MD, Professional Division United Kingdom John Thame Myron Zlotnick Ian Ferrier Chairman, Non-Executive Director General Counsel & Co Secretary Non-Executive Director Chris Hagglund Chief Financial Officer Nigel Boland Paul James Gavin Dixon Grant Linton Russell Scott Andrew Moon3 Richard Hellers4 GM, Development Professional Division GM Professional Division Australia CEO Business Division GM, Professional Division New Zealand GM Reckon Docs GM Billback President & CEO nQueue Billback Division 7,450,000 7,450,000 CEO, Executive Director 10,508,000 10,508,000 748,222 768,673 287,766 297,589 19,000 19,000 0 0 0 0 0 0 0 28,204 0 0 0 0 111,130 47,500 23,222 13,039 0 0 0 0 0 0 0 67,539 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 221,007 72,451 80,952 229,508 17,155 9,823 13,333 20,665 0 0 0 0 87,660 28,204 47,619 107,075 0 0 0 0 156,868 63,630 72,619 165,857 17,155 9,823 13,333 20,665 7,332 0 9,524 16,856 124,362 67,539 80,952 137,775 0 0 0 0 0 0 0 0 9,524 9,524 0 0 0 0 0 0 1 No options were issued in 2009. 2 Shareholdings at the date of the Directors' Report remain unchanged, apart from Brian Armstrong, who has sold 42,222 shares since year end, and Brian Coventry, who has sold 25,000 shares since year end. 3 Employment ended on 31 March 2009. 4 Mr Hellers was appointed President & CEO of the merged Billback USA and nQueue business effective from 1 July 2009. 54 Notes to the financial statements for the year ended 31 December 2009 27. Related Party Disclosures continued (e) Directors’ and Key Management Equity Holdings Options and Shareholding 2008 Shareholding Shareholding Performance Performance Performance Performance at start of at end of Options at Options at end shares at start shares vested shares issued shares held at 2008 20085 start of 2008 of 20084 of 2008 in 2008 in 2008 end of 2008 Office Deputy Chairman, Executive Director Executive Director MD, APS United Kingdom Chairman, Non-Executive Director General Counsel & Co Secretary Non-Executive Director Greg Wilkinson Clive Rabie Brian Armstrong Brian Coventry John Thame Myron Zlotnick Ian Ferrier Chris Hagglund3 Chief Financial Officer Nigel Boland GM, Development APS Paul James Gavin Dixon GM APS Australia CEO Quicken Australia Michael Donnelly1 MD, APS New Zealand Grant Linton2 GM, APS New Zealand 7,450,000 7,450,000 10,508,000 10,508,000 0 0 CEO, APS 728,000 748,222 42,222 287,766 287,766 40,111 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 162,351 46,762 58,656 221,007 9,823 0 0 0 7,332 17,155 0 0 60,642 16,873 27,018 87,660 0 0 0 0 0 0 0 47,500 47,500 105,544 21,802 51,324 156,868 0 0 0 0 0 0 0 0 0 0 9,823 0 67,539 9,823 0 0 0 0 0 0 7,332 17,155 7,332 7,332 56,823 124,362 7,332 0 0 0 19,000 19,000 0 0 0 0 0 0 23,222 23,222 0 0 0 0 0 0 0 0 1 Mr Donnelly resigned on 15 October 2008. 2 Mr Linton was appointed GM on 1 September 2008. 3 Options granted on: 15 December 2004; fair value per option granted: $0.3809; options expire on 15 December 2009. At exercise of options, an exercise price of $0.796 is payable per share. 4 All options have vested and are exercisable. No options were issued in 2008. 5 Shareholdings at the date of the Directors' Report remain unchanged. 55 Notes to the financial statements for the year ended 31 December 2009 28. Notes To The Statement of Cash Flows (a) Reconciliation of Cash For the purposes of the statement of cash flows, cash includes cash on hand and in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash at the end of the financial year as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows: Cash (i) (i) Cash balance is predominantly in the form of short-term money market deposits, which can be accessed at call. (b) Businesses Acquired Corporate Services and Billback businesses Consideration: Cash consideration (i) Net debt acquired Direct costs relating to the acquisition Fair value of net assets of entity acquired: Receivables Inventories Intellectual property – customer contracts Intellectual property – development and software Intellectual property – trademarks and domain names Fixed assets Deferred tax liabilities Trade payables Deferred revenue Other current liabilities Other non-current liabilities Goodwill (i) Reckon Limited has commenced legal proceedings against Espreon in relation to several claims which is expected to reduce the consideration paid. The amount of the claim is yet to be finalised. 56 Consolidated Parent 2009 $’000 2008 $’000 2009 $’000 2008 $’000 2,350 16,134 2,350 16,134 712 712 14,889 14,889 18,000 228 1,045 19,273 3,437 881 4,210 1,793 150 728 (439) (772) (3,361) (1,121) (138) 5,368 13,905 19,273 Notes to the financial statements for the year ended 31 December 2009 NQueue Billback Consideration: Cash consideration Direct costs relating to the acquisition Fair value of net assets of entity acquired: Receivables - current Receivables – non current Inventories Fixed assets Deferred revenue Other current liabilities Goodwill - 26 26 334 684 301 20 (1,082) (257) - 26 26 Corporate Services and Billback businesses Reckon Limited acquired the Corporate Services and Billback businesses previously owned by Espreon Limited effective from 2 January 2009 for $18 million. The acquisition was funded predominantly from existing cash reserves. Debt funding was used to fund the difference. The Corporate Services business is a provider of documentation for company formations, secretarial services, trusts and self managed super fund trust deeds. This is a range of products and services which is similar to Reckon’s Shelco business. The Billback business is a provider of technologies for the capture, reporting and billing of client expenses by professional services suppliers such as lawyers and accountants, and hence has a natural fit with Reckon’s Professional Division. nQueue Billback Reckon Limited merged its United States subsidiary of Billback with nQueue Inc effective from 1 July 2009. Reckon holds a 67% controlling interest in the merged entity. The merged entity brings together the best of the parties cost recovery and cost management products and service offerings in the USA and gives the business greater scale. All of these businesses contributed revenue of $24,700 thousand and EBITDA of $6,266 thousand (before restructure costs) to the Group results for the year. 57 Notes to the financial statements for the year ended 31 December 2009 Consolidated Parent 28. Notes To The Statement of Cash Flows continued 2009 $’000 2008 $’000 (c) Reconciliation of Profit After Income Tax To Net Cash Flows From Operating Activities Profit after income tax Depreciation and amortisation of non-current assets Non-cash employee benefits expense – share based payment Increase/(decrease) in current tax liability/asset Increase/(decrease) in deferred tax balances Unrealised foreign currency translation amount (Increase)/decrease in assets: Current receivables Current inventories Other current assets Non-current receivables Increase/(decrease) in liabilities: Current trade payables Other current liabilities Other non-current liabilities 13,602 6,897 311 (1,106) 733 (258) (388) 463 (309) (125) (371) (629) 61 11,312 4,663 - 805 (131) (194) (788) (91) 52 324 288 327 (268) 2009 $’000 12,249 5,364 311 (937) 384 - (379) 45 (65) (192) (153) 793 91 2008 $’000 10,963 4,511 - (664) (92) - 328 (84) 121 324 346 162 (88) Net cash inflow from operating activities 18,881 16,299 17,511 15,827 29. Outside Equity Interests in Controlled Entities Interest in: Share Capital Accumulated profits/(losses) Consolidated 2009 $’000 - 374 374 2008 $’000 - (2) (2) 58 Notes to the financial statements for the year ended 31 December 2009 30. Dividends – ordinary shares Final franked dividend for the year ended 31 December 2008 of 3.5 cents (2007: 3.0 cents) per share paid on 6 March 2009 Interim franked dividend for the year ended 31 December 2009 of 3.0 cents per share (2008: 2.5 cents) paid on 11 September 2009 Franking credits available for subsequent financial years based on a tax rate of 30% (2008: 30%) 31. Financial Instruments (a) Significant Accounting Policies Consolidated 2009 $’000 4,636 3,968 8,604 1,932 2008 $’000 3,983 3,264 7,247 2,507 Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which revenues and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in Note 1 to the financial statements. (b) Financial Risk Management Objectives The Board of Directors has overall responsibility for the establishment and oversight of the Company and Group’s financial management framework. The Board of Directors oversees how Management monitors compliance with risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks. The main risk arising from the Company and Group’s financial instruments are currency risk, credit risk, liquidity risk and cash flow interest rate risk. (c) Interest Rate Risk The Group and parent are exposed to interest rate risk on the cash held in bank deposits and on bank borrowings. Cash deposits of $2,350 thousand and $712 thousand were held by the consolidated entity and parent entity respectively at the reporting date, attracting an average interest rate of 1.5% (2008: 4.1%). If interest rates had been 50 basis points higher or lower (being the relevant volatility considered relevant by management) and all other variables were held constant, the Group’s net profit would increase/ decrease by $12 thousand (2008: $81 thousand) and the parent’s net profit would increase/decrease by $4 thousand (2008: $74 thousand). Borrowings by the consolidated entity and the parent entity at the reporting date were $2,270 thousand, attracting an average interest rate of 7.08% on overdraft facilities and 4.33% on bank bill facilities (2008: nil). If interest rates had been 50 basis points higher or lower and all other variables were held constant, the Group’s net profit would increase/decrease by $11 thousand (2008: nil) and the parent’s net profit would increase/decrease by $11 thousand (2008: nil). The Board of Directors monitors these exposures and does not presently hedge against these risks. The parent entity is also exposed to an immaterial interest rate risk on interest bearing loan balances due to its overseas subsidiaries. (d) Credit Risk Credit risk refers to the risk that a counter party will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has adopted the policy of only dealing with creditworthy counterparties and obtaining sufficient collateral or other security where appropriate, as a means of mitigating the risk of financial loss from defaults. The consolidated entity does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics. The carrying amount of financial assets recorded in the financial statements, net of any provisions for losses, represents the consolidated entity’s maximum exposure to credit risk without taking account of the value of any collateral or other security obtained. 59 Notes to the financial statements for the year ended 31 December 2009 (e) Foreign Currency Risk The consolidated entity and Company undertakes certain transactions denominated in foreign currencies that are different to the functional currencies of the entities undertaking the transactions, hence exposures to exchange rate fluctuations arise. The Board of Directors monitor these exposures and does not presently hedge against this risk. The carrying amount of the consolidated entity and Company’s foreign currency denominated monetary assets and liabilities at the reporting date that are denominated in a currency that is different to the functional currency of respective entities undertaking the transactions is as follows: Consolidated Parent Liabilities Assets Liabilities Assets 2009 $’000 - - 2008 $’000 - - 2009 $’000 33 28 2008 $’000 - 96 2009 $’000 - - 2008 $’000 - - 2009 $’000 - - 2008 $’000 - - Euro US Dollar At 31 December 2009, if the US Dollar weakened against the New Zealand Dollar by 10% (being the relevant volatility considered relevant by Management), with all other variables held constant the net profit of the consolidated entity would increase by $3 thousand (2008: $10 thousand). At 31 December 2009, if the Euro weakened against the UK Pound by 10% (being the relevant volatility considered relevant by Management), with all other variables held constant the net profit of the consolidated entity would increase by $3 thousand (2008: nil). At 31 December 2009, if the New Zealand Dollar, US Dollar and UK Sterling weakened against the Australian Dollar by 10% (being the relevant volatility considered relevant by Management), with all other variables held constant the net profit of the consolidated entity would increase by $231 thousand (2008: $269 thousand). This latter sensitivity relates to inter-group loan balances denominated in Australian Dollars, which are eliminated on consolidation. In Management’s opinion, the sensitivity analysis is not fully representative of the inherent foreign exchange risk as the year- end exposure does not necessarily reflect the exposure during the course of the years. The consolidated entity includes certain subsidiaries whose functional currencies are different to the consolidated entity presentation currency. The main operating entities outside of Australia are based in New Zealand, United States of America and the United Kingdom. These entities transact primarily in their functional currency and, aside from inter-group loan balances, do not have significant foreign currency exposures due to outstanding foreign currency denominated items. As stated in the Company and consolidated entity’s accounting policies per Note 1, on consolidation the assets and liabilities of these entities are translated into Australian Dollars at exchange rates prevailing at year end. The income and expenses of these entities is translated at the average exchange rates for the year. Exchange differences arising are classified as equity and are transferred to a foreign exchange translation reserve. The Company and consolidated entity’s future reported profits could therefore be impacted by changes in rates of exchange between the Australian Dollar and the New Zealand Dollar, and the Australian Dollar and the US Dollar and the Australian Dollar and the UK Sterling. (f) Liquidity The Group manages liquidity risk by maintaining adequate cash reserves and banking facilities by continuously monitoring forecast and actual cash flows. (g) Capital risk management The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern. The capital structure of the Group consists of cash, debt and equity attributable to equity holders of the parent. The Board reviews the capital structure on a regular basis. Based upon this review, the Group balances its overall capital structure through borrowings, the payment of dividends, issues of shares, share buy-backs and returns of capital. This strategy remains unchanged since the prior year. (h) Fair Value The fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets, is determined with reference to quoted market prices. The fair value of other financial assets and liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable market transactions. The carrying amount of financial assets and financial liabilities recorded in the financial report approximates their respective fair values, determined in accordance with the accounting policies disclosed in Note 1 to the financial statements. 60 Notes to the financial statements for the year ended 31 December 2009 32. Segment Information The Group has adopted AASB 8 Operating Segments and AASB 2008-3 Amendments to Australian Accounting Standards arising from AASB 8 with effect from 1 January 2009. AASB 8 requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. (a) Business segment information The consolidated entity is organised into three operating divisions: Business Division Professional Division nQueue Billback Division These divisions are the basis upon which the consolidated entity reports its financial information to the chief operating decision maker, being the Board of Directors. The principal activities of these divisions are as follows: • • Business Division - development, distribution and support of personal financial and accounting software, as well as related products and services to professional partners. Products sold in this division include QuickBooks, Quicken, Reckon Docs and Reckon Elite. Professional Division - development, distribution and support of practice management, tax, client accounting, cost management and related software under the APS and Billback brands. • nQueue Billback Division – distribution and support of cost recovery, cost management and related software to the USA legal market. Segment revenues and results Business Division Professional Division nQueue Billback Division Total Operating revenue 49,854 38,643 28,115 21,328 2009 $’000 2008 $’000 2009 $’000 2008 $’000 2009 $’000 7,339 2008 $’000 2009 $’000 2008 $’000 - 85,308 59,971 Interest revenue Total revenue Segment EBITDA 15,869 12,322 11,612 9,193 2,382 Depreciation and amortisation (1,782) (1,140) (4,570) (3,523) Business acquisition restructure costs (275) - (724) - (545) (177) Total segment profit before tax 13,812 11,182 6,318 5,670 1,660 Central administration costs Interest revenue/(Financing costs) Profit before income tax Income tax expense Profit for the year - - - - 81 804 85,389 60,775 29,863 21,515 (6,897) (4,663) (1,176) - 21,790 16,852 (3,756) (2,533) (222) 804 17,812 15,123 (4,210) (3,811) 13,602 11,312 61 Notes to the financial statements for the year ended 31 December 2009 The revenue reported above represents revenue generated from external customers. Segment profit represents the profit earned by each segment without allocation of central administration costs, finance costs and income tax expense, all of which are allocated to Corporate head office. This is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessing performance. Amounts reported in the prior period have been restated to conform to the requirements of AASB 8. As a result the following have been restated in 2008: • Corporate head office expenses previously included in the Business Division has been separated out. • Royalties paid by the Professional Division to the Business Division in lieu of development costs incurred by the latter have been removed and replaced by amortisation. Amortisation was previously reflected in the Business Division. Segment assets and liabilities Assets Liabilities Business Division Professional Division nQueue Billback Division Total of all segments Eliminations Consolidated 2009 $’000 23,331 35,107 10,486 68,924 (4,602) 64,322 2008 $’000 26,569 25,764 - 52,333 (1,320) 51,013 2009 $’000 12,613 9,182 3,854 25,649 (4,602) 21,047 2008 $’000 10,012 3,938 - 13,950 (1,320) 12,630 Additions to non-current assets 2009 $’000 6,673 8,152 7,081 2008 $’000 1,797 3,907 - 21,906 5,704 - - 21,906 5,704 (b) Geographical information Revenues from external customers Non-current assets Australia Other countries (i) (i) No single country outside of Australia is considered to generate revenues which are material to the Group. 2009 $’000 67,628 17,680 85,308 2008 $’000 51,626 8,345 59,971 2009 $’000 36,512 13,985 50,497 (c) Segment revenues External sales Business and wealth management products Accounting industry products Legal industry products 62 2009 $’000 44,433 28,203 12,672 85,308 2008 $’000 23,224 5,367 28,591 2008 $’000 33,498 26,473 - 59,971 Notes to the financial statements for the year ended 31 December 2009 33. Economic Dependency Reckon Limited generates a significant volume of its revenue from products supplied by Intuit under the manufacturing and distribution agreement it has with Intuit Inc. The term of the agreement is 10 years and is subject to market growth objectives. If these objectives are met the agreement is automatically extended by one year for each calendar year in which Reckon meets or exceeds its market growth objective. To date Reckon Limited has exceeded these growth objectives. 34. Subsequent Events Subsequent to the end of the financial year: Share buy-back A share buy back of up 10% of the Company’s share capital, was announced on 9 February 2010, as part of the Company’s strategy to manage its capital base. Dividend The Board has declared a dividend of 4 cents per share to shareholders on 9 February 2010. The dividend will be franked. The record date for the dividend is 19 February 2010. The impact on the franking account balance of unrecognised dividends is $2,275 thousand. Options Nil options in the Executive Share Option Plan No. 2 have lapsed and 10,034 options have been exercised with an average exercise price of $0.72. 35. Company information Reckon Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: 35 Saunders Street Pyrmont Sydney NSW 2009 A description of the nature of the consolidated entity’s operations and its principal activities is included in the review of operations and activities in the Directors’ Report, which is not part of this financial report. The Financial Report was authorised for issue by the directors on 24 March 2010. 63 Additional information as at 2 March 2010 Twenty Largest Holders of Quoted Equity Securities Ordinary Shareholder Intuit Ventures Inc National Nominees Limited JP Morgan Nominees Australia Limited HSBC Custody Nominees (Australia) Limited Gregory John Wilkinson RBC Dexia Investor Services Australia Nominees Pty Ltd Australian Executor Trustees NSW Ltd DJZ Investments Pty Limited Mr Clive Rabie and Mrs Kerry Rose Rabie Citicorp Nominees Pty Limited UBS Nominees Pty Limited Mr Stephen James Rickwood Cogent Nominees Pty Limited Mr Clive Alan Rabie Rawform Pty Ltd ANZ Nominees Limited Mr Philip Ross Hayman Queensland Investment Corporation Citicorp Nominees Pty Limited Reckon Australia Pty Ltd (as trustee for the Reckon Limited Performance Share Plan Trust) Number Percentage 14,828,304 14,405,727 12,849,579 9,712,580 6,300,000 5,082,273 5,031,301 4,750,000 3,764,071 3,417,596 3,211,718 2,751,062 2,730,461 1,993,929 1,150,000 1,149,239 1,000,000 1,000,000 941,204 713,252 11.12 10.80 9.64 7.28 4.73 3.81 3.77 3.56 2.82 2.56 2.41 2.06 2.05 1.50 0.86 0.86 0.75 0.75 0.71 0.53 96,782,296 72.57 Number of Holders of Equity Securities Equity securities include shares, units, options over issued or unissued securities, rights to any one of the former securities and convertible securities. Ordinary Share Capital 133,327,589 fully paid ordinary shares are held by 4,202 individual shareholders as at 2 March 2010. All issued ordinary shares carry one vote per share. Options 243,672 options were held by 28 individual option holders as at 31 December 2009. These options do not carry a right to vote and are not listed on the ASX. Since 31 December 2009, NIL options have lapsed. 64 Additional information as at 2 March 2010 Distribution of Holders of Equity Securities As at 2 March 2010 Number of Ordinary Shares Number of Shareholders Number of Option Holders 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over Total 993 1,976 652 585 56 4,202 0 5 15 8 0 28 Substantial Shareholders As at 2 March 2010 Ordinary Shares (Number) Ordinary Shares (Percentage) 11.12 10.80 9.64 7.88 7.60 5.59 Intuit Ventures Inc 14,828,304 National Nominees Limited JP Morgan Nominees Australia Limited Mr Clive Rabie and Mrs Kerry Rose Rabie HSBC Custody Nominees (Australia) Limited 14,405,727 12,849,579 10,508,000 9,712,580 Gregory John Wilkinson 7,450,000 Principal Registered Office Ground Floor, 35 Saunders Street Pyrmont NSW 2009 Tel: (02) 9577 5000 Share Registry Computershare Investor Services Pty Limited Level 3 60 Carrington Street Sydney NSW 2000 Tel: (02) 8234 5000 Auditors Deloitte Touche Tohmatsu 225 George Street Sydney NSW 2000 Principal Administration Office Ground Floor, 35 Saunders Street Pyrmont NSW 2009 Tel: (02) 9577 5000 Stock Exchange Listings Reckon Limited’s ordinary shares are listed on the Australian Stock Exchange Limited under the symbol ‘RKN’. Company Secretary Mr Myron Zlotnick Annual General Meeting The Annual General Meeting for Reckon Limited will be held on Tuesday 25 May 2010 at 10:00am at 35 Saunders Street, Pyrmont NSW. If you are unable to attend, you are invited to complete the Proxy Form included with your Notice of Meeting. The completed Proxy Form must be received no later than 48 hours before the Annual General Meeting. Important Information – Corporate Notices Securityholders will be aware that recent legislative changes have had an impact on the options to receive statutory corporate notices and reports. In the interest of cost saving and the environment (every little bit helps), we encourage you to opt in to receive all notices and reports electronically. Please go to: www.computershare.com.au and follow the prompts to register your opting in to receive ALL NOTICE AND REPORTS IN ELECTRONIC FORMAT. To register to be notified by email when the Annual Report and other Announcements are available online: • Visit the share registry at www.computershare.com • Click on ‘Securityholders’ • Click on ‘Elect to receive eCommunications from your companies’ • Type ‘RKN’ in the Company Code field • You will need to enter your personal security information: Holder Identification Number (HIN) or Securityholder Reference Number (SRN); family or company name, postcode or country (if outside Australia); and click ‘Submit’ After you have entered your email address and selected the publications you wish to receive, a confirmation email will be sent to you • Should you have any further enquiries, contact the Registry on 1300 855 080 or +61 3 9415 4000 (if outside Australia). For web enquiries, please send an email to web.queries@computershare.com.au. Alternatively, email your full name and address of the securityholder to shareholders@reckon.com.au to receive the Annual Report, corporate and statutory notices electronically. 65 66 67 68