Reckon Limited
Annual Report 2021

Plain-text annual report

Annual Report 2021 Reckon Limited Annual Report For the Financial Year Ended 31 December 2021 ABN 14 003 348 730 Contents 4 6 16 42 43 48 49 50 51 52 54 55 Message to Shareholders from the Chairman and Group CEO Directors’ Report Remuneration Report Auditor’s Independence Declaration Independent Auditor’s Report Directors’ Declaration Consolidated Statement of Profit or Loss Consolidated Statement of Profit or Loss and Other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Financial Statements 105 Additional Information as at 18 February 2022 3 Message from the Chairman It is my pleasure to present to you Reckon Limited’s 2021 Annual report and financial statements for the year ended 31 December 2021 (CY2021). In last year’s address I spoke about the advancement of our digital transformation from a desktop-focused business towards a cloud-first operation. I’m pleased to report that with a clear and focused strategy we have executed a number of initiatives over the last twelve months to further this transformation. There’s no question that ongoing disruption caused by the COVID-19 pandemic has continued to impact the broader operating landscape, as well as the businesses and communities that we serve. It has been inspiring to witness the resilience and adaptability displayed by our whole company, led by Reckon’s leadership of CEO Mr Sam Allert and CFO Mr Chris Hagglund. Navigating through a constantly changing environment, they have continued to support staff, boost morale and maintain a productive working environment. This allowed Reckon to continue to operate at full capacity and without material impact on the ongoing operation of our business. This in turn has enabled us to focus on supporting our clients. The rapidly decentralised work environment has led to us running additional webinars, remote training and implementations, and handle more support calls with a better response time and statistics than ever before. An amazing effort from the whole team considering the disruption and shift in how small business is being conducted. As further validation to the culture and workplace we have built at Reckon, our application to be certified as a Great Place to Work Australia was accepted. The certification is of particular significance as it’s a result from a two-week period of confidential employee surveying. It’s a very proud achievement and provides a benchmark for our company against the world’s best and confirms our long-held knowledge that we have an incredible team driven by an amazing culture. From a financial standpoint, we continued to perform very well throughout the year with each business division achieving a number of key milestones. The company maintained a stringent focus on capital management, deploying funds into growth, while continuing to deliver a strong earnings profile. This has allowed Reckon to maintain its consistent level of shareholder return, declaring a fully franked $0.05 dividend for the period yielding an approximate 8% return. On the strategic investment front, the Company finalised the acquisition of US-based start-up Zebraworks in February 2021 marking a key milestone for our Legal group. It enables our entry into the USA’s lucrative legal practice management industry, which we have had earmarked for expansion. We expect the acquisition to significantly accelerate the growth of our Legal Group making it a considerable contributor to the top-line growth of the Company, delivering organic sales and various cross-selling opportunities. Additional Company transactions include the sale of the Reckon Docs business to a Class Limited buyer group, with the funds received from the transaction being utilised to reduce debt. The reduction in debt is anticipated to further assist in achieving the consistent financial growth the Company has witnessed. As business continues to shift with the acceleration of digitisation, we remain in a strong position to accelerate our transition towards a cloud-based operation whilst achieving strong growth. We also welcomed Novatti Group Limited as a shareholder. Novatti are payments specialists, enabling any business to pay and be paid from any device, anywhere. Our relationship with Novatti continues to develop pleasingly. Work continues with Novatti on potential product launches and we anticipate these will unlock even more value for shareholders. I would like to thank the entire Reckon workforce for their dedication and commitment throughout the year. Likewise, to the Company’s management team I want to express my gratitude and appreciation for their leadership. And lastly, I want to thank the company’s shareholders for the ongoing support you show. I look forward to providing further updates on progress throughout the upcoming financial year. Greg Wilkinson Chairman 4 Message from the Group CEO The group has continued to deliver on its growth objectives to achieve strong operational and financial results in CY2021. As a company, we have continued to adapt and progress our transition to a cloud business, while continuing to ensure that we can service our customer base with a broad range of leading solutions. Our continued focus and increased investment into cloud-based products has seen a renewed confidence, supported by the increased client adoption and acceptance from the market with each new cloud module and product released. As we continue to develop and progress our digital transformation, we expect to continue to witness growth from each of the business, accountant, and legal operating groups. The Business Group continued its momentum with another year of consistent growth and profitability. The development of its Reckon Payroll product has delivered a new feature rich cloud payroll which will replace all current payroll products in use. Removing the old technology will see approximately 300,000 employees paid via Reckon Payroll cloud-based software. With all of our SME clients due to benefit from the transition, I look forward to seeing this number increase as we continue our growth trajectory. The Accountant Group saw a very encouraging increase in new business sales with the launch of the new APS Accountants Workspaces. The new software is a complete cloud-based APS environment and provides the Company with a compelling product to continue to take to market throughout FY22. With deployment of our technology in eight out of the top ten accounting firms, we anticipate that the Group will build upon the increased demand and experience growth in the near term. As highlighted by the Chairman, Reckon completed the acquisition of US based Zebraworks in February 2021. The acquisition provides us with an experienced in-country management team in the US which we will leverage to pursue growth and expand on the opportunity across the US and UK Legal markets. To accelerate that expansion, we brought to market Collection Q and Payment Q, the first cloud modules for our new cloud Practice Management for legal firms. The modules are able to be integrated with 3rd party on premise solutions allowing us to immediately begin business development initiatives within the growing sector. Our constant expanding portfolio of new cloud-based products, made possible by our ongoing investment in development, coupled with a very solid financial foundation, provides Reckon with a very exciting future and opportunities to continue to achieve the Company’s growth objectives. Our partnership with Novatti to launch integrated payments in 2022 is also well progressed which will facilitate further opportunities for our accounting and payroll solutions for small business. I look forward to updating shareholders over the course of CY2022 as progress continues to materialise. As a final word, I would like to thank all shareholders, Reckon team members, the Board, our partners and customers for their loyalty and support over the year. Sam Allert Group CEO 5 Directors’ Report The Directors of Reckon Limited submit these financial statements for the financial year ended 31 December 2021 Greg Wilkinson Independent Non-Executive Deputy Chairman until 30 June 2018, Chairman from 1 July 2018 Greg Wilkinson has over 30 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. He was appointed to the Audit & Risk Committee in February 2010 and Remuneration Committee in December 2011. He is also an investor and mentor to a number of cloud-based start-up companies. Greg was appointed Chairman on 1 July 2018. Greg resigned from the board of GetBusy PLC on 5 May 2020. Philip Hayman Independent Non-Executive Director from 1 July 2018 Phil Hayman was appointed to the board on 1 July 2018. He was a co-founder of Reckon in 1987. He resigned from Reckon in 2004 but has maintained his interest in Reckon through his ongoing shareholding. Phil has had varied general entrepreneurial and commercial experience through his investments in companies in start-up and first round capital raising phases. Phil is presently a director of an unlisted public company with manufacturing interests in China and sales in Australia and New Zealand. He also consults to an agricultural company with extensive holdings in southern NSW. He currently owns and manages an accommodation company. Clive Rabie Group Chief Executive Officer until 30 June 2018, Group Managing Director from 1 July 2018 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 and was appointed Group MD on 1 July 2018. He has extensive management and operational experience in the IT and retail sectors as both an owner and director of companies. Clive is a director of GetBusy PLC. 6 Samuel Allert Group Chief Executive Officer and Director from 1 July 2018 Sam Allert was appointed as a director on 1 July 2018. Sam was one of the first employees in the Australian Reckon APS business in 1999. He has held numerous roles in that business from National Sales Manager, Managing Director AU/NZ, eventually becoming CEO of Reckon APS in 2013. Taking on more responsibility Sam got involved with the Business Division in a newly formed position of MD AU/NZ for the Reckon Group in 2015. In July 2018 Sam stepped into the Group Chief Executive Officer position and was appointed to the board on 1 July 2018. Myron Zlotnick LLM, GCertAppFin Company Secretary Myron Zlotnick has over 20 years experience as a legal practitioner, general and corporate counsel, and as a director of companies in the information, communications and technology sector. 7 Directors’ Report (continued) Review of Operations and Statement of Principal Activities For the year reported the Company continues to be structured in three Groups, a Business Group, an Accountant Practice Management Group and a Legal Practice Management Group. The focus has been to grow each Group independently, and where possible implement integrations, seek out opportunities to cross sell, and to explore synergies across the Groups. From an internal operations point of view, within Australia and New Zealand, the Accountant Practice Management Group and Business Group have centralised Sales, Support, Marketing, and Client Success teams to manage the across-Group opportunities more efficiently. The Business Group undertakes the development, sales and support of business accounting and payroll software for small to larger sized businesses and personal wealth management software branded as Reckon One, Reckon Accounts Hosted, Reckon Accounts Business, Better Clinics and Better HQ (cloud products), and Reckon Accounts Personal respectively. It is operational predominantly in Australia and New Zealand with a presence in the United Kingdom. The Accountant Practice Management Group undertakes the development, sales and support of practice management, compliance and efficiency tools for professional accounting firms under the Reckon APS and Reckon Elite brands. This business also supplied corporate services such as company registration, company secretarial tools and supply of relevant content under the Reckon Docs brand. It is operational predominantly in Australia, New Zealand with a re-seller presence in the United Kingdom. The ReckonDocs business was sold to Class Limited effective 1 March 2021. The purchase consideration was $13 million. The Legal Practice Management Group supplies software and workflow solutions to legal firms and corporations for document scanning and routing, print management and cost recovery solutions under the Reckon nQueue and Reckon Billback brands. It is operational predominantly in the USA and United Kingdom, with re-sellers in other parts of the world. In February 2021 the Company announced the completion of a merger of its Legal Practice Management Group with the business of Zebraworks Inc (USA) into a 70/30 venture known as nQueue Zebraworks Inc. The merged business presents a platform for technology development and new markets. All Groups are supported by shared services teams which include IT, finance, marketing, and human resources. All the Groups have a loyal client base that run products and solutions based on desktop technology with very rich functions and features. Reckon has been on a transformation process developing or enhancing all products with a “cloud first” focus. The process is to provide an upgrade path for existing clients to the cloud, as well as providing new products that can attract and grow a new client base. The Business Group is furthest progressed on this strategy with the Accountant Practice Management Group and the Legal Practice Management Group also well poised for growth in the future. Business Group The Business Group distributes and supports a range of software products under the Reckon brand. These products are generally used by small to larger businesses in Australia and New Zealand and in the United Kingdom. Alongside cloud, hosted and desktop accounting software the range also includes solutions for payroll, point of sale, online practice management for allied health professionals (branded as Better Clinics) and scheduling and point of sale software (branded as BetterHQ), as well as personal finance software. A key focus in the Business Group is to grow the Reckon One cloud-based business accounting software. Reckon One cloud-based accounting software is based on a “designed by you” concept that allows users to tailor the solution to their needs by choosing modules their business will use. The current modules available are: Core (which includes payments and receipts, budgets and reporting); Invoices; Payroll; BankData (automatic bank statement import into accounts and reconciliation); Projects (manage revenue, costs and forecasts by project); Time (timesheets); and Employee Expenses (expense management module); and an open API for third party applications. Users can select which modules they need and only pay for those they use, making Reckon One a very cost-effective solution for small businesses. 8 The Payroll module includes the ability for small businesses to lodge their Single Touch Payroll reporting requirements, which is part of an overall strategy to integrate small business accounting with regulatory reporting under the Reckon GovConnect product brand. Reckon One is also available as a “white label” version. The Institute of Public Accountants provides a white label product to IPA members under the IPA Books+ brand. This partnership with the IPA continues to strengthen the recommender channel, with over 1200 IPA practices trained and certified as Cloud Advisors. The company has also entered in a while label arrangement with the Queensland government bringing Reckon One to Indigenous communities branded as Deadly Digits. The company also has a large focus on adding new mobile based applications that compliment and integrate with the Reckon One cloud accounting modules. The free Single Touch Payroll reporting application was the first of these new mobile apps and has been taken up by over 37,000 new users since May 2019, with over 780,000 pay runs processed via this app. In 2021 the company added a new mobile Payroll App, which is an ideal upgrade path from the free STP as it provides a complete feature rich payroll solution on the mobile.. Reckon Mate, a new employee facing mobile app released at the end of 2020 compliments Reckon One Payroll and our mobile strategy. The Company is also working on new mobile apps including Mobile Invoicing, Timesheets and Expenses. Reckon Accounts Hosted is a convenient secure online accounting software solution using the very same feature rich source code of the Reckon Accounts business range desktop package. It is a simple and efficient upgrade to “cloud accounting” for our many Reckon Accounts desktop clients. It is hosted in an AWS environment. Reckon Accounts products include: (1) Reckon BankData, a bank feed solution which allows connections with banks and other financial institutions to download bank transaction information directly into accounting software; and (2) Reckon GovConnect, an SBR-enabled solution for lodging reports to government agencies such as the ATO. The Company continues to explore strategic partnerships with suppliers who can meet the feature demands of small business for their diverse needs. Since 2017 the Company has partnered with Prospa in the “Fintech“ space to bring small business loans to its customer base under the Reckon Loans brand. In early 2022, the Company entered discussions with Novatti for the introduction of payment solutions for small business customers. The Company also partnered with Ozedi to implement eInvoicing solutions for small business customers. Better Clinics is a cloud-based practice management and scheduling software solution for health, medical and fitness professionals. This business presently focusses on the allied health services market that includes physiotherapists, chiropractors and personal trainers. This comprises a market of an estimated 120,000 customers. Accountant Practice Management Group The Accountant Practice Management Group develops, distributes and supports the APS suite of solutions for professional service firms in Australia, New Zealand and, via a reseller arrangement, in the United Kingdom. For professional accountants these solutions include Practice Management, Tax and Accounts production. It also delivers a wide range of complementary integrated modules for business-critical functions in professional firms: Practice Management (PM); Business Intelligence and Reporting (PIQ); Taxation (Tax); Client Accounting (XPA); Client Relationship Management (CRM); Workpaper Management (WM); Sync Direct and others. All the above modules were available in a hosted version called APS Private Cloud, if a client so requires. This platform has been moved to a more efficient solution using a new supplier and is now called APS Accountants’ Workspace. Consistent with the Group-wide philosophy, the Accountant Practice Management Group enhances products and develops new products under the “cloud first” concept. These products can and will integrate with existing Accountant Practice Management Group solutions and also provide an entirely new cloud-based suite that new clients can take on. 9 Directors’ Report (continued) New cloud products released in 2020/2021, include: Workflow and Contacts. Timesheets, Fees and Accounting are under development. From a branding point of view these cloud products are marketed as APS+, Workflow+, Contacts+, etc. The BankData product (powered by Reckon One Bank Data technology) is also targeted at accountants and bookkeepers. The module enables accountants and bookkeepers to efficiently download and process bank transactions and provide reporting and analysis to their clients. This is also undergoing an integration with Open Banking. Sync Direct is a cloud-based system that allows accountants to upload financial transaction data from virtually any source and automatically enter it into their practice management system for accounts and tax return preparation purposes. It is an extremely beneficial tool for professional accounting firms as it creates a “single ledger” experience for them without being required to use the same software as their clients. The Reckon Elite product suite includes tax return preparation tools, practice management tools and related solutions mostly used by accountants and tax agents. Reckon Elite is predominantly used in small to medium sized accounting firms compared to Reckon APS which is predominantly used by larger firms. Reckon Elite is also available in a hosted cloud based version called Elite Workspaces. The ReckonDocs corporate services business comprises technology for the registration and compliance management of companies and other business structures through an easy to use web-based ordering system. This business provides clients with an online company registration service; documentation and services for the establishment of a range of entities, especially trusts for self-managed superannuation funds; constitution updates and domain name registrations; and other documentation. This business was sold effective 1 March 2021. Legal Practice Management Group Since February 2021 the Company merged its Legal Practice Management Group with the business of Zebraworks Inc (USA) into a 70/30 venture known as nQueue Zebraworks Inc. The team from Zebraworks Inc brings a history and pedigree of success in the development of practice management solutions for Legal Practices. The merged business presents a platform for new cloud technology development and new markets. The Legal Practice Management Group, under the various nQueue, Billback and Zebraworks brands, supplies software solutions for document scanning and routing, print management and cost recovery solutions that assist law firms and commercial and government clients. These solutions enhance 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. The scan solution also presents an opportunity to expand to non-legal client markets. These solutions 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. Key focus of this Group is to reposition itself from a cost recovery provider to become a workflow expert in the areas of Print Management, Uniform Advanced Scanning and Cost Recovery and to continue moving to a subscription revenue model. It is also pursuing a wider channel sales network including manufacturers of multi-purpose office machines. In addition, the merged nQueue Zebraworks Inc business will be exploring opportunities to cross sell products and solutions from the Australian based Business Group and Accountant Practice Management Group. Cloud Practice management modules added to the suite of products in 2021 include Collection Q and Reporter Q. 10 Results of Operations Results Headlines (IFRS and non-IFRS) Revenue – continuing operations $71.3 million $70.9 million +0.6% 2021 2020 %Growth Revenue – discontinued operations* $0.8 million $4.7 million -83.7% EBITDA – continuing operations $29.2 million $29.7 million -2.0% EBITDA – discontinued operations* $0.3 million $2.9 million -89.9% Net profit – continuing operations $9.1 million $8.2million +10.4% Net profit – discontinued operations* $0.1million $1.5 million -92.1% Net profit attributable to members – continuing operations $9.7 million $8.2 million +17.8% Net profit attributable to members – discontinued operations* $0.1 million $1.5 million -92.1% * The ReckonDocs business was sold effective 1 March 2021, hence 2021 represents 2 months trading compared to 12 months in 2020. Revenue on a non-IFRS basis normalised for continuing businesses (at constant currency) is up 1.6% on the prior corresponding period. $65 million of the $71 million revenue is annual recurring revenue, up 2.9% over the prior corresponding period. Annual recurring revenue represents 92% of total available revenue. This is 2.9% up om the prior corresponding period. EBITDA on a non-IFRS basis normalised for continuing businesses (at constant currency) is up 1.4% on the prior corresponding period. The profitability of the Group has increased, with NPAT normalised for continuing operations up 7.8% on the prior corresponding period.. Debt has been reduced by 52% from $30.7 million to $14.7 million, largely funded by the proceeds of the Sale of the ReckonDocs business. A fully franked final dividend of 2 cents per share has been declared, taking the total dividend to 5 cents per share in respect of the 2021 year (2020: 5 cents). This represents a 8% shareholder return before tax. 11 Directors’ Report (continued) Cash spend on development (on a non-IFRS normalised basis) continues to focus on cloud products across the groups. Development spend in 2021 was $20 million consistent with 2020 development spend of $18.8 million. Cashflow before development spend from continuing operations is $30.9 million. Business Group • The Business Group continues to be a subscription business with strong online growth. Total revenue growth in this Group is up 4% on 2020. This represents three consecutive years of growth. • Subscription revenue now represents 97% (2020: 96%) of available revenue in this Group. • Cloud subscription revenue (from Reckon One and Reckon Accounts Hosted) has continued to grow strongly, up by 8% on 2020 and now represents 58% (2020: 56%) of this Group’s available revenue. The number of cloud users has reached 114,000 users up 12% on 2020. • The free payroll app for Single Touch Payroll launched in late May 2019 now has 37,000 users. The new paid payroll app now provides an ideal upgrade path for these users The total number of employees paid via Reckon payroll solutions in Australia stands at 300,000. • The partnership with the IPA for Reckon One continues to strengthen the recommender channel, with over 1,200 IPA practices trained and certified as Cloud Advisors. • New cloud products for the Business Group released in 2021 include Reckon Payroll, Payroll Mobile and Reckon Insights, a business analytics tool. A Reckon Invoicing app is scheduled for release in 2022. • A white label initiative for distribution of Reckon One with the Queensland Government known as Deadly Digits, is aimed at financial literacy in the indigenous community.. Other similar opportunities with a wide range of partners continue to be sought and pursued. For example, in early 2022 the Company has engaged with Novatti to explore enhanced payment services for small businesses to be integrated with Reckon products. The Company has also entered into an agreement with Ozedi to provide eInvoicing solutions to Reckon customers. Accountant Practice Management Group • The business remains entrenched as the product of choice amongst the major accounting firms. • Subscription income is 98% of available revenue in this Group and this is the foundation of the stability of this business. • Revenue in the Accountant Practice Management Group was down on the previous year, partially attributable to the impact of COVID 19 limitations. This was reflected in flat subscription revenue (down 1% on 2020), but 58% growth in upfront and service • While overall end user seat count of 84,000 was slightly behind 2020 on (85,000), an encouraging 22 new businesses signed on, 15 of which in the last third of 2021. This provides an order backlog with which to begin 2022. • Development of an enhanced hosted solution for APS modules known as APS Accountants’ Workspace also opens potential for a larger addressable market. The same applies for standalone cloud based products developed in 2020/21, branded as APS +.. A new release under this banner planned for 2022 is APS Ledger +. Overall cloud based end user seats count increased from 393 in 2020 to 2,653 in 2021. • The ReckonDocs content business was sold to Class Limited effective 1 March 2021. 12 Legal Practice Management Group • This Group relative to the rest of the Company was more significantly impacted by COVID-19 especially in the USA where - flowing on from 2020 - implementation of new sales was rendered difficult by restrictions on in person attendance at client premises. This is reflected in a 13% decline in upfront and service revenue from $1.5 million to $1.3 million. Notwithstanding this challenge, subscription revenue grew 1%. • Subscription revenue is 86% of the Group’s revenue (2020: 84%) and this represents a stable base for the business which is now poised to take advantage of the formation of the nQueue Zebraworks Inc business. • Included in growth plans is the release of Collection Q and Payments Q. Collection Q is a cloud based module that integrates with on premises practice management systems for more efficient debtor/collections management. Payments Q is an integrated payments solution that enables end users clients to pay via credit card. • In addition this Group also released mobile app versions for the Scan and Print solutions. • The USA market does represent growth opportunities for cloud based products especially in the longer term with a very large addressable market still using desktop solutions. COVID-19 Impact Operationally, the Company continued to manage the impact of COVID 19 smoothly so far as working from home was concerned as well as in terms of overall management of the business and its systems. The infrastructure and business interruption processes were well designed to deal with these sorts of situations, and continue to do so. The Company has displayed its resilience, by posting solid and stable results in challenging times for its customer base of small businesses and professional firms. As stated above there were performance impacts for the Legal Group. That said, the operations of the Company as a whole have not been adversely impacted by COVID 19. The financial position of the Company has not been materially adversely affected by COVID 19. At present, COVID 19 does not materially adversely impact the Company’s prospects for future financial years. No impairment is considered necessary. While it appears the world is learning to live with COVID 19, the impact of the COVID-19 pandemic is ongoing. It is not practicable to estimate the potential impact, positive or negative, after the reporting date. The situation is fluid and is dependent on measures imposed by the Australian Government and other countries, such as vaccination requirements, renewed travel restrictions and any economic stimulus that may be provided. Climate and Sustainability The nature of the Company’s operations on the face of it have low impacts on climate and sustainability. However, the board is mindful of the potential impact of climate change on economies at a macro level. The board plans to understand and begin to assess existing and emerging risks that may be applicable to the company’s business, including both physical and transitional climate risk. At present the board is comfortable there are none. 13 Directors’ Report (continued) Significant Changes in State of Affairs There were no significant changes to the Company’s state of affairs during the year. The sale of the ReckonDocs business in March 2021 is not viewed as a significant change to the nature or scale of its activities. Effective on 1 March 2021, the Company reached agreement with NowInfinity Pty Ltd (a wholly owned subsidiary of Class Ltd) and Class Ltd (the Class Buyer Group), to sell the assets comprising the ReckonDocs Business to the Class Buyer Group. The purchase consideration was $13 million dollars. Funds received were used to reduce Reckon’s debt, and to provide additional development funds for Reckon’s “cloud first“ development strategy for small business accounting and payroll, and practice management for accountants and lawyers. The ReckonDocs Business contributed revenue of $5 million and EBITDA of $3 million to the 2020 Reckon Group results. The ReckonDocs Business was part of Reckon’s Accountant Practice Management Group and is a provider of company formations, trust deeds and other related documents and services. Future Developments, Business Strategies and Prospects for Future Financial Years Consistent with commentary of prior years, the Company strategy is to bring together a suite of solutions that deliver business efficiency tools for small to medium sized businesses – an ecosystem for business, together with practice efficiency tools for professional firms – a platform for accountants and lawyers. The goal is to ultimately make it easy for small businesses to operate and perform, and accountants, bookkeepers and legal firms to collaborate with their clients and ensure their compliance obligations are met. Key to understanding the Company’s strategy over the next 2 to 3 years is to appreciate the following, generally: • • there are untapped opportunities in targeted and niche products that complement and diversify the traditional efficiency software offered to businesses and professional firms. investment will also be focused on maintaining, refining and improving existing assets and acquiring or developing solutions to complement or differentiate our offerings, especially in the cloud. • the businesses have a stable and loyal customer base. Specifically, for 2022 and beyond in the Business Group the intention is to pursue cloud growth across the small business accounting and payroll market. Payroll products will be complimented with new mobile apps in 2022 including Invoicing and Timesheets. Further white label opportunities will also be explored. The Company is also pursuing the potential to deploy various Fintech solutions through the customer base. In the Accountant Practice Management Group, the cloud based APS Accountants’ Workspace platform provides a growth opportunity for mid to large size accounting firms. Additional cloud modules such as Ledger +, WIP, and Debtor Management also present growth opportunities. Add on cloud modules such as Bank Data feeds and Sync Direct integration tools expand the product offering to existing and new clients. For the Legal Practice Management Group, the post COVID 19 pipeline of new customers is solid. The aim is also to pursue growth with existing NQ scanning and print 14 management solutions. And new cloud modules Collection Q and Reporter Q (a module that presents a dashboard across all practice management data) compliment desktop competitor products that create new sales opportunities. The Legal Group also plans to release a new cloud module, Inquiry Q, in 2022. This product integrates with and compliments Collection Q with improved and detailed reports across a firm’s debtors. The Company continues to assess appropriate corporate transactions. 15 Remuneration Report (Audited) 1. Persons Covered by this Report The Remuneration Report sets out, in accordance with section 300A of the Corporations Act: (i) the Company’s governance relating to remuneration, (ii) the policy for determining the nature and amount or value of remuneration of key management personnel; (iii) the various components or framework of that remuneration; (iv) the prescribed details relating to the amount or value paid to key management personnel, as well as a description of any performance conditions; (v) the relationship between the policy and the performance of the Company. Key management personnel (KMP) are the non-executive directors, the executive directors and employees who have authority and responsibility for planning, directing and controlling the activities of the consolidated entity. On that basis, the following roles/individuals are addressed in this report: Non-executive Directors • Mr Greg Wilkinson, director since 19 July 1999 • Deputy Chairman since 1 February 2006 • Chairman of the Board since 1 July 2018 • Risk and Audit Committee member since 1 February 2010 • Remuneration Committee member since 1 December 2011 • Mr Philip Hayman, independent non-executive director since 1 July 2018 • Remuneration Committee Chair since 1 July 2018 • Risk and Audit Committee Chairman since 1 July 2018 Senior Executives Classified as KMP • Mr Clive Rabie • Chief Operating Officer from 1 January 2001 • Executive Director since 24 May 2005 • Group Chief Executive Officer from 22 February 2006 • Group Managing Director since 1 July 2018 • Mr Sam Allert • Executive Director since 1 July 2018 • Group Chief Executive Officer since 1 July 2018 • Mr Chris Hagglund • Group Chief Financial Officer (CFO) since 1 October 2004 • Mr Myron Zlotnick • General Counsel from 1 October 2002 until 2 July 2018 • Company Secretary since 19 November 2002 • Corporate Counsel from 22 February 2021 16 2. Context of KMP Remuneration The Remuneration Committee and the board exercise their powers mindful of the various governance demands that impact on remuneration decisions and the interests of shareholders. . At the 2021 Annual General Meeting there was a vote of approval of 99.14% for remuneration practices. The board continues to endeavour to balance the idiosyncrasies of the Company and its unique demands with generally accepted governance practices for remuneration. On the whole the contents of the report are substantially similar to prior years. At the time of writing this report the board has been in the process of trying to set new incentive plans to meet the strategic imperatives of the Company. 3. Overview of Reckon’s Remuneration Governance Framework & Strategy The Company is influenced in the governance of KMP remuneration by a wide range of sources, including: • Remuneration Committee Members, • External remuneration consultants (ERCs), • Stakeholder groups including shareholders and proxy advisors, and • Company management to understand roles and issues facing the Company. The following outlines Reckon’s remuneration governance framework. 3.1 Remuneration Committee Authority for remuneration matters rests with the Remuneration Committee which reports to the board and makes recommendations regarding remuneration to the board which has ultimate responsibility for signing off on remuneration policies, practices and outcomes. The Remuneration Committee was comprised of two non-executive directors: • • Mr Philip Hayman (independent non-executive director) Mr Greg Wilkinson (independent, Chairman of the Board). The Remuneration Committee operated substantially in accordance with the aims and aspirations of Principle 8 of the ASX Corporate Governance Principles and Recommendations (“ASX Principles and Recommendations”), including that the majority of the committee should be composed of independent non-executive directors. The role and responsibilities of the committee are outlined in the Reckon Remuneration Committee Charter (the Charter), available on the Company Website. The role of the Remuneration Committee is to ensure that appropriate remuneration policies are in place which are designed to meet the needs of the Company and to enhance corporate and individual performance. That is, the development, maintenance and application of the Remuneration Governance Framework for the purposes of making recommendations to the Board regarding KMP remuneration matters, as well as advising the Board on procedures that must be undertaken in relation to the governance of remuneration, and communicating such matters to the market (such as the calculation of grants of incentives, review of performance conditions and receipt of independent advice, etc.). Under the Charter, the Remuneration Committee is to be composed of at least three non-executive members with the majority being independent directors. It should be noted that given the size of the Company and the board, the Remuneration Committee presently is comprised of only two members. Consideration will be given when relevant decisions need to be made to appointing a third independent member. The charter of the Remuneration Committee is available on the company’s website at https://www.reckon.com/au/ investors/governance/. 17 Remuneration Report (Audited) (continued) 3.2 Trading Policy The Trading Policy of the Company is available on the Company website. It contains the customary references to insider trading restrictions that are a legal requirement under the Corporations Act, as well as conditions associated with good corporate governance. To this end the policy specifies trading blackout periods during which officers of the Company may not trade in the securities of the Company. Officers must seek permission from the Chairman of the Company before trading in any periods outside blackout periods. The Trading Policy also requires officers to notify the Company Secretary of the transaction once it is completed and prohibits trading at all other times unless an exception provided by the Chairman following an assessment of the circumstances (e.g. financial hardship). Trading black outs operate in the period commencing one day before the end of a financial reporting period and end one day after the reporting for the relevant financial period has been announced to the public. Officers generally includes directors and Senior Executives of the Company. The policy also restricts employees from short-term trading or from hedging etc. and gives the Board the power to suspend all dealing in Company securities by employees at any time, should it be appropriate. 3.3 Executive Remuneration Policy The following outlines the policy that applies to executive KMP (and does not apply to non-executive directors): • Remuneration should be composed of: • • • Base Package (inclusive of superannuation, allowances, benefits and any applicable fringe benefits tax (FBT) as well as any salary sacrifice arrangements) Short term incentive (STI) which provides a reward for performance against annual objectives Long term incentive (LTI) which provides an equity-based reward for performance against indicators of shareholder benefit or value creation, over a three-year period • In total the sum of the elements will constitute a total remuneration package (TRP) • Both internal relativities and external market factors should be considered • TRPs ought to be structured with reference to market practices and the circumstances of the Company at the time • • • • That the Base Package policy mid-points should be set with reference to P50 (the median or the middle) of the relevant market practice subject to the circumstances of the Company at the time That TRPs at Target (being the Base Package plus incentive awards intended to be paid for targeted levels of performance) should be set between P50 and P75 (the upper quartile, the point at which 75% of the sample lies below) of the relevant market practice so as to create a strong incentive to achieve targeted objectives in both the short and long term Remuneration will be managed within a range so as to allow for the recognition of individual differences such as the calibre of the incumbent and the competency with which they fulfil a role (a range of +/- 20% is used, in line with common market practices) Exceptions will be managed separately such as when particular talent needs to be retained or there are individuals with unique expertise that need to be acquired (“Red circle” exceptions) and • Termination benefits will generally be limited to the default amount that may be provided for without shareholder approval, as allowed for under the Corporations Act. Taking account of the above, generally, remuneration structures are driven by the budget setting process and cost to company as well as the particular circumstances of the relevant KMP, their skill set, experience, and value to the Company. 18 Market capitalisation is one of the factors that influences external assessments of the appropriateness of remuneration; it is understood that external groups tend to see it as the primary indication of the size and status of the Company, and the field in which the Company is competing for talent. While Reckon does not subscribe to this view exclusively and instead considers a broad range of factors that drive competition for talent in different parts of the Company, it is acknowledged that it must be a consideration when communicating with stakeholders. The Company will also take into account the impact of corporate transactions on incentives designed to retain talent for the longer term. 3.4 Non-executive Director Remuneration Policy The Non-executive Director Remuneration Policy applies to non-executive directors (NEDs) of the Company in their capacity as directors and as members of committees, and may be summarised as follows: • Remuneration may be composed of: • • • Board fees inclusive of superannuation Other benefits (if appropriate) and Equity (if appropriate at the time, currently not applicable) • • • • Committee fees do not form part of the NED remuneration policy because at present the workload of the Board is shared equitably amongst its members Remuneration will be managed within the aggregate fee limit (AFL) or fee pool approved by shareholders of the Company – currently $400,000 in accordance with shareholder approval in 2008 Termination benefits will not be paid to NEDs by the Company A policy level of Board Fees (being the fees paid for membership of the Board, inclusive of superannuation) will be set with reference to the P50 (median or middle) of the market of comparable ASX listed companies. During the FY21 reporting period the following fees were applicable: Function Main Board Audit & Risk Committee Nomination & Remuneration Committee Other Committee Role Chair Member Chair Member Chair Member Chair Member Fee Including Super $137,027 $91,351 n/a n/a n/a n/a n/a n/a 19 Remuneration Report (Audited) (continued) As at the commencement of FY22 the following fees apply: Function Main Board Audit & Risk Committee Nomination & Remuneration Committee Other Committee Role Chair Member Chair Member Chair Member Chair Member Fee Including Super $137,333 $91,555 n/a n/a n/a n/a n/a n/a 3.5 Short Term Incentive (STI) Policy Currently the short term incentive policy of the Company is that an annual component of executive remuneration should be at-risk tested over a single financial year, and allow the Company to modulate the cost of employment to align with individual and Company performance while motivating value creation for shareholders. In addition: • STI should be settled in part or whole in the form of cash, and if appropriate at the time, a portion may be specified as being settled in the form of equity • The target cash component of the STI at target should have a weighting in the remuneration mix that is no greater than the sum of LTI at target and any equity component of the STI at target, to ensure that executives are focused on long term value creation via equity ownership • If part of the STI is to be settled in the form of equity: • STI deferral is to apply to contribute to the long-term alignment of executives and shareholders, and to facilitate retention of senior executive talent, and • For FY21 approximately one third to one half of any STI award will be settled provided the incumbent has remained employed for 12 months following the end of the STI Measurement Period in order to receive the full award. 3.6 Long Term Incentive (LTI) Policy Currently the long term incentive policy of the Company is that an annual component of remuneration of executives should be at-risk and based on equity in the Company to ensure that executives hold a stake in the Company, to align their interests with those of shareholders, and that executives share risk with shareholders. Further: • The LTI should be based on Performance Rights that vest based on assessment of performance against objectives • The Measurement Period should be three years • There should be two measures of long-term performance, one which best reflects internal measures of performance and one which best reflects external measures of performance 20 • • • The measure that has strongest alignment with shareholders is total shareholder return (TSR), however it is recognised that absolute TSR is influenced by overall economic movements. Therefore, the TSR component of LTI is based on relative TSR which removes broad market movements from assessments of the Company’s TSR performance and avoids windfall gains from broad market movements. Vesting only when the performance of the Company meets or exceeds the performance of the broader market Senior Executives are faced with significant and long-term business development and project-based challenges. Therefore the LTI should also be linked to the achievement of earnings growth objectives that will lead to value creation for shareholders, and the earnings per share (EPS) growth measure is considered the best measure of long term performance and value creation from an internal perspective, by the Board and by many stakeholders When an executive owns a substantial portion of the Company’s issued capital, they are ineligible for employee share scheme (ESS) tax treatment, and the consequences of participating in the plan are punitive. In order to address this there is a separate plan (not presently in operation) which is effectively the same as the Rights LTI plan but allows for the LTI instrument to be replaced with Share Appreciation Rights (SARs) which are settled in cash, when this circumstance arises. Such payments are treated the same way as a cash STI in terms of tax. This treatment also applies to any deferred component of STI that would otherwise be awarded in the form of share-based rights. Whilst it is recognised that the settling of incentive rights in the form of cash is unusual, it is trusted that shareholders understand the need to do so in these limited cases • The SAR plan operates in a similar way to an option, in that the participant only receives a benefit to the extent of growth in value over the market value of a share at the time of calculation/granting. This requires that they be valued differently, as their value is not the whole value of a Company share. 21 Remuneration Report (Audited) (continued) 3.7 Variable Executive Remuneration – The Short Term Incentive (STI) Short Term Incentive (STI) Aspect Purpose Measurement Period Award Opportunities Key Performance Indicators (KPIs), Weighting and Performance Goals Plan, Offers and Comments The STI Plan’s purpose is to give effect to an element of Senior Executive Remuneration. This element of remuneration constitutes part of a market competitive total remuneration package and aims to provide an incentive for Senior Executives to deliver and outperform annual business plans that will lead to sustainable superior returns for shareholders. Target-based STI’s are also intended to modulate the cost to the Company of employing Senior Executives, such that risk is shared with the executives themselves and the cost to the Company is reduced in periods of poor performance. The Company’s financial year i.e. from 1 January to the following 31 December. FY21 Offers The CEO was offered a target-based STI equivalent to roughly 29% of the Base Package for target performance, with a stretch opportunity of up to 110% of the target. The CFO was offered a target-based STI equivalent of up to 28% of the Base Package for target performance with a stretch opportunity of up to 110% of the target. Comments The incentive levels offered in FY21 were consistent with the proportional opportunities (proportional to Base Package) offered in previous years. FY22 Offer The FY22 offers are substantially similar to the FY21 offers. FY21 Offers KPIs may vary to some extent between participants and reflect the nature of their roles, while creating shared objectives where appropriate. KPIs used for FY21 included: • Revenue • EBITDA • EPS Weightings are applied to the KPIs selected for each participant to reflect the relative importance of each KPI. Information on this aspect and specific KPIs is given in detail elsewhere in this report. Comments The Board selected KPI’s that were identified as having the strongest links with long term value creation for shareholders at the Company level, and those objectives over which individuals had most control that would also be expected to contribute to long term value creation and sustainability for shareholders within a 12 month period, as well as KPIs to recognise individual role related objectives and business plans for FY21. FY21 Offers The FY22 offers are substantially similar to the FY21 offers. 22 Award Determination and Payment Calculations are performed following the end of the Measurement Period and the audit of Company accounts. Payments are in cash with PAYG tax deducted, paid following the completion of the Measurement Period and completed audited full year accounts. A portion of the STI (between one third and one half) is only paid a year later provided the KMP is still employed. Performance was determined following audit sign-off of the FY21 accounts. Change of Control The Board has discretion to terminate the STI for the Measurement Period and make pro-rata awards having regard to performance or make pro-rata awards based on performance and allow the plan to continue for the. Measurement Period or make no interim awards and allow the Plan to continue for the Measurement Period. Plan Gate and Board Discretion Fraud, Gross Misconduct etc Clawback and Malus If the Company’s overall performance during the Measurement Period is substantially lower than expectations and resulted in significant loss of value for shareholders, the Board may abandon the STI Plan for the Measurement Period or adjust STI payouts downward. The Board also has discretion to increase payouts, however, it has been determined that such discretion will only be applied in future when it would be substantially inappropriate not to do so, due to an anomaly during the Measurement Period, or because of exceptional circumstances, which would be explained in detail as part of the Remuneration Report. If the Board forms the view that a Participant has committed fraud, defalcation or gross misconduct in relation to the Company then all entitlements in relation to the Measurement Period will be forfeited by that participant. A clawback policy is in place for cases of material misstatement or misconduct. The Remuneration Committee has the power to withdraw offers that have not vested or to clawback short-term incentives paid in the case of serious misconduct or material misstatement in the financial statements respectively. 3.8 Variable Executive Remuneration – Long Term Incentive (LTI) – Performance Rights Plan Long Term Incentive (LTI) Aspect Purpose Plan, Offers and Comments The LTI Plan’s purpose is to give effect to an element of Senior Executive remuneration. This element of remuneration constitutes part of a market competitive total remuneration package and aims to provide an incentive for Senior Executives to deliver Company performance that will lead to sustainable superior returns for shareholders. Other purposes of the LTI Plan is to act as a retention mechanism so as to maintain a stable team of performance focused Senior Executives, to create alignment with the interests and experiences of shareholders and to modulate the cost to the Company of employing executives such that in periods of poor performance the cost is lesser (applies to non-market measures under AASB 2). Currently the Company operates two performance rights plans, one which is settled in the form of Company shares (equity-based Rights), and one which is settled in the form of cash, but based on growth/change in the Company’s share price (SARs), similar to an option (necessary to avoid potentially adverse tax treatment of certain executive KMP due to personal shareholdings). 23 Remuneration Report (Audited) (continued) Measurement Period Normally three years. FY22 Offers FY22 offers have not yet been made to KMP, pending the Remuneration Committee’s review of the LTI plan as well as ongoing strategic reviews. FY21 Offers FY21 offers were not made to all KMP, pending the Remuneration Committee’s review of the LTI plan. Form of Equity LTI is in the form of Performance Rights, which are either rights to: • • ordinary Company shares, under the regular LTI plan, or to a cash value equivalent to growth in the market value of a share in respect of each vested Performance Right, since the date of grant/calculation, under the share appreciation rights plan (SARs), both of which vest subject to the satisfaction of conditions related to long term performance and/ or service on an identical basis i.e. the form of equity has no bearing on the setting of vesting conditions etc. There is no entitlement to dividends during the Measurement Period. LTI Value The Board retains discretion to determine the value of LTI to be offered each year, subject to shareholder approval in relation to Directors, when the Rights are to be settled in the form of a new issue of Company shares. The Board may also seek shareholder approval for grants to Directors in other circumstances, at its discretion. FY21 Offers A single once off offer was made on the same terms as 2020. At 20% of the Corporate Counsel / Company Secretary Base Package. 24 Vesting Conditions The Board has discretion to set vesting conditions for each offer. Performance Rights that do not vest will lapse. The vesting conditions are TSR relative to the ASX 300, with a 50% weighting, and EPS Growth relative to target, with a 50% weighting. Adjustment of the TSR vesting scale will occur to remove any vesting at below-market (index) performance. FY21 Offers The vesting scales for prior offers are: Performance Level Annualised EPS Growth Vesting Below Threshold < Budget Threshold =Budget 0% 75% Between Threshold and Target >Budget, <110% of Budget Pro-rata Target 110% of Budget 100% Performance Level Relative TSR of the Company as % of the S&P ASX 300 Accumulation Index Below Threshold < Index Threshold =Index (100%) Vesting 0% 75% Between Threshold and Target >100%, <110% Pro-rata Target 110% of Index 125% 25 Remuneration Report (Audited) (continued) FY22 Offers FY22 offers have not been made to KMP, pending the Remuneration Committee’s review of the LTI plan as well as ongoing strategic reviews. Comments The Board of Reckon recognises that it is important that shareholders understand why the LTI vesting conditions selected are appropriate to the circumstances of the Company, and therefore seeks to be transparent in this regard. A form of total shareholder returns (TSR) was selected as it recognises the total returns (share price movement and dividends assuming they are reinvested into company shares) that accrue to shareholders over the Measurement Period. This measure creates the most direct alignment between the experience of shareholders and the scaling of rewards realised by Senior Executives. Relative TSR has been selected to ensure that participants do not receive windfall gains from broad market movements unrelated to the performance of the Senior Executives (which is the key feature that has led many companies to use relative TSR). Relative TSR achieves this by modulating the required TSR outcome of the Company based on indicators of overall market movements, and assessing performance in excess of broad market movements unrelated to the activities of the Company. While ranked TSR was considered, it was not possible to identify a comparator group of companies that was statistically robust enough to be meaningful and the Board was concerned that this would undermine the link between executive performance and reward outcomes. In addition, the comparator group used until very recently is no longer appropriate as several entities have failed or are no longer listed on the ASX. TSR relative to a robust indicator of market movements/performance will therefore apply to future grants of LTI. The relative TSR vesting scale requires that the Company deliver a TSR to shareholders that is at least as good or better than the market over the Measurement Period before any vesting may occur. Full vesting becomes available when the TSR of the Company reaches 100% of the TSR of the index over the Measurement Period. The Target of 110% of the index is considered by the Board to be challenging, but achievable, should the Board’s assumptions in making that assessment prevail. While under such a TSR LTI approach, the market indicator is generic, the vesting scale reflects the expectations of the Board, management, shareholders and other stakeholders given the particular circumstances of the Company, relative to the broader market. This new measure is, in the view of the Board and based on advice, likely to better align the outcomes of the LTI plan with Company performance and shareholder interests than selecting a tailored but largely irrelevant comparator group of companies to which a generic vesting scale is then applied, which is the approach adopted by the vast majority of companies that use ranked TSR. Based on advice received by the Board from its independent remuneration advisor in 2016, it is understood to be good practice to have both an external (TSR) and internal measure of long- term Company performance in relation to the LTI. The internal measures that will most clearly align with shareholder value creation at this stage will be the achievement of the earnings growth targets specified by the Board in consideration of business plans and economic circumstances each year. Therefore, earnings per share growth (EPSG) is used as the second condition. Retesting The Plan Rules do not contemplate retesting and therefore retesting is not a feature of the Company’s current LTI offers. 26 Plan Gate and Board Discretion A gate applies to the TSR component of the LTI such that no vesting will occur if the Company’s TSR is not positive. If the movement of the index is low over the Measurement Period, at less than 5%, then the Board will exercise its discretion to limit vesting to the threshold level, or an even lesser level. The Board has the power to exercise discretion to decline to allow an award to vest, for example in the circumstances of a “bad leaver”. Amount Payable for Performance Rights Exercise of Vested Performance Rights Dealing Restrictions on Shares Cessation of Employment During a Measurement Period No amount is payable for Performance Rights. The value of Rights is included in assessments of remuneration and policy. Under the plan rules, vested Performance Rights will be available to be exercised, subject to the payment of any Exercise Price, until the last exercise date. Exercised Rights will be satisfied in the form of ordinary Company shares, except where the participant necessarily participates in the cash Rights (SAR) plan to address the tax issues faced by them as significant shareholders in the Company (see earlier discussion of this aspect). No amount is payable by participants to exercise vested Performance Rights. Shares that result from the exercise and vesting of Performance Rights will be subject to dealing restrictions as per the Company’s trading policy applicable to officers of the Company. In the event of cessation of employment due to dismissal for cause all unvested Performance Rights are forfeited. In the event of cessation of employment due to resignation or dismissal all unvested Performance Rights are forfeited. Change of Control of the Company The Board retains discretion under the rules of the plans to over-rule the automatic vesting of incentives in the event of “capital events” such as takeovers or restructures. Fraud, Gross Misconduct etc Clawback and Malus If the Board forms the view that a Participant has committed fraud, defalcation or gross misconduct in relation to the Company then all entitlements in relation to the Measurement Period will be forfeited by that participant. A clawback policy is in place for cases of material misstatement or misconduct. The Remuneration Committee has the power to withdraw offers that have not vested or to clawback short-term incentives paid in the case of serious misconduct or material misstatement in the financial statements respectively. In previous years the Company also operated a Retention Rights scheme which allowed for vesting based on service only. On 24 May 2011 the Remuneration Committee approved and recommended to the Board an extension to the long-term incentive plan by adding a long-term retention incentive. The genesis of the idea to extend the plan and offer additional performance shares was to provide a reward and an incentive for senior level employees who have a long employment history and good performance record (i.e. beyond the KMP). It was also intended that these performance shares could be used to provide an incentive for employees with potential for a longer-term contribution to the success of the company to participate in the growth of equity value of the company. Part of the company’s success as an organisation is premised on human domain expertise and the consistency and longevity of service of KMP and other senior employees. The offer of these additional performance shares is designed to encourage and reward employees to commit to longevity as well as to complement other traditional forms of executive remuneration. By rewarding those employees who commit to the company over a very long period and thereby providing stability as the business grows and matures, the board believes long term shareholder benefits will result for shareholders. 27 Remuneration Report (Audited) (continued) The long-term retention incentives are offered to selected employees with the principal vesting condition that participants must remain employed for the term specified (typically 7-10 years). The shares offered remain at risk of forfeiture until the relevant period of service has been satisfied. There is no entitlement to dividends during the relevant period of service. It is the Remuneration Committee’s belief that the addition of these performance shares has added to the balance and overall mix of remuneration to the applicable employees in a positive way. If the exacting service requirements are not satisfied, then any costs incurred under AASB 2 will be recouped and any forfeited shares will be available for reallocation or to fund other employee equity entitlements. This legacy arrangement has been phased out, with the final tranche vesting at the end of FY20 in respect of KMP. 3.9 Securities Holding Policy The Board currently sees a securities holding policy as unnecessary since executives receive a significant component of remuneration in the form of equity and that a number of key executives already hold significant numbers of shares, voluntarily. Given that the outcome is effectively already being achieved, it was determined that such a policy was currently unnecessary. 3.10 Clawback Policy Reckon has adopted a clawback policy which is activated in cases of material misstatements in the Company’s financial reports, or in cases of misconduct by executives. 28 4. Actual/Realised Remuneration Relevant to FY21 Completion 4.1 Senior Executive Remuneration The statutory disclosure requirements do not provide clear information on value obtained by KMP during the current year as the statutory information attempts to match the disclosed remuneration with when the services are provided. The following table outlines the non-deferred component of STI achieved during the financial year, and the LTI, if any, and/or any deferred STI that vested during the financial year in relation to the completion of the performance or vesting period at the end of the specified financial year: Name Role(s) Year Salary Superannuation Contributions Other Benefits4 Base Package STI1 LTI2 Amount % of TRP Amount % of TRP Amount % of TRP Total Remuneration Package (TRP) Mr Clive Rabie Mr Sam Allert Mr Chris Hagglund Mr Myron Zlotnick3 Group MD 2020 $687,845 $25,000 Group MD 2021 $532,949 $26,773 $0 $0 $712,845 100% $559,722 100% $0 $0 na na $0 $0 0% $712,845 na $559,722 Group CEO 2020 $588,795 $25,009 ($11,394) $602,410 67% $127,919 14% $172,000 19% $902,329 Group CEO 2021 $598,461 $26,250 $18,911 $643,622 65% $175,636 18% $169,816 17% $989,074 Group CFO 2020 $500,650 $24,100 $10,755 $535,505 68% $142,186 18% $107,028 14% $784,719 Group CFO 2021 $510,742 $25,200 $8,332 $544,274 69% $145,687 18% $104,377 13% $794,338 Company Secretary Company Secretary 2020 $0 $0 $0 $0 n/a 2021 $278,370 $22,083 $16,761 $317,214 84% $0 $0 n/a $0 n/a $0 0% $59,000 16% $376,214 2020 $1,777,290 $74,109 ($639) $1,850,760 $270,105 $279,028 $2,399,893 TOTALS 2021 $1,920,522 $100,306 $44,004 $2,064,832 $321,323 $333,193 $2,719,348 1 Note that the STI value reported in this table is the STI that was paid during the reporting period, being the award earned during the previous period. Incentive outcomes for the current and previous period are outlined elsewhere in this report. 2 Note that the LTI value reported in this table is the amortised accounting charge of all grants that have not lapsed or vested as at the start of the reporting period. 3 Mr Zlotnick’s services as Company Secretary were provided on an independent contractor basis until February 2021 at an annual fee of $160,745 (2020: $160,745). On 22 February 2021 Mr Zlotnick was engaged as an employee. 4 Other benefits include movement in annual leave and long service leave. Both target and awarded values of STI and LTI remuneration are outlined in the relevant sections of the Remuneration Report to assist shareholders to obtain a more complete understanding of remuneration as it relates to senior executives. 29 Remuneration Report (Audited) (continued) 5. Maximum Available Executive Remuneration for FY21 The disclosures required under the Corporations Act and prepared in accordance with applicable accounting standards attempt to match remuneration reported with the services provided to earn that revenue in the relevant year. The table below, on the other hand, indicates remuneration offered to KMP to be earned in the current and future periods. For example, the LTI disclosed is not reflective of the offer made in the year being reported on due to the requirements of AASB 2. It should be noted that the table presents target incentive opportunities for achieving a challenging but achievable target level of performance. In the case of STI, the maximum incentive may be up to 10% higher (i.e. 110% of the target). It should be noted that the table presents target incentive opportunities for achieving a challenging but achievable target level of performance. In the case of STI, the maximum incentive may be up to 10% higher (i.e. 110% of the target). Position Incumbent Group MD Group CFO Group CEO Mr Clive Rabie Mr Chris Hagglund Mr Sam Allert Company Secretary Mr Myron Zlotnick Base Package Including Super Fixed % TRP STI LTI Target % of Base Package Target STI Amount STI % TRP Target % of Base Package Target LTI Amount LTI % TRP Total Remuneration Package at Target Performance $559,722 100% 0% $0 0% 0% $0 0% $559,722 $544,274 68% 28% $151,500 19% 19% $105,833 13% $801,607 $643,622 65% 28% $180,000 18% 27% $172,000 17% $995,622 $317,214 84% 0% $0 0% 19% $59,000 16% $376,214 The incentives presented in the table above is the target level of STI offered for FY21, valued at the time of the grant. The intended value for STI and LTI will flow to participants when performance targets are achieved. 30 6. Remuneration Records for FY21 – Statutory Disclosures The following table outlines the remuneration accrued for Senior Executives of the Company during FY21 and FY20 prepared according to statutory disclosure requirements and applicable accounting standards: Name Role(s) Year Base Package Including Super and Other Benefits Non-deferred STI paid for the Financial Year Deferred cash STI paid out for the FY Grant Value of Previous Equity Grants that Vested for the FY1 Actual Total Remuneration Package (TRP) Amount % of TRP Amount % of TRP Amount % of TRP Amount Group MD 2020 $712,845 100% Group MD 2021 $559,722 100% $0 $0 % of TRP 0% 0% $0 $0 Group CFO 2020 $535,505 78% $82,505 12% $63,182 Group CFO 2021 $544,274 68% $83,368 10% $70,863 Group CEO 2020 $602,410 77% $121,480 16% $54,156 Group CEO 2021 $643,622 66% $122,750 13% $60,740 2020 $0 n/a n/a n/a n/a 0% 0% 9% 9% 7% 6% n/a $0 $0 $3,948 0% 0% 1% $712,845 $559,722 $685,140 $99,632 13% $798,137 $0 0% $778,046 $149,448 16% $976,560 n/a n/a $0 2021 $317,214 100% $0 0% $0 0% $0 0% $317,214 2020 $1,850,760 $203,985 $117,338 $3,948 $2,176,031 2021 $2,064,832 $206,118 $131,603 $249,080 $2,651,633 Mr Clive Rabie Mr Chris Hagglund Mr Sam Allert Mr Myron Zlotnick2 TOTALS Company Secretary Company Secretary 1 This is the value as at grant of any equity that vested in relation to the completion of the specified financial year. 2 Mr Zlotnick’s services as Company Secretary were provided on an independent contractor basis until February 2021 at an annual fee of $160,745 (2020: $160,745). On 22 February 2021 Mr Zlotnick was engaged as an employee. Non-executive director fees are managed within the current annual fees limit (AFL or fee pool) of $400,000 which was approved by shareholders at the 2008 AGM. Remuneration received by non-executive directors in FY20 and FY21 is disclosed below: Name Role(s) Year Board Fees Committee Fees Superannuation Other Benefits Equity Grant Termination Benefits Total Mr Greg Wilkinson Mr Philip Hayman Independent, non-executive Chairman Independent, non-executive Deputy Chairman Independent, non-executive director Independent, non-executive director TOTALS 2020 $122,400 $0 $11,628 $0 $0 $0 $134,028 2021 $124,848 $0 $12,179 $0 $0 $0 $137,027 2020 $81,600 $0 $7,752 $0 $0 $0 $89,352 2021 $83,232 2020 $204,000 2021 $208,080 $0 $0 $0 $8,119 $19,380 $20,298 $0 $0 $0 $0 $0 $0 $0 $0 $0 $91,351 $223,380 $228,378 31 Remuneration Report (Audited) (continued) 7. Performance Outcomes for FY21 7.1 Company Performance All incentives paid for relevant periods for LTI and STI were measured strictly against the targets set. In the context of some lagged impact of COVID 19 and an extremely competitive market, especially for the Business Group, and the Accountant Group to some extent, the board is satisfied that the vesting of incentives correlates with performance. The board is mindful of the need to retain talent and believes that the KMPs are appropriately incentivized given that several parts of the business are almost in a start up phase. More impressive returns are only anticipated in the longer term if strategies are executed correctly. As evidenced in this report, the Company as a whole has achieved: • progress on cloud development to transition to a cloud first company; • • • • solid revenue, solid profits, and cash generation; stable growth through Accountants Group and Business Group; reduction in debt; increased strategic partnerships; • ±8% gross yield by way of divided paid; and • growth in annual recurring revenue. Date Revenue ($m) Profit After Tax attributable to owners of the parent ($m) Share Price Change in Share Price Dividends 31-Dec-21 $72.1* $9.8* $0.93 $0.15 31-Dec-20 31-Dec-19 $75.6 $75.4 31-Dec-18 $75.4** 31-Dec-17 $90.3** $9.7 $8.1 $7.7** $7.6** $0.78 $0.01 $0.77 $0.10 $0.67 -$0.90 $1.57 -$0.02 $0.23*** $0.05 $0.05 $0.05 $0.03 *The ReckonDoc business was sold effective 1 March 2021 ($0.8 million of revenue was transferred to discontinued operations). ** In 2017 the Document Management Group was only included in the results for 7 months, and none for 2018. ***The dividend in specie paid to shareholders in the Document Management de-merger was $0.23 per share. 32 7.2 Links Between Performance and Reward The remuneration of executive KMP is intended to be composed of three parts as outlined earlier, being: • • Base Package, which is not intended to vary with performance but which tends to increase as the scale of the business increases (i.e. following success) STI which is intended to vary with indicators of annual Company and individual performance, including a deferred component to encourage retention and • LTI which is also intended to deliver a variable reward based on long-term measures of Company performance. The STI achieved in relation to the FY21 period was paid after the end of the period (during FY22) in February 2022. On average 102% of the target award opportunity or approximately 93% of the maximum award opportunity (being 110% of the target) available was paid. This level of award was considered appropriate under the STI scheme since the objectives were set and offers made in relation to the achievement of each KPI at the beginning of the financial year, and the majority of those objectives were met. During the FY21 period the objectives that were linked to the payment of STI included: Name Position Held at Year End Mr Clive Rabie Group MD Mr Chris Hagglund Group CFO Mr Sam Allert Group CEO/ MD ANZ* Mr Myron Zlotnick Company Secretary KPI Summary Revenue EBITDA EPS Revenue EBITDA EPS Revenue EBITDA EPS Revenue EBITDA EPS FY21 Company Level KPI Summary Weighting Target Achievement Award Outcomes Total Award 40% 40% 20% 40% 40% 20% 40% 40% 20% 40% 40% 20% n/a n/a $0 $72.9m $28.9m 5.9cps $72.9m $28.9m 5.9cps 99% 102% 110% 99% 102% 110% $83,368 $122,750 n/a n/a $0 This value is accounted for in the realised remuneration table presented earlier. The STI paid during the FY21 period related to performance during the FY20 period and was paid in cash in February 2020. On average 101% of the target award opportunity or 92% of the maximum award opportunity (being 110% of 33 Remuneration Report (Audited) (continued) the target) available was paid. This level of award was considered appropriate under the STI scheme that was in place during FY20, which is summarised in the table below. Therefore, there were strong links between internal measures of Company performance and the payment of short-term incentives: Name Position Held at Year End FY20 Company Level KPI Summary Weighting Target Achievement Award Outcomes Total Award1 KPI Summary Revenue Mr Clive Rabie Group MD EBITDA EPS Revenue Mr Chris Hagglund Group CFO EBITDA EPS Revenue Mr Sam Allert Group CEO EBITDA Mr Myron Zlotnick Company Secretary EPS Revenue EBITDA EPS 40% 40% 20% 40% 40% 20% 40% 40% 20% 40% 40% 20% n/a n/a n/a $79.3m $32.0m 7.7cps $79.3m $32.0m 7.7cps 95% 102% 112% 95% 102% 112% $82,505 $121,480 n/a n/a n/a This value is accounted for in the realised remuneration table presented earlier. 34 Vesting of LTI incentives for the performance period 2019 to 2021 were paid in February 2022 based on achievement of KPIs set at follows: Incumbent Role Target LTI Value (at grant January 2019) to Vest for FY21 Tranche Weighting % Number of Shares Eligible to Vest for FY21 Performance Against Target % of Grant Vested Number of Shares or Appreciation Rights Vested Mr Clive Rabie Mr Chris Hagglund Mr Sam Allert Group MD n/a Group CFO Group CEO $104,000 $156,000 Mr Myron Zlotnick Company Secretary n/a TSR EPS TSR EPS TSR EPS TSR EPS n/a n/a n/a n/a n/a 50/50 200,000 50/50 300,000 Partially achieved Partially achieved 95.8% 191,667 95.8% 287,500 n/a n/a n/a n/a n/a The Board is confident in stating that the links between Company performance and executive reward, both internally and externally measured, and over both the short and long term, are well aligned and appropriate to the Company. However, the Board will continue to make improvements and adjustments to these links as stakeholder expectations and Company circumstances evolve. 7.3 Links Between Company Strategy and Remuneration The Company intends to attract and retain the superior talent required to successfully implement the Company’s strategies at a reasonable and appropriately variable cost by: • positioning Base Packages (the fixed element) around P50 of relevant market data benchmarks when they are undertaken • • • supplementing the Base Package with at-risk remuneration, being incentives that motivate executive focus on short to mid-term objectives linked to the strategy via KPIs and annual performance assessments, and the imposing of deferral periods for part of STI awards, and long term value creation for shareholders by linking a material component of remuneration to those factors that shareholders have expressed should be the long-term focus of executives and the Board. Key strategies remain: investment in new technology; investment in new markets; and sustaining existing profitable businesses. It is important to fix remuneration mindful of maintaining morale and retaining talent. 35 Remuneration Report (Audited) (continued) 8. Employment Terms for Key Management Personnel A summary of contract terms in relation to executive KMP is presented below: Name Position Held at Close of FY21 Employing Company Duration of Contract Period of Notice Termination Payments From Company From KMP Mr Clive Rabie Mr Chris Hagglund Mr Myron Zlotnick** Mr Sam Allert Group MD Reckon Limited Open ended 1 month 1 month Group CFO Reckon Limited Open ended 3 months 3 months Company Secretary Corporate Counsel Reckon Limited Open ended 1 month 3 months Group CEO Reckon Limited Open ended 1 month 1 month Up to 12 months* Up to 12 months* Up to 12 months* Up to 12 months* * Under the Corporations Act the Termination Benefit Limit is 12 months average salary (last 3 years) unless shareholder approval is obtained. ** Mr Zlotnick’s services as Company Secretary were provided on an independent contractor basis until February 2021 at an annual fee of $160,745 (2020: $160,745). On 22 February 2021 Mr Zlotnick was engaged as an employee. On appointment to the Board, all non-executive directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including compensation relevant to the office of the director. Non-executive directors are not eligible to receive termination payments under the terms of the appointments. A summary of the appointment terms in relation to non-executive KMP is presented below: Name Position Held at Close of FY19 Employing Company Duration of Contract Period of Notice From Company From KMP Termination Payments Mr Greg Wilkinson Mr Phillip Hayman Independent non-executive Chairman Independent Non-executive Director Reckon Limited Reckon Limited Open ended None None None Open ended None None None 36 9. Changes in KMP Held Equity The following table outlines the changes in the amount of equity held by executives over the financial year Number Held at Open 2021 Granted FY21* Forfeited** Vested** Purchased / Disposed / DRP Number Held at Close 2021 Name Instrument Number Number Number Number Number Number Mr Clive Rabie Mr Chris Hagglund Mr Myron Zlotnick Mr Sam Allert Shares 10,597,141 Rights/ Options - Shares 749,833 Rights/ Options Shares Rights/ Options 550,000 - - - - - - - 300,000**** Shares 200,279 Rights/ Options 1,300,000 - - - - - - - 191,667*** 8,333 191,667 - - - - - 287,500*** 12,500 287,500 * 1 January 2021. ** Granted 1 January 2019. - - - - - - - - 10,597,141 - 941,500 350,000 - 300,000 487,779 1,000,000 *** Purchased on-market in February 2022 in respect of rights that vested for the reporting period. These shares formed part of a total of 796,479 shares purchasd on-market (at $1.01 per share) to satisfy vesting of rights for KMPs and non-KMPs. The fair value at grant date of 1 January 2019 is $0.52 per share. **** The fair value at grant date of 1 January 2021 is $0.59 per share. 37 Remuneration Report (Audited) (continued) The following table outlines the changes in the amount of equity held by non-executive directors over the financial year: Name Instrument Number Held at Open 2021 Granted FY21 Forfeited Vested Purchased / DRP Number Held at Close 2021 Number Number Number Number Number Number Mr Greg Wilkinson Mr Philip Hayman Shares 8,019,374 Rights/Options n/a Shares 1,397,460 Rights/Options n/a 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 n/a 0 n/a 8,019,374 n/a 1,397,460 n/a The following table outlines the value of equity granted during the year that may be realised in the future: 2021 Equity Grants Tranche Total Value at Grant Value Expensed in FY21 Max Value to be Expensed in Future Years Min Value to be Expensed in Future Years Name Role Mr Clive Rabie Group CEO Mr Chris Hagglund Group CFO TSR EPS Service TSR EPS n/a n/a $0 $0 n/a n/a n/a n/a Must be employed at end of performance period $0 $0 $0 $0 Service Must be employed at end of performance period Mr Myron Zlotnick Company Secretary TSR EPS $88,500 $88,500 $29,500 $29,500 $59,000 $59,000 Service Must be employed at end of performance period Mr Sam Allert MD Business & Accounting ANZ TSR EPS $0 $0 $0 $0 $0 $0 Service Must be employed at end of performance period TOTALS $177,000 $59,000 $118,000 n/a n/a $0 $0 $0 $0 $0 $0 $0 38 10. Other Remuneration Related Matters The following outlines other remuneration related matters that may be of interest to stakeholders, in the interests of transparency and disclosure: • Other than as disclosed, there were no loans to Directors or other KMP at any time during the reporting period and • There were no relevant material transactions involving KMP other than compensation and transactions concerning shares, performance rights/options as discussed in this report. The rules state that in all cases save as the rules provide otherwise, the Board has an over-riding discretion in relation to any of its powers under the Rules. This concludes the remuneration report which has been audited. 39 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’ Meeting 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 Meeting Reckon Limited – Attendance Tables Board Audit & Risk Committee Remuneration Committee Eligible to attend Attended Eligible to attend Attended Eligible to attend Attended Greg Wilkinson Clive Rabie Phil Hayman Sam Allert 12 12 12 12 12 12 12 12 2 n/a 2 n/a 2 n/a 2 n/a 3 n/a 3 n/a 3 n/a 3 n/a 40 Non-Audit Fees Details of the non-audit services can be found in note 6 to the financial statements. The directors are satisfied that the provision of non-audit services, during the year, by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are of the opinion that the services as disclosed in note 6 to the financial statements do not compromise the external auditor’s independence, based on advice received from the Audit & Risk Committee, for the following reasons: • All non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor, and • None of the services undermine the general principles relating to auditor independence as set out in Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the company or jointly sharing economic risks and rewards. Subsequent Events None post 31 December 2021. Auditor’s Independence Declaration The auditor’s independence declaration is included after this report on page 41. Rounding Off of Amounts The company is a company of the kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the directors’ report and the financial statements are rounded off to the nearest thousand dollars, unless otherwise indicated. On behalf of the directors, Mr G Wilkinson Chairman Sydney 30 March 2022 41 Tel: +61 2 9251 4100 Fax: +61 2 9240 9821 www.bdo.com.au Level 11, 1 Margaret Street Sydney NSW 2000 Australia DECLARATION OF INDEPENDENCE BY JOHN BRESOLIN TO THE DIRECTORS OF RECKON LIMITED As lead auditor of Reckon Limited for the year ended 31 December 2021, I declare that, to the best of my knowledge and belief, there have been: 1. No contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and 2. No contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Reckon Limited and the entities it controlled during the period. BDO Audit Pty Ltd John Bresolin Director Sydney, 30 March 2022 BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation. 42 Tel: +61 2 9251 4100 Fax: +61 2 9240 9821 Level 11, 1 Margaret Street Sydney NSW 2000 Australia INDEPENDENT AUDITOR'S REPORT To the members of Reckon Limited Report on the Audit of the Financial Report Opinion We have audited the financial report of Reckon Limited (the Company) and its subsidiaries (the Group), which comprises the consolidated statement of financial position as at 31 December 2021, the consolidated statement of profit or loss, consolidated statement of profit or loss and other comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the financial report, including a summary of significant accounting policies and the directors’ declaration. In our opinion the accompanying financial report of the Group, is in accordance with the Corporations Act 2001, including: (i) Giving a true and fair view of the Group’s financial position as at 31 December 2021 and of its financial performance for the year ended on that date; and (ii) Complying with Australian Accounting Standards and the Corporations Regulations 2001. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (including Independence Standards) (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. BDO Audit Pty Ltd ABN 33 134 022 870 is a member of a national association of independent entities which are all members of BDO Australia Ltd ABN 77 050 110 275, an Australian company limited by guarantee. BDO Audit Pty Ltd and BDO Australia Ltd are members of BDO International Ltd, a UK company limited by guarantee, and form part of the international BDO network of independent member firms. Liability limited by a scheme approved under Professional Standards Legislation. 43 Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Acquisition of nQueue Zebraworks Inc Key audit matter How the matter was addressed in our audit As disclosed in note 26 (c) of the financial report, Our procedures, amongst others, included: the Group acquired nQueue Zebraworks Inc during the year. • Obtaining an understanding of the acquisition during the year through review and discussion with Accounting for the acquisition of a business can management of the transaction documents related to be complex and accounting standards require the the acquisition to understand the structure, key terms Group to assess whether the transaction is a and conditions business combination, whether there is control • Assessing the appropriateness of the business over the investee and identify all assets and combination performed by the Group, including review liabilities of the newly acquired business and of the employment arrangements with selling estimate the fair value of each item. shareholders, against the requirements of AASB 3 We determined that the acquisition was a key audit matter because of the high level of judgment and estimates used by the Group in determining: • • • Control over the investee. Consideration paid for the acquisition. Employment arrangements with selling shareholders. Management engaged experts to assist with the Business Combinations • Engaging with internal specialists in assessing the appropriateness of the judgements made by management concerning control over the investee against the requirements of AASB 10 Consolidated Financial Statements • Engaging with internal specialists to evaluate and challenge key assumptions of the Group’s valuations including: - Assessing the scope, objectivity and competency valuation of the acquired business and of the independent valuer engaged by the Group - - Evaluating the key assumptions, including discount rates, used by the Group’s independent valuer Challenging the Group’s independent valuer’s approach and methodology to valuing their assets by comparing to the requirements of the accounting standards. • • Testing the statement of financial position at acquisition date of the business acquired. Assessing the adequacy of the Group’s disclosures of the acquisition. consideration paid. 44 Revenue recognition in respect of bundled goods and services Key audit matter How the matter was addressed in our audit The Group has various revenue streams for which Our procedures, amongst others, included: revenue is recognised as or when the performance obligation is satisfied by transferring the promised good or service. For bundled goods or services, significant management judgment is required in determining the fair value of the transaction price allocated to each separate performance obligation. As at 31 December 2021 the Group has reported Sales Revenue of $71.3m (2020: $70.8m) from its continuing • Obtaining an understanding of the Group’s revenue recognition policies and assessing the policies applied for compliance with the relevant accounting standards Identifying and testing the relevant controls over the recognition and measurement of revenue transactions Selecting a sample of revenue transactions, the • • operations as disclosed in Note 4. The related contract fair value of each element of the bundle liabilities as disclosed in the statement of financial position as at 31 December 2021 are $5.9m (2020: $5.6m). transaction was recalculated ensuring: - The logic used by management in the underlying allocation model is reasonable - - and appropriate. Evaluating the data inputs into the model for reasonableness through agreement to the underlying data sources on a sample basis. Comparison of our independent expectation of the margin to be applied against management’s margin. • Selecting a sample of revenue transactions from the various streams throughout the year and tracing to supporting documentation, cash receipts and verifying whether revenue was accounted for appropriately Recalculation of the deferred revenue for the year ensuring the completeness and accuracy by agreement, on a sample basis, to underlying supporting documentation and data sources Assessing the adequacy of the disclosures in Notes 1(m), 1(n), 1(x) and 4 of the financial statements. • • 45 Capitalised development costs Key audit matter How the matter was addressed in our audit The carrying value of capitalised development costs as Our procedures, amongst others, included: at 31 December 2021 is $39.8m ($36.5m) as disclosed in Note 12 of the financial report. • Obtaining an understanding of the processes and key controls in place over the recording and The Group conducts a significant level of development identification of development costs and products activities for which certain directly attributable costs for which these costs have been capitalised are capitalised. The identification of these costs • Evaluating the appropriateness and eligibility of involves significant management judgment in assessing costs capitalised, on a sample basis, by agreeing whether the costs are: • • • Eligible for capitalisation under the criteria prescribed by Australian Accounting Standards Appropriate and directly attributable to relevant products developed Supportable to the extent to which these capitalised development costs will generate sufficient economic benefit to support their carrying values. the costs to external invoices, supporting payroll and time records and cost allocation calculations Assessing the recoverability of the carrying value of the capitalised development costs by major product, with reference to current product performance, historical and forecast cash flows. Assessing the adequacy of the disclosures in Notes 1(f), (x) and 12 of the financial report. • • Other information The directors are responsible for the other information. The other information comprises the information in the Group’s annual report for the year ended 31 December 2021, but does not include the financial report and the auditor’s report thereon. Our opinion on the financial report does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the Financial Report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In preparing the financial report, the directors are responsible for assessing the ability of the group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or has no realistic alternative but to do so. 46 Other matter The financial report of Reckon Limited, for the year ended 31 December 2020 was audited by another auditor who expressed an unmodified opinion on that report on 26 March 2021. Auditor’s responsibilities for the audit of the Financial Report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website (http://www.auasb.gov.au/Home.aspx) at: https://www.auasb.gov.au/admin/file/content102/c3/ar1_2020.pdf This description forms part of our auditor’s report. Report on the Remuneration Report Opinion on the Remuneration Report We have audited the Remuneration Report included in the directors’ report for the year ended 31 December 2021. In our opinion, the Remuneration Report of Reckon Limited, for the year ended 31 December 2021, complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. Remuneration Report of Reckon Limited for the year ended 31 December 2020 was audited by another auditor who issued an unmodified opinion in their audit report dated 26 March 2021. BDO Audit Pty Ltd John Bresolin Director Sydney, 30 March 2022 47 Directors’ Declaration The directors of the company declare that: 1. the financial statements and notes as set out on pages 49 to 104, 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 2021 and of the performance for the year ended on that date of the consolidated group; 2. 3. in the directors opinion, the attached financial statements are in compliance with international financial reporting standards, as stated in note 1 to the financial statements, 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 4. the directors have been given the declarations required by Section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Board of Directors pursuant to Section 295(5) of the Corporations Act 2001. On behalf of the directors, Mr G Wilkinson Chairman Sydney, 30 March 2022 48 Consolidated Statement of Profit or Loss for the year ended 31 December 2021 Continuing operations Revenue Product costs Employee benefits expenses Marketing expenses Premises and establishment expenses Telecommunications Legal and professional expenses Other expenses Transaction costs Transaction related share based payment expenses Other income - Cares Act loan forgiveness Note Consolidated 2021 $’000 2020 $’000 Restated1 3, 4 71,304 3 (8,010) 70,875 (7,603) (24,996) (24,283) (3,325) (3,397) (801) (442) (912) (753) (510) (848) (3,357) (4,161) (411) (794) 26(c) (1,099) - 3 1,202 1,210 Depreciation and amortisation of other non-current assets 3 (18,778) (18,339) Finance costs Profit before income tax Income tax expense Profit for the year attributable from continuing operations 3 5 9,600 (503) 9,097 (775) (1,163) Profit from discontinued operations Profit for the year Profit attributable to: Owners of the parent Non - controlling interest Profit for the year 26(d) 118 9,215 9,822 (607) 9,215 10,234 (1,995) 8,239 1,497 9,736 9,736 - 9,736 Earnings per share for profit attributable to the parent Cents Cents Basic Earnings per Share Diluted Earnings per Share Earnings per share from continuing operations for profit attributable to the parent Basic earnings per share Diluted earnings per share Earnings per share from discontinued operations for profit attributable to the parent Basic earnings per share Diluted earnings per share 1 Restated to reflect the sale of the Reckon Docs business, refer 26(d) The above consolidated income statement should be read in conjunction with the accompanying notes. 22 22 8.7 8.4 8.6 8.3 0.1 0.1 8.6 8.4 7.3 7.1 1.3 1.3 49 Consolidated Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 2021 Profit for the year Other comprehensive income/(loss), net of income tax Items that may be reclassified subsequently to profit or loss: Exchange difference on translation of foreign operations Fair value movement on interest rate swap Total other comprehensive income/(loss), net of income tax Total comprehensive income for the year Total comprehensive income attribute to: Owners of the parent Non - controlling interest Note Consolidated 2021 $’000 2020 $’000 Restated1 9,215 9,736 21 21 216 199 415 120 (281) (161) 9,630 9,575 10,237 9,575 (607) - 9,630 9,575 1 Restated to reflect the sale of the Reckon Docs business, refer 26(d) The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 50 Consolidated Statement of Financial Position as at 31 December 2021 ASSETS Current Assets Cash and cash equivalents Trade and other receivables Other financial assets Inventories Current tax receivables Other assets Total Current Assets Non-Current Assets Trade and other receivables Property, plant and equipment Deferred tax assets Intangible assets Other assets Right of use assets Total Non-Current Assets Total Assets LIABILITIES Current Liabilities Trade and other payables Provisions Contract liabilities Other financial liabilities Lease liabilities Total Current Liabilities Non-Current Liabilities Trade and other payables Borrowings Deferred tax liabilities Provisions Other financial liabilities Lease liabilities Total Non-Current Liabilities Total Liabilities Net Assets EQUITY Issued capital Reserves Retained earnings Total Equity attributable to owners of the parent Non - controlling interest Total Equity Note Consolidated 2021 $’000 2020 $’000 26 7 14 8 7 9 11 12 8 10 15 17 14 10 13 16 15 14 10 20 21 1,394 2,969 - 566 420 1,937 7,286 - 1,810 42 58,202 170 4,362 64,586 71,872 4,468 3,022 5,912 58 1,737 15,197 1,183 16,137 3,995 268 - 3,269 24,852 40,049 31,823 1,134 4,315 131 1,075 865 1,629 9,149 45 1,922 50 65,732 186 5,960 73,895 83,044 4,213 2,902 5,551 - 1,831 14,497 1,093 31,788 4,963 278 257 4,789 43,168 57,665 25,379 20,524 (48,626) 58,631 30,529 1,294 31,823 20,524 (49,653) 54,508 25,379 - 25,379 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 51 Consolidated Statement of Changes in Equity for the year ended 31 December 2021 Issued capital Share buyback reserve Foreign currency translation reserve Share- based payments reserve Swap hedging reserve Retained earnings Acquisition of non controlling interest reserve Non- controlling interest Consolidated $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 Total 20,524 (42,018) (1,905) 679 (257) 54,508 (6,152) - 25,379 Balance at 1 January 2021 Non - controlling interest at date of acquisition (note 26 (c)) Profit for the year Other comprehensive income: Exchange differences on translation of foreign operations Fair value movement on interest rate swap Total comprehensive income Share based payments expense (note 3) Dividends paid (note 27) Vested shares Treasury shares transferred to retained earnings Exchange adjustment Balance at 31 December 2021 - - - - - - - - - - - - - - - - - - - - - - 216 - 216 - - - - - - - - - - 598 - (43) 56 1 - - - 199 - 9,822 - - 199 9,822 - (5,665) 22 (56) - - - - - - - - - - - - - - - 849 849 (607) 9,215 - - 216 199 (607) 9,630 1,059 1,657 - - - (7) (5,665) (21) - (6) 20,524 (42,018) (1,689) 1,291 (58) 58,631 (6,152) 1,294 31,823 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 52 Consolidated Statement of Changes in Equity (continued) for the year ended 31 December 2021 Issued capital $’000 Share buyback reserve $’000 Foreign currency translation reserve Share- based payments reserve Swap hedging reserve Retained earnings Acquisition of non controlling interest reserve Attributable to owners of the parent $’000 $’000 $’000 $’000 $’000 $’000 20,524 (42,018) (2,025) 545 24 50,172 (6,152) 21,070 - - - - - - - - - - - - - - - - - - - - - 120 - 120 - - - - - - - - - - 270 - (136) - - - - - (281) 9,736 - - (281) 9,736 - - - - - - - (5,665) 136 129 - - - - - - - - - - - - 9,736 120 (281) 9,575 270 (5,665) - 129 - - Other comprehensive income: Consolidated Balance at 1 January 2020 Profit for the year Exchange differences on translation of foreign operations Fair value movement on interest rate swap Total comprehensive income Share based payments expense Dividends paid (note 27) Vested shares released to retained earnings Surplus treasury shares released to retained earnings Treasury shares acquired Treasury shares vested/lapsed Balance at 31 December 2020 20,524 (42,018) (1,905) 679 (257) 54,508 (6,152) 25,379 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 53 Consolidated Statement of Cash Flows for the year ended 31 December 2021 Cash Flows From Operating Activities Receipts from customers Payments to suppliers and employees Payment for capitalised development costs Interest paid Income taxes paid Note Consolidated Inflows/(Outflows) 2021 $’000 2020 $’000 80,195 85,517 (47,447) (49,660) (20,347) (19,495) (548) (944) (1,068) (2,505) Net cash inflow from operating activities 26(b) 10,785 12,913 Cash Flows From Investing Activities Proceeds from sale of business Cash balance on acquisition of subsidiary Loan repayments received Payment for property, plant and equipment Net cash inflow from investing activities Cash Flows From Financing Activities Repayment of borrowings Payments for lease liabilities capitalised under AASB 16 Payment for treasury shares 26(d) 26(c) 12,892 613 131 (739) 12,897 - - 1,064 (496) 568 (15,651) (5,751) (2,121) (2,040) (21) - Dividends paid to owners of the parent 27 (5,665) (5,665) Net cash outflow from financing activities (23,458) (13,456) Net Increase in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash and cash equivalents 224 1,134 36 25 1,124 (15) Cash and cash equivalents at the end of the financial year 26(a) 1,394 1,134 The above consolidated statement of cash flows should be read in conjunction with the accompanying note. 54 Notes to the Financial Statements for the year ended 31 December 2021 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 the consolidated entity consisting of Reckon Limited and its subsidiaries. For the purposes of preparing the consolidated financial statements, the company is a for-profit entity. 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. Compliance with Australian Accounting Standards ensures that the consolidated financial statements and notes of Reckon Limited comply with International Financial Reporting Standards (IFRSs). Consequently, this financial report has been prepared in accordance with and complies with IFRSs as issued by the International Accounting Standards Board. The financial statements were authorised for issue by the directors on 30 March 2022. 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. Historical cost is generally based on the fair values of the consideration given in exchange for assets. The company is a company of the kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Corporations Instrument amounts in the financial report are rounded to the nearest thousand dollars, unless otherwise indicated. COVID-19 Impact The Reckon Group has again displayed its resilience, by posting revenue growth in these extraordinary times. This is despite revenue growth being hampered by COVID-19 in the Legal Group where there is a reliance on on-site sales and installation activity. No impairment is considered necessary. The impact of the COVID-19 pandemic is ongoing and it is not practicable to estimate the potential impact, positive or negative, after the reporting date. The situation is rapidly developing and is dependent on measures imposed by the Australian Government and other countries, such maintaining social distancing requirements, quarantine, travel restrictions and any economic stimulus that may be provided. Significant Accounting Policies (a) Basis of consolidation The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. Control is achieved when the Company: • • • has power over the investee; is exposed, or has rights, to variable returns from its involvement with the investee; and has the ability to use its power to affect its returns. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Specifically, the results of subsidiaries acquired or disposed of during the year are included in profit or loss from the date the company gains control until the date when the company ceases to control the subsidiary. 55 Notes to the Financial Statements (continued) Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group. All intra-group transactions, balances, income and expenses are eliminated in full on consolidation. Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company. (b) Business Combinations Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that: • Deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements and share- based payment arrangements are recognised and measured in accordance with the relevant accounting standards. Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain. Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis. Where the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date. Where a business combination involves the issuance of a put option granted to the vendor in respect of an equity interest not owned by the parent, the present value of the put exercise price is recognised as a financial liability in the consolidated accounts of the parent entity. The recognition of this liability effectively treats the option as if it has been exercised, constituting a transaction between owners as owners which is recorded in equity. Any subsequent re- measurement is considered to be part of the equity transaction and is recorded in equity via an “acquisition of non- controlling interest reserve. If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date. 56 (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 - 7 years Right of use assets are depreciated over the shorter period of the lease term and the useful life of the underlying asset. (d) 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. (e) Foreign Currency Translation 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 in other comprehensive income and accumulated in a foreign exchange translation reserve. 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, a proportionate share of such exchange differences are recognised in profit or loss 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. 57 Notes to the Financial Statements (continued) (f) Intangible assets Goodwill Goodwill arising on an acquisition of a business is carried at cost as established at the date of the acquisition of the business less accumulated impairment losses, if any. For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss in the consolidated income statement. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Intellectual Property Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. Customer contracts are amortised on a straight-line basis over their useful life to the Group of ten years. Brand names are not amortised but are subject to annual impairment testing. The Group has committed to continually use, invest in and promote acquired brands, therefore brands have been assessed to have an indefinite life. Research and development costs Research expenditure is recognised as an expense when incurred. An internally-generated intangible asset arising from development is recognised if, and only if, all of the following have been demonstrated: • • • • • the technical feasibility of completing the intangible asset so that it will be available for use or sale; the intention to complete the intangible asset and use or sell it; the ability to use or sell the intangible asset; how the intangible asset will generate probable future economic benefits; the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and • the ability to measure reliably the expenditure attributable to the intangible asset during its development. Development costs in respect of enhancements on existing suites of software applications are capitalised and written off over a 3 to 4-year period. Development costs on technically and commercially feasible new 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. 58 At each balance 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. (g) 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. The current tax payable is based on taxable profit for the year. Taxable profit differs from net profit as reported in profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The provisions are measured at the best estimate of the amount expected to become payable. The assessment is based on the judgement of finance professionals within the Company and on specialist independent tax advice. 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. The company and its wholly-owned Australian resident entities have formed a tax-consolidated group and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Reckon Limited. The Group uses the standalone approach by reference to the carrying amounts in the separate financial statements of each entity in applying the accounting for tax consolidation. The tax sharing agreement entered into between members of the tax-consolidated group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations or if an entity should leave the tax-consolidated group. The effect of the tax sharing agreement is that each member’s liability for tax payable by the tax consolidated group is limited to the amount payable to the head entity under the tax funding arrangement. (h) 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. (i) Share-based payments Equity settled share-based payments to employees are measured at the fair value of the equity instruments at the grant date. Details regarding the determination of the fair value of equity settled shared-based transactions are set out in note 19. 59 Notes to the Financial Statements (continued) The fair value determined at grant date of the equity settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of the number of equity instruments that will eventually vest. At each reporting date, the Group revises its estimate of the number of equity instruments expected to vest. The impact off the revision is recognised in the profit or loss. (j) Employee Benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave and long service leave when it is probable that settlement will be required and they are capable of being measured reliably. Liabilities recognised in respect of short-term employee benefits, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of long-term employee benefits are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date. 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. (k) Financial Instruments Financial assets and financial liabilities are recognised in the Group’s statement of financial position when the Group becomes a party to the contractual provisions of the instrument. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss. Financial assets All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. All recognised financial assets are measured subsequently in their entirety at either amortised cost or fair value, depending on the classification of the financial assets. Foreign exchange gains and losses The carrying amount of financial assets that are denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of each reporting period. See hedge accounting policy regarding the recognition of exchange differences where the foreign currency risk component of a financial asset is designated as a hedging instrument for a hedge of foreign currency risk. Impairment of financial assets The Group recognises a loss allowance for expected credit losses on trade receivables. The amount of expected credit losses is updated at each reporting date to reflect changes in credit risk since initial recognition of the respective financial instrument. 60 The Group always recognises lifetime ECL (expected credit losses) for trade receivables. The expected credit losses on these financial assets are estimated using a provision matrix based on the Group’s historical credit loss experience, adjusted for factors that are specific to the debtors, general economic conditions and an assessment of both the current as well as the forecast direction of conditions at the reporting date, including time value of money where appropriate. Lifetime ECL represents the expected credit losses that will result from all possible default events over the expected life of a financial instrument. (i) Significant increase in credit risk In assessing whether the credit risk on a financial instrument has increased significantly since initial recognition, the Group compares the risk of a default occurring on the financial instrument at the reporting date with the risk of a default occurring on the financial instrument at the date of initial recognition. In making this assessment, the Group considers both quantitative and qualitative information that is reasonable and supportable, including historical experience and forward-looking information that is available without undue cost or effort. In particular, the following information is taken into account when assessing whether credit risk has increased significantly since initial recognition: • existing or forecast adverse changes in business, financial or economic conditions that are expected to cause a significant decrease in the debtor’s ability to meet its debt obligations; • an actual or expected significant deterioration in the operating results of the debtor; The Group assumes that the credit risk on a financial instrument has not increased significantly since initial recognition if the financial instrument is determined to have low credit risk at the reporting date. A financial instrument is determined to have low credit risk if: 1. the financial instrument has a low risk of default; 2. the debtor has a strong capacity to meet its contractual cash flow obligations in the near term; and 3. adverse changes in economic and business conditions in the longer term may, but will not necessarily, reduce the ability of the borrower to fulfil its contractual cash flow obligations. (ii) Definition of default The Group considers the following as constituting an event of default for internal credit risk management purposes as historical experience indicates that financial assets that meet either of the following criteria are generally not recoverable: • information developed internally or obtained from external sources indicates that the debtor is unlikely to pay its creditors, including the Group, in full. iii) Write-off policy The Group writes off a financial asset when there is information indicating that the debtor is in severe financial difficulty and there is no realistic prospect of recovery, e.g. when the debtor has been placed under liquidation or has entered into bankruptcy proceedings. Financial assets written off may still be subject to enforcement activities under the Group’s recovery procedures, taking into account legal advice where appropriate. Any recoveries made are recognised in profit or loss. (iv) Measurement and recognition of expected credit losses The measurement of expected credit losses is a function of the probability of default, loss given default (i.e. the magnitude of the loss if there is a default) and the exposure at default. The assessment of the probability of default 61 Notes to the Financial Statements (continued) and loss given default is based on historical data adjusted by forward-looking information as described above. As for the exposure at default, for financial assets, this is represented by the assets’ gross carrying amount at the reporting date. For financial assets, the expected credit loss is estimated as the difference between all contractual cash flows that are due to the Group in accordance with the contract and all the cash flows that the Group expects to receive, discounted at the original effective interest rate. (v) Derecognition of financial assets The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset measured at amortised cost, the difference between the asset’s carrying amount and the sum of the consideration received and receivable is recognised in profit or loss. Financial liabilities and equity Classification as debt or equity Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Financial liabilities All financial liabilities are measured subsequently at amortised cost or at FVTPL. Foreign exchange gains and losses For financial liabilities that are denominated in a foreign currency and are measured at amortised cost at the end of each reporting period, the foreign exchange gains and losses are determined based on the amortised cost of the instruments. These foreign exchange gains and losses are recognised in the ‘other gains and losses’ line item in profit or loss (note 14) for financial liabilities that are not part of a designated hedging relationship. For those which are designated as a hedging instrument for a hedge of foreign currency risk, foreign exchange gains and losses are recognised in other comprehensive income and accumulated in a separate component of equity. Derecognition of financial liabilities The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability derecognised and the consideration paid and payable is recognised in profit or loss. Derivative financial instruments The Group enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange rate risks, including foreign exchange forward contracts, options and interest rate swaps. Derivatives are recognised initially at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. Further details of derivative financial instruments are disclosed in notes 1(u) and 14. 62 (l) Impairment of assets At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. When an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. (m) Revenue Recognition Sale of goods and services The Group applies the following 5-step model for revenue recognition related to contracts with customers: a. Identify the contract(s) with customer b. Identify the performance obligation in the contract c. Determine the transaction price d. Allocate the transaction price to the performance obligation in the contract e. Recognise revenue when or as the entity satisfied in performance obligations. The Group recognises sales revenue related to the transfer of promised goods or services when a performance obligation is satisfied and when control of the goods or services passes to the customer, which is when the customer receives the product upon delivery. The amount of revenue recognised reflects the consideration to which the Group is or expects to be entitled in exchange for those goods or services. If the consideration promised includes a variable amount, the Group estimates the amount of consideration to which it will be entitled and only to the extent that it is highly probable that a significant reversal of revenue will not occur. Contracts with customers can include various combinations of products and services, which are in certain circumstances bundled and in other circumstances are capable of being distinct and accounted for as separate performance obligations. Where a contract with multiple performance obligations that is not bundled, the revenue associated with each obligation is calculated based on its stand-alone selling price. 63 Notes to the Financial Statements (continued) Revenue is recognised over time if: • • • the customer simultaneously receives and consumes the benefits as the entity performs; the customer controls the asset as the entity creates or enhances it; or the seller’s performance does not create an asset for which the seller has an alternative use and there is a right to payment for performance to date. Where the above criteria is not met, revenue is recognised at a point in time. The Group recognises revenue predominantly from the following sale of software and services: Business Group desktop products Business Group desktop products are sold with post-sale technical support services. These can be sold as a once- off package, or on an annual subscription basis. For all Business Group desktop products contracts that contain the sale of a licence, three distinct performance obligations are: i. Sale of a software/upgrade licence; and ii. The provision of minor maintenance updates which may be made available over the period of the contracts; and iii. Post-sale technical support for a specified period of time. Revenue is recognised for a Business Group desktop licence at the point of sale. This is because customers purchase a specific version of the software that exists at the time the licence is granted. Revenue is recognised for the customer’s entitlement to access additional maintenance updates and the provision of post-sale technical support over the time of the contract with the customer. This is due to the fact that Reckon may provide minor maintenance updates to which the customer may be entitled over the term of the contract. In relation to the post-sale technical support, the customer is deemed to simultaneously receive and consume the benefits provided by Reckon’s performance of the post-sale technical support services as it is performed. The price allocated to each performance obligation is based on the determined stand-alone selling prices of each obligation. The price allocated to the sale of the software licence has been determined by using the adjusted market assessment approach. The price allocated to the post-sale technical support has been determined on management’s assessment by using an expected cost plus margin approach. The relative standalone selling price has been apportioned to each performance obligation based on these methods. The revenue stream forms part of “Subscription revenue” and “Other recurring revenue” as outlined in Note 4. Reckon One (Business Group) Reckon One is a cloud software as a service (sold on a monthly subscription basis) that is accessible to a customer through their web browser and is sold with post-sale technical support services. Within these contracts, the contract promises generally are: i. Sale of a licence; ii. Ongoing maintenance of the cloud platform to ensure that it is accessible; and iii. Post-sale technical support for a specified period of time. As the customer is not able to benefit from the licence if the cloud is not accessible, two distinct performance obligations generally are: i. Sale of a licence and ongoing maintenance for access to the cloud; and ii. Post-sale technical support. The transaction price is fixed in the contract entered into by the customer dependent on the specific modules purchased. 64 Revenue for the licence and ongoing maintenance for the Reckon One product is recognised over the time of the contract with the customer. Reckon is providing a continuous service of making the online portal available during the contract period and the customer simultaneously receives and consumes the benefits provided by Reckon’s performance as Reckon delivers the service. Revenue for the post-sale technical support provided is also recognised over time. This is due to the fact that the customer simultaneously receives and consumes the benefits provided by the Reckon’s performance of the post- sale technical support services. The services are made available to the customer throughout the term of the contract. Although there are two distinct performance obligations, both currently maintain the same contractual billing period and are recognised over time. Accordingly, Reckon have deemed it unnecessary to allocate the transaction price allocated to each performance obligation separately. The revenue stream forms part of “Subscription revenue” as outlined in Note 4. Subscription revenue relates to streams where customers use the services over the life of the contract. Reckon Accounts Hosted (Business Group) Reckon Accounts Hosted is a hosted software where software is accessible via a web browser or through a desktop icon, and allows the customer to store data on the customer’s device or an external server. Reckon Accounts Hosted can be sold as on an annual or monthly subscription basis. For all Reckon Accounts Hosted contracts that contain the sale of a licence, the goods and services provided are: i. Sale of a software licence; ii. Post-sale technical support for a specified period of time; and iii. Hosting services for a specified period of time. Each of the contract promises are considered as a distinct performance obligation because the customer can benefit from the use the software without the provision of the technical support and/or hosting services and they are distinct within the context of the contract. Revenue is recognised for a Reckon Accounts Hosted licence at the point of sale. This is because customers purchase a specific version of the software that exists at the time the licence is granted. Revenue for the hosting services and ongoing support is recognised over the time of the contract with the customer. Reckon is providing a continuous service of hosting the customer’s data and providing post-sale technical support over the contract period and the customer simultaneously receives and consumes the benefits provided by Reckon’s performance as Reckon performs. The services are made available to the customer throughout the term of the contract. The price allocated to each performance obligation is determined based on the determined stand-alone selling prices of each performance obligation. The price allocated to the sale of the software licence has been determined by using the adjusted market assessment approach. The price allocated to the hosting services and post-sale technical support has been determined on management’s assessment by using an expected cost plus a margin approach. The relative standalone selling price has been apportioned to each performance obligation based on these methods. This revenue stream forms part of “Subscription Revenue” as outlined in Note 4. Subscription revenue relates to streams where customers pay for the services over the life of the contract, rather than upfront at the commencement of the contract. 65 Notes to the Financial Statements (continued) Membership fees (Business Group) Membership revenue relates to fees obtained as part of the Reckon’s Partner Program. Memberships are sold on an annual basis. For all Membership contracts, the goods and services provided include: i. The provision of software licences; ii. Access to a dedicated partner support team; iii. A partner resource kit; iv. Invitations to exclusive events and training; v. Marketing tool kits; and vi. Annual partner awards. Each of the contract promises above are considered to be a distinct performance obligations because the customer can benefit from the use the software without the provision of the other contract promises listed above and they are distinct within the context of the contract. Revenue is recognised for a software licence at the point of sale. This is because customers purchase and obtain a specific version of the software that exists at the time the licence is granted. Revenue for the remaining benefits of joining the membership is recognised over time. Reckon provides a range of different services which are delivered to the customer over the life of the contract. The nature of the services are such that the customer simultaneously receives and consumes the benefits provided by Reckon’s performance as Reckon performs. The price allocated to each performance obligation is determined based on the determined stand-alone selling prices of each performance obligation. The price allocated to the software licence has been determined based on the adjusted market assessment approach. The price allocated to the remaining performance obligations has been determined on management’s assessment by using an expected cost plus a margin approach. The relative standalone selling price has been apportioned to each performance obligation based on these methods. This revenue stream forms part of “Other Revenue” as outlined in Note 4. Practice Management Accountant Group APS is a desktop/cloud hybrid software as a service (sold on a subscription basis) that is accessible to a customer for download through their web browser. This is sold with implementation services and the promise of specific upgrades to the software modules. Without the required upgrades, the software would not be functional for the customer. Technical support is also provided over the contract period. The following generally are the contract promises: i. Sale of a licence; ii. Implementation services; iii. Specific upgrades for the functionality of the software; iv. Ongoing maintenance of the hosted platform to ensure that the software is accessible; and v. Post-sale technical support for a specified period of time. 66 A customer is not able to benefit from the software without the implementation services and the specific upgrades, as they are critical to the functioning of the software in its intended use. Knowledge of how to implement the software and pass on the upgrades is proprietary to Reckon and therefore only Reckon can perform this. Therefore, the customer is not able to use readily available resources to perform the implementation or pass on upgrades. Therefore, one distinct performance obligation has been identified for the bundle of the sale of a licence, implementation services, upgrades, and maintenance. Post-sale technical support has been identified as a separate performance obligation. This is because the customer can benefit from the use the software without the provision of the technical support and: i. The licence and technical support do not significantly modify or customise each other. ii. The licence and technical support are not highly interdependent or highly interrelated as one does not significantly affect the other. Revenue for the performance obligation (being the bundled licence, implementation services, upgrades and maintenance) is recognised over time. Reckon is providing a continuous service of making the software, upgrades and the online portal available during the contract period and the customer simultaneously receives and consumes the benefits provided by Reckon’s performance as Reckon performs. Accordingly, revenue is recognised for Practice Management Accountant Group post-sale technical support over the time of the contract with the customer. As both performance obligations are recognised over the same period of time, Reckon has deemed it unnecessary to allocate the transaction price attributed to each performance obligation separately. This revenue stream forms part of “Subscription Revenue” as outlined in Note 4. Subscription revenue relates to streams where customers pay for the services over the life of the contract, rather than upfront at the commencement of the contract. Elite (Practice Management Accountant Group) Elite is a desktop/cloud hybrid software licence that is accessible to a customer for download through their web browser. Revenue is recognised for this software licence at the point of sale. This is because customers purchase and obtain a specific version of the software that exists at the time the licence is granted. Revenue is recognised as and when the performance obligation is transferred which is generally when the software has been delivered to the client. Corporate Services (Practice Management Accountant Group) Corporate Services revenue relates to the provision of services including the registration of companies, provision of template trust deeds and provision of company search information. These services are sold as once-off products on an ad-hoc basis as required by a customer and deemed to have one distinct performance obligation for the services provided. Revenue is recognised for corporate services at the point of sale. This is because the services are provided to the customer immediately once payment is made and there is not further obligation linked to this good. This revenue stream forms part of “Other Revenue” as outlined in Note 4. Practice Management Legal Group The Practice Management Legal Group sells nQueue software and some hardware to the customer. nQueue’s product is a cost recovery software which allows customers to track the costs associated with printing, photocopying, and other disbursements and allocate these costs to their clients. nQueue also provides scanning and print solutions 67 Notes to the Financial Statements (continued) to its clients. nQueue licences are sold with implementation and post-sale technical support services. nQueue licences are sold either as a bundle including post-technical support services, but with implementation services sold separately (subscription model) or the software, support and implementation services are all sold separately (upfront model). For Practice Management Legal Group upfront model, three distinct performance obligations have been identified: i. The provision of the software licence; and ii. The provision of implementation services; and iii. The provision of support services over the life of the contract. Revenue is recognised for the licence at the point of sale. This is because customers purchase a specific version of the software that exists at the time the licence is granted. Revenue is recognised for the implementation services at point at which the services have been provided. These services are sold on an ad-hoc basis as required by a customer and deemed to have one distinct performance obligation for the services provided. The support services have been deemed to be a separately distinct performance obligation. These services are provided to customers who have existing contracts with nQueue. Customers can choose to purchase the support services on a yearly basis. As such, the customer can benefit from support services on their own. It is noted that support services are all separately identifiable within the context of the contract because support services do not significantly modify the software. The price allocated to the provision of the software licence and implementation services, and well as the price allocated to the support services is based upon a price list and is separately identifiable. Revenue for the software licence and implementation services is recognised as and when the performance obligation is transferred which is generally when installation is completed. Conversely, revenue for the provision of support services is recognised over the life of the contact as the benefits from any support is simultaneously consumed by the customer as it is provided. The services are made available to the customer throughout the term of the contract. Revenue for the performance obligation related to the subscription model (being the bundled licence and support) is recognised over time. Reckon is providing a continuous service of making the software and support available so long as the customer continues to pay for the service. As the customer is not able to benefit from the software and support if Reckon does not grant continuous access, the performance obligation is transferred over the term of the contract. The customer simultaneously receives and consumes the benefits provided by Reckon’s performance as Reckon performs. This software licence and implementation services revenue above forms part of “other revenue” and revenue from the sale of subscription products and the provision of support services forms part of “subscription revenue” as described in Note 4. Cost of obtaining a customer contract AASB 15 requires that incremental costs associated with acquiring a customer contract, such as sales commissions, are recognised as an asset and amortised over a period that corresponds with the period of benefit. An assessment of commissions paid by the Group was performed in connection with the sale of all products. The contracts for which commissions are paid vary in length however commissions are expensed over a maximum of 12 months. There are no other costs incurred that are considered to be incremental. 68 The following table summarises the revenue recognition of major sale of software and services: Revenue stream Performance obligation Timing of recognition Business Group desktop products Sale of a software licence At the point of sale. Maintenance updates Over the time of the contract with the customer. Post-sale technical support for a specified period of time Over the time of the contract with the customer. Reckon One Sale of licence and ongoing maintenance for access to the cloud Over the time of the contract with the customer. Post-sale technical support for a specified period of time Over the time of the contract with the customer. Reckon Accounts Hosted Sale of a software licence At the point of sale. Post-sale technical support for a specified period of time Over the time of the contract with the customer. Hosting services for a specified period of time Over the time of the contract with the customer. Membership fees – sale of license Sale of a software licence At the point of sale. Membership fees – support Additional membership benefits Over the time of the contract with the customer. Practice Management Accountant Group Sale of a bundled licence, implementation services, upgrade and maintenance. Over the time of the contract with the customer. Post-sale technical support Over the time of the contract with the customer. Corporate Services Revenue Provision of corporate services At the point of sale. Practice Management Legal Group The provision of the software licence and implementation services At the point of sale. The provision of support services (upfront model) and software and support services (subscription model) over the life of the contract Over the time of the contract with the customer. Interest Interest revenue relates to revenue recognised from the provision of loans to customers and is accounted for per the requirements of AASB 9 Financial Instruments. Interest revenue is recognised as interest accrues using the effective interest method, which is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. 69 Notes to the Financial Statements (continued) (n) Contract liabilities Contract liabilities relate to payments received from customers for performance obligations which have not yet been fulfilled. Contract liabilities arise when payment for performance obligations do not match the timing of when the performance obligations are satisfied. Contract liabilities are recognised at the inception of the contract and unwound as the performance obligation is satisfied over the life of the contract. (o) 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. (p) Cash and cash equivalents Cash and cash equivalents include cash on hand, deposits held at call with financial institutions and bank overdrafts. (q) Borrowings Borrowings are initially measured at fair value, net of transaction costs and are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. (r) 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. (s) Fair Value estimation The fair value of financial instruments and share based payments that are not traded in an active market is determined using appropriate valuation techniques. The Group uses a variety of methods and assumptions that are based on existing market conditions. The fair value of financial instruments traded on active markets (quoted shares), are based on balance date bid prices. The Directors consider that the nominal value less estimated credit adjustments of trade receivables and payables approximate their fair values. (t) Government Grants Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received. Government grants are recognised in profit or loss on a systematic basis over the periods in which the Group recognises as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Group should continue to develop its range of software products, are 70 offset against development costs in the statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets. Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised as other income in profit or loss in the period in which they become receivable. Government assistance which does not have conditions attached specifically relating to the operating activities of the entity is recognised in accordance with the accounting policies above. (u) Hedge Accounting The Group enters into derivative financial instruments to manage its exposure to interest rate risk, including interest rate swaps which is designated as cash flow hedges. At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk, which is when the hedging relationship meets all of the following hedge effectiveness requirements: • • • there is an economic relationship between the hedged item and the hedging instrument; the effect of credit risk does not dominate the value changes that result from that economic relationship; and the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item. If a hedging relationship ceases to meet the hedge effectiveness requirement relating to the hedge ratio but the risk management objective for that designated hedging relationship remains the same, the Group adjusts the hedge ratio of the hedging relationship (i.e. rebalances the hedge) so that it meets the qualifying criteria again. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of swap hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in the ‘other gains and losses’ line item. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item. However, when the hedged forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income and accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or nonfinancial liability. Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in profit or loss. Note 14 sets out details of the fair values of the derivative instruments used for hedging purposes. 71 Notes to the Financial Statements (continued) (v) Leases The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the Group’s incremental borrowing rate. This rate has been determined by considering the nature of the leased assets, the Group’s credit rating and the borrowing rate of funds in similar economic environments. Lease payments included in the measurement of the lease liability compromise: • Fixed lease payments (including in-substance fixed payments), less any lease incentives receivable. The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made. The Group remeasures the lease liability (and makes a corresponding adjustment to the related right-of-use assets) whenever: • The lease term has changed or there is a change in the assessment of exercise of a purchase option, in which case the lease liabilities is remeasured by discounting the revised lease payments using a revised discount rate. • The lease payments change due to changes in an index or rate or a change in expected payment under guaranteed residual value, in which cases the lease liability is remeasured by discounting the revised leased payments using the initial discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used). • A lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate. The Group did not make any such adjustments during the periods presented. The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses. Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease. The right-of-use assets are presented as a separate line in the consolidated statement of financial position. The Group applies AASB 136 Impairment of Assets to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in the ‘Property, plant and equipment’ policy. Variable rents that do not depend on an index or rate are not included in the measurement of the lease liability and the right-of-use asset. The related payments are recognised as an expense in the period in which the event or condition that triggers those payments occurs and are included in the line ‘premises expenses or other expenses’ in the statement of profit or loss. (w) Discontinued operations A discontinued operation is a component of the consolidated entity that has been disposed of or is classified as held for sale and that represents a separate major line of business or geographical area of operations, is part of a single 72 co-ordinated plan to dispose of such a line of business or area of operations, or is a subsidiary acquired exclusively with a view to resale. The results of discontinued operations are presented separately on the face of the statement of profit or loss and other comprehensive income. (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 – The Group has made judgements in relation to the bundling of contract promises into a single distinct performance obligation by determining whether the contract promises are separately identifiable in the context of the contract. The Group has also used judgement in allocating the transaction price to revenue streams which have more than one performance obligation and where the stand-alone selling price is not directly observable. The Group has applied the expected cost plus a margin approach in estimating these prices as described in Note 1(m) above. ECL on impairment of financial assets – An allowance for doubtful debts is recognised based on the expected credit loss (ECL) from the time the receivable is initially recognised. The ECL is based on a provision matrix that reflects the Group’s historical credit loss experience, adjusted for management’s knowledge of specific customers’ circumstances, as well as current collection trends and business conditions. Basis of consolidation – In assessing whether it has control over the nQueue Zebraworks Inc. Group following the acquisition in February 2021, the Group has made some key judgements, including contractual arrangements between the Group and shareholders, which provides the Group with the ability to execute power over the relevant activities of nQueue Zebraworks Inc. Following this assessment, the Group concluded that it has control. 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 12. 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 a model that adopts Monte Carlo simulation approach and by external valuation reports, and the assumptions related to this can be found in Note 19 and 26 (c). Product life and amortisation – the Group amortises capitalised development costs based on a straight-line basis over a period of 3-4 years commencing at the time of commercial release of the new product. This is the assessed useful life. Deferred consideration - the Group assesses the likelihood of the payment of deferred consideration on its business combinations based on budgeted and forecast performance. 73 Notes to the Financial Statements (continued) (y) New Accounting Standards The Group has adopted all of the new and revised Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to its operations and effective for the current reporting period. None of the new standards or revisions that are mandatory for the first time materially affected any of the amounts recognised in the current period or any prior period and are not likely to significantly affect future periods. The Group has not early adopted any new or revised Accounting Standards and Interpretations issued by AASB which are not yet effective during the year. (z) Working capital deficiency The consolidated statement of financial position indicates an excess of current liabilities over current assets of $7,911 thousand (2020: $5,348 thousand). This arises partly due to the adoption of AASB 16, whereby the right of use assets are treated as non-current assets, whereas a portion of the lease liabilities are treated as current liabilities. Net cash inflows from operating activities for the year were $10,785 thousand (2020: $12,913 thousand). Unused bank facilities at balance date was $22,182 thousand. Also, included in current liabilities are contract liabilities of $5,912 thousand (2020: $5,551 thousand), settlement of which will involve substantially lower cash outflows. Given the above, the Directors believe that preparation of the financial report on a going concern basis is appropriate. 2 Segment Information Operating segments are 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 Group • Practice Management Group, Accountant • Practice Management Group, Legal 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 Group - development, distribution and support of business accounting and personal financial software, as well as related products and services. Products sold in this division include Reckon Accounts and Reckon One. • Practice Management Group, Accountant - development, distribution and support of practice management, tax, client accounting and related software under the APS brand and Reckon Elite brand. • Practice Management Group, Legal - development, distribution and support of cost recovery, scan and cloud- based integration platforms under the nQ Zebraworks brand predominantly to the legal market. 74 2 Segment Information (continued) Segment revenues and results Operating revenue Business Group Practice Management Group, Accountant Practice Management Group, Legal Total revenue for continuing operations 2021 $’000 2020 $’000 Restated5 39,881 21,787 9,636 71,304 38,546 21,855 10,474 70,875 2021 $’000 2021 $’000 2021 $’000 2020 $’000 2020 $’000 2020 $’000 EBITDA1 D&A2 NPAT3 Restated5 EBITDA1 Restated5 D&A2 Restated5 NPAT3 20,379 (7,771) 12,608 19,670 (8,010) 11,660 11,891 (7,408) 4,483 11,582 (6,672) 4,910 514 (3,599) (3,085) 1,111 (3,657) (2,546) Segment results Business Group Practice Management Group, Accountant Practice Management Group, Legal Central administration costs (3,323) - (3,323) (3,043) - (3,043) 29,461 (18,778) 10,683 29,320 (18,339) 10,981 Transaction costs4 Transaction related share based payment expenses (note 26(c)) Other income - Cares Act loan forgiveness (refer note 3) Finance costs Profit before income tax Income tax expense Profit for the year for continuing operations (411) (1,099) 1,202 (775) 9,600 (503) 9,097 (794) - 1,210 (1,163) 10,234 (1,995) 8,239 1 EBITDA means earnings before interest tax, depreciation and amortisation. 2 D&A means depreciation and amortisation. 3 NPAT means net profit after tax. 4 Transaction costs relate to merger of the Legal Group and Zebraworks. 5 Restated to reflect the sale of the Reckon Docs business, refer 26(d) 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, new market expenditure, 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. No single customer contributed 10% or more of Group revenue for either 2021 or 2020. 75 Notes to the Financial Statements (continued) 2 Segment Information (continued) Assets Liabilities Additions to non- current assets Segment assets and liabilities 2021 $’000 2020 $’000 2021 $’000 2020 $’000 2021 $’000 2020 $’000 Business Group 19,576 18,958 10,603 11,445 9,148 7,998 Practice Management Group, Legal 14,027 13,362 5,154 5,027 4,676 4,014 Practice Management Group, Accountant 34,156 47,114 3,738 4,498 8,663 9,002 Corporate Division 4,113 3,610 20,554 36,695 - - 71,872 83,044 40,049 57,665 22,487 21,014 (b) Geographical information Australia United States of America Other countries (i) Revenue from external customers Non-current assets 2021 $’000 2020 $’000 2021 $’000 2020 $’000 Restated1 54,957 53,728 50,643 61,303 7,760 8,587 8,508 8,639 8,689 5,254 7,382 5,210 71,304 70,875 64,586 73,895 (i) No other country outside of Australia and the United States of America are considered to generate revenues which are material to the group. 1 Restated to reflect the sale of the Reckon Docs business, refer 26(d) 76 3 Profit for the Year Profit before income tax includes the following items of revenue and expense: Revenue Sales revenue Subscription revenue Other recurring revenue Loans revenue Other revenue Sale of goods and rendering of services Expenses Product costs Expected credit losses: Other Entities Depreciation of non-current assets: Property, plant and equipment Amortisation of non-current assets: Leasehold improvements Right of use assets Intellectual property Development costs Total depreciation and amortisation Foreign exchange losses Employee benefits expense: Post employment benefits – defined contribution plans Termination benefits Equity settled share based payments Finance costs: Loans/overdrafts Leases Other Operating lease rental expenses: Minimum lease payments Other income - Cares Act loan forgiveness 1 Restated to reflect the sale of the Reckon Docs business, refer 26(d) Consolidated 2021 $’000 2020 $’000 Restated1 65,255 64,012 1,051 248 4,750 1,403 370 5,090 71,304 70,875 8,010 7,603 337 864 450 1,146 25 16,293 18,778 31 2,756 84 1,657 549 136 90 775 517 1,202 525 985 382 1,172 25 15,775 18,339 95 2,556 97 270 944 176 43 1,163 543 1,210 The Legal Group in the USA received a loan under the “CARES“ Act. This was received as part of the USA stimulus package to assist small businesses during the COVID-19 crisis. The loan was able to be forgiven if the use of the loan met certain criteria, which included retaining our USA employees. The criteria have been met and so the loan has been forgiven. 77 Notes to the Financial Statements (continued) 4 Revenue Primary segments 2021 Product Description Revenue recognition Busines Group $’000 Practice Management Accountant Group $’000 Practice Management Legal Group $’000 Consolidated Group $’000 Subscription revenue Bundled licence, support, hosting and implementation Over time - 21,357 - 21,357 8,307 18,641 Licence, support and hosting Over time 10,334 Licence Point in time 25,257 Other recurring revenue Support Over time 32 Licence Point in time 1,019 Loan income Interest and commission Over time Other revenue Membership support Over time 248 399 Membership fees - license Point in time 2,030 - - - - - - - Licence and implementation Point in time Other Point in time - 562 430 - 1,329 - Total revenue for continuing operations 39,881 21,787 9,636 71,304 2020 (Restated1) Subscription revenue Bundled licence, support, hosting and implementation Over time - 21,581 - 21,581 8,818 18,487 Licence, support and hosting Over time 9,669 Licence Point in time 23,944 Other recurring revenue Support Over time 44 Licence Point in time 1,359 Loan income Interest and commission Over time Other revenue Membership support Over time 370 429 Membership fees - license Point in time 2,164 - - - - - - - Licence and implementation Point in time Other Point in time - 567 274 - 1,656 - Total revenue for continuing operations 38,546 21,855 10,474 70,875 1 Restated to reflect the sale of the Reckon Docs business, refer 26(d) 78 25,257 32 1,019 248 399 2,030 1,759 562 23,944 44 1,359 370 429 2,164 1,930 567 - - - - - - - - - - - - 5 Income Tax (a) Income tax expense recognised in profit and loss Current tax Deferred tax Over provided in prior years (b) The prima facie income tax expense on pre-tax accounting profit reconciles to the income tax expense in the financial statements as follows: Profit before income tax from continuing operations Profit before income tax from discontinued operations Profit before income tax Income tax expense calculated at 30% of profit Tax Effect of: Effect of lower tax rates on overseas income Utilisation of prior period capital tax losses not previously brought to account Tax effect of non-deductible/non-taxable items: Research and development claims Sundry items Over provision in prior years Income tax expense attributable to profit Comprising: Continuing operations Discontinued operations The tax rate used for the 2021 and 2020 reconciliations above is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law. (c) Future income tax benefits not brought to account as an asset: Tax losses: Revenue Capital Consolidated 2021 $’000 2020 $’000 2,027 (960) (514) 553 9,600 168 9,768 2,930 (17) (1,135) (780) 69 1,067 (514) 553 503 50 553 1,961 727 (51) 2,637 10,234 2,139 12,373 3,712 40 - (792) (272) 2,688 (51) 2,637 1,995 642 2,637 694 1,155 1,849 - 3,106 3,106 79 Notes to the Financial Statements (continued) 6 Remuneration of Auditors (a) BDO and Deloitte Touche Tohmatsu During the year, the auditors of the parent entity earned the following remuneration: BDO Auditing and reviewing of financial reports Tax compliance and other consulting services Deloitte Touche Tohmatsu Auditing and reviewing of financial reports Tax compliance and other consulting services (b) Other Auditors Auditing and reviewing of financial reports Tax compliance and other consulting services Consolidated 2021 $ 2020 $ 168,000 46,000 214,000 - - - 46,350 243,000 86,740 101,150 133,090 344,150 347,090 344,150 65,306 60,155 62,325 21,536 127,631 81,691 80 7 Trade and Other Receivables Current: Trade receivables (i) Allowance for Expected Credit Loss (ECL) Other receivables Non-current: Trade receivables 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 Total The movement in the ECL in respect of trade receivables is detailed below: Balance at beginning of the year Amounts written off during the year Increase in ECL recognised in the profit and loss Balance at end of year Consolidated 2021 $’000 2020 $’000 2,739 4,213 (149) (463) 2,590 3,750 379 565 2,969 4,315 - - - 35 10 45 1,124 85 445 951 186 1,559 1,654 2,696 463 683 (337) (714) 23 149 494 463 81 Notes to the Financial Statements (continued) 7 Trade and Other Receivables (continued) To determine the expected credit loss of trade receivables, a provision matrix is determined based on historic credit loss rates for each group of customers, adjusted for any material expected changes to the customers’ future credit risk. On that basis, the credit loss allowance as at 31 December 2021 was determined as follows: 2021 Receivables Current Past due 1 to 30 days Past due 30 to 60 days Past due over 60 days Business Group $’000 Legal Practice Management Group $’000 Accountant Practice Management Group $’000 254 27 28 34 294 1,017 30 229 Group $’000 1,085 1,124 85 445 2,739 56 93 149 537 80 27 182 826 3 12 15 Total receivables 343 1,570 Allowance based on historic credit losses Adjustment for expected changes in credit risk1 Credit loss allowance 1 6 7 52 75 127 Net carrying amount 336 1,443 811 2,590 1 Adjustment to reflect the expected change in the probability of default relating to customers that are over 60 days past due and those customers specifically identified. 82 7 Trade and Other Receivables (continued) 2020 Receivables Current Past due 1 to 30 days Past due 30 to 60 days Past due over 60 days Total receivables Allowance based on historic credit losses Adjustment for expected changes in credit risk1 Credit loss allowance Business Group $’000 Legal Practice Management Group $’000 Accountant Practice Management Group $’000 418 569 52 1,098 999 327 118 290 Group $’000 1,517 951 186 1,559 2,137 1,734 4,213 100 276 376 5 66 71 108 355 463 100 55 16 171 342 3 13 16 Net carrying amount 326 1,761 1,663 3,750 1 Adjustment to reflect the expected change in the probability of default relating to customers that are over 60 days past due and those customers specifically identified. 83 Notes to the Financial Statements (continued) Consolidated 2021 $’000 2020 $’000 1,877 1,597 60 32 1,937 1,629 61 109 170 47 139 186 8 Other Assets Current: Prepayments Other Non current: Prepayments Other 84 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 and equipment Consolidated Carrying amount at 1 January 2021 Additions Effect of foreign currency exchange differences Capitalised lease incentive reallocated Depreciation/amortisation expense Balance at 31 December 2021 Consolidated Carrying amount at 1 January 2020 Additions Effect of foreign currency exchange differences Capitalised lease incentive reallocated Depreciation/amortisation expense Balance at 31 December 2020 Consolidated 2021 $’000 2020 $’000 2,594 3,805 (1,882) (3,092) 712 713 10,736 11,394 (9,638) (10,185) 1,098 1,810 Leasehold Improvements $’000 Plant and Equipment $’000 1,209 1,922 Total $’000 713 261 7 181 (450) 712 919 2 (7) 181 (382) 713 1,209 1,922 491 29 - (631) 1,098 752 36 181 (1,081) 1,810 1,434 2,353 494 (50) - (669) 1,209 496 (57) 181 (1,051) 1,922 85 Notes to the Financial Statements (continued) 10 Right of Use Assets/Lease liabilities Consolidated 2021 $’000 2020 $’000 11,324 11,136 (6,962) (5,176) 4,362 5,960 1,737 3,269 5,006 1,737 1,544 1,474 251 - 1,831 4,789 6,620 1,831 1,603 1,460 1,474 252 5,006 6,620 5,960 7,761 263 11 143 (40) (1,872) (1,904) 4,362 5,960 Right of use assets At cost Less: Accumulated amortisation Lease liabilities Current Non-current Lease liabilities maturity profile Year 1 Year 2 Year 3 Year 4 Year 5 Consolidated Right of Use Assets Carrying amount at 1 January Additions Effect of foreign currency exchange differences Depreciation/amortisation expense Balance at 31 December Leases relate to office premises with lease terms of between 1 to 7 years. 86 11 Deferred Tax Assets The balance comprises temporary differences attributable to: Expected credit loss Employee benefits Other provisions Details of unrecognised deferred tax assets can be found in Note 5(c) Reconciliation: Opening balance at 1 January (Charged) / credited to profit or loss Balance at 31 December 12 Intangibles Intellectual property – at cost (i) Accumulated amortisation Development costs – at cost Accumulated amortisation Goodwill – at cost (i) The intellectual property carrying amount comprises of customer contracts. Consolidated 2021 $’000 2020 $’000 2 20 20 42 50 (8) 42 4 3 43 50 94 (44) 50 14,655 14,962 (14,641) (14,923) 14 39 175,587 174,757 (135,748) (138,171) 39,839 36,586 18,349 29,107 58,202 65,732 87 Notes to the Financial Statements (continued) 12 Intangibles (continued) Impairment test for goodwill Goodwill is allocated to the Group’s cash generating units (CGUs) identified based on how the businesses are managed and reported on and taking into account the use of shared resources, as follows Business Group Accountants Group Legal Group Consolidated 2021 $’000 2020 $’000 730 730 14,641 25,765 2,978 2,612 18,349 29,107 The recoverable amount of a CGU is the higher of its fair value less costs of disposal or its value in use. The Group has used both assessment methods in the current year. In assessing impairment using value in use, the estimated future cash flows are discounted to their present value using a post-tax discount rate of 10.8% (2020:10.7%) which reflects current market assessments of the time value of money and the risks specific to the GCU for which the estimates of future cash flows have not been adjusted. Value in use calculations utilise the most recently completed approved budgets for the forthcoming year. Subsequent cash flows are projected using constant long term average growth rates of 2.5% per annum (2020:2.5%). Sensitivity analysis performed indicates that if a change in profit and associated development costs reflected in the models were to decrease by up to 15% for the respective CGU’s there would be no impairment. Where a fair value less cost of disposal assessment has been performed, the Group has determined the fair value with reference to current and future trading modelling and consideration as to the fair value on an arm’s length transaction basis. At year end the Business Group and Practice Management Accountant Group CGUs were tested for impairment by determining the recoverable amount using the value in use method, and by determining the recoverable amount for the Practice Management Legal Group CGU through a fair value less cost of disposal model prepared by an independent valuer. Subsequent cashflows are projected using constant long-term growth rates of 3% per annum (2020:3%). In assessing fair value less cost of disposal, the estimated future cashflows are discounted to their present value using a post-tax discount rate of 11% for the existing business and 25% (2020:11% and 17% respectively) for the new practice management business recently commenced. No impairment losses have been recognised during the year or the prior year. Fair value was measured by an independent valuer utilising the discounted cash flow method based on a most recently completed approved budget for the forthcoming year and forecasts for a further 4 years. Valuation also incorporated publicly available information including a cross check with regard to the revenue multiple implied in the valuation compared to the revenue multiple of Reckon Limited. Consolidated movements in intangibles At 1 January 2021 Additions Disposal Effect of foreign currency exchange differences Note 26(c) 26(d) Amortisation charge At 31 December 2021 At 1 January 2020 Additions Effect of foreign currency exchange differences Amortisation charge At 31 December 2020 88 Goodwill $’000 29,107 221 (11,124) 145 - 18,349 29,347 - (240) - 29,107 Intellectual Property $’000 Development Costs $’000 Total $’000 65,732 21,472 36,586 21,251 (1,540) (12,664) (39) 106 (16,419) (16,444) 39,839 58,202 32,747 20,375 - 62,158 20,375 (240) (16,536) (16,561) 36,586 65,732 39 - - - (25) 14 64 - - (25) 39 13 Borrowings Current: Bank overdraft (i) Non-current Bank borrowings (i) Consolidated 2021 $’000 2020 $’000 - - 16,137 31,788 (i) The consolidated entity has decreased its bank facilities to $40 million during the year (2020 : $50 million) following the sale of the Reckon Docs business. The facility comprises variable rate bank overdraft facilities, loan facilities, and bank guarantee and transactional facilities. The facilities expire in 31 March 2025. The facility is secured over the Australian, New Zealand and United Kingdom net assets. Reckon has partially hedged the bank borrowings – refer note 14. 2021 The available, used and unused components of the facility at year end is as follows: Available Used Unused The remaining contractual maturity for the facility is as follows: 2-5 years Weighted average interest rate Bank overdraft and bank guarantee $’000 Loan facility $’000 37,000 16,137 20,863 3,000 1,681 1,319 16,137 1,681 2.43% 2.30% 89 Notes to the Financial Statements (continued) 14 Other financial assets/(liabilities) Current: Loans receivable (ii) Derivative that is designated and effective as a hedging instrument carried at fair value (i) Consolidated 2021 $’000 2020 $’000 - (58) 131 - Non-current: Derivative that is designated and effective as a hedging instrument carried at fair value (i) - (257) (i) This balance represents an interest rate swap. To reduce the fair value risk of changing interest rates, the Group has entered into a pay-floating receive-fixed interest rate swap. The swap’s notional principal is $9 million and represents 56% of the bank borrowings outstanding at 31 December 2021. The swap matures in August 2022. The fixed interest rate is 2.96%, and interest rate swaps are settled monthly or quarterly. Within the context of AASB 7, this is classified as a level 2 fair value measurement being derived from inputs, other than quoted prices included within level 1, that are observable for the asset or liability, either directly or indirectly. (ii) The loan receivable was net of an expected credit loss allowance of $21 thousand in 2020 (2021:Nil). 15 Provisions Current: Employee benefits – annual leave Employee benefits – long service leave Consolidated 2021 $’000 2020 $’000 1,206 1,816 3,022 1,196 1,706 2,902 Non-current: Employee benefits – long service leave 268 278 90 16 Deferred Tax Liabilities The temporary differences are attributable to: Expected credit loss Employee benefits Sales returns and volume rebates Contract liabilities Difference between book and tax value of non-current assets Other provisions Reconciliation: Opening balance at 1 January Charged / (credited) to profit or loss Balance at 31 December Details of unrecognised deferred tax assets can be found in Note 5(c) 17 Contract liabilities The unsatisfied performance obligations are as set out below: Subscription revenue Other revenue Consolidated 2021 $’000 2020 $’000 (4) (27) (1,182) (1,104) - (436) 6,361 (744) 3,995 4,963 (968) 3,995 4 (495) 7,111 (526) 4,963 4,280 683 4,963 Consolidated 2021 $’000 2020 $’000 5,753 5,385 159 166 5,912 5,551 Management expects that 100% of the transaction price allocated to the unsatisfied contracts as of the year ended 31 December 2021, will be recognised as revenue during the year ended 31 December 2022. 91 Notes to the Financial Statements (continued) Parent 2021 $’000 2020 $’000 3,974 67,419 71,393 9,757 26,352 36,109 4,437 77,888 82,325 8,778 38,793 47,571 20,524 20,524 (42,018) (42,018) (58) 1,250 (257) 679 (1,657) (1,657) (476) 57,719 35,284 (476) 57,959 34,754 6,229 8,701 - – 18 Parent Entity Disclosures Financial position Assets Current assets Non-current assets Liabilities Current liabilities Non-current liabilities Equity Share capital Share buyback reserve Swap hedging reserve Share based payments reserve Acquisition of non-controlling interest reserve Foreign currency translation reserve Retained earnings Financial performance Total comprehensive income Capital commitments for the acquisition of property, plant and equipment Not longer than 1 year Other Reckon Limited assets have been used as security for the bank facilities set out in note 13. The parent entity has no contingent liabilities. Working capital deficiency - refer note 1(y). 92 19 Employee Benefits Long-term incentive plan The long-term incentive plan presently comprises two possible methods of participation: the grant of equity under a performance share plan; or cash payments under a share appreciation plan. The board has discretion to make offers to applicable employees to participate in these plans. Performance shares offered (all in respect of the company’s ordinary shares) and/or share appreciation rights do not vest before three years after their grant date and are conditional on the participant remaining employed at vesting date, subject to board discretion. Vesting is also conditional upon the company achieving defined performance criteria. From 2011 onwards performance shares were also offered with longer term vesting periods. The single vesting condition is that participants must remain employed for the term required. To achieve 100% vesting employees must remain in employment for an effective 10 years from the date of the initial offer. Participation in this programme is no longer offered. The share appreciation rights plan represents an alternative remuneration element (to offering 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 the share price at the end of the performance period is greater than at the beginning of the performance period. The performance criteria for the rights to vest are fixed by the board in the exercise of its discretion. At present these are the same as the TSR target set for performance shares to vest and the same sliding scale applies. There are two performance criteria that must be met. The first is achievement of budgeted earnings per share growth (EPS) over the performance period. The second is a comparison of the company’s total shareholder return over the performance period measured against the change in the S&P/ASX 300 over the performance period. The criteria carry equal weighting. Vesting against both criteria occurs on a sliding scale. In the case of EPS 75% of entitlements vest if the target EPS is achieved and 100% of entitlement will vest on achievement of 110% of target EPS, on a sliding scale capped at 100% of entitlement. In the case of TSR, 75% of entitlements vest if the target TSR is achieved, 100% of entitlements will vest on achievement of 110% of target TSR, and a prorata vesting occurs between 100% and 110% of target TSR capped at 110%. Share based payments are expensed over the vesting period for each tranche offered. No options were issued during the year (2020: Nil). 595,000 senior executive rights (2020: 737,500), nil appreciation rights (2020: nil), and nil performance shares (2020: nil), were issued during the year. The fair value of senior executive rights issued in 2021 was $0.59, using a model that adopts the Monte Carlo simulation approach. The assumptions used in this model for the tranches issued in 2021 are: grant date share price of $0.78; expected volatility of 45.0%; dividend yield of 6.0%; and a risk-free rate of 0.1%. The expense recognised in 2021 for the rights/performance shares was $558 thousand (2020: $227 thousand). Remaining share based payments of $1,099 thousand relates to nQueue Zebraworks Inc. refer to note 26(c). 93 Notes to the Financial Statements (continued) 19 Employee Benefits (continued) Set out below are summaries of performance shares and appreciation rights granted under the long-term incentive plan: Performance Shares Grant Date Vesting Date Shares Granted Shares lapsed during the year Shares vested during the year Shares available at the end of the year 2021 2020 2021 2020 2021 2020 Jan’14 Dec’20 101,250 Jan’15 Dec’21 37,500* - - 8,250 25,625 - - - - - 25,625 8,250 8,250 * Purchased on market ($1.01 per share) in February 2022 in respect of rights that vested for the reporting period. Nil shares have been acquired for future grants. Senior Executive 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 2021 2020 2021 2020 2021 2020 Jan’19 Dec’21 860,000* Sep’19 Dec’22 1,000,000 Jan’20 Dec’22 737,500 Jan’21 Dec’23 595,000 - - - - 25,000 - - - - - - - - - - - 822,500 822,500 1,000,000 1,000,000 737,500 737,500 595,000 - * Purchased on market ($1.01 per share) in February 2022 in respect of rights that vested for the reporting period. Short-term incentive plan Each annual budget fixes a pool of cash representing a total potential amount in which the relevant employees can share if short term performance conditions are met. The performance period for the short-term incentive plan is one-year. However, approximately one third of the payment will only be made if the employee remains in employment for a further one year period after the performance period. The performance conditions are budgeted targets set for revenue, EBITDA and earnings per share. Actual performance is the measured on a sliding scale from 90% to 110% against the budgeted performance of the group to determine the extent to which incentives are paid. The incentive is paid on a sliding scale. Below 90% no incentive is paid. Between 90% and 110% a pro rata increase is paid, capped at 110%. There is an overlap of earnings per share as a performance condition for the long-term incentive and the short-term incentive. 94 20 Issued Capital Fully Paid Ordinary Share Capital 2021 2020 No. $’000 No. $’000 Balance at beginning of financial year 113,294,832 20,524 113,294,832 20,524 Dividend re-investment plan - - - - Balance at end of financial year 113,294,832 20,524 113,294,832 20,524 Less Treasury shares Balance at beginning of financial year Shares purchased in current period Lapsed shares utilised Shares vested Balance at end of financial year - - - - - - - - - - - - - - - - - - - - Balance at end of financial year net of treasury shares 113,294,832 20,524 113,294,832 20,524 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. During the year nil shares were bought back. No options were exercised during the year. The Group implemented a dividend re-investment plan in 2016. 95 Notes to the Financial Statements (continued) 21 Reserves Nature and purpose of reserves (a) Foreign currency translation reserve 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) Swap hedging reserve The swap hedging reserve represents the cumulative gains or losses arising on changes in the fair value of hedging instruments entered into. These gains or losses will be reclassified to profit or loss only when the hedged transaction affects profit or loss. (c) Share buyback reserve The value of shares bought back are allocated to this reserve. (d) 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 and recognised to date which have not yet vested. (e) Acquisition of non-controlling interest reserve The acquisition of non-controlling interest reserve represents an equity account to record transactions between equity holders. 22 Earnings per Share Basic earnings per share – continuing operations Diluted earnings per share – continuing operations Consolidated 2021 cents 8.7 8.4 2020 cents 8.6 8.4 Weighted average number of ordinary shares used in the calculation of basic earnings per share 113,294,832 113,294,832 Weighted average number of ordinary shares and potential ordinary shares (in relation to employee performance shares) used in the calculation of diluted earnings per share 116,458,082 115,888,707 Earnings used in the calculation of earnings per share is $9,822 thousand (2020: $9,736 thousand), and for discontinued operations $118 thousand (2020: $1,497 thousand). 23 Contingent Liabilities There are no material contingent liabilities as at 31 December 2021 (2020: Nil). The potential contingent liability disclosed in the half year accounts in relation to Microsoft has since been settled, and is no longer a contingent liability. There was no material disagreement. 96 24 Commitments for Expenditure (a) Capital Expenditure Commitments The consolidated entity has capital expenditure commitments of $nil as at 31 December 2020 (2019: $nil). (b) Other Commitments Within 1 year Later than 1 year and not longer than 5 years 25 Subsidiaries Consolidated 2021 $’000 403 588 991 2020 $’000 420 1,019 1,439 Name of Entity Country of Incorporation Ownership Interest Parent Entity Reckon Limited Subsidiaries Reckon Australia Pty Limited Reckon Limited Performance Share Plan Trust Reckon New Zealand Limited Reckon Accountants Group Pty Limited Reckon Holdings NZ Pty Limited Reckon One Limited Reckon Docs Pty Limited nQ Zebraworks Pty Limited (Previously nQueue Pty Limited)2 Australia Australia Australia New Zealand Australia New Zealand United Kingdom Australia Australia nQ Zebraworks Limited (Previously nQueue Billback Limited)2 United Kingdom nQ Zebraworks Inc1 Billback Systems LLC1 nQ Zebraworks LLC2 United States of America United States of America United States of America Reckon Accounts Pte Limited Singapore 1 Billback Systems LLC and Zebraworks Inc. were merged into nQ Zebraworks Inc. 2 Wholly owned subsidiaries of nQ Zebraworks Inc. All shares held are ordinary shares. 2021 % 2020 % 100 100 100 100 100 100 100 70 70 70 - 70 100 100 100 100 100 100 100 100 100 100 100 100 100 100 97 Notes to the Financial Statements (continued) 26 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) Bank overdraft (i) Cash balance is predominantly in the form of short-term money market deposits, which can be accessed at call. (b) Reconciliation of Profit After Income Tax To Net Cash Flows From Operating Activities Profit after income tax Depreciation and amortisation of non-current assets Payment for capitalised development costs Non-cash interest Non-cash employee benefits expense – share based payment Loss on disposal of business Increase/(decrease) in current tax liability/asset Increase/(decrease) in deferred tax balances Unrealised foreign currency translation amount (Increase)/decrease in assets net of acquisitions: Current receivables Current inventories Other current assets Non-current receivables Non-current other Increase/(decrease) in liabilities net of acquisitions: Current trade payables Other current liabilities Other non-current liabilities Consolidated 2021 $’000 2020 $’000 1,394 1,134 - - 1,394 1,134 9,215 9,736 18,904 19,100 (20,347) (19,495) 227 1,657 148 445 (960) 46 870 173 (306) 45 16 74 588 (10) 219 399 - (658) 727 392 2,289 303 153 81 73 (207) (284) 85 Net cash inflow from operating activities 10,785 12,913 98 26 Notes to the Statement of Cash Flows (continued) (c) Legal Group acquisition The acquisition of Zebraworks was concluded during the year and was effective from 1 February 2021. A new Legal Group USA holding company, nQueue Zebraworks Inc., was established and Zebraworks Inc. and the existing Legal Group were merged into this new structure. Zebraworks is a SaaS start-up building an integration platform to move legal practices to the cloud. Reckon Limited owns 70% of the new venture, with Zebraworks shareholders (mainly management) owning 30%. Management have the opportunity to progressively increase their shareholding by 15% of total issued capital if certain KPI’s are met by 2027. The KPI’s include revenue targets and product release targets. Non-cash consideration of $2,449 thousand was transferred which is equal to 30% of the existing Practice Management Group, Legal measured at fair value. The non-cash consideration includes $1,600 thousand of share based payments, related to founding shareholders. Fair value of the non-cash consideration was measured by an independent valuer utilising the discounted cash flow method based on a high level cashflow projection prepared by management and publicly available information. The valuation assessment was cross checked with regard to the revenue multiple implied in the valuation compared to the revenue multiple of Reckon Limited. An appropriate consideration on lack of discount for control and limited liquidity was also applied. Trading results for the merged entity are as set out in note 2, and movements in the non-controlling interest are as set out in the consolidated statement of changes in equity. Net assets acquired: Cash Fixed assets Other assets Goodwill Non-cash consideration transferred Less consideration treated as remuneration Net non-cash consideration Consolidated 2021 $’000 2020 $’000 613 13 2 221 849 2,449 (1,600) 849 - - - - - - - - Had the acquisition been effected at 1 January 2021 there would have been no further material impact on the results for the year. Share based payments recognised in nQueue Zebraworks Inc. As part of the nQueue Zebraworks Inc acquisition, there are founding shareholders continuing employment and shares provided to these founding shareholders were treated as remuneration. Attaching to a portion of these shares are clawback provisions for certain members of management should they leave within three years. These shares are restricted until such time as they vest. Vesting occurs in tranches over a three year period. A share based payment expense of $1,099 thousand has been included in the consolidated statement of profit and loss in 2021. 99 Notes to the Financial Statements (continued) (d) Discontinued operations - Disposal of Reckon Docs business The Reckon Docs business was sold to Class Limited effective 1 March 2021. The funds have been used to reduce debt. Consolidated 2021 $’000 2020 $’000 11,124 1,540 476 8 (107) 13,041 12,473 509 (90) 12,892 149 769 (475) 294 (126) (50) 118 108 108 - - - - - - - - - - - 4,713 (1,813) 2,900 (761) (642) 1,497 1,543 1,543 Net assets sold: Goodwill Development costs Trade debtors Inventory Provisions Proceed on sale comprise: Cash settlement from Class Limited Collection of trade receivables Transaction costs Loss on disposal before income tax Trading results for the Reckon Docs business: Revenue Expenses EBITDA Amortisation Income tax expense Profit for the year Net cash from operating activities Net cash and cash equivalents from discontinued operations 100 26 Notes to the Statement of Cash Flows (continued) (e) Assets and liabilities The table below details changes in the Group’s liabilities arising from financing activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the Group’s consolidated statement of cash flows as cash flows from financing activities. Note Cash Non-cash Balance at 1 Jan 2021 $’000 Financing cash flows (i) $’000 Fair value adjustment $’000 Balance at 31 Dec 2021 $’000 Borrowings 31,788 (15,651) - 16,137 Interest rate swap fair value hedge or economically hedging financing liabilities Total liabilities from financing activities 257 - (199) 58 32,045 (15,651) (199) 16,195 (i) The cash flows from bank loans, and other borrowings make up the net amount of proceeds from borrowings and repayments of borrowings in the statement of cash flows. Note Cash Non-cash Borrowings Interest rate swap fair value hedge or economically hedging financing liabilities Total liabilities from financing activities 13 14 Balance at 1 Jan 2020 $’000 Financing cash flows (i) $’000 Fair value adjustment $’000 Balance at 31 Dec 2020 $’000 37,539 (5,751) - 31,788 (24) - 37,515 (5,751) 281 281 257 32,045 (i) The cash flows from bank loans, and other borrowings make up the net amount of proceeds from borrowings and repayments of borrowings in the statement of cash flows. 27 Dividends – Ordinary Shares A fully franked final dividend for the year ended 31 December 2020 of 2 cents (2019: 2 cents) per share was paid on 26 March 2021. A fully franked interim dividend for the year ended 31 December 2021 of 3 cents (2020: 3 cents) per share was paid on 29 September 2021. Franking credits available for subsequent financial years based on a tax rate of 30% (2020: 30%) Consolidated 2021 $’000 2020 $’000 2,266 2,266 3,399 3,399 5,665 5,665 1,852 4,138 101 Notes to the Financial Statements (continued) 28 Financial Instruments (a) 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. (b) Interest Rate Risk The group is exposed to interest rate risk on the cash held in bank deposits and on bank borrowings. Cash deposits of $1,394 thousand were held by the consolidated entity at the reporting date, attracting an average interest rate of 0.11% (2020: 0.22%). Interest bearing borrowings by the consolidated entity at the reporting date were $16,137 thousand (2020:$31,788 thousand). Interest rate risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings, and by the use of interest rate swap contracts. Variable rate borrowings during the year attracted an average interest rate of 2.30% (2020: 2.30%) on overdraft facilities and 2.43% on loan facilities (2020: 2.87%). 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 $81 thousand (2020: $159 thousand). Hedging activities are evaluated to align with interest rate views and defined risk appetite, ensuring the most cost- effective hedging strategies are applied. The maturity profile for the consolidated entity’s cash ($1,394 thousand) that is exposed to interest rate risk is one year, and interest-bearing borrowings ($16,137 thousand) that are exposed to interest rate risk, and the interest rate swap is two years. On the assumption that interest bearing borrowings and variable interest rates remain at the current level, the annual interest costs are expected to be $393 thousand. Further details are set out in note 12. c) 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. The average credit period on sale of goods is 45 days. Interest is generally not charged. The group has assessed the expected credit loss on receivables and have used a provision matrix to measure the Group’s estimated impairment losses (refer note 7). 102 28 Financial Instruments (continued) (d) Foreign Currency Risk 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. The 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. The Group had assessed that any reasonable change in rates of exchange would not result in a material impact to the consolidated entity. (e) Liquidity The Group manages liquidity risk by maintaining adequate cash reserves and banking facilities by continuously monitoring forecast and actual cash flows. 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. Further details are set out in notes 1 and 13. (f) 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, other financial assets, 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 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. 103 Notes to the Financial Statements (continued) 29 Related Party Disclosures (a) Key Management Personnel Remuneration Short term benefits Post-employment benefits Share based payments Consolidated 2021 $ 2020 $ 2,510,327 2,301,974 120,604 249,080 93,489 3,948 2,880,011 2,399,411 The names of and positions held by the key management are set out on page 16 of the Remuneration Report. 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 and other key management personnel apart from those disclosed in this note. (c) Directors’ and Key Management Equity Holdings Refer to the tables on pages 36 and 37 of the Remuneration Report. 30 Subsequent Events There were no subsequent events that have significantly affected, or may significantly affect the consolidated entity’s results and financial position as at 31 December 2021. 31 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: • Level 2, 100 Pacific Highway North Sydney Sydney NSW 2060 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 30 March 2022. 104 Additional Information as at 18 February 2022 (Unaudited) Corporate Governance Statement The Reckon Limited Corporate Governance Statement is available on our website in the section titled Corporate Governance (https://www.reckon.com/au/investors/governance) Twenty Largest Holders of Quoted Equity Securities Ordinary Shareholder NOVATTI GROUP LIMITED CITICORP NOMINEES PTY LIMITED J P MORGAN NOMINEES AUSTRALIA PTY LIMITED GREGORY JOHN WILKINSON BNP PARIBAS NOMINEES PTY LTD DJZ INVESTMENTS PTY LTD MR CLIVE RABIE + MRS KERRY RABIE NATIONAL NOMINEES LIMITED UBS NOMINEES PTY LTD CS THIRD NOMINEES PTY LIMITED RAWFORM PTY LTD BNP PARIBAS NOMS PTY LTD MR CLIVE ALAN RABIE HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED BNP PARIBAS NOMINEES PTY LTD RECKON AUSTRALIA PTY LTD MR PHILIP ROSS HAYMAN VANWARD INVESTMENTS LIMITED CERTANE CT PTY LTD HURSTCLAN HOLDINGS PTY LTD Number Percentage 22,518,138 14,282,251 10,490,029 6,280,487 6,113,527 5,690,000 3,920,000 2,174,929 1,787,737 1,508,940 1,330,306 1,126,000 987,141 958,587 862,485 796,479 650,909 576,082 500,000 500,000 19.88 12.61 9.26 5.54 5.40 5.02 3.46 1.92 1.58 1.33 1.17 0.99 0.87 0.85 0.76 0.70 0.57 0.51 0.44 0.44 83,054,027 73.31 Number of Holders of Equity Securities Ordinary Share Capital 113,294,832 fully paid ordinary shares are held by 3,100 individual shareholders as at 18 February 2022. All issued ordinary shares carry one vote per share. Less than marketable parcels As at 18 February 2022 there were 313 holders holding less than a marketable parcel of RKN shares. A marketable parcel of RKN shares was 484 shares, based on a price of $1.0350 on 18 February 2022 105 Additional Information as at 18 February 2022 (Unaudited) (continued) Distribution of Holders of Equity Securities As at 18 February 2022 Number of Ordinary Shares 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Total Number of Shareholders 836 1,299 419 477 69 Shares 504,018 3,472,484 3,273,985 13,341,198 92,703,147 3,100 113,294,832 % 0.44 3.06 2.89 11.78 81.82 100 Substantial Shareholders As at 18 February 2022 (a) From Twenty Largest holders of Quoted Equity Securities Ordinary Shareholder NOVATTI GROUP LIMITED CITICORP NOMINEES PTY LIMITED CLIVE ALAN RABIE J P MORGAN NOMINEES AUSTRALIA PTY LIMITED GREGORY JOHN WILKINSON BNP PARIBAS NOMINEES PTY LTD (b) As disclosed to ASX during 2021 and up to 18 February 2022 Ordinary Shareholder Novatti Group Limited Spheria Asset Management Pty Ltd Microequities Asset Management Pty Ltd On-market buy back There is no on-market buy-back in place as at 18 February 2022. Number Percentage 22,518,138 14,282,251 10,597,141 10,490,029 8,019,374 6,113,527 19.88 12.61 9.35 9.26 7.08 5.40 Ordinary Shares 22,518,138 10,293,940 8,520,011 Percentage 19.88% 9.09% 7.52% Unquoted Equity Securities As at 18 February 2022 there are: • • zero rights on issue held by zero holders; zero options on issue held by zero holders. 106 Principal Registered Office Level 2, 100 Pacific Highway North Sydney NSW 2060 Tel: (02) 9134 3300 Principal Administration Office Level 2, 100 Pacific Highway North Sydney NSW 2060 Tel: (02) 9134 3300 Share Registry Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney NSW 2000 Tel: (02) 8234 5000 Stock Exchange Listings Reckon Limited’s ordinary shares are listed on the Australian Securities Exchange Limited under the symbol ‘RKN’. Auditors BDO Audit Pty Ltd Level 11, 1 Margaret Street Sydney NSW 2000 Company Secretary Mr Myron Zlotnick Annual General Meeting The Annual General Meeting for Reckon Limited will be held on 25 May 2022 at 10:00am at Level 2, 100 Pacific Highway, North Sydney, NSW. PLEASE NOTE THAT IT IS INTENDED AT THE DATE OF THIS REPORT TO HOLD A HYBRID MEETING. PAY CLOSE ATTENTION TO THE NOTICE OF MEETING TO CHECK ON THE STATUS OF THE ANNUAL GENERAL MEETING. If you are unable to attend OR NOT PERMITTED 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. 107 Important Information – Corporate Notices Security holders have the option as to how they receive statutory corporate notices and reports. In the interest of cost saving and the environment, 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 request to opt in to receive TO RECEIVE ALL NOTICES 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/au • Click on “Investor Centre” • Follow the prompts to update your “Communications Options” • After you have updated 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). Alternatively, email your full name and address of the securityholder to shareholders@reckon.com to receive the Annual Report, corporate and statutory notices electronically. 108 This page is intentionally blank 109 

Continue reading text version or see original annual report in PDF format above