RURAL FUNDS GROUP ANNUAL REPORT for the year ended 30 June 2017 Rural Funds Group (ASX: RFF) stapled group comprising: Rural Funds Trust ARSN 112 951 578 and RF Active ARSN 168 740 805 Responsible Entity: Rural Funds Management Limited ACN 077 492 838 AFSL 226701 Issued on: 27 September 2017 CONTENTS Letter from the Managing Director Corporate governance statement ASX additional information Investment strategy, FY17 results highlights and Fund overview Financial statements 2 5 25 28 32 LETTER FROM THE MANAGING DIRECTOR Dear Unitholder, We are pleased to present to you the accounts for the Rural Funds Group (ASX: RFF) for the year ended 30 June 2017 (FY17). RFF at 30 June 2017 RFF ended the financial year in a good financial position. Funds from operations slightly exceeded forecast at 12.5 cents per unit and distributions per unit (DPU) of 9.6 cents were paid to investors, representing an 8% growth on the prior year. Gearing at the end of the period of 29% was at the lower end of the target range, positioning the fund to pursue acquisitions. RFF now has a low payout ratio of 80%, designed to support DPU growth target of 4% p.a. The weighted average lease expiry (WALE) of 13.2 years provides a long term contracted lease income stream. Review of financial year 2017 In July 2016, RFF raised $61 million through a non-renounceable Entitlement Offer. The proceeds, in combination with debt and retained earnings, were used to fund the purchase of three Queensland cattle properties and the associated breeding herd. This included two breeding properties, Mutton Hole and Oakland Park, situated near the Gulf of Carpentaria, for $18.4 million, and Rewan Station, a high value backgrounding and finishing property located near Rolleston in central Queensland, for $31.6 million. The proceeds also contributed to the funding of the Kerarbury orchard expansion at Darlington Point, NSW and the purchase of three macadamia orchards near Bundaberg, Queensland, which were initially debt funded. In December 2016, RFF purchased a 9,549 megalitre Murrumbidgee River high security water entitlement for $34.4 million. This transaction represents one of the largest trades of Murrumbidgee River high security water entitlements. Rural Funds Management (RFM) will seek to lease the water on a long-term basis as part of a horticultural development. In the interim, revenue will be generated from the sale of the annual water allocations from FY18. Also in December 2016, RFF purchased the 4,880 ha cotton property ‘Lynora Downs’ for $26.5 million. Located 130 km south of Emerald, Central Queensland, the asset diversified RFF into a new sector and supports the climatic diversification strategy of the Fund. Following the debt funded acquisition of the water entitlements and cotton property, RFF completed a $78.6 million Entitlement Offer in June 2017 reducing gearing to 29%. The 2018 financial year In FY18, RFM, your Fund’s manager, will pursue acquisitions in the cattle and cotton sectors. RFF entered both sectors in FY17, and it is possible additional assets can be acquired that complement the Fund. The acquisition of the three Queensland cattle properties by RFF, and operation of these properties by the lessee, has confirmed an investment strategy whereby underutilised assets can be made more productive, and in time, more valuable. Since acquiring the properties, stocking rates have increased such that they now carry 27% more stock than their initially assessed capacity. In addition, RFF has funded improvements on these assets, including additional water infrastructure and pasture improvement, with the aim of further improving carrying capacity – expenditure that accrues additional rent. It is anticipated that this investment will increase carrying capacity by 25%, and in time these productivity gains will be reflected in the property valuations. 2 Productivity gains generated by good management and targeted capital improvements are most achievable on assets that are predominantly natural resource based. For this reason, RFM is observing that natural resource predominant assets tend to present opportunities for a greater total return than infrastructure type assets in the current market. This strategy of increasing productivity is underpinned by a manager who has operational knowledge in the sectors in which assets are leased. RFM will seek to leverage this understanding of the management of cattle and cotton properties to repeat this strategy of acquisition and development in FY18. While increased asset values are positive, this does not immediately translate into increased income for RFF unitholders. This is because contracted lease payments do not increase until the valuation of the property increases and a rent review is completed – generally at the fifth anniversary of the lease. For this reason, this investment strategy should produce shorter term increases in asset values, followed by longer term increases in rental income. RFM will continue to work closely with its lessees to manage RFF’s current portfolio of assets. A key part of ongoing management is the identification and funding of development and capital expenditure programs. It is expected that RFF will spend $81 million on capital development over the next three years. This expenditure, occurring on assets in all sectors in which RFF owns properties, aims to make the properties more productive for the lessee and attracts rent as it is deployed. In conclusion, during this current financial year RFF will see expansion of its asset base and revenues due to existing capital expenditure programs, possible increases in asset values and contractual rental indexation mechanisms. This growth will be funded by cash retained after payment of distributions. RFF has sufficient additional funds to complete an acquisition in the cattle sector and RFM will continue to investigate further opportunities that can enhance the financial performance and diversity of the Fund. Yours faithfully, David Bryant Managing Director Rural Funds Management Limited RURAL FUNDS GROUP ANNUAL REPORT 2017 | 3 “...RFM IS OBSERVING THAT NATURAL RESOURCE PREDOMINANT ASSETS TEND TO PRESENT OPPORTUNITIES FOR A GREATER TOTAL RETURN...” CORPORATE GOVERNANCE STATEMENT Definitions AFSL ASIC ASX Australian Financial Services Licence Australian Securities and Investments Commission Australian Securities Exchange or ASX Limited Corporations Act Corporations Act 2001 Rural Funds Group (the Fund) is listed on the ASX and is a stapled entity comprising Rural Funds Trust and RF Active, both registered managed investment schemes under the Corporations Act. Units in Rural Funds Trust are stapled to units in RF Active. Rural Funds Management Limited (the Responsible Entity) is the Responsible Entity for the Fund and has established and oversees the corporate governance of the Fund. The Responsible Entity holds an Australian Financial Services Licence (AFSL) authorising it to operate the Fund. It has a duty to act in the best interest of unitholders of the Fund. The Fund has a compliance plan that has been lodged with ASIC and a copy of the compliance plan can be obtained from ASIC or by contacting the Responsible Entity. The Responsible Entity publishes a number of its corporate governance related policies on its website at: http://ruralfunds.com.au/rural-funds-group/about/corporate-governance/ The Board takes its corporate governance responsibilities seriously. The Board is comprised of four directors and has a mix of the experience and skills necessary to oversee the corporate governance requirements of the Responsible Entity. This ensures the Responsible Entity operates with integrity, is accountable and acts in a professional and ethical manner. The Board works together and its collective ability facilitates effective decision making to lead a viable, profitable and efficient business. To the extent that they are applicable and appropriate for the Fund, the Responsible Entity has adopted and complies with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations 3rd Edition. In accordance with ASX Listing Rule 4.10.3, set out below are the ASX Corporate Governance Council’s eight principles of good corporate governance, and the extent to which there is compliance with the recommendations for each principle. The statement has been approved by the Board of the Responsible Entity and applies to the period 1 July 2016 to 30 June 2017 (“Statement Period”). At the time of printing this statement, there have been no material changes to the corporate governance policies and practices since 30 June 2017. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 5 “...THE RESPONSIBLE ENTITY OPERATES WITH INTEGRITY, IS ACCOUNTABLE AND ACTS IN A PROFESSIONAL AND ETHICAL MANNER.” 6 PRINCIPLE 1 Lay solid foundations for management and oversight A listed entity should establish and disclose the respective roles and responsibilities of its board and management and how their performance is monitored and evaluated. ASX RECOMMENDATION FUND’S RESPONSE 1.1 The business of the Fund is managed under the direction of the Board of the Responsible Entity comprising: > Chair: Guy Paynter (independent non-executive director) > Managing Director: David Bryant > Non-Executive Director: Michael Carroll (independent non-executive director) > Non-Executive Director: Julian Widdup (independent non-executive director) The conduct of the Board is governed by the Constitution of the Fund and the Corporations Act. The broad functions and responsibilities of the Board are set out in sections 2.3 – 2.4 of the Corporate Governance Charter. The specific responsibilities are set out in section 2.5. The Board has delegated responsibility for the day-to-day management of the Fund to the Managing Director of the Responsible Entity. The delegations are outlined in the Corporate Governance Charter. The Managing Director, David Bryant, is responsible for financial; continuous disclosure and compliance oversight; media and analyst briefings and responses to member questions; and ensuring the Board is provided with information to make fully informed decisions. The Constitution of the Fund is available by contacting the Responsible Entity. The Corporate Governance Charter is available on the Responsible Entity’s website. As an externally managed scheme, recommendation 1.2 does not apply to the Fund. All directors of the Responsible Entity receive letters of appointment setting out the key terms and conditions of their appointment. All executives of the Responsible Entity enter into an employment agreement setting out the key terms and conditions of their employment including a position description, duties, rights, responsibilities, remuneration and entitlements on termination. The Company Secretary of the Responsible Entity is accountable to the Board, through the Chair, on all matters to do with the proper functioning of the Board. As stated in the Corporate Governance Charter, the Company Secretary reports directly to the Managing Director. 1.2 1.3 1.4 RURAL FUNDS GROUP ANNUAL REPORT 2017 | 7 ASX RECOMMENDATION FUND’S RESPONSE The Responsible Entity has a diversity policy, which is reviewed annually with any changes approved by the Board. The policy provides the framework by which the Responsible Entity actively manages and encourages diversity and inclusion. It recognises that its employees are one of its greatest assets and it has a range of employees with skills and capabilities that ensure the ongoing strength, continuity and stability of the Responsible Entity. The policy addresses issues of diversity in developing selection criteria, skills mix and process when recommending candidates for appointment to the Board. Additionally, the Responsible Entity seeks to attract a diverse pool of suitably skilled candidates for available positions within the organisation. Due to the size of the Responsible Entity’s Board and its senior management team, and the limited turnover of personnel at this level, it has not set quantitative gender diversity objectives. The Responsible Entity will endeavour to maintain, or improve, its current level of gender diversity as senior management vacancies arise. A copy of the policy is available on the Responsible Entity’s website. The Responsible Entity’s senior executive team includes one female executive (out of a total of four executives). Of the 82 staff, 30.4% are female. The performance of the Board, its committees and individual directors is outlined in the Corporate Governance Charter. The performance of individual Board members is reviewed annually in accordance with the timelines outlined in the Responsible Entity’s Performance Management Policy. The performance of senior executives is formally reviewed annually, in accordance with the timelines outlined in the Responsible Entity’s Performance Management Policy. The annual process reviews each individual’s past performance, their achievement of key performance indicators over the previous 12 months, sets key performance indicators for the coming 12 months, and identifies training and development opportunities. The formal process provides an opportunity for the senior executive and the Managing Director to focus solely on performance and development. Informal reviews providing feedback about key projects are conducted on an ongoing basis. 1.5 1.6 1.7 8 PRINCIPLE 2 Structure the board to add value A listed entity should have a board of an appropriate size, composition, skills and commitment to enable it to discharge its duties effectively. ASX RECOMMENDATION FUND’S RESPONSE 2.1 2.2 2.3 As an externally managed scheme, recommendation 2.1 does not apply to the Fund. Additionally, due to the small size of the Responsible Entity’s Board, it is usual that all of the Board members are involved in the full spectrum of discussion and decisions on matters. As a result, they bring the full complement of skills and experience available to address matters as they arise. If, and when gaps are identified, external advice is sought from senior consultants such as specialist tax, legal or business advisers to address any skills gaps. As an externally managed scheme, recommendation 2.2 does not apply to the Fund. The Responsible Entity Board comprises four members, three of whom are independent non-executive directors. DIRECTOR COMMENCEMENT INDEPENDENT David Bryant 17 February 1997 Guy Paynter 15 April 2010 Michael Carroll 15 April 2010 Julian Widdup 17 February 2017 No Yes Yes Yes Guy Paynter is an Independent Director, holds the role of Chair of the Board and is a member of the Audit Committee and Remuneration Committee. Guy Paynter is a former director of broking firm JB Were and brings to the Responsible Entity more than 30 years of experience in corporate finance. Guy is a former member of the ASX and a former associate of the Securities Institute of Australia (now known as the Financial Services Institute of Australasia). Today, Guy is Chair of Bill Peach Group Limited (previously known as Aircruising Australia Limited). Guy’s agricultural interests include cattle breeding in the Upper Hunter region in New South Wales. Guy holds a Bachelor of Laws from the University of Melbourne. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 9 ASX RECOMMENDATION FUND’S RESPONSE 2.3 continued David Bryant is the Managing Director. David holds 79.08% of shares on issue in the Responsible Entity. David Bryant established RFM in February 1997 and since that time has led the team that is responsible for the acquisition of large-scale agricultural property assets and associated water entitlements. As at 30 June 2017, RFM manages over $640 million of agricultural assets. On a day-to-day level, David is responsible for leading the RFM Executive, maintaining key commercial relationships and sourcing new business opportunities. David holds a Diploma of Financial Planning from the Royal Melbourne Institute of Technology (RMIT) University and a Master of Agribusiness from The University of Melbourne. Michael Carroll is a Non-Executive Director and is the Chair of the Audit Committee and the Remuneration Committee. Michael Carroll serves in a board and advisory capacity for a range of agribusiness entities. Michael is a Director of Tassal Group Ltd, Select Harvests Ltd, Paraway Pastoral Company and Sunny Queen Ltd. Former board positions include the Australian Farm Institute, Warrnambool Cheese & Butter Factory Company Holdings Ltd, Meat & Livestock Australia, Queensland Sugar Ltd, the Gardiner Dairy Foundation and Rural Finance Corporation of Victoria. Michael has senior executive experience in a range of companies, including establishing and leading the National Australia Bank Agribusiness division. Michael holds a Bachelor of Agricultural Science from La Trobe University and a Master of Business Administration (MBA) from the University of Melbourne’s Melbourne Business School. Michael has completed the Advanced Management Program at Harvard Business School, Boston, and is a Fellow of the Australian Institute of Company Directors. 10 ASX RECOMMENDATION FUND’S RESPONSE 2.3 continued Julian Widdup is a Non-Executive Director and is a member of the Audit Committee and Remuneration Committee. Julian Widdup is a former executive of infrastructure investment management companies, Palisade Investment Partners and Access Capital Advisers (now Whitehelm Capital) where he was responsible for the acquisition and asset management of major infrastructure assets, risk management, portfolio construction, institutional client management and overseeing all aspects of investment operations. Previously Julian had worked with Towers Perrin (now Willis Towers Watson) as an asset consultant, the Australian Bureau of Statistics and the Insurance and Superannuation Commission (now APRA). Julian brings extensive experience to the RFM Board, having previously served as a director of Palisade Investment Partners, Darwin International Airport, Alice Springs Airport, NZ timberland company Taumata Plantations Limited, Regional Livestock Exchange Investment Company, Merredin Energy power generation company, Victorian AgriBioscience Research Facility, Casey Hospital in Melbourne and Mater Hospital in Newcastle. Julian holds a Bachelor of Economics from the Australian National University, is a Fellow of the Institute of Actuaries of Australia and a Fellow of the Australian Institute of Company Directors. Further information on the composition of the Responsible Entity’s Board, executive management and asset and business management profiles; and the skills, knowledge and experience of the individual members can be found on the Responsible Entity’s website. The independence of the Non-Executive Directors has been ascertained in compliance with the Corporations Act and the ASX Listing Rules, and there are no other factors which might reasonably be seen as undermining their independence. All directors must declare actual or potential conflicts of interest and excuse themselves from discussions on issues where an actual or potential conflict of interest arises. The directors’ interests and any subsequent changes have been disclosed to the ASX. The Responsible Entity directors are subject to director rotation consistent with the Responsible Entity’s constitution. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 11 ASX RECOMMENDATION FUND’S RESPONSE As an externally managed scheme, recommendation 2.4 does not apply to the Fund; however, as outlined in 2.3, the Responsible Entity’s Board is comprised of a majority of independent directors. As an externally managed scheme, recommendation 2.5 does not apply to the Fund; however, Independent Non-Executive Director, Guy Paynter, holds the role of Chair of the Responsible Entity. As an externally managed scheme, recommendation 2.6 does not apply to the Fund; however, any new directors would be provided with an induction relevant to the Responsible Entity and the Fund. Additionally, directors are provided with opportunities to develop and maintain their skills and knowledge, through both formal and informal training and networking opportunities. 2.4 2.5 2.6 12 PRINCIPLE 3 Act ethically and responsibly A listed entity should act ethically and responsibly. ASX RECOMMENDATION FUND’S RESPONSE 3.1 The Responsible Entity has adopted a Directors’ Code of Conduct (the Code) that sets out the minimum acceptable standards of behaviour. The Code seeks to give directors guidance on how best to perform their duties, meet their obligations and understand the company’s corporate governance practices. The Code focuses on directors’ obligations to comply with codes and law, their general duties, their application of business judgement, the application of independent and sound decision making, confidentiality, improper use of information, cooperation, personal interests and conflicts, conduct and complaints. In addition to the Directors’ Code of Conduct, the Responsible Entity has a general Code of Conduct that is applicable to directors and all staff. The Corporate Governance Charter which includes the Directors’ Code of Conduct is available on the Responsible Entity’s website. Both codes are reviewed annually to ensure that they remain current and relevant. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 13 PRINCIPLE 4 Safeguard integrity in corporate reporting A listed entity should have formal and rigorous processes that independently verify and safeguard the integrity of its corporate reporting. ASX RECOMMENDATION FUND’S RESPONSE 4.1 The Board of Directors of the Responsible Entity has established an Audit Committee. The purpose of the Audit Committee is to assist the Board in overseeing the integrity of financial reporting, financial controls and procedures in respect of the Fund as well as the independence of the Fund’s external auditors. The Audit Committee is comprised of three members, all of whom are non-executive independent directors. An independent director, who is not the Chair of the Board of the Responsible Entity, is Chair of the Committee. The relevant qualifications and experience of the members is available on the Responsible Entity’s website. The Audit Committee will routinely invite other individuals to attend meetings, including executive management and management members of the Responsible Entity and the Auditor of the Fund. The Audit Committee and invitees will review the financial reports and provide commentary to the Board as required. Three meetings of the Audit Committee were held in relation to the accounts during the Statement Period. The Audit Committee ordinarily holds two meetings per year, or more if required. The Audit Committee has a formal charter that details the roles and responsibilities of the Audit Committee and its obligations to report to the Board. The charter sets out the powers of the Audit Committee, the meeting procedure framework, the process for selection of external auditors and audit planning. The Audit Committee charter can be found in Schedule 1 of the Corporate Governance Charter on the Responsible Entity’s website. 4.2 The Board has received a declaration from the Managing Director and the Chief Operating Officer that, in their opinion: > > > > the financial records of the Fund have been properly maintained in accordance with section 286; the financial statements and notes referred to in paragraph 295(3)(b) for the financial year comply with the accounting standards; the financial statements and notes give a true and fair view of the financial position and performance of the entity; and the opinion has been formed on the basis of a sound system of risk management and internal control which is operating effectively. As an externally managed scheme, recommendation 4.3 does not apply to the Fund. The Fund has not held an Annual General Meeting during the Statement Period. 4.3 14 PRINCIPLE 5 Make timely and balanced disclosure A listed entity should make timely and balanced disclosure of all matters concerning it that a reasonable person would expect to have a material effect on the price or value of its securities. ASX RECOMMENDATION FUND’S RESPONSE 5.1 The Responsible Entity has adopted a Continuous Disclosure Policy that applies to all directors and employees of the Responsible Entity. The policy is available on the Responsible Entity’s website. The policy reflects the desire to promote a fair market in the Fund’s units, honest management and timely, full and fair disclosure. It complies with the disclosure requirements of the ASX and explains the Fund’s disclosure obligations, the types of information that need to be disclosed, and identifies who is responsible for disclosure. It also explains how employees of the Responsible Entity can contribute. The policy underlines the Board’s commitment to ensuring that unitholders are provided with accurate and timely information about the Fund’s activities. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 15 PRINCIPLE 6 Respect the rights of security holders A listed entity should respect the rights of its security holders by providing them with appropriate information and facilities to allow them to exercise those rights effectively. ASX RECOMMENDATION FUND’S RESPONSE The Responsible Entity is a boutique fund and asset manager specialising in the rural property sector. The Responsible Entity was established in 1997 to provide retail investors with an opportunity to invest in Australian rural assets. The management team includes specialist fund managers, finance professionals, horticulturists, agricultural managers and livestock managers. This team provides the Responsible Entity with the specialised skills and experience required to manage the agricultural assets. The Responsible Entity also utilises the best available consultants and supporting resources to achieve desired outcomes and has a substantial network available to ensure that, where appropriate, tasks can be outsourced. The Responsible Entity has the primary responsibility for managing the Fund on behalf of unitholders. Information about the Responsible Entity, the Fund, and corporate governance practices and policies is available on the Responsible Entity’s website. The Responsible Entity’s website has information available to unitholders to facilitate two-way communication. The investment products tab on the website provides a link to the Fund’s website which provides a Fund overview, sector, asset and lease information, strategy and investment process, financial information, key documents, news and announcements and details about how to contact the Responsible Entity and the Registry. In addition, unitholders are encouraged to contact the Responsible Entity using any of the following methods: Email: investorservices@ruralfunds.com.au Website: https://ruralfunds.com.au/contact-us/ Phone: 1800 026 665 Fax: 1800 625 518 By visiting the Responsible Entity’s office: Level 2, 2 King St, Deakin ACT 2600 From time to time, the Responsible Entity arranges tours of the assets of the Fund. Unitholders are invited to attend these tours. Additionally, unitholders are welcome to make their own arrangements to visit the assets by contacting investor services by any of the methods mentioned above. 6.1 6.2 16 ASX RECOMMENDATION FUND’S RESPONSE 6.3 6.4 As an externally managed scheme that does not hold periodic meetings, recommendation 6.3 does not apply to the Fund. However, if the Responsible Entity was required to hold a Unitholder meeting, it could use a web-conferencing and/or a teleconferencing facility for remote Unitholders along with an online polling system provided by the Registry, enabling Unitholders to vote online at any meeting. The Responsible Entity encourages all investors to communicate with it and with the Fund’s registry (Boardroom Pty Limited) electronically; however, the Responsible Entity continues to communicate with any investor via traditional methods (mail and phone) when appropriate. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 17 PRINCIPLE 7 Recognise and manage risk A listed entity should establish a sound risk management framework and periodically review the effectiveness of that framework. ASX RECOMMENDATION FUND’S RESPONSE The Responsible Entity has not established a risk committee. Due to the size of the Board and the nature of the business, the Board has determined that risk oversight should be managed by the full Board. The Board has ultimate responsibility for overseeing the risk management framework and for approving and monitoring compliance with the framework. The Board receives monthly reports on all material business risks in relation to the Fund, including a report on all risks rated extreme or high. The ongoing management of identified risks is undertaken by the relevant executive and/or asset managers of each business area, who report to the Board on the effectiveness of control measures. The Responsible Entity has established a Risk Management Policy which documents the Responsible Entity’s policy for the oversight and management of material business risks. It ensures that risks are identified and assessed, and that measures to monitor and manage each of the material risks are implemented. The Risk Management Policy is based on standards set out in the International Standards ISO 31000:2009. The Risk Management Policy is available on the Responsible Entity’s website. The Responsible Entity’s risk management framework is reviewed annually, or more often if there has been a change in the relevant legislation or in business requirements. An annual risk review was performed during the Statement Period. The annual risk review requires each risk owner to review each risk and assess whether the existing risk rating is appropriate. This results in all risks being re-evaluated. In some cases, the risks may be re-rated and the residual risk amended depending on changes in the likelihood of the risk occurring, the consequence if the risk did occur, and the effectiveness of control measures in place. 7.1 7.2 18 ASX RECOMMENDATION FUND’S RESPONSE 7.3 7.4 The Responsible Entity has an Internal Compliance Committee that provides assistance to the Board in evaluating the risk management framework and material business risks on an ongoing basis. Whilst not an internal audit committee, this Committee reports to the Board quarterly and may make recommendations to the Board for changes to processes and systems to ensure compliance with legal and regulatory requirements. The Internal Compliance Committee was comprised of: > Executive Manager Funds Management > Manager Corporate Services > > > > > > Financial Controller Client Services Supervisor (until 23 February 2017) Senior Fund Administrator (from 11 May 2017) Compliance Officer Business Manager – Rural Funds Group, Almond and Macadamia Projects (invitee) Business Manager – RFM StockBank, RFM Poultry, Cattle JV and Cotton JV (invitee) > National Manager Cropping and Livestock (from 2 February 2017) (invitee) > National Manager Cattle (from 7 November 2016) (invitee) This broad representation of roles on the Committee ensures it is fully informed of matters, and there is sufficient skills and experience among its members to make decisions as necessary. The Responsible Entity is committed to undertaking the Fund’s business activities in a responsible and ethical manner and ensuring that it remains sustainable. Environmental, social and governance (ESG) issues are embedded in many of its policies and procedures and are considered when making investment decisions. RFF’s core activity is the leasing of agricultural land, water and infrastructure, and thus the Fund is largely passive in nature. Lessees are required to adopt practices that retain or improve the integrity of the Fund’s assets. The information presented below details the Responsible Entity’s consideration of those ESG matters of greatest materiality to the Fund and its investors. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 19 ASX RECOMMENDATION FUND’S RESPONSE 7.4 continued Environment Management of natural resources, including water resources RFF is the owner of a quality portfolio of Australian agricultural assets and the stewardship of these assets is of critical importance to the performance and growth of RFF. RFF’s properties are leased to operators who are required to use best practice agricultural production methods when operating the properties. Wherever practical, the Fund will: > monitor industry developments and adopt farm management practices that incorporate the latest research findings and technologies, to minimise environmental impacts and better utilise the natural resources; > maximise water use efficiency through the utilisation of modern, well managed irrigation systems; > > > > ensure water management practices take account of water quality and minimise run-off; use communication technologies to access water use data remotely, that assists to optimise water use; adopt nutrient management practices which improve long term soil health and ensure that pest and weed management requiring the use of chemicals, occurs in a safe and environmentally responsible manner; and ensure that lessees and staff understand and are focused on sustainable farming principles and adhere to environmental legislation and regulations. RFM monitors the impact of climate change on RFF’s portfolio of assets and has implemented a climatic diversification strategy. The strategy promotes the acquisition of assets across different growing regions and asset classes. A Climate Diversification Discussion Paper was released to the ASX on 20 June 2016. RFM regularly reviews assets and infrastructure to identify more efficient technologies to reduce RFF’s energy consumption and carbon footprint. RFF’s assets in the cattle and poultry sectors have achieved savings from solar technologies. Other examples of energy savings are the RFF almond and macadamia assets which benefit from technology that measures tree sap flow, resulting in energy savings through the delivery of exact water requirements water. Climate change Energy use 20 ASX RECOMMENDATION FUND’S RESPONSE 7.4 continued Social Community engagement Human capital management Community engagement is an integral part of RFM’s corporate culture and is key to maintaining the support of the communities where RFF owns assets. RFM’s first preference is to seek potential personnel with suitable skills and expertise from local communities, for employment and contracting opportunities in the areas where it operates. In addition to being an employer in various areas of rural and regional Australia, RFM regularly provides support via donations, labour and other means to local community organisations. As RFF does not directly employ staff, RFM is responsible for human capital management associated with the management and operation of the Fund. RFM has implemented a range of policies in relation to its management of human capital, including: Code of Conduct, Environmental, HSE (Health, Safety and Environment), Incident Management, Diversity, and Equal Employment Opportunity. The aim of these policies is to create a safe, diverse and equitable work place. The Responsible Entity takes its obligations under Workplace Health and Safety legislation seriously and has an extensive HSE management system implemented to educate personnel and protect them from harm. The RFM Board receives a monthly report on workplace health and safety issues and incidents. RFM also periodically reviews arrangements with contractors to determine if practices and standards meet legislative requirements and contractual obligations. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 21 ASX RECOMMENDATION FUND’S RESPONSE 7.4 continued Social continued Animal welfare Governance Corporate governance 22 RFF owns properties that are leased to entities where cattle and chicken production occur. RFM has policies and procedures with respect to animal treatment and welfare while they are under the control of RFM and its employees. The following information is provided about the cattle and chicken growing sectors. Poultry: > > The birds produced at RFF’s poultry sheds are accredited under the RSPCA’s Approved Farming Scheme Standards — Meat Chickens. Ongoing compliance with the Standards is monitored through RSPCA audits, with each farm being audited twice each year, in addition to random audits. Chickens are raised in large sheds with prescribed stocking densities and the freedom to express normal behaviours in accordance with the RSPCA’s Standards. Cattle: RFF’s cattle properties comprise an integrated breeding to finishing operation and the lessees have adopted and practise “low stress” stock handling methods. Fattened animals are generally sold domestically, to either a processor or feedlot. A small proportion of the cattle may not be suited to being finished and may be sold to the live export market. In FY17 live export sales represented less than 10% of all sales. RFM as Responsible Entity, has primary responsibility for the management of RFF on behalf of its Unitholders. The Board takes its corporate governance responsibilities seriously. The Board, which has a majority of independent directors, including an independent Chairman, is comprised of four directors with the experience and skills necessary to oversee the corporate governance requirements of the Responsible Entity. The Board works together, and their collective ability facilitates effective decision making to lead a viable, profitable and efficient business. In addition, RFM has established an Internal Compliance Committee (ICC) which reports to the Board monthly. The ICC monitors and reports on compliance with RFM’s AFSL and compliance program to ensure that it is effective in meeting RFM’s compliance requirements. The ICC also provides a supporting role to the Compliance Officer. The members of the Committee are structured to include representation from different business units to ensure compliance monitoring and review are well embedded across RFM. ASX RECOMMENDATION FUND’S RESPONSE 7.4 continued Governance continued Conflicts of interest and related party transactions RFM manages a number of entities, including in its role as Responsible Entity for six funds. Where related party transactions occur between RFF and another RFM managed entity, they are subject to the RFM Conflict of Interest Management Policy. RFM’s responsibilities and contractual obligations are set out in the Fund’s Constitution, the Corporations Act and in the Responsible Entity’s AFSL. As Responsible Entity, RFM must always act in the best interests of the Unitholders, and if there is a conflict between the Unitholder’s interest and its own interests, it must give priority to the Unitholders’ interests. RFM has also established protocols, including appointing separate personnel to act for each entity with separate external advisers. To monitor compliance with these obligations, the RFM Board receives a monthly written report from the RFM Compliance Officer, who reports on Responsible Entity compliance, conflicts of interests and related party transactions. RFM employees are obligated to conduct themselves according to the standards set out in the RFM Code of Conduct, the Corporate Governance Charter and other related policy documents. This means that our employees conduct themselves with integrity, and in compliance with legislative requirements and our internal policies and procedures. Employee performance is monitored through a combination of ongoing informal reviews and formal annual reviews. RFM’s recruitment process includes reference checking of all potential employees, as well as national police checks and bankruptcy checks for sensitive roles. We believe that acting ethically while doing business must underpin our approach. Ethical conduct by staff The Responsible Entity manages the above risks in accordance with its Risk Management Policy available on the Responsible Entity’s website. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 23 PRINCIPLE 8 Remunerate fairly and responsibly An externally managed listed entity should clearly disclose the terms governing the remuneration of the Responsible Entity. ASX RECOMMENDATION FUND’S RESPONSE 8.1 The Responsible Entity has adopted the ASX’s alternative recommendations for externally managed entities and provides the following details governing the remuneration to the Responsible Manager: > > > Fund Management Fee – up to 1.0% p.a. of the gross asset value of the Fund; Asset Management Fee – up to 1.0% p.a. of the gross asset value of the Fund; and Termination Fee – 1.5% of the gross asset value of the Fund. The fees listed above represent the maximum allowed under the Fund’s Constitution. At present, the Responsible Entity charges total fees (fund management and asset management fees) of 1.05% of the gross asset value of the Fund. The Board of Directors of the Responsible Entity established a Remuneration Committee on 17 February 2017. The purpose of the Remuneration Committee is to advise on remuneration and issues relevant to the remuneration policies and practices for senior executives and non-executive directors. The Remuneration Committee is comprised of three members, all of whom are non-executive independent directors. An independent director, who is not the Chair of the Board of the Responsible Entity, is Chair of the Committee. The relevant qualifications and experience of the members is available on the Responsible Entity’s website. The Remuneration Committee will routinely invite other individuals to attend meetings, including executive management and management members of the Responsible Entity. The Remuneration Committee and invitees will review the remuneration and diversity report and provide commentary to the Board as required. One meeting of the Remuneration Committee was held in relation to remuneration during the Statement Period. The Remuneration Committee ordinarily holds two meetings per year, or more if required. The Remuneration Committee has a formal charter that details the responsibilities of the Remuneration Committee and its obligations to report to the Board. The charter sets out the powers of the Remuneration Committee and the meeting procedure framework. The Remuneration Committee charter can be found in Schedule 2 of the Corporate Governance Charter on the Responsible Entity’s website. Refer to 8.1 Refer to 8.1 8.2 8.3 24 ASX ADDITIONAL INFORMATION Additional information required by the ASX Limited (ASX) Listing Rules and not disclosed elsewhere in this report is set out below. This information is effective as at 14 September 2017. (a) Distribution of Equity Securities HOLDING SIZE 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over UNITHOLDERS CLASS 1,670 3,168 1,727 3,169 184 Ordinary fully stapled securities Ordinary fully stapled securities Ordinary fully stapled securities Ordinary fully stapled securities Ordinary fully stapled securities (b) Substantial unitholders The number of substantial unitholders and their associates are set out below: UNITHOLDER NUMBER OF UNITS % J P Morgan Nominees Australia Limited 38,861,088 HSBC Custody Nominees (Australia) Limited 19,365,019 Netwealth Investments Limited14,718,201 15.258 7.603 5.779 (c) Holders of less than marketable parcels The number of holders of less than marketable parcels, being $500 based on the ASX unit closing price of $2.27 as at 14 September 2017 is set out below: NUMBER OF UNITHOLDERS NUMBER OF UNITS 151 3,565 (d) Voting rights The voting rights attaching to the ordinary units, set out in Section 253C of the Corporations Act 2001, are: i. on a show of hands, each member of a registered scheme has 1 vote; and ii. on a poll, each member of the scheme has 1 vote for each dollar of the value of the total interests they have in the scheme. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 25 (e) Twenty largest unitholders at 14 September 2017 UNITHOLDER NUMBER OF UNITS % J P Morgan Nominees Australia Limited 38,861,088 15.258 HSBC Custody Nominees (Australia) Limited 19,365,019 Netwealth Investments Limited 14,718,201 Citicorp Nominees Pty Limited Rural Funds Management Ltd Argo Investments Limited 9,248,062 9,110,507 5,407,750 Netwealth Investments Limited 4,071,711 National Nominees Limited 3,334,544 Bryant Family Services Pty Ltd 2,151,404 BNP Paribas Noms Pty Ltd 1,437,901 Sccasp Holdings Pty Ltd 1,279,287 One Managed Investment Funds Limited Folkstone Maxim A-Reit Securities A/C Level 11 900,000 BNP Paribas Nominees Pty Ltd 881,665 Boskenna Pty Ltd 814,696 Bond Street Custodians Limited 601,049 Wf Super Pty Ltd Noeljen Pty Ltd 592,566 547,617 Brispot Nominees Pty Ltd 544,248 Mrs Jocelyn Alleyne Besly 528,831 Bond Street Custodians Limited 481,119 7.603 5.779 3.631 3.577 2.123 1.599 1.309 0.845 0.565 0.502 0.353 0.346 0.320 0.236 0.233 0.215 0.214 0.208 0.189 (f) On-market buy-back As at 14 September 2017, RFF confirms there is no on-market buy-back facility in operation. 26 (g) Material lease details subsequent to listing rule 10.1 waiver RFM provides the following disclosure subsequent to listing rule 10.1 waiver (WLC140177-002). Further details of all leases are contained in the FY17 Financial Results Presentation provided to the ASX on 22 August 2017. LESSEES: AETL AS CUSTODIAN AND RFM AS RESPONSIBLE ENTITY RFM ALMOND FUND 2006 AETL AS CUSTODIAN AND RFM AS RESPONSIBLE ENTITY FOR RFM ALMOND FUNDS 2007 & 2008 AETL AS CUSTODIAN AND RFM AS RESPONSIBLE ENTITY FOR RFM POULTRY Area: 272 hectares of almond orchards 279 hectares of almond orchards 303,216 sq metres of poultry sheds Property and location: Mooral, Hillston NSW Mooral, Hillston, NSW Expiry: 30-Jun-26 2-Jul-28 13 farms (134 sheds) Griffith, NSW, and 4 farms (20 sheds) Lethbridge, VIC. Weighted average lease expiry 15-Jan-23 FY18 forecast rent: $1.6m $2.0m $10.7m Capital commitments: Capex required to meet orchard development requirements and replacement capital items on account of lessor, both subject to additional rental. Capex required to meet orchard development requirements and replacement capital items on account of lessor, both subject to additional rental. R&M and ongoing capital expenditure on account of lessee Indexation: 2.5% per annum 2.5% per annum 65% of CPI capped at 2% Payment frequency: Annually in October Quarterly in advance Quarterly in advance Securities exchange The Trust is listed on ASX. ASX reserves the right (but without limiting its absolute discretion) to remove Rural Funds Trust (RFT), or RF Active (RFA) from the official list if any of their securities cease to be “stapled” together, or any securities are issued by RFA which are not stapled to equivalent securities in RFT, or any securities are issued by RFT which are not stapled to equivalent securities in RFA. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 27 Investment strategy RFM’s investment strategy for RFF focuses on the management of the existing portfolio and expansion through acquisitions. This strategy has the aim of increasing; earnings and distribution growth, sector and climatic diversification, liquidity and scale. Lessees Climatic zone Sector type RFM Poultry (NSX: RFP) 21% Olam Orchards Australia 26% RFM Almonds 7% Select Harvests (ASX: SHV) 18% Treasury Wine Estates (ASX: TWE) 7% RFM Macadamias 2% Cattle JV 8% Cotton JV 4% Other 6% Southern 81% Northern 14% Other 4% Infrastructure predominant 48% Natural resource predominant 48% Other 4% EPU and DPU (cents)1 22.5 EPU DPU 16.7 8.4 8.59 8.93 9.64 FY15 FY16 FY17 Liquidity (units traded – mil) 76.3 65.5 22.6 FY15 FY16 FY17 Fund overheads per unit (cents) 0.023 0.018 0.012 FY15 FY16 FY17 1 Earnings per unit (EPU) and Distributions per unit (DPU). EPU calculated as Total Comprehensive Income / weighted average units. FY17 results highlights Key financial metrics EPU driven by AFFO (adjusted funds from operations) growth and revaluations of almond orchards and vineyards. AFFO growth of 34.4% primarily a result of almond developments and market rent reviews. EPU 16.71 cents1 AFFO 12.51 cpu2 DPU 9.64 cents Balance sheet metrics Adjusted total assets increased primarily due to: almond developments; acquisitions in the cattle and cotton sectors; and revaluations. Gearing reduction provides balance sheet capacity to pursue future acquisitions. $587.5m adj. total assets3 Debt $167.7m FY18 forecasts Payout ratio 80% providing funding for capex, which attracts additional lease income. DPU in line with annual growth target of 4%. AFFO 12.5 cpu DPU 10.03 cents Capital management Syndicated debt facility incorporating a limit and tenor increase and interest cost reduction. Term debt facility $250m Term debt drawn $164.5m QUARTERLY DPU FREQUENCY 77% AFFO PAYOUT RATIO $1.58 ADJ. NAV PER UNIT 28.5% GEARING 4.0% FY18 DPU GROWTH 5.0% FORECAST YIELD4 53.5% DEBT HEDGED 4.08% 12 MTH INTEREST RATE 1 EPU calculated as Total Comprehensive Income / weighted average units. 2 Cents per unit. 3 Adjusted assets incorporates most recent independent property valuations, inclusive of water entitlements. 4 FY18 forecast DPU of 10.03 cents divided by 14 August 2017 closing price of $2.01. Fund overview Rural Funds Group Rural Funds Group (RFF) is an agricultural real estate investment trust (REIT) which owns a diversified portfolio of high quality Australian agricultural assets that are leased to experienced agricultural operators (tenants). Assets are diversified across six agricultural sectors and leased to a range of ASX-listed and privately owned lessees. Investment approach RFM has outlined a number of principles which underpin its approach to the assessment of new investments: > Maintain REIT structure, with direct agricultural risks borne by tenants rather than RFF; > > > > > Acquire quality assets, leased to suitable tenants; Enhance sector diversification to achieve a suitable balance between infrastructure predominant and natural resource ‘growth’ assets; Strategic investment in different climatic zones to increase geographic diversification; Identify investments which may benefit from productivity capex to deliver asset value growth, rental growth, and improve counterparty profitability over time; and Invest in sectors where RFM has direct operational knowledge. Cattle Properties: Value: Lessee: WALE: FY18 f’cast rent: % of FY18 revenue: 3 $54.5m Cattle JV 9.0 yrs $4.2m 8% Vineyards Properties: Value: Lessee: WALE: FY18 f’cast rent: % of FY18 revenue: 7 $46.8m TWE 8.9 yrs $3.5m 7% Poultry Properties: Value: Lessee: WALE: FY18 f’cast rent: % of FY18 revenue: 17 farms (154 sheds) $85.7m RFM Poultry 10.3 yrs $10.7m 21% Cotton Properties: Value: Lessee: WALE: FY18 f’cast rent: % of FY18 revenue: 1 $27.8m Cotton JV 4.8 yrs $2.1m 4% Macadamias Properties: Value: Lessee: WALE: FY18 f’cast rent: % of FY18 revenue: 3 $8.9m 2007 Macgrove Project & RFM 12.7 yrs $0.9m 2% Almonds Properties: Value: Lessee: WALE: FY18 f’cast rent: % of FY18 revenue: 4 $311.2m SHV, Olam, RFM Almond Schemes & RFM 16.4 yrs $25.3m 51% 2 1 1 1 3 5 4 13 1 1 4 Rural Funds Group Number of properties: 35 Value1: Sectors: Weighted Average Lease Expiry (WALE)2: $534.9m 6 13.2 years FY18 forecast rent3: $46.7m 1 Includes water entitlements held at fair value. 2 2017 lease expiries weighted by forecast FY18 rental income, expressed in years from 30 June 2017. 3 Excludes plant & equipment lease income. * Shaded areas in map denote different climatic zones. Source: Bureau of Meteorology (BOM). 32 FINANCIAL STATEMENTS for the year ended 30 June 2017 Rural Funds Group (ASX: RFF) stapled group comprising: Rural Funds Trust ARSN 112 951 578 and RF Active ARSN 168 740 805 Responsible Entity: Rural Funds Management Limited ACN 077 492 838 AFSL 226701 Rural Funds Group Corporate Directory Registered Office Responsible Entity Directors Company Secretaries Custodian Auditors Share Registry Bankers Level 2, 2 King Street DEAKIN ACT 2600 Rural Funds Management Limited ABN 65 077 492 838 AFSL 226701 Level 2, 2 King Street DEAKIN ACT 2600 Ph: 1800 026 665 Guy Paynter David Bryant Michael Carroll Julian Widdup Andrea Lemmon Stuart Waight Australian Executor Trustees Limited ABN 84 007 869 794 Level 22, 207 Kent Street SYDNEY NSW 2000 PricewaterhouseCoopers One International Towers Sydney Watermans Quay BARANGAROO NSW 2000 Boardroom Pty Limited Level 12, 225 George Street SYDNEY NSW 2000 Ph: 1300 737 760 Australia and New Zealand Banking Group Limited (ANZ) 242 Pitt Street SYDNEY NSW 2000 Rabobank Australia Group Darling Park Tower 3 201 Sussex Street SYDNEY NSW 2000 Stock Exchange Listing Rural Funds Group units (Rural Funds Trust and RF Active form a stapled investment vehicle) are listed on the Australian Securities Exchange (ASX) ASX Code RFF 34 Rural Funds Group Directors’ Report 30 June 2017 Rural Funds Group (RFF or the Group) comprises the stapled units in two Trusts, Rural Funds Trust (RFT) (ARSN 112 951 578) and RF Active (RFA) (ARSN 168 740 805) (collectively, the Trusts). The Directors of Rural Funds Management Limited (RFM) (ACN 077 492 838, AFSL 226701), the Responsible Entity of Rural Funds Group present their report on the Group for the year ended 30 June 2017. In accordance with AASB 3 Business Combinations, the stapling arrangement referred to above is regarded as a business combination and Rural Funds Trust has been identified as the parent for the purpose of preparing the consolidated financial report. The Directors’ report is a combined report that covers both Trusts. The financial information for the Group is taken from the Consolidated Financial Statements and notes. Directors The following persons held office as Directors of the Responsible Entity during the year and up to the date of this report: Guy Paynter David Bryant Michael Carroll Julian Widdup Non-Executive Chairman Managing Director Non-Executive Director Non-Executive Director (appointed 15 February 2017) Principal activities and significant changes in nature of activities The principal activity of the Group during the year was the leasing of agricultural properties and equipment. The Group is a lessor of agricultural property with revenue derived from leasing almond orchards, macadamia orchards, poultry property and infrastructure, vineyards, cattle properties, cotton properties, agricultural plant and equipment, and water rights. The following activities of the Group changed during the year: The Group purchased three cattle properties, Rewan, Mutton Hole and Oakland Park, in central and far north Queensland, leased to Cattle JV Pty Limited (CJV), a wholly owned subsidiary of RFM. The Group purchased Lynora Downs, a 4,880 hectare cotton property located in Central Queensland. Cotton JV Pty Limited, a joint venture between RFM and Queensland Cotton Corporation Pty Limited (a subsidiary of Olam International Limited), operates and has leased Lynora Downs for a period of five years, with an option to extend for a further five years; and The Group acquired a 9,549 megalitre (ML) high security Murrumbidgee River water entitlement which will generate revenue through the sale of annual water allocations until it is required for future horticultural developments. Operating results The consolidated net profit after income tax of the Group for the year ended 30 June 2017 amounted to $43,326,000 (restated 2016: $483,000 loss). The consolidated total comprehensive income of the Group for the year ended 30 June 2017 amounted to $34,238,000 (2016: $34,774,000). The Group holds investment property, bearer plants and derivatives at fair value. After adjusting for the effects of fair value adjustments, depreciation, impairments and one-off transaction costs during the year the profit before tax would have been $25,599,000 (2016: $14,342,000) representing adjusted funds from operations (AFFO). RURAL FUNDS GROUP ANNUAL REPORT 2017 | 35 Rural Funds Group Directors’ Report 30 June 2017 Adjusted funds from operations (AFFO) Net profit before income tax Change in fair value of investment property Change in fair value of plant and equipment - bearer plants Change in fair value of interest rate swaps Depreciation and impairments Gain on sale of assets Share of net profit of associate attributable to change in fair value of investment property One-off transaction costs AFFO AFFO cents per unit 2017 $'000 45,167 (17,191) 2,498 (5,311) 1,568 (33) (1,099) - 25,599 12.51 Restated 2016 $'000 439 (3,343) 9,029 7,116 939 (290) - 452 14,342 9.26 Having eliminated fair value adjustments and one-off transaction costs, the adjusted funds from operations (AFFO) effectively represents funds from operations from the property rental business. Financial position The net assets of the consolidated Group have increased to $357,678,000 at 30 June 2017 from $207,864,000 at 30 June 2016. At 30 June 2017 the Group had total assets of $543,003,000 (2016: $379,039,000). At 30 June 2017, the Group held total water entitlements (including investments in Barossa Infrastructure Limited (BIL) and Coleambally Irrigation Co-operative Limited (CICL)) at a book value of $121,469,000 (2016: $69,534,000). Independent valuations as at 30 June 2017 were received on the established almond orchard properties and vineyards that attribute a value to the water entitlements held by the Group. The Directors consider that these valuations remain reasonable estimates of the fair value at 30 June 2017 and on this basis the fair value of water entitlements at 30 June 2017 was $166,012,000 (2016: $97,949,000). The value of water entitlements is illustrated in the table below: Intangible assets (water entitlements) Investment in CICL Investment in BIL Total book value of water entitlements Revaluation of water entitlements per valuation Adjusted total water entitlements 2017 $'000 108,738 12,222 509 121,469 44,543 166,012 2016 $'000 59,691 9,334 509 69,534 28,415 97,949 36 Rural Funds Group Directors’ Report 30 June 2017 Financial position (continued) Adjusted net asset value The following depicts the net assets of the Group following the revaluation of water entitlements comprising intangible assets and investments in BIL and CICL per these valuations. Net assets per Consolidated Statement of Financial Position Revaluation of water entitlements per valuation Adjusted net assets Adjusted NAV per unit Significant changes in state of affairs 2017 $'000 357,678 44,543 402,221 1.58 2016 $'000 207,864 28,415 236,279 1.43 In July 2016, the Group successfully completed a non-renounceable rights issue of $61,000,000 (1 new unit for every 4 existing units) in order to fund the acquisition of three cattle properties, as well as macadamia orchards located near Bundaberg, QLD, which were acquired in March 2016, and an additional 1,000 hectares of almond development at the Kerarbury property. In July 2016, the Group negotiated an increase to its debt facility from $147,500,000 to $200,000,000. In July and August 2016 the Group acquired three cattle properties: Rewan, a 17,479 hectare cattle finishing property near Rolleston, QLD and two breeding properties, Oakland Park and Mutton Hole, located near the Gulf of Carpentaria in far north Queensland and comprising a combined area of 225,800 hectares. The properties and livestock has been be leased for ten years to Cattle JV Pty Limited, a wholly owned subsidiary of RFM. In December 2016, the Group acquired a 9,549 megalitre (ML) high security Murrumbidgee River water entitlement. The acquisition represents one of the largest ever sales of high security Murrumbidgee River water entitlements and will provide a cornerstone resource for future horticultural developments. In the interim, the Group will generate revenue from the sale of annual water allocations. In December 2016, the Group acquired Lynora Downs, a 4,880 hectare cotton property located in Central Queensland. RFM and Queensland Cotton Corporation Pty Limited, a subsidiary of Olam International Limited, have established a joint venture, Cotton JV Pty Limited, which leases and operates Lynora Downs for a period of five years, with an option to extend for a further five years. In December 2016, the Group negotiated an increase to its debt facility from $200,000,000 to $250,000,000 along with a one year extension to the facility expiry, now being December 2019. Concurrent to this process, the debt facility was syndicated with Rabobank Australia Group (Rabobank) with existing financier Australia and New Zealand Banking Group Limited (ANZ). In June 2017, the Group successfully completed a non-renounceable rights issue of $78,623,000 (2 new units for every 9 existing units), in order to reduce gearing and create balance sheet capacity to further build the Group’s portfolio of quality agricultural assets. The equity proceeds raised were also applied against the debt drawn to acquire the Lynora Downs cotton property and a parcel of Murrumbidgee River high security water entitlements, both of which were acquired using debt in December 2016. In the opinion of the Directors, there were no other significant changes in the state of affairs of the Group during the year. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 37 Rural Funds Group Directors’ Report 30 June 2017 Property leasing At 30 June 2017 the Group held 35 properties as follows: 17 poultry farms (303,216 square metres); 3 almond orchards (2,414 planted hectares); 1 almond orchard under development (2,500 planted hectares at completion); 7 vineyards (666 planted hectares); 3 macadamia orchards (259 planted hectares); 3 cattle properties (243,300 hectares). 1 cotton property (1,038 irrigable hectares) During the year ended 30 June 2017, the properties held by the Group recorded a fair value of investment properties increment of $17,191,000 (2016: $3,343,000) and a fair value of bearer plants decrement of ($11,687,000) (2016: $26,495,000 increment). Almond orchards Established almond orchard properties (including water entitlements) are located near Hillston, NSW and are leased to tenants who make regular rental payments. On these properties, 2,414 hectares (2016: 2,414 hectares) are applied to almond growing: 1,006 hectares (2016: 1,006) at Yilgah, 808 hectares (2016: 808) at Mooral and 600 hectares at Tocabil (2016: 600). The full almond area is under lease to the following tenants: Select Harvests Limited (SHV) 1,221 hectares (2016: 1,221); RFM Almond Fund 2006 (AF06) 272 hectares (2016: 272); RFM Almond Fund 2007 (AF07) 73 hectares (2016: 73); RFM Almond Fund 2008 (AF08) 206 hectares (2016: 206); Olam Orchards Australia Pty Limited (Olam) 600 hectares (2016: 600); Rural Funds Management Limited (RFM) 42 hectares (2016: 42). The Group underwent a rent review for the properties leased to Select Harvests Limited which was effective from 1 July 2016. The Group had two almond orchards which are under lease to Olam. Tocabil was leased to Olam in March 2015. The full 600 hectares of almond orchard at Tocabil is established and fully leased. The Kerarbury property was leased to Olam from September 2015. A 2,500 hectare almond orchard is being developed in accordance with the lease of this property. For its almond orchards the Group owns water entitlements of 77,922ML (2016: 59,985ML). During the year, a total of 17,937ML (2016: 26,766ML) of water entitlements were purchased. At 30 June 2017 no deposits were paid for an additional water entitlements (2016: 6,591ML). For its almond orchards the Group also owns 21,430ML (2016: 21,430ML) of water delivery entitlements. Poultry property The poultry property and infrastructure held by the Group includes 17 poultry growing farms located in Griffith, NSW and Lethbridge, VIC and 1,432ML of water entitlements (2016: 1,432ML). Leases are in place with RFM Poultry, a scheme managed by RFM, for 100% (2016: 100%) of the poultry property and infrastructure, with remaining lease terms between 7 and 19 years. The poultry growing operations are performed by RFM Poultry which is contracted with Baiada Poultry Pty Limited and Turi Foods Pty Limited. Vineyards The vineyard properties held by the Group include seven vineyards, with six located in South Australia, in the Barossa Valley, Adelaide Hills and Coonawarra regions, and one located in the Grampians in Victoria. For its vineyards, the Group owns 936ML of water entitlements (2016: 936ML). All vineyards are leased to Treasury Wine Estates and produce premium quality grapes. Six of the vineyards are leased until June 2026 and one is leased until June 2022. 38 Rural Funds Group Directors’ Report 30 June 2017 Property leasing (continued) Macadamia orchards Established macadamia orchards located near Bundaberg, QLD are leased to the following tenants: 2007 Macgrove Project (M07) 234 hectares (2016: 234); Rural Funds Management Limited (RFM) 25 hectares (2016: 25). Cattle property Cattle properties held by the Group comprise a total of 243,279 hectares and are leased to Cattle JV Pty Limited, a wholly owned subsidiary of RFM, for ten years. Rewan is a 17,479 hectare cattle finishing property located near Emerald, QLD. Oakland Park and Mutton Hole are neighbouring breeding properties near Normanton, QLD with a combined total of 225,800 hectares. Cotton property A 4,880 hectare cotton property was acquired during the year and is located near Emerald, QLD. 18,487ML of water entitlements were acquired with the property. The property is leased to Cotton JV Pty Limited (CotJV), a joint venture between RFM and Queensland Cotton Corporation Pty Limited (a subsidiary of Olam International Limited), for five years. Other activities The Group held a 33.50% stake in RFM StockBank (2016: 33.50%), a scheme managed by RFM, which operates a livestock leasing business. Under the livestock leasing operation, RFM StockBank retains ownership of the livestock and leases them to farmers in return for a placement fee which is similar to interest, and an upfront fee from the livestock agent. RFM, as Responsible Entity for RFM StockBank, has commenced the windup of RFM StockBank. A final capital return was paid to investors on 9 August 2017. Agricultural plant and equipment with a net book value of $5,127,000 (2016: $4,178,000) is owned by the Group and leased to AF06, AF07, AF08, M07, Cotton JV and Cattle JV. Breeder assets with a net book value of $10,953,000, acquired during the year, are leased to Cattle JV Pty Limited. The Group sold its 8.96% interest in Perth Markets Limited (PML), a stapled entity which owns the Market City site in Canning Vale, WA. RFF acquired 5,275,000 PML securities at $1 per security in February 2016, and sold them during March 2017 at $1.147 per security. Banking facilities At 30 June 2017 the core debt facility available to the Group was $250,000,000 (2016: $147,500,000), with a drawn down balance of $164,500,000 (2016: $146,500,000). The facility limit was increased to $250,000,000 in December 2016 with a one year extension to the facility expiry, being December 2019. Concurrent to this process, the debt facility has been syndicated with Rabobank Australia Group (Rabobank) selected as part of a syndicate with existing financier Australia and New Zealand Banking Group Limited (ANZ). At 30 June 2017 RFF had active interest rate swaps totaling 53.5% (2016: 60%) of the drawn down balance to manage interest rate risk. Distributions Distribution paid 29 July 2016 Distribution paid 28 October 2016 Distribution paid 31 January 2017 Distribution paid 28 April 2017 Distribution declared 7 June 2017, paid 31 July 2017 Cents per unit 2.2325 2.4100 2.4100 2.4100 2.4100 Total $ 3,691,602 4,986,940 4,996,810 5,006,323 6,130,580 RURAL FUNDS GROUP ANNUAL REPORT 2017 | 39 Rural Funds Group Directors’ Report 30 June 2017 Earnings per unit Net profit after income tax for the year ($'000) Weighted average number of units on issue during the year Basic and diluted earnings per unit (total) (cents) Indirect cost ratio 43,326 204,617,207 21.17 The indirect cost ratio (ICR) is the ratio of the Group’s management costs over the Group’s average net assets for the year, expressed as a percentage. Management costs include management fees and reimbursement of other expenses in relation to the Group, but do not include transactional and operational costs such as brokerage. Management costs are not paid directly by the unitholders of the Group. The ICR for the Group for the year ended 30 June 2017 is 3.29% (2016: 2.43%). The ICR for the year has been impacted by costs associated with the rights issue completed in July 2016 and June 2017. Matters subsequent to the end of the year No matter or circumstance has arisen since the end of the year that has significantly affected or could significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in future financial years. Likely developments and expected results of operations The Group expects to continue to derive its core future income from the holding and leasing of investment property, bearer plants and water entitlements. Management is continually looking for growth opportunities in agricultural and related industries. Environmental regulation The operations of the Group are subject to significant environmental regulations under the laws of the Commonwealth and States or Territories of Australia. Water usage for irrigation, domestic and levee purposes, including containing irrigation water from entering the river, water course or water aquifer are regulated by the Water Management Act 2000. Water licences are leased to external parties who are then responsible to meet the legislative requirements of these licences. There have been no known significant breaches of any environmental requirements applicable to the Group. Units on issue 254,380,898 units in Rural Funds Trust were on issue at 30 June 2017 (2016: 165,357,290). During the year 89,023,608 units were issued by the Trust (2016: 33,215,055) and nil (2016: nil) were redeemed. Indemnity of Responsible Entity and Custodian In accordance with its constitution, Rural Funds Group indemnifies the Directors, Company Secretaries and all other officers of the Responsible Entity and Custodian when acting in those capacities, against costs and expenses incurred in defending certain proceedings. Rounding of amounts The Group is an entity to which ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 applies and accordingly amounts in the consolidated financial statements and Directors' report have been rounded to the nearest thousand dollars. 40 Rural Funds Group Directors’ Report 30 June 2017 Information on Directors of the Responsible Entity Guy Paynter Qualifications Experience Special responsibilities Directorships currently held in other listed entities and during the three years prior to the current year David Bryant Qualifications Experience Non-Executive Chairman Bachelor of Laws from The University of Melbourne Guy Paynter is a former director of broking firm JB Were and brings to RFM more than 30 years of experience in corporate finance. Guy is a former member of the Australian Securities Exchange (ASX) and a former associate of the Securities Institute of Australia (now known as the Financial Services Institute of Australasia). Guy is also Chairman of Bill Peach Group Limited (previously known as Aircruising Australia Limited). Guy's agricultural interests include cattle breeding in the Upper Hunter region in New South Wales. Member of Audit Committee and Remuneration Committee RFM Poultry Managing Director Diploma of Financial Planning from the Royal Melbourne Institute of Technology and a Masters of Agribusiness from The University of Melbourne. David Bryant established RFM in February 1997 and since that time has led the team that is responsible for the acquisition of large scale agricultural property assets and associated water entitlements. RFM manages over $600 million of agricultural assets. On a day-to-day level, David is responsible for leading the RFM Executive, maintaining key commercial relationships and sourcing new business opportunities. Special responsibilities Directorships currently held in other listed entities and during the three years prior to the current year Managing Director RFM Poultry Michael Carroll Qualifications Experience Special responsibilities Directorships currently held in other listed entities and during the three years prior to the current year Non-Executive Director Bachelor of Agricultural Science from La Trobe University and a Masters of Business Administration from The University of Melbourne's Melbourne Business School. Michael has completed the Advanced Management Program at Harvard Business School, Boston, and is a Fellow of the Australian Institute of Company Directors. Michael Carroll serves a range of food and agricultural businesses in a board and advisory capacity. Michael is on the boards of Tassal Group Limited, Select Harvests Limited, Paraway Pastoral Company, Sunny Queen Pty Limited, and the Gardiner Dairy Foundation. Michael also has senior executive experience in a range of companies, including establishing and leading the National Australia Bank (NAB) Agribusiness division. Chairman of Audit Committee and Remuneration Committee Michael is on the Board of Tassal Group Limited, RFM Poultry and Select Harvests Limited. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 41 Rural Funds Group Directors’ Report 30 June 2017 Information on Directors of the Responsible Entity (continued) Julian Widdup Qualifications Experience Special responsibilities Directorships currently held in other listed entities Directorships held in other listed entities during the three years prior to the current year Non-Executive Director Bachelor of Economics from the Australian National University. Julian is a Fellow of the Institute of Actuaries of Australia and a Fellow of the Australian Institute of Company Directors. Julian brings extensive experience to the RFM board having previously served as a director of Palisade Investment Partners, Darwin International Airport, Alice Springs Airport, NZ timberland company Taumata Plantations Limited, Regional Livestock Exchange Investment Company, Merredin Energy power generation company, Victorian AgriBioscience Research Facility, Casey Hospital in Melbourne and Mater Hospital in Newcastle. Member of Audit Committee and Remuneration Committee. RFM Poultry None noted Interests of Directors of the Responsible Entity Balance at 30 June 2015 Additions Balance at 30 June 2016 Additions Balance at 30 June 2017 Guy Paynter Units 382,156 David Bryant Michael Carroll Units - Units 3,656,191 151,100 533,256 281,440 814,696 3,987,152 7,643,343 4,034,839 11,678,182 - - 19,389 19,389 Company Secretaries of the Responsible Entity Stuart Waight and Andrea Lemmon are RFM’s joint company secretaries. Stuart joined RFM in 2003, is a Chartered Accountant and is RFM’s Chief Operating Officer. Andrea has been with RFM since 1997 and is RFM’s Executive Manager Funds Management. Meetings of Directors of the Responsible Entity During the financial year 16 meetings of Directors (including committees of Directors) were held. Attendances by each Director during the year were as follows: Directors meetingsp Audit Committee meetings Remuneration Committee meetings Guy Paynter David Bryant Michael Carroll Julian Widdup No. eligible to attend 16 No. attended 15 No. eligible to attend 1 No. attended 1 No. eligible to attend 1 No. attended 1 16 16 7 16 14 7 - 1 1 - 1 1 - 1 1 - 1 1 42 Rural Funds Group Directors’ Report 30 June 2017 Non-audit services During PricewaterhouseCoopers for compliance audit services provided. the year ended 30 June 2017 fees of $6,369 (2016: $6,121) were paid or payable to Auditor’s independence declaration The auditor’s independence declaration in accordance with section 307C of the Corporations Act 2001 for the year ended 30 June 2017 has been received and is included on page 44 of the financial report. The Directors’ report is signed in accordance with a resolution of the Board of Directors of Rural Funds Management Limited. David Bryant Director 21 August 2017 RURAL FUNDS GROUP ANNUAL REPORT 2017 | 43 Auditor’s Independence Declaration As lead auditor for the audit of Rural Funds Group for the year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been: (a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Rural Funds Group and the entities it controlled during the period. CMC Heraghty Partner PricewaterhouseCoopers Sydney 21 August 2017 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 44 Rural Funds Group Consolidated Statement of Comprehensive Income For the year ended 30 June 2017 Revenue Other income Management fees Property expenses Finance costs Other expenses Share of net profit - equity accounted investments Gain on sale of assets Depreciation and impairments Change in fair value of plant and equipment - bearer plants Change in fair value of investment property Change in fair value of interest rate swaps Net profit before income tax Income tax expense Net profit/(loss) after income tax Other comprehensive income: Revaluation (decrement)/increment - bearer plants Revaluation decrement other Income tax relating to these items Other comprehensive income/(loss) for the year, net of tax Total comprehensive income attributable to unitholders Total comprehensive income for the year attributable to unitholders arising from: Rural Funds Trust RF Active (non-controlling interest) 12 7 24 24 7 30 June 2017 $'000 Note Restated 30 June 2016 $'000 6 41,573 26,549 72 (4,393) (1,473) (7,891) (2,494) 1,304 33 (1,568) (2,498) 17,191 5,311 45,167 (1,841) 43,326 76 (3,165) (1,256) (5,612) (2,763) 61 290 (939) (9,029) 3,343 (7,116) 439 (922) (483) (9,189) 35,524 - 101 (9,088) 34,238 (14) (253) 35,257 34,774 34,131 107 34,238 34,644 130 34,774 Earnings per unit Basic and diluted earnings per unit from continuing operations: Per stapled unit (cents) Per unit of Rural Funds Trust (cents) Per unit of RF Active (cents) 26 26 26 21.17 21.12 0.05 (0.31) (0.39) 0.08 Refer to note 2 for details of restatement as a result of the amendments made to Accounting Standards AASB 116 Property, Plant and Equipment and AASB 141 Agriculture in relation to bearer plants. The accompanying notes form part of these financial statements. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 45 Rural Funds Group Consolidated Statement of Financial Position As at 30 June 2017 Restated 2016 Restated 2015 $'000 $'000 2017 $'000 Note ASSETS Current assets Cash and cash equivalents Trade and other receivables Other current assets Total current assets Non-current assets Investments accounted for using the equity method Financial assets Plant and equipment Plant and equipment - bearer plants Investment property Intangible assets Deferred tax assets Total non-current assets Total assets LIABILITIES Current liabilities Trade and other payables Interest bearing liabilities Income tax payable Distributions payable Total current liabilities Non-current liabilities Interest bearing liabilities Other non-current liabilities Derivative financial liabilities Deferred tax liabilities Total non-current liabilities Total liabilities (excluding net assets attributable to unitholders) 9 10 13 15 14 11 11 12 16 3,838 4,608 1,800 3,034 7,239 2,501 10,246 12,774 712 2,729 307 3,748 3,903 617 3,153 - 23,916 5,127 121,193 273,783 108,738 9,041 10,078 4,178 113,206 67,581 168,951 142,379 59,691 1,120 28,965 2,317 21,22 - 532,757 543,003 366,265 248,915 379,039 252,663 17 18 25 18 19 20 21,22 5,138 3,204 - 6,368 14,710 6,920 3,030 - 3,901 13,851 2,038 657 29 2,947 5,671 164,500 146,500 91,451 1,634 3,878 603 1,634 9,190 - 1,553 2,048 - 170,615 157,324 95,052 185,325 171,175 100,723 Net assets attributable to unitholders 357,678 207,864 151,940 Total liabilities 543,003 379,039 252,663 Refer to note 2 for details of restatement as a result of the amendments made to Accounting Standards AASB 116 Property, Plant and Equipment and AASB 141 Agriculture in relation to bearer plants. The accompanying notes form part of these financial statements. 46 Rural Funds Group Consolidated Statement of Financial Position As at 30 June 2017 NET ASSETS ATTRIBUTABLE TO UNITHOLDERS Unitholders of Rural Funds Trust Issued units Asset revaluation reserve Accumulated profit Parent entity interest Unitholders of RF Active Issued units Accumulated profit Non-controlling interest Restated 2016 Restated 2015 $'000 $'000 2017 $'000 Note 252,880 134,110 111,711 24 27,575 73,860 36,663 35,218 1,406 37,427 354,315 205,991 150,544 3,066 297 3,363 1,683 190 1,873 1,323 73 1,396 Total net assets attributable to unitholders 357,678 207,864 151,940 Water entitlements are held at cost in the Consolidated Statement of Financial Position in accordance with accounting standards. Refer to note 5 for disclosure of the Directors’ valuation of water entitlements, which are supported by independent property valuation. Refer to note 2 for details of restatement as a result of the amendments made to Accounting Standards AASB 116 Property, Plant and Equipment and AASB 141 Agriculture in relation to bearer plants. The accompanying notes form part of these financial statements. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 47 Rural Funds Group Consolidated Statement of Changes in Net Assets Attributable to Unitholders For the year ended 30 June 2017 2017 Balance at 1 July 2016 Restated Other comprehensive income Total other comprehensive income Profit before income tax Income tax expense Total comprehensive income for the year Issued units Units issued during the year Issue costs Total issued units Note Issued units Retained earnings Asset revaluation reserve Total Non- controlling interest Total $'000 $'000 $'000 $'000 $'000 $'000 134,110 35,218 36,663 205,991 1,873 207,864 - - - - - - - (9,088) (9,088) (9,088) (9,088) - - (9,088) (9,088) 45,050 (1,831) - - 45,050 (1,831) 117 45,167 (10) (1,841) 43,219 (9,088) 34,131 107 34,238 140,577 (5,264) 135,313 - - - - 140,577 1,420 141,997 - (5,264) (37) (5,301) - 135,313 1,383 136,696 7 23 23 Distributions to unitholders 25 (16,543) (4,577) - (21,120) - (21,120) Balance at 30 June 2017 252,880 73,860 27,575 354,315 3,363 357,678 2016 Restated Balance at 1 July 2015 Other comprehensive income Total other comprehensive income Profit before income tax Income tax expense Total comprehensive income for the year Issued units Units issued during the year Issue costs Total issued units Distributions to unitholders Balance at 30 June 2016 Note Issued units Retained earnings Asset revaluation reserve Total Non- controlling interest Total $'000 $'000 $'000 $'000 $'000 $'000 111,711 37,440 1,406 150,557 1,383 151,940 - - - - - - - 35,257 35,257 35,257 35,257 388 (1,001) - - 388 (1,001) - - 51 79 35,257 35,257 439 (922) (613) 35,257 34,644 130 34,774 36,449 (1,661) 34,788 (12,389) 134,110 - - - (1,609) 35,218 - - - - 36,449 (1,661) 34,788 (13,998) 36,663 205,991 368 (8) 360 - 36,817 (1,669) 35,148 (13,998) 1,873 207,864 7 23 23 25 Refer to note 2 for details of restatement as a result of the amendments made to Accounting Standards AASB 116 Property, Plant and Equipment and AASB 141 Agriculture in relation to bearer plants. The accompanying notes form part of these financial statements. 48 Rural Funds Group Consolidated Statement of Cash Flows For the year ended 30 June 2017 Note Cash flows from operating activities Receipts from customers Payments to suppliers Interest received Finance costs Net cash inflow from operating activities 32 Cash flows from investing activities Payments for acquisition of macadamia leasing business Payments for investment property Payments for bearer plants Payments for intangible assets Payments for financial assets Payments for plant and equipment Payments for deposits Payments for equity accounted investments Proceeds from sale of investment property Proceeds from sale of assets Proceeds from sale of / Distributions from equity accounted investments Distributions received 2017 $'000 48,600 (13,672) 95 (8,109) 26,914 - (87,641) (19,673) (49,758) (13,882) (1,788) - - - 60 10,345 11 2016 $'000 29,255 (9,492) 80 (5,612) 14,231 (7,291) (23,275) (13,606) (30,381) (9,359) (1,760) (2,242) (5,275) 1,162 348 234 11 Net cash outflow from investing activities (162,326) (91,434) Cash flows from financing activities Proceeds from issue of units Proceeds from borrowings Repayment of borrowings Distributions paid Net cash inflow from financing activities Net increase in cash and cash equivalents held Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period 9 136,696 18,174 - (18,654) 136,216 804 3,034 3,838 35,148 58,079 (657) (13,045) 79,525 2,322 712 3,034 The accompanying notes form part of these financial statements. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 49 Rural Funds Group Notes to the Financial Statements 30 June 2017 1 General information This financial report covers the consolidated financial statements and notes of Rural Funds Trust and its Controlled Entities including RF Active (Rural Funds Group, the Group or collectively the Trusts). Rural Funds Group is a for profit entity domiciled in Australia. The Directors of the Responsible Entity authorised the Financial Report for issue on 21 August 2017 and have the power to amend and reissue the Financial Report. Items included in the financial statements of each of the Group entities are measured using the currency of the primary economic environment in which the entity operates (functional currency). The consolidated financial statements are presented in Australian dollars which is the parent entity’s functional and presentation currency. The separate financial statements and notes of the parent entity, Rural Funds Trust, have not been presented within this financial report as permitted by amendments made to the Corporations Act 2001. Parent entity information is included in note 34. 2 Summary of significant accounting policies Basis of preparation The accounting policies that have been adopted in respect of the financial report are those of Rural Funds Management (RFM) as Responsible Entity of the Trusts. The Trusts have common business objectives and operate as an economic entity collectively known as Rural Funds Group. The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, and other authoritative pronouncements of the Australian Accounting Standards Board, the Corporations Act 2001 and the Trusts’ Constitution. The report has been prepared on a going concern basis. The financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The significant accounting policies used in the preparation and presentation of these financial statements are provided below and are consistent with prior reporting periods unless otherwise stated. The financial statements are based on historical cost, except for the measurement at fair value of selected non-current assets, financial assets and financial liabilities. As permitted by ASIC Corporations (Stapled Group Reports) Instrument 2015/838, issued by the Australian Securities and Investments Commission, these financial statements are consolidated financial statements and accompanying notes of both Rural Funds Trust and RF Active. Principles of consolidation The consolidated financial statements include the financial position and performance of controlled entities from the date on which control is obtained until the date that control is lost. Intragroup assets, liabilities, equity, income, expenses and cash flows relating to transactions between entities in the consolidated Group have been eliminated in full for the purpose of these financial statements. Appropriate adjustments have been made to the controlled entity’s financial position, performance and cash flows where the accounting policies used by that entity were different from those adopted by the consolidated entity. All controlled entities have a 30 June financial year end. 50 Rural Funds Group Notes to the Financial Statements 30 June 2017 2 Summary of significant accounting policies (continued) Principles of consolidation (continued) Controlled entities In accordance with AASB 3 Business Combinations, Rural Funds Trust is deemed to control RF Active from the stapling date of 16 October 2014. Rural Funds Trust is considered to be the acquirer of RF Active due to the size of the respective entities and as the stapling transaction and capitalisation of RF Active was funded by a distribution from Rural Funds Trust that was compulsorily used to subscribe for units in RF Active. Associates Associates are entities over which the Group has significant influence but not control or joint control, generally accompanying a holding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting, after initially being recognised at cost. The Group's share of its associates’ post-acquisition profits or losses is recognised in profit or loss, and its share of post-acquisition other comprehensive income is recognised in other comprehensive income. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. Dividends or distributions receivable from associates are recognised as a reduction in the carrying amount of the investment. Business combinations Business combinations are accounted for by applying the acquisition method which requires an acquiring entity to be identified in all cases. The acquisition date under this method is the date that the acquiring entity obtains control over the acquired entity. The fair value of identifiable assets and liabilities acquired are recognised in the consolidated financial statements at the acquisition date. Goodwill or a discount on acquisition may arise on the acquisition date, this is calculated by comparing the fair value of the consideration transferred and the amount of non-controlling interest in the acquirer with the fair value of the net identifiable assets acquired. Where the consideration is greater than the identifiable assets, the excess is recorded as goodwill. Where the net assets acquired are greater than the consideration, the measurement basis of the net assets are reassessed and then a discount on acquisition recognised in the Consolidated Statement of Comprehensive Income. All acquisition-related costs are recognised as expenses in the periods in which the costs are incurred except for costs to issue debt or equity securities. Any contingent consideration which forms part of the combination is recognised at fair value at the acquisition date. If the contingent consideration is classified as equity then it is not remeasured and the settlement is accounted for within equity. Otherwise subsequent changes in the value of the contingent consideration liability are measured through the statement of comprehensive income. Comparative amounts Comparative amounts have been restated to reflect changes in accounting standards relating to bearer plants, as disclosed in the Plant and equipment – bearer plants section of note 2 to the financial statements. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 51 Rural Funds Group Notes to the Financial Statements 30 June 2017 2 Summary of significant accounting policies (continued) Revenue Revenue is recognised when the amount of the revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to the entity and specific criteria relating to the type of revenue as noted below, have been satisfied. Revenue from the leasing of investment property, water rights, bearer plants, property, plant and equipment and infrastructure, where the Group is a lessor, is recognised in income over the lease term on an accruals basis. The respective leased assets are included in the Consolidated Statement of Financial Position based on that nature. Interest revenue is recognised using the effective interest rate method. All revenue is stated net of the amount of goods and services tax (GST). Income tax The charge for current income tax expense is based on the profit adjusted for any non-assessable or disallowed items. It is calculated using the tax rates that have been enacted or are substantially enacted by the balance sheet date. Deferred tax is accounted for using the balance sheet method in respect of temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss. Deferred tax is calculated at the tax rates that are expected to apply to the period when the asset is realised or liability is settled. Deferred tax is charged/credited in the income statement except where it relates to items that may be credited directly to equity, in which case the deferred tax is adjusted directly against equity. Deferred income tax assets are recognised to the extent that it is probable that future tax profits will be available against which deductible temporary differences can be utilised. The amount of benefits brought to account or which may be realised in the future is based on management’s judgement, the assumption that no adverse change will occur in income taxation legislation and the anticipation that the consolidated group will derive sufficient future assessable income to enable the benefit to be realised and comply with the conditions of deductibility imposed by the law. Goods and services tax (GST) Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). Receivables and payables are stated inclusive of GST. The net amount of GST recoverable from, or payable to, the ATO is included as part of trade and other receivables or payables in the consolidated statement of financial position. Cash flows in the consolidated statement of cash flows are included on a gross basis and the GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. 52 Rural Funds Group Notes to the Financial Statements 30 June 2017 2 Summary of significant accounting policies (continued) Cash and cash equivalents Cash and cash equivalents comprises cash on hand, demand deposits and short-term investments with less than 3 months of original maturity which are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. Bank overdrafts also form part of cash equivalents for the purpose of the consolidated statement of cash flows and are presented within current liabilities on the consolidated statement of financial position. Trade and other receivables Trade receivables are recognised initially at fair value and subsequently measured at amortised cost less an allowance for doubtful debts. Collectability of trade receivables is reviewed on an ongoing basis. Individual impairment is identified at a counterparty specific level following objective evidence that a financial asset is impaired. This may be after an interest or principal payment is missed or when information comes to hand that would indicate an inability to meet repayments. An allowance for doubtful debts is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the allowance is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the originally assessed effective interest rate and taking into account the amount of security held. The amount of the allowance is recognised in the income statement. Debts which are known to be uncollectible are written off when identified. Write-offs are charged against accounts previously established for impairment allowance or directly to the income statement. Where the debt is in relation to amounts due on almond groves and the impact of non-payment would result in the cancellation of the almond grove rights, which would revert to the Group, then the impairment provision is measured against the value of the rights that would be obtained by the Group. Intangible assets Water rights Permanent water rights and entitlements are recorded at historical cost less accumulated impairment losses. Such rights have an indefinite life, and are not depreciated. The carrying value is tested annually for impairment as well as for possible reversal of impairment. If events or changes in circumstances indicate impairment, or reversal of impairment, the carrying value is adjusted to take account of impairment losses. Financial instruments Financial instruments are recognised initially using trade date accounting, i.e. on the date that the Group becomes party to the contractual provisions of the instrument. On initial recognition, all financial instruments are measured at fair value plus transaction costs (except for instruments measured at fair value through profit or loss where transaction costs are expensed as incurred). a. Financial assets Financial assets are divided into the following categories which are described in detail below: loans and receivables; and financial assets at fair value through profit or loss. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 53 Rural Funds Group Notes to the Financial Statements 30 June 2017 2 Summary of significant accounting policies (continued) Financial instruments (continued) Financial assets are assigned to the different categories on initial recognition, depending on the characteristics of the instrument and its purpose. A financial instrument’s category is relevant to the way it is measured and whether any resulting income and expenses are recognised in profit or loss or in other comprehensive income. b. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise principally through the provision of goods and services to customers but also incorporate other types of contractual monetary assets. After initial recognition these are measured at amortised cost using the effective interest method, less provision for impairment. Any change in their value is recognised in profit or loss. Discounting is omitted where the effect of discounting is considered immaterial. Significant receivables are considered for impairment on an individual asset basis when they are past due at the reporting date and when objective evidence is received that a specific counterparty will default. The amount of the impairment is the difference between the net carrying amount and the present value of the future expected cash flows associated with the impaired receivable. For trade receivables, impairment provisions are recorded in a separate allowance account with the loss being recognised in profit or loss. When confirmation has been received that the amount is not collectable, the gross carrying value of the asset is written off against the associated impairment provision. Subsequent recoveries of amounts previously written off are credited against other income in profit or loss. In some circumstances, the Group renegotiates repayment terms with customers which may lead to changes in the timing of the payments, the Group does not necessarily consider the balance to be impaired, however assessment is made on a case-by-case basis. c. Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets: acquired principally for the purpose of selling in the near future; designated by the entity to be carried at fair value through profit or loss upon initial recognition; or, which are derivatives not qualifying for hedge accounting. The Group has some derivatives which are designated as financial assets at fair value through profit or loss. Assets included within this category are carried in the consolidated statement of financial position at fair value with changes in fair value recognised in finance income or expenses in profit or loss. Any gain or loss arising from derivative financial instruments is based on changes in fair value, which is determined by direct reference to active market transactions or using a valuation technique where no active market exists. 54 Rural Funds Group Notes to the Financial Statements 30 June 2017 2 Summary of significant accounting policies (continued) Financial instruments (continued) d. Financial liabilities Financial liabilities are recognised when the Group becomes a party to the contractual agreements of the instrument. All interest-related charges are reported in profit or loss are included in the income statement line items "finance costs". Financial liabilities are classified as either financial liabilities ‘at fair value through profit or loss’ or other financial liabilities depending on the purpose for which the liability was acquired. Although the Group uses derivative financial instruments in economic hedges of interest rate risk, it does not hedge account for these transactions. The Group‘s financial liabilities include borrowings and trade and other payables, which are measured at amortised cost using the effective interest rate method. All of the Group‘s derivative financial instruments that are not designated as hedging instruments in accordance with the strict conditions explained in AASB 139 Financial Instruments: Recognition and Measurement are accounted for at fair value through profit or loss. e. Impairment of financial assets At the end of the reporting period the Group assesses whether there is any objective evidence that a financial asset or group of financial assets is impaired. f. Financial assets at amortised cost If there is objective evidence that an impairment loss on financial assets carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the assets carrying amount and the present value of the estimated future cash flows discounted at the financial assets original effective interest rate. Impairment on loans and receivables is reduced through the use of an allowance account, all other impairment losses on financial assets at amortised cost are taken directly to the asset. Plant and equipment Classes of plant and equipment other than bearer plants are measured using the cost model as specified below. The asset is carried at its cost less any accumulated depreciation and any impairment losses. Costs include purchase price, other directly attributable costs and the initial estimate of the costs of dismantling and restoring the asset, where applicable. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred. The depreciation rates used for each class of depreciable asset are shown below: Fixed asset class: Capital works in progress Plant and equipment Motor vehicles Depreciation rate: Nil 3-16 years 6-16 years RURAL FUNDS GROUP ANNUAL REPORT 2017 | 55 Rural Funds Group Notes to the Financial Statements 30 June 2017 2 Summary of significant accounting policies (continued) Plant and equipment (continued) At the end of each annual reporting period, the depreciation method, useful life and residual value of each asset is reviewed. Any revisions are accounted for prospectively as a change in estimate. Gains and losses on disposals are determined by comparing proceeds with carrying amount. These are included in profit or loss. When revalued assets are sold, it is Group policy to transfer any amounts included in other reserves in respect of those assets to retained earnings. Plant and equipment - bearer plants Amendments to AASB 116 Property, Plant and Equipment and AASB 141 Agriculture distinguish bearer plants from other biological assets. Bearer plants are solely used to grow produce over their productive lives and are seen to be similar to an item of machinery. They will therefore now be accounted for under AASB 116 Property, Plant and Equipment. The Group’s wine grape vines, almond trees and macadamia trees qualify as bearer plants under the new definition in AASB 141 Agriculture. As required under the standards, the change in accounting policy has been applied retrospectively to the earliest period presented in the financial statements. As a consequence, the vines and trees were classified to property, plant and equipment effective 1 July 2015 and prior year financial statement balances restated with the fair value at 1 July 2015 adopted as the cost base of the asset. The bearer plants continue to be measured at fair value, any increase in the carrying amount above cost is recognised in asset revaluation reserve, and any decrease in the carrying amount below cost is recognised in profit and loss. The financial effect of this change is shown in the table below. Consolidated Statement of Comprehensive income (extract) As originally stated For the year ended Increase/ (Decrease) Change in fair value of biological assets Net profit before income tax Income tax (expense)/benefit Net profit after income tax Other comprehensive income Total comprehensive income Earnings per unit (cents) 30 June 2016 $'000 26,495 35,963 (1,175) 34,788 (14) 34,774 22.46 $'000 (35,524) (35,524) 253 (35,271) 35,271 - (22.77) Restated For the year ended 30 June 2016 $'000 (9,029) 439 (922) (483) 35,257 34,774 (0.31) 56 . l w o e b n o i t i s o p l i a c n a n i f f o t n e m e t a t s e h t m o r f t c a r t x e e h t n i n w o h s s i n o i t i s o p l i a c n a n i f e h t n o e g n a h c i s h t f o t c e f f e e h T ) d e u n i t n o c ( s e i c i l o p g n i t n u o c c a t n a c i f i n g s i f o y r a m m u S 2 ) d e u n i t n o c ( s t n a l p r e r a e b - i t n e m p u q e d n a t n a P l s t n e m e t a t S i l a i c n a n F e h t o t s e t o N 7 1 0 2 e n u J 0 3 p u o r G s d n u F l a r u R - y l u J 1 5 1 0 2 0 0 0 $ ' 1 8 5 , 7 6 3 6 6 , 2 5 2 3 2 7 , 0 0 1 0 4 9 , 1 5 1 6 0 4 , 1 0 4 4 , 7 3 0 4 9 , 1 5 1 ) e s a e r c e D ( 5 1 0 2 / e s a e r c n I y l u J 1 - - - - - - 0 0 0 $ ' 1 8 5 , 7 6 ) 1 8 5 , 7 6 ( - 0 0 0 $ ' 1 8 5 , 7 6 3 6 6 , 2 5 2 3 2 7 , 0 0 1 0 4 9 , 1 5 1 6 0 4 , 1 0 4 4 , 7 3 0 4 9 , 1 5 1 - 6 1 0 2 0 0 0 $ ' e n u J 0 3 6 0 2 , 3 1 1 9 3 0 , 9 7 3 5 7 1 , 1 7 1 4 6 8 , 7 0 2 8 1 2 , 5 3 3 6 6 , 6 3 / e s a e r c n I ) e s a e r c e D ( 0 0 0 $ ' 6 0 2 , 3 1 1 ) 6 0 2 , 3 1 1 ( - - - 1 7 2 , 5 3 ) 1 7 2 , 5 3 ( 4 6 8 , 7 0 2 - 6 1 0 2 0 0 0 $ ' e n u J 0 3 6 0 2 , 3 1 1 - 9 3 0 , 9 7 3 5 7 1 , 1 7 1 4 6 8 , 7 0 2 2 9 3 , 1 9 8 4 , 0 7 4 6 8 , 7 0 2 d e t a t s e R d e t a t s y l l a n g i r o s A i d e t a t s e R d e t a t s y l l a n g i r o s A i f o t n e m e t a t S d e t a d i l o s n o C ) t c a r t x e ( n o i t i s o P l i a c n a n F i s t e s s a l i a c g o o B l i l s t n a p r e r a e b - t i n e m p u q e d n a t n a P l s e i t i l i b a i l l a t o T s t e s s a l a t o T s t e s s a t e N e v r e s e r n o i t l a u a v e r t e s s A y t i u q e l a t o T i s g n n r a e i d e n a e R t RURAL FUNDS GROUP ANNUAL REPORT 2017 | 57 Rural Funds Group Notes to the Financial Statements 30 June 2017 2 Summary of significant accounting policies (continued) Investment property Investment properties, comprise land, buildings and integral infrastructure including irrigation and trellising. Investment properties are held for long-term rental yields and are not occupied by the Group. They are carried at fair value and changes in fair value are presented in the income statement. Leases Leases of fixed assets or biological assets where substantially all the risks and benefits incidental to the ownership of the asset, but not the legal ownership, are transferred from the lessor, are classified as finance leases. Lease payments for operating leases, where substantially all of the risks and benefits have not been transferred from the lessor, are charged as expenses on a straight-line basis over the life of the lease term. Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the life of the lease term. 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 outflow can be reliably measured. Provisions are measured at the present value of management's best estimate of the outflow required to settle the obligation at the end of the reporting period. The discount rate used is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the unwinding of the discount is taken to finance costs in the income statement. Provisions for distributions Provision is made for the amount of any distribution declared, being appropriately authorised and no longer at the discretion of the Group, on or before the end of the reporting period but not distributed at the end of the reporting period. Borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalised as part of the cost of that asset. All other borrowing costs are recognised as an expense in the period in which they are incurred. Earnings per unit Basic earnings per unit are calculated on net profit attributable to unitholders of the Group divided by the weighted average number of issued units. Interest bearing liabilities Interest bearing liabilities are initially recognised at fair value less any related transaction costs. Subsequent to initial recognition, interest bearing liabilities are stated at amortised cost. Any difference between cost and redemption value is recognised in the statement of comprehensive income over the entire period of the borrowings on an effective interest basis. Interest-bearing liabilities are classified as current liabilities unless the Group has an unconditional right to defer the settlement of the liability for at least twelve months from the balance sheet date. 58 Rural Funds Group Notes to the Financial Statements 30 June 2017 2 Summary of significant accounting policies (continued) Issued units Ordinary units are classified as liabilities in accordance with AASB 132 Financial Instruments: Presentation. Incremental costs directly attributable to the issue of ordinary units and unit options which vest immediately are recognised as a deduction from net assets attributable to unitholders, net of any tax effects. There is no equity relating to the Group. Rounding of amounts The Group is an entity to which ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 applies and accordingly amounts in the consolidated financial statements and Directors' report have been rounded to the nearest thousand dollars. Parent entity information The financial information of the parent entity, Rural Funds Trust, disclosed in note 34 has been prepared on the same basis as the consolidated financial statements, except as set out below. Investments in subsidiaries and associates Investments in subsidiaries and associates are accounted for at historical cost less any accumulated impairment. Distributions received from equity investments are recognised in the parent entity’s profit or loss when its right to receive the distribution is established. New accounting standards and interpretations Standard Name Effective date for the Group Requirements Impact AASB 15 Revenue from contracts with customers 1 Jan 2018 Recognise contracted AASB 16 Leases 1 Jan 2019 revenue when control of a good or service transfers to a customer. The notion of control replaces the existing notion of risks and rewards. Introduces a single lease accounting model and requires lessees to recognise on the balance sheet an asset (right of use) and a corresponding liability (lease commitment) for leases with a term of more than 12 months. It is not expected that this standard will have a material impact on the Group. There is no impact on reported financial position or performance expected for the Group as it is a lessor in nature. There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 59 Rural Funds Group Notes to the Financial Statements 30 June 2017 3 Significant accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements, estimates and assumptions in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors it believes to be reasonable under the circumstances, the result of which form the basis of the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods. Management has identified the following critical accounting policies for which significant judgements, estimates or assumptions are made. Valuations Directors obtain independent valuations where appropriate. Directors have considered independent valuations and market evidence where appropriate to determine the appropriate fair value to adopt. Independent property valuations were obtained for almond orchard properties, from independent valuer, CBRE Valuations Pty Limited in June 2017. Independent property valuations were obtained for vineyard properties from independent valuer, Gaetjens Pickett Valuers in June 2017. Independent property valuations were obtained for the cattle properties situated near the Gulf of Carpentaria in Queensland from independent valuer, Herron Todd White in June 2017. Independent valuations were completed for properties within the last 12 months for the Central Queensland cattle and cotton properties and the Tocabil almond orchard property. CBRE Valuations Pty Limited completed the valuation on the cattle property in December 2016, and the cotton property in October 2016. Colliers International Consultancy and Valuation Pty Limited completed the valuation on the Tocabil property in November 2016. The Directors have concluded that there has been no material change to the industry and geographical conditions in which the independent valuers previously assessed these assets. Valuations have not been commissioned for the year end and as such, Directors’ valuations have been adopted for these properties in the financial statements. Independent valuations were not completed during the year for the poultry property and infrastructure and the macadamia orchard properties. The poultry property and infrastructure have not been independently valued due to the Directors adopting a more conservative view in line with assumptions applied with those assets. The macadamia orchard properties have not been independently valued due to the value of the assets and as there has been no material change to the industry and geographical conditions of the properties in which the independent valuers previously assessed these assets. Directors’ valuations have been adopted for these properties in the financial statements. The Group’s properties, including those under development, are valued at fair value excluding the value of water rights. Water rights are treated as intangible assets, which are held at historical cost less accumulated impairment losses. The valuation model used judgement by using discount rates, capitalisation rates and comparable sales in calculating the values and allocating those values over investment property and bearer plants. Recognition of deferred tax assets The recognition of deferred tax assets is based upon whether it is more likely than not that sufficient and suitable taxable profits will be available in the future against which the reversal of temporary differences can be deducted. To determine future taxable profits, reference is made to the latest available profit forecasts. Where the temporary differences are related to losses, relevant tax law is considered to determine the availability of the losses to offset against the future taxable profits. Recognition therefore involves judgement regarding the future financial performance of the particular legal entity or tax group in which the deferred tax asset has been recognised. Historical differences between forecast and actual taxable profits have not resulted in material adjustments to the recognition of deferred tax assets. 60 Rural Funds Group Notes to the Financial Statements 30 June 2017 3 Significant accounting judgements, estimates and assumptions (continued) Valuation of Barossa Infrastructure Limited and Coleambally Irrigation Co-operative Limited shares The shares in Barossa Infrastructure Limited (BIL) and Coleambally Irrigation Co-operative Limited (CICL) have been valued using the number of megalitres of water that the Group is entitled to under the BIL and CICL schemes as supported by an external valuation on an 'in use' basis, or at initial cost. These methods are used due to a lack of evidence of trading in BIL and CICL shares. 4 Working capital The deficiency in working capital at 30 June 2017 is due to the timing of distributions. Based on the forecast cash flows, the Group believes it can pay all of its debts as and when they fall due. 5 Segment information The Group operates in one operating segment (2016: one segment), being the holding and leasing of agricultural property and equipment. Water rights and entitlements The Board reviews the business based on the internal and external valuations of its properties. Permanent water rights and entitlements are held at historical cost less accumulated impairment losses. The book value of the water rights (including investments in BIL and CICL) at 30 June 2017 is $121,469,000 (2016: $69,534,000). In June 2017 independent property valuations were performed by CBRE Valuations Pty Limited on the almond orchard properties that attribute a value to the water entitlements held by the Group. The Directors consider that these valuations are reasonable estimates of the fair value at 30 June 2017. These valuations value the water rights at 30 June 2017 at $166,012,000 (2016: $97,949,000) representing a movement in the value of the water rights above cost of $44,543,000 (2016: $28,415,000). The following is a comparison of the book value at 30 June 2017 to an adjusted value based on the Directors' valuation of the water rights. Per Statutory Consolidated Statement of Financial Position Revaluation of water entitlements per Directors' valuation Adjusted Consolidated Statement of Financial Position $'000 $'000 $'000 10,246 532,757 543,003 14,710 170,615 185,325 357,678 1.41 - 44,543 44,543 - - - 44,543 0.17 10,246 577,300 587,546 14,710 170,615 185,325 402,221 1.58 Assets Total current assets Total non-current assets Total assets Liabilities Total current liabilities Total non-current liabilities Total liabilities (excluding net assets attributable to unitholders) Net assets attributable to unitholders Net asset value per unit ($) RURAL FUNDS GROUP ANNUAL REPORT 2017 | 61 Rural Funds Group Notes to the Financial Statements 30 June 2017 6 Revenue Rental revenue Interest received Total 7 Income tax expense The major components of income tax expense comprise: Current tax Deferred tax Adjustments in respect of current income tax of previous years Adjustments in respect of deferred income tax of previous years Income tax expense/(benefit) reported in the Statement of Comprehensive Income Income tax expense is attributable to: Profit from continuing operations Total 2017 $'000 41,479 94 41,573 2017 $'000 - 2,021 - (180) 1,841 1,841 1,841 Deferred income tax expense/(benefit) included in income tax expense comprises: Decrease in deferred tax assets Increase/(decrease) in deferred tax liabilities Total 1,120 721 1,841 Amounts charged or credited directly to equity Capitalised issue costs Change in fair value taken through asset revaluation reserve Total 2017 $'000 (16) (101) (117) Numerical reconciliation of income tax expense to prima facie tax payable Accounting profit before tax from continuing operations At the statutory income tax rate of 30% (2016: 30%) Tax effect of amounts that are not deductible/(taxable) in determining taxable income Adjustments in respect of tax of previous years Imputation credits received Total 2017 $'000 45,167 13,550 (11,504) (180) (25) 1,841 2016 $'000 26,469 80 26,549 Restated 2016 $'000 - 957 (29) (6) 922 922 922 2,332 (1,382) 950 Restated 2016 $'000 (6) 253 247 Restated 2016 $'000 439 132 884 (35) (59) 922 62 Rural Funds Group Notes to the Financial Statements 30 June 2017 7 Income tax expense (continued) From 1 July 2014 both Rural Funds Trust and RFM Chicken Income Fund (a subsidiary of Rural Funds Trust) are flow through trusts for tax purposes. As a result, it is no longer probable that a lax liability will be incurred in these entities in relation to future sale of assets for a gain or through trading. Franking credits At 30 June 2017 there are $156,000 of franking credits available to apply to future RF Active income distributions (2016: $59,000). 8 Remuneration of auditors During the year the following fees were paid or payable for services provided by the auditor of the Group: PricewaterhouseCoopers Australia: Audit and review of financial statements Compliance audit Total 9 Cash and cash equivalents Cash at bank Total Reconciliation of cash 2017 $ 250,637 6,370 257,007 2017 $'000 3,838 3,838 2016 $ 210,508 6,121 216,629 2016 $'000 3,034 3,034 Cash and cash equivalents reported in the Consolidated Statement of Cash Flows are reconciled to the equivalent items in the Consolidated Statement of Financial Position as follows: Cash and cash equivalents 3,838 3,034 10 Trade and other receivables Current Trade receivables Sundry receivables Receivables from related parties Total 2017 $'000 1,756 1,175 1,677 4,608 2016 $'000 6,056 433 750 7,239 Trade receivables are non-interest bearing and are generally on 30 day terms. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 63 0 0 0 $ ' 2 6 4 , 1 2 4 8 3 , 7 1 1 - ) 7 2 ( ) 2 1 8 ( ) 7 8 6 , 1 1 ( 0 2 3 , 6 2 1 4 2 4 0 0 0 $ ' 9 4 4 , 7 1 - - - 6 1 9 , 1 9 8 7 , 9 1 0 0 0 $ ' 3 4 1 , 6 - - - - ) 4 2 ( 9 1 1 , 6 - - - 0 0 0 $ ' 4 1 6 , 9 8 0 5 2 , 9 1 5 8 2 , 5 9 ) 9 7 5 , 3 1 ( 0 0 0 $ ' 9 9 7 , 3 8 8 7 , 1 ) 7 2 ( ) 2 1 8 ( 9 7 3 - 7 2 1 , 5 9 7 3 0 0 0 $ ' - - - - - ) 9 7 3 ( t t n u o m a k o o b t e n g n n e p O i s n o i t i d d A n e m r i a p m i d n a n o i t i a c e r p e D s r e f s n a r T l s a s o p s D i t n u o m a k o o b t e n g n s o C i l e u a v l r i a f n i e g n a h C l a t o T - s t n a l P r e r a e B - s t n a l P r e r a e B - s t n a l P r e r a e B s d r a y e n V i s a i m a d a c a M s d n o m A l d n a t n a l P t n e m p u q e i s s e r g o r p n i s k r o w l a t i p a C d e t a t s e R 6 1 0 2 0 0 0 $ ' 4 3 7 , 0 7 9 4 9 , 0 2 ) 8 5 ( ) 6 3 7 ( 5 9 4 , 6 2 4 8 3 , 7 1 1 - - - 0 0 0 $ ' 6 4 8 , 4 2 ) 7 9 3 , 7 ( 9 4 4 , 7 1 - - - 0 0 0 $ ' 0 3 9 , 6 ) 7 8 7 ( 3 4 1 , 6 - - 0 0 0 $ ' 5 3 7 , 2 4 0 0 2 , 2 1 9 7 6 , 4 3 4 1 6 , 9 8 0 0 0 $ ' 9 0 1 , 3 4 8 4 , 1 ) 8 5 ( ) 6 3 7 ( - 9 9 7 , 3 4 4 5 3 3 0 0 0 $ ' - - - 9 7 3 t n u o m a k o o b t e n g n n e p O i s n o i t i d d A t n u o m a k o o b t e n g n s o C l i e u a v l r i a f n i e g n a h C n o i t i a c e r p e D l s a s o p s D i l a t o T - s t n a l P r e r a e B - s t n a l P r e r a e B - s t n a l P r e r a e B s d r a y e n V i s a i m a d a c a M s d n o m A l d n a t n a l P t n e m p u q e i s s e r g o r p n i s k r o w l a t i p a C 7 1 0 2 s t n e m e t a t S i l a i c n a n F e h t o t s e t o N 7 1 0 2 e n u J 0 3 p u o r G s d n u F l a r u R 64 i t n e m p u q e d n a t n a P l 1 1 Rural Funds Group Notes to the Financial Statements 30 June 2017 12 Investment property Opening balance Acquisitions Additions Change in fair value Disposals Total 2017 $'000 168,951 64,452 23,189 17,191 - 273,783 2016 $'000 142,379 1,116 23,275 3,343 (1,162) 168,951 Amounts recognised in profit and loss Rental income from investment property, bearer plants and water entitlements Change in fair value 39,077 17,191 25,319 3,343 Direct operating expenses incurred during the year that did not generate rental income amounted to $97,000 (2016: $100,000). Leasing arrangements Minimum lease payments receivable under non-cancellable operating leases of investment properties, bearer plants, plant and equipment and water rights not recognised in the financial statements, are receivable as follows: Within one year Later than one year, but not later than five years Later than five years Total 13 Other current assets Prepayments Deposits Deposits - water purchases Total 44,683 204,238 547,107 796,028 2017 $'000 401 1,399 - 1,800 35,318 156,153 458,560 650,031 2016 $'000 118 1,066 1,317 2,501 RURAL FUNDS GROUP ANNUAL REPORT 2017 | 65 Rural Funds Group Notes to the Financial Statements 30 June 2017 14 Financial assets Non-current Investment - BIL Investment - CICL Investment - RFM Poultry Finance Lease - Breeders Investment - Macadamias Processing Co Total 2017 $'000 509 12,222 130 10,953 102 23,916 2016 $'000 509 9,334 133 - 102 10,078 Coleambally Irrigation Co-operative Limited (CICL) is Australia's fourth largest irrigation company and is wholly owned by its farmer members. CICL's irrigation delivery system delivers water to 400,000 hectares of area across the Coleambally Irrigation District, in the Riverina, near Griffith, NSW. 15 Investments accounted for using the equity method RFM StockBank Perth Markets Limited 2016 $'000 2016 $'000 2017 $'000 2017 $'000 Summarised financial information for associates Summarised balance sheet Total current assets Total non-current assets Total current liabilities Total non-current liabilities Net assets 568 - (568) - - 14,670 - (3,053) - 11,617 - - - - - 6,714 135,014 (2,506) (81,777) 57,445 Reconciliation to carrying amounts Opening net assets Net assets at date of gaining significant influence through: - Initial equity issue Profit for the period Distributions paid during the period Other comprehensive income Distributions provided for Disposal of interest in Perth Markets Limited during the year Closing net assets Group's share in % Group's share in $'000 Carrying value of investment 11,617 11,643 57,445 - 238 (11,406) - (449) - - 33.50% - - 588 - - (614) - 24,027 (3,471) 3,077 - - (81,078) 11,617 33.50% 3,894 3,894 - 0.00% - - 56,416 1,029 - - - - 57,445 8.96% 5,147 5,147 66 Rural Funds Group Notes to the Financial Statements 30 June 2017 15 Investments accounted for using the equity method (continued) RFM StockBank Perth Markets Limited 2016 2017 2017 2016 Summarised statement of comprehensive income Revenue Profit from continuing operations Other comprehensive income Total comprehensive income $'000 $'000 $'000 $'000 741 239 - 239 2,328 588 - 588 11,303 24,027 3,077 27,104 5,764 1,029 - 1,029 Distributions received or receivable from associate 4,018 173 323 - The Group sold its 8.96% interest in Perth Markets Limited (PML), a stapled entity which owns the Market City site in Canning Vale, WA. RFF acquired 5,275,000 PML securities at $1 per security in February 2016, and sold them during March 2017 at $1.147 per security. RFM, as Responsible Entity for RFM StockBank, has commenced the windup of RFM StockBank. A final capital return was paid to investors on 9 August 2017. There are no commitments or contingencies relating to investments accounted for using the equity method. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 67 l a t o T 0 0 0 $ ' 1 9 6 , 9 5 8 5 7 , 9 4 ) 1 1 7 ( 8 3 7 , 8 0 1 2 5 6 , 9 0 1 r e h t O 0 0 0 $ ' - ) 4 5 ( 0 3 4 , 4 3 6 7 3 , 4 3 0 3 4 , 4 3 0 0 0 $ ' n o t t o C - - 2 7 6 , 3 2 7 6 , 3 2 7 6 , 3 ) 4 1 9 ( ) 4 5 ( - 8 3 7 , 8 0 1 6 7 3 , 4 3 2 7 6 , 3 l a t o T 0 0 0 $ ' 5 6 9 , 8 2 1 8 3 , 0 3 8 4 5 ) 3 0 2 ( 1 9 6 , 9 5 4 9 8 , 9 5 ) 3 0 2 ( 1 9 6 , 9 5 - - - - - - - - - - - - - - - - r e h t O 0 0 0 $ ' 0 0 0 $ ' n o t t o C s a i m a d a c a M s d r a y e n V i e r u t c u r t s a r f n i y r t l u o P s d n o m A l 7 1 0 2 0 0 0 $ ' 0 0 0 $ ' 0 0 0 $ ' - 2 0 6 6 0 2 8 0 8 8 0 8 - 8 0 8 - - 0 0 5 - 0 0 5 0 0 5 0 0 5 - - 9 4 0 , 1 - 9 4 0 , 1 9 4 0 , 1 9 4 0 , 1 0 0 0 $ ' 0 4 5 , 7 5 0 5 4 , 1 1 ) 7 5 6 ( 3 3 3 , 8 6 3 9 1 , 9 6 ) 0 6 8 ( 3 3 3 , 8 6 t n u o m a k o o b t e n g n n e p O i t n e r r u c - n o N t n e m r i a p m I s n o i t i d d A t n u o m a k o o b t e n g n s o C l i t s o C d n a n o i t a s i t r o m a d e a u m u c c A t l t n u o m a k o o b t e N t n e m r i a p m i s a i m a d a c a M s d r a y e n V i e r u t c u r t s a r f n i y r t l u o P s d n o m A l 6 1 0 2 0 0 0 $ ' 0 0 0 $ ' 0 0 0 $ ' - - 4 5 8 4 5 2 0 6 2 0 6 - 2 0 6 0 0 5 9 4 0 , 1 - - - - 0 0 5 0 0 5 0 0 5 - - - - 9 4 0 , 1 9 4 0 , 1 9 4 0 , 1 0 0 0 $ ' - 6 1 4 , 7 2 7 2 3 , 0 3 ) 3 0 2 ( 0 4 5 , 7 5 3 4 7 , 7 5 ) 3 0 2 ( 0 4 5 , 7 5 t n u o m a k o o b t e n g n n e p O i t n e r r u c - n o N s n o i i t i s u q c A t n e m r i a p m I s n o i t i d d A d n a n o i t a s i t r o m a d e a u m u c c A t l t n u o m a k o o b t e N t n e m r i a p m i t s o C t n u o m a k o o b t e n g n s o C l i . s t n e m e l t i t n e d n a s t h g i r r e t a w f o n o i t a u a v l ’ s r o t c e r i D r o f 5 e t o n o t r e f e R . s t n e m e l t i t n e d n a s t h g i r r e t a w f o p u e d a m e r a s t e s s a l i e b g n a t n I s t n e m e t a t S i l a i c n a n F e h t o t s e t o N 7 1 0 2 e n u J 0 3 p u o r G s d n u F l a r u R 68 s t e s s a l i e b g n a t n I 6 1 Rural Funds Group Notes to the Financial Statements 30 June 2017 17 Trade and other payables Trade payables Accruals Sundry creditors Total 18 Interest bearing liabilities Current Equipment loans (ANZ) Total Non-current Borrowings (ANZ) Borrowings (Rabobank) Total 2017 $'000 1,087 1,375 2,676 5,138 2017 $'000 3,204 3,204 2016 $'000 659 694 5,567 6,920 2016 $'000 3,030 3,030 105,280 59,220 164,500 146,500 - 146,500 RURAL FUNDS GROUP ANNUAL REPORT 2017 | 69 , d n u F e m o c n I i n e k c h C M F R , t s u r T s d n u F l a r u R r o f i n a d o t s u c s a ) L T E A ( d e t i m L i e e t s u r T r o t u c e x E n a i l a r t s u A y b l d e h s t e s s a e h t r e v o e g r a h c g n i t a o l f d n a d e x i f a d n a ; e v i t c A F R d n a ) t s u r T s d n u F l a r u R i i f o y r a d s b u s a ( d n u F e n W n a i i l a r t s u A M F R i i . s e i r a d s b u s s t i d n a t s u r T s d n u F l a r u R i r o f n a d o t s u c s a L T E A y b d e d v o r p s e i r a d s b u s s t i i i i d n a t s u r T s d n u F l a r u R e h t y b d e n w o y t r e p o r p l l a r e v o s e g a g t r o m d e r e t s g e r i L A T O T 0 0 0 $ ' 1 7 1 , 2 8 4 7 2 1 , 5 9 5 4 , 5 4 7 5 7 , 2 3 5 L A T O T 8 7 1 , 4 0 0 0 $ ' 1 9 6 , 1 5 3 9 6 8 , 5 5 3 - - 7 2 1 , 5 7 2 1 , 5 0 0 0 $ ' d n a t n a l P t n e m p u q e i - s t e s s a 0 0 0 $ ' 3 3 8 , 2 1 3 8 0 , 1 1 6 1 9 , 3 2 - - 0 0 0 $ ' 3 9 1 , 1 2 1 3 9 1 , 1 2 1 s t n a l P r e r a e B l a i c n a n F i - i t n e m p u q e d n a t n a l P - 0 0 0 $ ' 2 6 3 , 4 7 6 7 3 , 4 3 r e t a W s e c n e c i l - - 0 0 0 $ ' 3 8 7 , 3 7 2 y t r e p o r p t n e m t s e v n I 8 3 7 , 8 0 1 3 8 7 , 3 7 2 - 0 0 0 $ ' 8 7 1 , 4 8 7 1 , 4 - 0 0 0 $ ' 3 4 8 , 9 3 4 8 , 9 - 0 0 0 $ ' 6 0 2 , 3 1 1 6 0 2 , 3 1 1 d n a t n a l P t n e m p u q e i s t e s s a l a i c n a n F i s t n a l P r e r a e B - i t n e m p u q e d n a t n a l P 0 0 0 $ ' 1 9 6 , 9 5 r e t a W s e c n e c i l - 1 9 6 , 9 5 - 0 0 0 $ ' 1 5 9 , 8 6 1 1 5 9 , 8 6 1 y t r e p o r p t n e m t s e v n I s e i t r e p o r P d e s a e L : e g a g t r o M s n a o l t n e m p u q E i s t e s s a r e h O t l a t o T d e t a t s e R 6 1 0 2 s e i t r e p o r P d e s a e L : e g a g t r o M s n a o l t n e m p u q E i l a t o T 7 1 0 2 : s n a o l e h t r e v o y t i r u c e s s a d e g d e p e r a l s t e s s a g n w o i l l o f e h T : y b d e r u c e s e r a ) k n a b o b a R ( p u o r G a i l a r t s u A k n a b o b a R d n a ) Z N A ( i p u o r G g n k n a B d n a a e Z w e N d n a n a l i l a r t s u A h t i i w s g n w o r r o B s t n e m e t a t S i l a i c n a n F e h t o t s e t o N 7 1 0 2 e n u J 0 3 ) d e u n i t n o c ( s e i t i l i b a i l g n i r a e b t s e r e t n I 8 1 p u o r G s d n u F l a r u R 70 Rural Funds Group Notes to the Financial Statements 30 June 2017 18 Interest bearing liabilities (continued) Loan amounts are provided at the Bankers’ floating rate, plus a margin. For bank reporting purposes, these assets are valued at market value. Refer to note 5 for Directors’ valuation of water rights and entitlements. Borrowings At 30 June 2017 the core debt facility available to the Group, and due to expire in December 2019, was $250,000,000 (2016: $147,500,000). As at 30 June 2017 RFF had active interest rate swaps totalling 53.5% (2016: 60%) of the drawn down balance to manage interest rate risk. Loan covenants Under the terms of the borrowing facility, the Group is required to comply with the following financial covenants: maintenance of a maximum loan to value ratio of 50%; maintenance of net tangible assets (including water entitlements) in excess of $200,000,000; and, an interest cover ratio for the Group not less than 2.75:1.00. Rural Funds Group has complied with the financial covenants of its borrowing facilities during the year. 19 Other non-current liabilities Lessee deposits Total 20 Derivative financial instruments Non-current Interest rate swaps Total other liabilities 2017 $'000 1,634 1,634 2017 $'000 3,878 3,878 2016 $'000 1,634 1,634 2016 $'000 9,190 9,190 RURAL FUNDS GROUP ANNUAL REPORT 2017 | 71 Rural Funds Group Notes to the Financial Statements 30 June 2017 21 Deferred tax Deferred tax liabilities Plant and equipment - bearer plants Plant & equipment Fair value investment property Gross deferred tax liabilities Set off of deferred tax assets Net deferred tax liabilities Deferred tax assets Investments Legal costs Other Unused income tax losses Gross deferred tax assets Set off of deferred tax liabilities Net deferred tax assets 2017 $'000 4,103 1,936 1,519 7,558 (6,955) 603 227 36 53 6,639 6,955 (6,955) - 2016 $'000 3,513 2,381 515 6,409 (6,409) - 227 80 21 7,201 7,529 (6,409) 1,120 The deferred tax assets include an amount of $6,955,000 (2016: $7,200,000), which includes $6,615,000 (2016: $7,151,000) of carried forward tax losses of the RFM Australian Wine Fund. The Group has concluded that the deferred tax assets will be recoverable using the estimated future taxable income based on budgets and the contracted cash flows of the subsidiary. The losses can be carried forward indefinitely and have no expiry date. 22 Recognised tax assets and liabilities Current income tax Deferred income tax Opening balance Credited/(charged) to income Credited to equity 2017 $'000 - - - 2016 $'000 (29) 29 - Closing balance Tax expense/(credit) in the Consolidated Statement of Comprehensive Income Amounts recognised in the Consolidated Statement of Financial Position: Deferred tax asset - - Deferred tax liability 2017 $'000 1,120 (1,841) 118 (603) 1,841 2016 $'000 2,317 (950) (247) 1,120 922 - (603) 1,120 - 72 Rural Funds Group Notes to the Financial Statements 30 June 2017 23 Issued units Units on issue at the beginning of the year (thousands) Units issued during the year (thousands) Distributions to unitholders 2017 2016 No. 165,357 $'000 135,793 No. 132,142 $'000 113,034 89,024 - 136,696 (16,543) 33,215 - 35,148 (12,389) Units on issue at the end of the year 254,381 255,946 165,357 135,793 The holders of ordinary units are entitled to participate in distributions and the proceeds on winding up of the Group. On a show of hands at meetings of the Group, each holder of ordinary units has one vote in person or by proxy, and upon a poll each unit is entitled to one vote. The Group does not have authorised capital or par value in respect of its units. 24 Asset revaluation reserve Opening balance Bearer plants revaluation Net decrement in financial assets Total comprehensive income Income tax applicable Closing balance 25 Distributions The Group paid and declared the following distributions in the year: Distribution paid 29 July 2016 Distribution paid 28 October 2016 Distribution paid 31 January 2017 Distribution paid 28 April 2017 Distribution declared 7 June 2017, paid 31 July 2017 26 Earnings per unit Per stapled unit Net profit after income tax for the year ($'000) Weighted average number of units on issue during the year Basic and diluted earnings per unit (total) (cents) 2017 $'000 36,663 (9,189) - (9,189) 101 27,575 Cents per unit 2.2325 2.4100 2.4100 2.4100 2.4100 Restated 2016 $'000 1,406 35,524 (14) 35,510 (253) 36,663 Total $ 3,691,602 4,986,940 4,996,810 5,006,323 6,130,580 2017 Restated 2016 43,326 204,617,207 (483) 154,854,317 21.17 (0.31) RURAL FUNDS GROUP ANNUAL REPORT 2017 | 73 Rural Funds Group Notes to the Financial Statements 30 June 2017 26 Earnings per unit (continued) Per unit of Rural Funds Trust Net profit after income tax for the year ($'000) Weighted average number of units on issue during the year Basic and diluted earnings per unit (total) (cents) Per unit of RF Active Net profit after income tax for the year ($'000) Weighted average number of units on issue during the year Basic and diluted earnings per unit (total) (cents) 2017 Restated 2016 43,219 204,617,207 (613) 154,854,317 21.12 (0.39) 107 130 204,617,207 0.05 154,854,317 0.08 27 Capital commitments Significant capital expenditure relating to the Kerarbury almond development, contracted for but not recognised as liabilities is as follows: Bearer plants Investment property Intangible assets Total 28 Fair value measurement of assets and liabilities Fair value hierarchy 2017 $'000 26,265 42,024 16,032 84,321 Restated 2016 $'000 67,955 33,039 39,655 140,649 This note explains the judgements and estimates made in determining the fair values of the financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its financial instruments into the three levels prescribed under the Australian Accounting Standards. AASB 13 Fair Value Measurement requires all assets and liabilities measured at fair value to be assigned to a level in the fair value hierarchy. The level in the fair value hierarchy is determined having regard to the nature of inputs used to determine fair value. The hierarchy is as follows: Level 1 Level 2 Level 3 Fair value based on unadjusted quoted prices in active markets for identical assets or liabilities that the entity can access at the measurement date (such as publicly traded equities). Fair value based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. One or more significant inputs to the determination of fair value is based on unobservable inputs for the asset or liability. 74 Rural Funds Group Notes to the Financial Statements 30 June 2017 28 Fair value measurement of assets and liabilities (continued) Financial assets and liabilities Fair value hierarchy 2017 Recurring fair value measurements Financial assets Equity securities (listed) Equity securities (unlisted) Total Financial liabilities Derivatives Total 2016 Financial assets Equity securities (listed) Equity securities (unlisted) Total Financial liabilities Derivatives Total Level 1 $'000 Level 2 $'000 Level 3 $'000 Total $'000 130 - 130 - - 133 - 133 - - - - - - 12,833 12,833 3,878 3,878 - - - - - 9,190 9,190 - 9,945 9,945 - - 130 12,833 12,963 3,878 3,878 133 9,945 10,078 9,190 9,190 The Group’s policy is to recognise transfers into and out of fair value hierarchy levels at the end of the reporting period. There were no transfers in the current year (2016: nil). Valuation techniques used to determine fair values Specific valuation techniques used to value financial instruments include: the use of quoted market prices or dealer quotes for similar instruments; the present value of the estimated future cash flows based on observable yield curves to determine the fair value of the interest rate swaps; and, discounted cash flow analysis to determine the fair value of the remaining financial instruments. All of the resulting fair value estimates are included in level 1 or 2 except for unlisted equity securities which are level 3, where the fair values have been determined based on present values and the discount rates used were adjusted for counterparty or own credit risk. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 75 Rural Funds Group Notes to the Financial Statements 30 June 2017 28 Fair value measurement of assets and liabilities (continued) Financial assets and liabilities (continued) Fair value measurements using significant unobservable inputs (level 3) The following table presents the changes in level 3 items for the years ended 30 June 2017 and 30 June 2016: Unlisted equity securities Opening balance Additions Losses recognised in other comprehensive income Closing balance Valuation inputs and relationship to fair value 2017 $ 9,945 2,888 - 12,833 2016 $ 520 9,437 (12) 9,945 Description Investment in BIL Investment in CICL Investment in MPC Closing balance Fair value $'000 509 12,222 102 12,833 Unobservable inputs Range of inputs Relationship of unobservable inputs to fair value Price of water entitlements Price of water entitlements +/- 10% +/- 10% +/- $50,000 +/- $121,000 Price of macadamias +/- 10% +/- $10,000 - - - The Group’s investment in Macadamia Processing Co. Limited is held at cost. Non-financial assets Fair value hierarchy This note explains the judgements and estimates made in determining fair values of the non-financial assets that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Group has classified its non-financial assets and liabilities into the three levels prescribed under Australian Accounting Standards as mentioned above. At 30 June 2017 all non-financial assets are level 3. 76 Rural Funds Group Notes to the Financial Statements 30 June 2017 28 Fair value measurement of assets and liabilities (continued) Non-financial assets (continued) 2017 Investment properties Almond orchard property Poultry property and infrastructure Vineyard property Macadamia orchard property Cotton property Cattle property Plant and equipment - bearer plants Almond orchard Vines Macadamia orchard Total non-financial assets Restated 2016 Investment properties Almond orchard property Poultry property and infrastructure Vineyard property Macadamia orchard property Plant and equipment - bearer plants Almond orchard Vines Macadamia orchard Total non-financial assets Level 3 $'000 Total $'000 95,605 83,011 25,435 2,015 24,157 43,560 95,285 19,789 6,119 394,976 58,329 86,011 23,156 1,455 89,614 17,449 6,143 282,157 95,605 83,011 25,435 2,015 24,157 43,560 95,285 19,789 6,119 394,976 58,329 86,011 23,156 1,455 89,614 17,449 6,143 282,157 The Group’s policy is to recognise transfers in to and transfers out of fair value hierarchy levels as at the end of the reporting period. There were no transfers between levels for recurring fair value measurements during the year. Valuation techniques used to determine level 3 fair values Directors obtain independent valuations where appropriate. At the end of each reporting period, the Directors update their assessment of fair value of each property, taking into account the most recent independent valuations. The Directors determine a property’s value within a range of reasonable fair value estimates. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 77 d r a h c r o l a t o T a i m a d a c a M s e n V i d n o m A l d r a h c r o s t n a l p r e r a e b - i t n e m p u q e d n a t n a l P y t r e p o r p t n e m t s e v n I y t r e p o r p y t r e p o r p d r a h c r o y t r e p o r p e l t t a C n o t t o C a i m a d a c a M d r a y e n V i y t r e p o r p y r t l u o P d n a y t r e p o r p d n o m A l d r a h c r o e r u t c u r t s a r f n i y t r e p o r p 0 0 0 $ ' 7 5 1 , 2 8 2 0 0 0 $ ' 3 4 1 , 6 3 6 8 , 2 4 2 5 4 , 4 6 4 0 5 , 5 - - ) 4 2 ( 0 0 0 $ ' 0 0 0 $ ' 0 0 0 $ ' 0 0 0 $ ' 9 4 4 , 7 1 4 1 6 , 9 8 - 6 1 9 , 1 ) 9 7 5 , 3 1 ( 5 8 7 - 4 2 4 - 0 5 2 , 9 1 8 5 2 , 1 7 1 5 , 1 4 - 9 7 0 , 2 5 3 9 , 2 2 ) 7 5 8 ( - - 0 0 0 $ ' 5 5 4 , 1 0 6 5 6 7 9 , 4 9 3 9 1 1 , 6 9 8 7 , 9 1 5 8 2 , 5 9 0 6 5 , 3 4 7 5 1 , 4 2 5 1 0 , 2 0 6 9 , 9 0 2 - ) 2 6 1 , 1 ( - 1 4 6 , 6 0 8 8 , 6 3 5 0 4 , 1 5 2 5 , 5 6 4 8 , 4 2 5 3 7 , 2 4 - - - - - 0 0 2 , 2 1 8 3 8 , 9 2 ) 7 8 7 ( ) 7 9 3 , 7 ( 9 7 6 , 4 3 7 5 1 , 2 8 2 3 4 1 , 6 9 4 4 , 7 1 4 1 6 , 9 8 - - - - - - - - - - - - - 7 3 1 6 1 1 , 1 - 2 0 2 5 5 4 , 1 0 0 0 $ ' 6 5 1 , 3 2 0 0 0 $ ' 1 1 0 , 6 8 - - - - 9 7 2 , 2 5 3 4 , 5 2 ) 0 0 0 , 3 ( 1 1 0 , 3 8 5 3 5 , 3 1 7 1 9 , 1 9 - - - - - - 1 2 6 , 9 6 5 1 , 3 2 ) 6 0 9 , 5 ( 1 1 0 , 6 8 - 0 0 0 $ ' 9 2 3 , 8 5 2 9 2 , 9 1 4 8 9 , 7 1 5 0 6 , 5 9 - 7 2 9 , 6 3 8 3 1 , 3 2 ) 4 7 5 ( ) 2 6 1 , 1 ( 9 2 3 , 8 5 6 1 0 2 y u J 1 l l e c n a a b g n n e p O i s n o i i t i s u q c A s n o i t i d d A t j n e m t s u d a e u a v l r i a F 7 1 0 2 e n u J 0 3 e c n a l a b g n s o C l i 5 1 0 2 y u J 1 l l e c n a a b g n n e p O i s n o i i t i s u q c A s n o i t i d d A l s a s o p s D i t j n e m t s u d a e u a v l r i a F 6 1 0 2 e n u J 0 3 e c n a l a b g n s o C l i ; s e c n e r e f f i d e s o h t t c e l f e r j o t d e t s u d a , s t e k r a m e v i t c a s s e l n i s e i t r e p o r p r a l i m s i f o s e c i r p t n e c e r r o e r u t a n t n e r e f f i d f o s e i t r e p o r p r o f t e k r a m e v i t c a n a n i s e c i r p t n e r r u c . e c n e d v e i t e k r a m i f o s s y a n a l n a m o r f d e v i r e d e t a r n o i t a s i l a t i p a c a d n a , e m o c n i t e k r a m t e n d e t a m ’ i t s e s y t r e p o r p a n o p u d e s a b s n o i t c e o r p e m o c n j i d e s i l a t i p a c d n a ; s w o l f h s a c e r u t u f f o s e t a m i t s e l e b a i l e r n o d e s a b s n o i t c e o r p w o j l f h s a c d e n u o c s d t i ) 3 l e v e l ( s t u p n i l e b a v r e s b o n u t n a c i f i n g s i g n s u i s t n e m e r u s a e m e u a v l r i a F . 3 l e v e l n i d e d u c n l i e r a s e i t r e p o r p r o f s e t a m i t s e e u a v l r i a f g n i t l u s e r l l A n o i t a m r o f n i i r e d s n o c s r o t c e r i D e h t l e b a l i a v a t o n s i n o i t a m r o f n i h c u s e r e h W . s e i t r e p o r p r a l i m s i r o f t e k r a m e v i t c a n a n i s e c i r p t n e r r u c s i e u a v l r i a f f o e c n e d v e i t s e b e h T ) d e u n i t n o c ( s e i t i l i b a i l d n a s t e s s a f o t n e m e r u s a e m e u a v l r i a F 8 2 s t n e m e t a t S i l a i c n a n F e h t o t s e t o N 7 1 0 2 e n u J 0 3 p u o r G s d n u F l a r u R 78 i : g n d u c n l i s e c r u o s f o y t e i r a v a m o r f e l b a v r e s b o n u f o p h s n o i t a l e R i s t u p n i f o e g n a R * s t u p n i e l b a v r e s b o n U t a e u l a v r i a F n o i t p i r c s e D r o f e v o b a e e S . s t n e m e r u s a e m e u a v l r i a f 3 l e v e l g n i r r u c e r n i d e s u s t u p n i l e b a v r e s b o n u t n a c i f i n g s e h t i t u o b a n o i t a m r o f n i e v i t a t i t n a u q e h t s e s i r a m m u s e b a l t i g n w o l l o f e h T . d e t p o d a s e u q n h c e i t n o i t a u a v l e h t e u l a v r i a f o t s t u p n i . e u a v l r i a f d n a t n u o c s d e h t i r e h g h i e h T e h t r e w o l e h t , e t a r n o i t a s i l a t i p a c % 6 1 0 2 a / n % 0 0 . 9 % 7 1 0 2 % 5 7 . 8 % 0 5 . 8 e t a r e t a r t n u o c s D i n o i t a s i l a t i p a C 6 1 0 2 0 0 0 $ ' 7 1 0 2 0 0 0 $ ' 3 4 9 , 7 4 1 0 9 8 , 0 9 1 y t r e p o r p d r a h c r o d n o m A l * * ) s e c n e c i l r e t i a w g n d u c x e ( l , e t a r n o i t a s i l a t i p a c e h t r e h g h i e h T % 0 0 . 3 1 - % 5 7 . 0 1 % 0 2 . 4 1 - % 5 7 . 0 1 e t a r n o i t a s i l a t i p a C 1 1 0 , 6 8 1 1 0 , 3 8 d n a y t r e p o r p y r t l u o P ) d e u n i t n o c ( s e i t i l i b a i l d n a s t e s s a f o t n e m e r u s a e m e u a v l r i a F 8 2 s t n e m e t a t S i l a i c n a n F e h t o t s e t o N 7 1 0 2 e n u J 0 3 p u o r G s d n u F l a r u R e u a v l r i a f o t i s p h s n o i t l a e r d n a s t u p n i n o i t l a u a V . e u a v l r i a f e h t r e w o l e h t . e u a v l r i a f e h t r e w o l l . e u a v e h t r e h g h i e h t , d n a l f o e r a t c e h r e p e u a v l e h t r e h g h i e h T . e u a v l r i a f e h t r e w o l h c a e r e p e u a v l e h t r e h g h i e h T e h t , e t a r t n u o c s d e h t i r e h g h i e h T a / n e h t , e t a r t n u o c s d e h t i r e h g h i e h T a / n . e u a v l r i a f e h t r e w o l e h t , e t a r t n u o c s d e h t i i r e h g h e h T % 5 7 . 9 , y t i c a p a c g n y r r a c i i l t n e a v u q e t l u d a % 5 5 . 9 % 0 0 . 9 % 0 0 . 9 0 5 2 , 4 $ - 0 5 6 $ e t a r t n u o c s D i l t n e a v u q e i t l u d a r e p $ 0 0 0 , 7 1 $ - 0 0 2 , 1 $ e s u y b a e r a d n a l f o a h r e p $ e t a r t n u o c s D i - - 7 5 1 , 4 2 d n a y t r e p o r p n o t t o C * * ) s e c n e c i l i g n d u c x e ( l e r u t c u r t s a r f n i 0 6 5 , 3 4 d n a y t r e p o r p e l t t a C * * ) s e s n e c i l t r e a w i g n d u c x e ( l e r u t c u r t s a r f n i e t a r t n u o c s D i 5 0 6 , 0 4 4 2 2 , 5 4 r e t i a w g n d u c x e ( l d r a y e n V i i g n d u c x e ( l e r u t c u r t s a r f n i * * ) s e c n e c i l t r e a w y t i c a p a c g n y r r a c i * * ) s e s n e c i l t r e a w . e u a v l e h t r e h g h i e h t , e t a r n o i t a s i l a t i p a c e h t r e h g h i e h T % 0 0 . 9 % 0 0 . 9 e t a r t n u o c s D i 8 9 5 , 7 4 3 1 , 8 y t r e p o r p d r a h c r o a m a d a c a M i . e u a v l r i a f e h t r e w o l e h t * * ) s e c n e c i l r e t i a w g n d u c x e ( l . s t n e m e t a t s l i a c n a n i f d e t a d i l o s n o c e h t o t 6 1 e t o n n i d e l i a t e d s a , t n e m r i a p m i l d e t a u m u c c a s s e l t s o c l a c i r o t s h i t a l d e h e r a s e c n e c i l t r e a W * * . s e u a v l r i a f t c e f f a y l l a i r e t a m t a h t s t u p n i l e b a v r e s b o n u n e e w t e b i s p h s n o i t a e r - r e t n l i t n a c i f i n g s i o n e r e w e r e h T * RURAL FUNDS GROUP ANNUAL REPORT 2017 | 79 Rural Funds Group Notes to the Financial Statements 30 June 2017 28 Fair value measurement of assets and liabilities (continued) Valuation processes Directors obtain independent valuations where appropriate. Directors have considered independent valuations and market evidence where appropriate to determine the appropriate fair value to adopt. The main level 3 inputs used by the Group include discount rates and capitalisation rates estimated in the respective valuations based on comparable transactions and industry data. Changes in level 3 fair values are analysed at each reporting date during the valuation discussion between management and external valuers. As part of this discussion management presents updated model inputs and explains the reason for any fair value movements. 29 Financial risk management The Group is exposed to a variety of financial risks through its use of financial instruments. This note discloses the Group‘s objectives, policies and processes for managing and measuring these risks. The Group‘s overall risk management plan seeks to minimise potential adverse effects due to the unpredictability of financial markets. The Group does not speculate in financial assets. The most significant financial risks which the Group is exposed to are described below: Specific risks Market risk - interest rate risk and price risk Credit risk Liquidity risk Financial instruments used The principal categories of financial instrument used by the Group are: Trade receivables Cash at bank Bank overdraft Trade and other payables Floating rate bank loans Interest rate swaps Financial risk management policies Risks arising from holding financial instruments are inherent in the Group’s activities and are managed through a process of ongoing identification, measurement and monitoring. The Responsible Entity is responsible for identifying and controlling the risks that arise from these financial instruments. The risks are measured using a method that reflects the expected impact on the results and net assets attributable to unitholders of the Group from changes in the relevant risk variables. Information about these risk exposures at the reporting date, measured on this basis, is disclosed below. Concentrations of risk arise where a number of financial instruments or contracts are entered into with the same counterparty, or where a number of counterparties are engaged in similar business activities that would cause their ability to meet contractual obligations to be similarly affected by changes in economic, political or other conditions. 80 7 1 0 2 0 0 0 $ ' 0 0 0 $ ' 6 1 0 2 7 1 0 2 0 0 0 $ ' 6 1 0 2 0 0 0 $ ' 7 1 0 2 0 0 0 $ ' 6 1 0 2 0 0 0 $ ' 7 1 0 2 0 0 0 $ ' 6 1 0 2 0 0 0 $ ' 7 1 0 2 0 0 0 $ ' s t n u o m a e h T . 7 1 0 2 e n u J 0 3 t a s a s e i t i l i b a i l d n a s t e s s a l i a c n a n i f i d e s n g o c e r m o r f g n i t l u s e r t s e r e t n i d n a s t n e m y a p e r d e x i f y l l a u t c a r t n o c l l a s t c e l f e r w o e b l l e b a t e h T ) d e u n i t n o c ( t n e m e g a n a m k s i r l i a c n a n F i t n e m e g a n a m l a t i p a c d n a k s i r y t i i d u q L i i g n s u d e t a m i t s e n e e b e v a h s w o l f h s a c e h t e r e h w e g n a h c x e f o s l l i b d n a s p a w s e t a r t s e r e t n i r o f t p e c x e , s w o l f h s a c d e t n u o c s d n u i l a u t c a r t n o c e h t e r a e b a l t e h t n i d e s o c s d i l l a t o T s r a e y 5 r e v O s r a e y 5 o t 3 s r a e y 3 o t 1 r a e y 1 o t s h t n o m 6 s h t n o m 6 n a h t s s e L . e t a d g n i t r o p e r e h t t l a e b a c i l p p a s e t a r t s e r e n t i - 6 1 0 2 0 0 0 $ ' 4 3 0 , 3 9 3 2 , 7 - 9 0 5 4 3 3 , 9 2 0 1 3 3 1 - 0 2 9 , 6 8 4 4 , 3 0 9 1 , 9 8 3 1 , 5 9 1 6 , 3 8 7 8 , 3 0 6 8 , 1 6 1 8 0 7 , 7 7 1 8 1 4 , 1 8 1 3 4 3 , 0 9 1 - - 9 4 1 7 7 0 , 7 6 2 2 , 7 - - 4 5 1 7 0 7 , 2 1 6 8 , 2 1 5 3 , 0 2 1 8 7 , 2 4 8 7 0 , 0 1 7 0 3 , 8 2 8 3 8 , 3 8 0 6 , 4 9 0 5 2 7 3 , 1 2 2 2 2 , 2 1 2 0 1 0 3 1 - - - 9 0 5 4 3 3 , 9 2 0 1 3 3 1 - - 9 0 5 4 4 3 , 5 1 2 2 2 , 2 1 2 0 1 0 3 1 - - - - - - - - - - 3 0 8 4 4 2 - - - - - - 3 1 4 , 2 3 1 4 , 2 - - 4 7 8 4 9 2 7 4 0 , 1 8 6 1 , 1 5 0 6 , 8 5 1 9 4 7 , 5 7 1 7 0 0 , 4 5 9 6 , 2 3 3 5 , 0 1 0 7 8 , 7 - 4 6 5 , 1 1 0 3 , 1 - 7 7 8 6 6 5 , 1 - - 7 4 4 - - 4 9 4 0 4 7 , 5 5 1 6 0 3 , 3 7 1 0 6 5 , 3 1 0 2 , 2 0 6 5 , 2 0 2 9 , 6 5 8 4 8 6 5 - 1 0 2 , 2 8 3 1 , 5 1 3 5 - - - - - - - - - - - - - - 3 1 4 , 2 3 1 4 , 2 - - - - - - - - - - 1 0 6 - - - - 6 1 0 2 0 0 0 $ ' 4 3 0 , 3 9 3 2 , 7 - - - - - - - - - 1 0 6 8 0 6 , 4 7 1 0 2 0 0 0 $ ' 8 3 8 , 3 s t 1 0 6 3 7 2 , 0 1 7 4 0 , 9 l n e a v u q e i h s a c d n a h s a C r e h t o d n a e d a r T s t e s s a l i a c n a n F i l s e b a v e c e r i s r e d e e r B - e s a e L e c n a n F i L C C I C P M P F R I L B - - - - t n e m t s e v n I t n e m t s e v n I t n e m t s e v n I t n e m t s e v n I l a t o T s e i t i l i b a i l g n i r a e b t s e r e t n I l s e b a y a p r e h t o d n a e d a r T s p a w s t e a r t s e r e t n I s n a o l t n e m p u q E i l a t o T s e i t i l i b a i l l i a c n a n F i i . d e n a t n a m e r a i s e i t i l i c a f i g n w o r r o b d e s i l i t u n u e t a u q e d a t a h t g n i r u s n e d n a s w o l f h s a c t s a c e r o f g n i r o t i n o m y b k s i r y t i i d u q i l s e g a n a m p u o r G e h T 9 2 RURAL FUNDS GROUP ANNUAL REPORT 2017 | 81 s t n e m e t a t S i l a i c n a n F e h t o t s e t o N 7 1 0 2 e n u J 0 3 p u o r G s d n u F l a r u R Rural Funds Group Notes to the Financial Statements 30 June 2017 29 Financial risk management (continued) Liquidity risk and capital management (continued) The Responsible Entity of the Group defines capital as net assets attributable to unitholders. The Group's objectives when managing capital are to safeguard the going concern of the Group and to maintain an optimal capital structure. The Group is able to maintain or adjust its capital by divesting assets to reduce debt or adjusting the amount of distributions paid to unitholders. Interest rate swaps held for hedging Interest rate risk is managed by using a floating rate debt and through the use of interest rate swap contracts. The Group does not speculate in the trading of derivative instruments. Interest rate swap transactions are entered into by the Trust to exchange variable and fixed interest payment obligations to protect long-term borrowings from the risk of increasing interest rates. The economic entity has variable interest rate debt and enters into swap contracts to receive interest at variable rates and pay interest at fixed rates. The notional principal amounts of the swap contracts approximates 53.5% (2016: 60%) of the Group's drawn down debt at 30 June 2017. At balance date, the details of the interest rate swap contracts are: Maturity of notional amounts Settlement - between 0 to 3 years Settlement - 3 to 5 years Settlement - greater than 5 years Total Effective average interest rate payable Balance 2017 % 3.40 2.70 3.19 2016 % 3.44 - 3.42 2017 $'000 35,000 15,000 38,000 88,000 2016 $'000 75,000 - 13,000 88,000 82 Rural Funds Group Notes to the Financial Statements 30 June 2017 29 Financial risk management (continued) Interest rate swaps held for hedging (continued) The following interest rate swap contracts have been entered into at 30 June 2017 but are not yet effective. Maturity of notional amounts Settlement - between 3 to 5 years Settlement - greater than 5 years Total Effective average interest rate payable Balance 2017 % - 3.04 2016 % 2.50 3.10 2017 $'000 2016 $'000 - 100,000 100,000 10,000 75,000 85,000 The net gain recognised on the swap derivative instruments for the year ended 30 June 2017 was $5,311,000 (2016: $7,116,000 loss). At 30 June 2017 the Group had the following mix of financial assets and liabilities exposed to variable interest rates: Cash Interest bearing liabilities Total 2017 $'000 3,838 (164,500) (160,662) 2016 $'000 3,034 (146,500) (143,466) At 30 June 2017, 1.91% (2016: 2.03%) of the Group’s debt is fixed, excluding the impact of interest rate swap contracts. Credit risk The maximum exposure to credit risk (excluding the value of any collateral or other security) at balance date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets. This has been disclosed in the Consolidated Statement of Financial Position and notes to the financial statements. Credit risk for derivative financial instruments arises from the potential failure by counterparties to the contract to meet their obligations. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 83 Rural Funds Group Notes to the Financial Statements 30 June 2017 29 Financial risk management (continued) Market risk Interest rate risk (sensitivity analysis) At 30 June 2017, the effect on profit before tax and equity as a result of changes in the interest rate, net of the effect of interest rate swaps, with all other variables remaining constant, would be as follows: Change in profit before income tax: Increase in interest rate by 1% Decrease in interest rate by 1% Change in equity: Increase in interest rate by 1% Decrease in interest rate by 1% 30 Key management personnel Directors 2017 $'000 10,395 (11,525) 10,395 (11,525) 2016 $'000 6,556 (7,221) 6,556 (7,221) The Directors of RFM are considered to be key management personnel of the Group. The Directors of the Responsible Entity in office during the year and up to the date of this report are: Guy Paynter David Bryant Michael Carroll Julian Widdup (appointed 15 February 2017) Interests of Directors of the Responsible Entity Units in the Group held by Directors of RFM or related entities controlled by Directors of RFM as at 30 June 2017 are: Balance at 30 June 2015 Additions Balance at 30 June 2016 Additions Balance at 30 June 2017 Guy Paynter Units 382,156 151,100 533,256 281,440 814,696 David Bryant Michael Carroll Units 3,656,191 3,987,152 7,643,343 4,034,839 11,678,182 Units - - - 19,389 19,389 84 Rural Funds Group Notes to the Financial Statements 30 June 2017 30 Key management personnel (continued) Other key management personnel In addition to the Directors noted above, RFM, as Responsible Entity of the Group is considered to be key management personnel with the authority for the strategic direction and management of the Group. The constitutions of Rural Funds Trust and RF Active (the stapled entities forming the Group) are legally binding documents between the unitholders of the Group and RFM as Responsible Entity. Under the constitutions, RFM is entitled to the following remuneration: Management fee: 0.6% per annum (2016: 0.6%) of the gross value of Group assets; and, Asset management fee: 0.45% per annum (2016: 0.45%) of the gross value of Group assets. Compensation of key management personnel No amount is paid by the Group directly to the Directors of the Responsible Entity. Consequently, no compensation as defined in AASB 124 Related Party Disclosures is paid by the Group to the Directors as key management personnel. Fees paid to RFM as Responsible Entity are disclosed in note 31. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 85 Rural Funds Group Notes to the Financial Statements 30 June 2017 31 Related party transactions Transactions between the Group and related parties are on commercial terms and conditions. Responsible Entity (Rural Funds Management) and related entities Transactions between the Group and the Responsible Entity and its associated entities are shown below: Management fee Asset management fee Total management fees Expenses reimbursed to RFM Expenses reimbursed to RFM Poultry Expenses due to Murdock Viticulture Distribution paid/payable to RFM Total amount paid to RFM and related entities Rental income received from RFM Almond Fund 2006 Rental income received from RFM Almond Fund 2007 Rental income received from RFM Almond Fund 2008 Rental income received from RFM Rental income received from RFM Farming Pty Limited Rental income received from Cattle JV Rental income received from Cotton JV Rental income received from RFM Poultry Rental income received from 2007 Macgrove Project Rental income received from RMA Macadamias Finance lease income from Cattle JV Expenses charged to RFM Poultry Distribution received/receivable from RFM Poultry Distribution received/receivable from RFM StockBank Water sale proceeds from RFM Almond Fund 2006 Water sale proceeds from RFM Almond Fund 2007 Water sale proceeds from RFM Almond Fund 2008 Water sale proceeds from RFM Water sale proceeds from RFM Farming Pty Limited Interest income from Cattle JV 30 June 2017 $'000 1,883 2,510 4,393 2,491 229 - 834 7,947 2,029 606 1,549 336 148 2,694 991 10,520 744 290 790 1 14 4,018 44 12 34 7 30 9 30 June 2016 $'000 1,809 1,356 3,165 2,231 - 199 376 5,971 1,945 588 1,498 372 390 - - 10,449 140 - - 54 14 234 59 16 44 9 52 - Total amounts received from RFM and related entities 24,866 15,864 Murdock Viticulture is a vineyard manager 28% owned by RFM. 86 Rural Funds Group Notes to the Financial Statements 30 June 2017 31 Related party transactions (continued) Debtors (including finance lease receivable) RFM Farming Pty Limited RFM RFM Macadamias Pty Limited 2007 Macgrove Project Cattle JV Cotton JV Total Creditors RFM Total 2017 $'000 27 3 - 345 11,770 485 12,630 2017 $'000 472 472 Entities with influence over the Group Rural Funds Management Limited Interest in related parties RFM StockBank RFM Poultry Units 8,632,418 Units 3,897,259 108,615 2017 % 3.39 2017 % 33.50 1.58 Units 5,153,833 Units 3,897,259 108,615 2016 $'000 3 41 20 538 - - 602 2016 $'000 153 153 2016 % 3.12 2016 % 33.50 1.58 RURAL FUNDS GROUP ANNUAL REPORT 2017 | 87 Rural Funds Group Notes to the Financial Statements 30 June 2017 32 Cash flow information Reconciliation of net profit/(loss) after income tax to cash flow from operating activities: Net profit/(loss) after income tax Cash flows excluded from profit attributable to operating activities Non-cash flows in profit Share of net profit - equity accounted investments Change in fair value of bearer plants Change in fair value of investment property Change in fair value of interest rate swaps Depreciation and impairments Gain on sale of assets Distributions received Changes in operating assets and liabilities (Increase)/decrease in trade and other receivables Decrease in other assets Increase/(decrease) in trade and other payables Decrease in deferred tax asset (net) Net cash inflow from operating activities 2017 $'000 43,326 Restated 2016 $'000 (483) (1,304) 2,498 (17,191) (5,311) 1,568 (33) - 2,618 701 (1,782) 1,824 26,914 (61) 8,776 (3,343) 7,116 939 (290) (36) (4,510) 48 4,878 1,197 14,231 88 Rural Funds Group Notes to the Financial Statements 30 June 2017 33 Events after the reporting date No matter or circumstance has arisen since the end of the year that has significantly affected or could significantly affect the operations of the Group, the results of those operations or the state of affairs of the Group in future financial years. 34 Parent entity The individual financial statements of the parent entity, Rural Funds Trust, show the following aggregate amounts: Statement of Financial Position ASSETS Current assets Non-current assets Total assets LIABILITIES Current liabilities Non-current liabilities Total liabilities (excluding net assets attributable to unitholders) Net assets attributable to unitholders Total liabilities Statement of Comprehensive Income Net profit after income tax Other comprehensive income for the period, net of tax Total comprehensive income attributable to unitholders 2017 $'000 9,977 499,645 509,622 11,126 170,013 181,139 328,483 509,622 37,386 (8,850) 28,536 Restated 2016 $'000 13,285 340,371 353,656 10,578 157,324 167,902 185,754 353,656 (1,365) 34,664 33,299 RURAL FUNDS GROUP ANNUAL REPORT 2017 | 89 Rural Funds Group Directors’ Declaration 30 June 2017 In the Directors of the Responsible Entity’s opinion: 1 The financial statements and notes of Rural Funds Group set out on pages 45 to 89 are in accordance with the Corporations Act 2001, including: a. b. complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and giving a true and fair view of the Group’s financial position as at 30 June 2017 and of its performance for the financial year ended on that date; and 2 There are reasonable grounds to believe that the Group will be able to pay its debts as and when they become due and payable. Note 2 confirms that the financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board. The Directors have been given the declarations by the persons performing the chief executive officer and chief financial officer functions as required by section 295A of the Corporations Act 2001. This declaration is made in accordance with a resolution of the Board of the Directors of Rural Funds Management Limited. David Bryant Director 21 August 2017 90 Independent auditor’s report To the stapled security holders of Rural Funds Group Report on the audit of the financial report Our opinion In our opinion: The accompanying financial report of Rural Funds Trust (the Registered Scheme) and its controlled entities (including RF Active) (together Rural Funds Group, or the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Group's financial position as at 30 June 2017 and of its financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. What we have audited The Group financial report comprises: the consolidated statement of financial position as at 30 June 2017 the consolidated statement of comprehensive income for the year then ended the consolidated statement of changes in net assets attributable to unitholders for the year then ended the consolidated statement of cash flows for the year then ended the notes to the consolidated financial statements, which include a summary of significant accounting policies the directors’ declaration. Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 91 Our audit approach An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the industry in which it operates. The structure of Rural Funds Group is commonly referred to as a “stapled group”. In a stapled group the securities of two or more entities are 'stapled' together and cannot be traded separately. In the case of the Group, the units in Rural Funds Trust have been stapled to the units in RF Active. For the purposes of consolidation accounting, Rural Funds Trust is 'deemed' the parent and the consolidated report reflects the consolidation of Rural Funds Trust and its controlled entities, including RF Active. Materiality For the purpose of our audit we used overall Group materiality of $3.5 million, which represents approximately 1% of the Group’s net assets. We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole. We chose Group net assets because, in our view, it is the benchmark against which the financial position of the Group is most reliably measured. We used a 1% threshold based on our professional judgement, noting it is within the range of commonly acceptable thresholds. Audit scope Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events. The audit of the group was performed by a team primarily in Sydney which included individuals with industry expertise and valuation experts. 92 Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit Committee. Key audit matter How our audit addressed the key audit matter Valuation of investment properties (Refer to note 3, 12) $273.8m Investment properties are carried at fair value. All agricultural assets, which comprise investment properties, bearer plants, and water entitlements have been externally valued in the last 12 months, with the exception of the Poultry property and infrastructure and the macadamia orchard properties which were externally valued at 30 June 2016. The directors monitor and update the key inputs of the valuation model and consider whether any significant market indicators suggest that the valuation has changed and as such an updated external valuation is needed. Key variables in the valuation model included discount rates, capitalisation rates, passing rents and comparable sales. Factors such as prevailing market conditions, and the individual nature, condition, location and the expected future income of these properties impacted these variables. This was a key audit matter because of the: size of the investment property balance in the consolidated statement of financial position quantum of revaluation gains that could directly impact the consolidated statement of comprehensive income through the net fair value gain/loss of investment properties inherently subjective nature of investment property valuations due to the use of assumptions and estimates in the valuation model sensitivity of valuations to key inputs/assumptions in the model such as the discount rate and capitalisation rates. We compared a sample of inputs used in the valuation model, such as rental income and lease terms, to the relevant tenancy schedules and lease agreements. We compared the market rents, discount rates and capitalisation rates used in the valuation models for a sample of investment properties to an acceptable range which we determined based on benchmark market data. Where the rates used fell outside of our anticipated range, we discussed the rationale supporting the rates applied in the valuation with management and obtained supporting documents for the rationale provided. Where an external valuation of investment properties was obtained: We assessed the competency, qualifications, experience and objectivity of any external valuers used by the Group. We read the valuers’ terms of engagement - we did not identify any terms that might affect their objectivity or impose limitations on their work relevant to the valuation. We inspected the final valuation reports and agreed the fair value as per the valuation to the value recorded in the Group’s accounting records. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 93 Key audit matter How our audit addressed the key audit matter In addition to the audit procedures described in the Valuation of investment properties key audit matter, we performed the below procedures, amongst others, with respect to the value of bearer plants. We reperformed the calculation of the fair value of bearer plants, by deducting the fair value of land and infrastructure and water entitlements from the fair value of the agricultural asset. In respect of the fair value of water entitlements, we agreed the volume of water to water entitlements certificates agreed the water rate to market rates as quoted by the external valuers engaged to value the agricultural assets. We evaluated the directors’ estimation of the fair value of land and infrastructure by, for example, considering comparable sales transactions. We considered whether the methodology used to determine the value of bearer plants was in line with the requirements of Australian Accounting Standards. Valuation of bearer plants (Refer to note 11) $121.2m The Group’s bearer plants include almond trees, macadamia trees and wine grape vines, which are classified as Plant and equipment and carried at fair value. The valuations described in the Valuation of investment properties key audit matter above are determined for the agricultural assets as a whole. The valuers also determine the value of the investment property and water entitlements in isolation. As a result, the directors determine the fair value of bearer plants as the residual value after deducting the fair value of land and water entitlements from the value of the agricultural assets. The fair value of water entitlements are determined based on the volume of water and the market rates for water. For reference, water entitlements are carried at historic cost and assessed for impairment annually. This was a key audit matter because of the: size of the bearer plants on the consolidated statement of financial position quantum of revaluation gains that could directly impact the consolidated statement of comprehensive income through the net fair value gain/loss of bearer plants inherently subjective nature and sensitivity of the valuations due to the use of assumptions and estimates as described in the Valuation of investment properties key audit matter. Related party transactions (Refer to note 31) The Group’s Responsible Entity, along with other funds for which it is the Responsible Entity, are considered related parties of the Group. Key transactions with these parties include: Lease of investment properties, land, building and plant and equipment Lease of bearer plants Lease of cattle for breeding Lease of water entitlements. We obtained an understanding of the Group’s processes for identifying related parties and related party transactions, through discussions with management. For significant contracts entered into during the year, we verified that the transactions were approved in accordance with internal procedures including involvement of key personnel at the appropriate level by inspecting relevant supporting documents. 94 Key audit matter How our audit addressed the key audit matter Management fees Asset management fees Distributions from investments Recharge of operating expenses We considered the related party transactions to be a key audit matter due to the influence of related parties on the Group, as well as the potential impact of these transaction on the results of the Group. Additionally, because of their nature, they are pervasive and material to the presentation of and disclosures within the financial report. For a sample of lease income received during the year, we agreed the lease income to the relevant supporting documents including the lease agreements and evaluated the directors’ assertion that the transactions were at arm’s length by comparing the transactions to the market data which was used by the external valuers in their valuation of the related investment property. For management and asset management fees, we compared the rates used to determine fees to the rates disclosed in the prospectus documents for the related funds. We discussed the related party transactions with management to obtain an understanding of the business rationale for the transactions. For a sample of related party agreements, we assessed the rights and obligations of the parties as per the terms and conditions of the agreements and, taking these into account, whether the transactions were recorded appropriately by the Group. We assessed the adequacy of the disclosures in Note 31, of related party relationships and transactions in light of the requirements of Australian Accounting Standards. Other information The directors of Rural Funds Management Limited (the Responsible Entity of the Group) (the directors) are responsible for the other information. The other information included in the Group’s annual report for the year ended 30 June 2017 comprises the Directors' Report, and ASX additional information (but does not include the financial report and our auditor’s report thereon), which we obtained prior to the date of this auditor’s report. We also expect information to be made available to us after the date of this auditor’s report, including Letter from the Managing Director and Corporate governance statement. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. RURAL FUNDS GROUP ANNUAL REPORT 2017 | 95 If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, 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. When we read the other information not yet received as identified above, if we conclude that there is a material misstatements therein, we are required to communicate the matter to the directors and use our professional judgement to determine the appropriate action to take. 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 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 of the Responsible Entity either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report. PricewaterhouseCoopers CMC Heraghty Partner Sydney 21 August 2017 96 ruralfunds.com.au