Smartgroup
Annual Report 2017

Plain-text annual report

Smartgroup Corporation Ltd 94 Market Release Market Release 21 February 2018 ASX Market Announcements Office 22 February 2017 ASX Limited 20 Bridge Street ASX Market Announcements Office Sydney, NSW, Australia, 2000 ASX Limited 20 Bridge Street Sydney, NSW, Australia, 2000 Smartgroup Corporation Ltd - Results for announcement to the market. Smartgroup Corporation Ltd - Results for announcement to the market In accordance with the Listing Rules, Smartgroup Corporation Ltd encloses for immediate release the following information: 1. Appendix 4E, and In accordance with the Listing Rules, Smartgroup Corporation Ltd encloses for immediate release the following information: 2. Smartgroup Corporation Ltd Annual Report 2017. 1. Appendix 4E, and 2. Smartgroup Corporation Ltd Annual Report 2016. Smartgroup Corporation Ltd will conduct a briefing on the results from 9.00am (Sydney time) on 22 February 2018. Smartgroup Corporation Ltd will conduct a briefing on the results from 9.00am (Sydney time) on 23 February 2017. Amanda Morgan General Counsel and Joint Company Secretary Amanda Morgan General Counsel and Joint Company Secretary. Appendix 4E Preliminary Final Report 1. Company details Name of entity: Smartgroup Corporation Ltd ABN: 48 126 266 831 Reporting period: For the year ended 31 December 2017 Previous period: For the year ended 31 December 2016 2. Results for announcement to the market Revenues from ordinary activities Profit from ordinary activities after tax attributable to the owners of Smartgroup Corporation Ltd Profit for the year attributable to the owners of Smartgroup Corporation Ltd $’000 $’000 up 57,483 38.9% to 205,443 up up 8,525 26.0% to 41,313 8,525 26.0% to 41,313 Dividends Amount per security Cents Franked amount per security Cents Final dividend for the year ended 31 December 2016 (paid on 31 March 2017) Interim dividend for the year ended 31 December 2017 (paid on 29 September 2017) 15.0 16.5 15.0 16.5 On 21 February 2018 the Directors declared a fully-franked dividend of 18.5 cents per ordinary share. The final dividend will be paid on 30 March 2018 to shareholders registered on 15 March 2018. There is no dividend reinvestment plan. Comments The profit for the Group after providing for income tax amounted to $41,309,000 (31 December 2016: $32,788,000). Refer to Chairman’s Report and CEO’s ‘Report of operations’ for detailed commentary of the results. 3. Net tangible assets Net tangible assets per ordinary security (103.09) (76.90) Reporting period Cents Previous period Cents 4. Control gained over entities On 2 May 2017, the Group acquired 100% of the ordinary shares of AccessPay Pty Ltd, Fleet Solutions Pty Ltd and 50% of the ordinary shares of AccessPay Payroll Solutions Pty Ltd (AccessPay Group). On 23 August 2017, the Group acquired 100% of the ordinary shares of ABM Corporation Pty Ltd (Aspire). On 20 October 2017, the Group acquired the assets of RACV Salary Solutions (Salary Solutions). Refer to note 23 to the financial statements for further details of acquisitions. 5. Details of associates and joint venture entities Name of associate / joint venture Reporting entity’s percentage holding Contribution to profit Reporting period % Previous period % Reporting period $’000 Previous period $’000 Health-e Workforce Solutions Pty Ltd 50% 50% Group’s aggregate share of associates and joint venture entities’ profit Profit from ordinary activities after income tax - - 348 348 513 513 6. Audit qualification or review The financial statements have been audited and an unqualified opinion has been issued. 7. Attachments Additional Appendix 4E disclosure requirements can be found in the attached Directors’ Report and the Financial Report. Annual Report 2017 At Smartgroup, we simplify salary packaging, fleet management and a range of other employee management services for organisations across Australia. In This Annual Report Who We Are 2017 Company Snapshot Chairman’s Report 2017 Financial Highlights Managing Director and CEO Report of Operations What We Do Who We Help Environmental, Social and Governance Report Directors’ Report Financial Report Shareholder Information Four Year Summary Corporate Directory Glossary 2 3 4 5 6 10 11 12 15 37 94 96 97 98 Who We Are Smartgroup is an award-winning, ASX-listed company that provides specialist employee management services including salary packaging, novated leasing, fleet management, payroll administration, employee share plan administration and workforce optimisation. Recognised leader for customer care and innovation Smartgroup continues to be recognised as a leader for high standards of customer care and innovation. The capability triangle reflects our company values and methods in pursuit of operational excellence and overall business success. Customer service – providing and maintaining the highest levels of service to ensure an optimal experience for our customers is paramount. Innovation – striving for continuous improvement and process efficiency. Staff engagement – ensuring the foundation of operational excellence at Smartgroup. Customer Service Smartsalary 2017 National Service Champion 2016 National Service Champion 2015 Highly Commended (National) 2011–2015 Winner (NSW State) 7 2012 Winner (National) 2017 Smartsalary #47 2016 Smartgroup #11 2016 Smartfleet #31 2014 Smartsalary #44 2013 Smartsalary #31 Lean Agile Innovation Staff Engagement 2 2017 Company Snapshot Our Customers 3,900+ employer clients 325,000+ 80,000+ salary packaging customers novated and fleet vehicles under management Our People 700+ Smartgroup employees Specialist capabilities in all salary packaging sectors: education, health, not-for-profit, government and corporate. National presence in all States and Territories in Australia. Our Service Our Community s m a r t s a l a r y a c h i e v e m e n t s +44 NET PROMOTER SCORE (NPS) Placed among leading service providers globally and revealing strong customer propensity to recommend our service. Achieved the highest ever audit score from the Customer Service Institute of Australia for the third consecutive year. Recognised as one of the 2017 Australian Financial Review 50 Most Innovative Companies for processes that improve customer experience. 300,000+ trees planted. We were the highest contributor to Greenfleet through the Smartleasing customer carbon offset program. Autopia partnered with UN Women to raise awareness of gender equality and domestic violence, and raised $57,000 for their National Committee Australia Tax Appeal. Local causes supported. We supported numerous staff-initiated awareness and fund-raising activities in aid of local charities. 3 Chairman’s Report It gives me great pleasure to present the Annual Report for Smartgroup Corporation for the calendar year ending 31 December 2017. Under the leadership of Deven Billimoria and the Smartgroup senior management team, our financial results for 2017 reflect another year of strong growth, achieved through the acquisition of new businesses, continued integration of previous acquisitions, new client wins and improved sales to our existing client base. Smartgroup has delivered: • Revenues of $205.4 million, up 40 per cent on the prior year • Operating EBITDA1 of $93.6 million, up 48 per cent on the prior year • Operating NPATA2 of $64.1 million, up 46 per cent on the prior year • Statutory Net Profit After Tax of $41.3 million, up 26 per cent on the prior year. Throughout 2017, Smartgroup marched forward as an industry leader in specialist employee management services. The Board is pleased to declare a fully franked final dividend of 18.5 cents per share, taking the full-year dividends for 2017 to 35.0 cents per share. Throughout 2017, Smartgroup marched forward as an industry leader in specialist employee management services, expanding on our foundation salary packaging and novated leasing activities with enhanced capabilities in fleet management, payroll services, employee share plans and workforce optimisation solutions. The company increased its footprint in the salary packaging and novated leasing markets through both marked organic growth and the acquisitions of AccessPay, Aspire and RACV Salary Solutions (now operating as Salary Solutions). These acquisitions are being successfully integrated into the Smartgroup business, with the achievement of forecast synergies tracking well. In December, we expanded our fleet management offering, entering into an agreement to acquire Perth-based specialist provider Fleet West. This acquisition was completed in early January 2018, post year-end balance date. The ongoing improvements of operations and customer service standards across the group are deeply embedded in the Smartgroup culture and will continue to be a key focus. On behalf of the Board, I sincerely thank our customers and shareholders for their ongoing support, and our employees who continue to exceed the high standards we set. We look forward to continuing to deliver value for our shareholders, exceptional service to our customers and an engaging and supportive workplace for employees. Michael Carapiet Chairman 4 The following highlights represent the financial performance of Smartgroup for the year ended 31 December 2017. 2017 Financial Highlights Revenue EBITDA1 $205.4m up 40% $93.6m up 48% NPATA2 $64.1m up 46% Operating cash flow3 Net debt4 99% as a % of NPATA $111.1m Dividends declared 35.0cps up 41% After-tax profits (NPATA) Dividends per share declared (fully franked) 64.1 44.0 2017 2016 35.0 24.8 26.2 2015 16.6 17.4 $m 2014 6.15 Cents per share The 2017 Financial Highlights are presented on an adjusted basis and have been reconciled to the statutory 2017 Financial Report. 1 EBITDA is Earnings Before Interest, Tax, Depreciation and Amortisation adjusted for significant non-operating items. 2 NPATA is Net Profit After Tax, adjusted to exclude the non-cash tax effected amortisation of intangibles and significant non-operating items. 3 Operating cash flow excludes receipts and payments from customers’ salary packaging accounts and significant non-operating items. 4 Net Debt is cash and cash equivalents less borrowings, adjusted to exclude capitalised borrowing costs. 5 Represents dividend declared only for H2 2014. 5 Managing Director and CEO Report of Operations I’m pleased to announce Smartgroup has enjoyed another period of operational and financial success, while continuing to provide the highest levels of service to our loyal customers. Overview We have achieved a number of positive operational and growth outcomes in 2017 by enhancing our capabilities, growing our client base and completing complementary acquisitions. Growth through acquisition Smartgroup acquired three salary packaging businesses during 2017, strengthening our presence and service capability across all sectors. Digital innovation to improve the quality of service and customer experience, while reducing manual processes, has remained a key imperative for our flagship brand, Smartsalary. Topping off a great year of digital development, Smartsalary was recognised as being among Australia and New Zealand’s 50 Most Innovative Companies by the Australian Financial Review. The high level of service at Smartsalary was again recognised by our customers. We finished the year with an average Net Promoter Score (NPS) of +44 on a scale of -100 to +100. A company’s NPS is a measure of how likely a customer is to provide a word-of-mouth referral. Once again, this places us among leading service providers globally. In addition, Smartsalary was recognised as the 2017 Service Champion by the Customer Service Institute of Australia (CSIA). These achievements are a fitting acknowledgement of the ongoing commitment of our staff to put customers first, and are indicative of the standards of service and operational efficiency we set for all Smartgroup brands. In May, Smartgroup acquired AccessPay, a salary packaging provider to the Public Benevolent Institution (PBI) sector with c.40,000 salary packages across c.500 employer clients. Aspire Benefits Management, a novated leasing provider to the corporate sector, joined the Group in August with c.1,500 novated leases across c.100 employer clients. Smartgroup completed the acquisition of RACV Salary Solutions in October. RACV Salary Solutions (now operating as Salary Solutions) is a national provider of salary packaging and novated leasing, delivering benefits including c.38,000 salary packages and c.4,500 novated leases across c.700 employer clients. In addition, in December we announced the acquisition of Fleet West, expanding our fleet management capabilities. Fleet West manages c.2,800 vehicles for c.180 employer clients in the not- for-profit sector, and has joined Smartfleet to further extend the Smartgroup fleet service offering. These four acquisitions have added to our capacity and better enable us to leverage best practice across all Smartgroup businesses, for the benefit of both our customers and shareholders. 2017 acquisitions: building the presence of Smartgroup in the salary packaging market† PBI Hospitals Government Corporate Large Corporate SME Rebatable Smaller Corporate clients transitioned to Autopia Acquisition completion date PBI Charities/ NFPs N/A Smaller PBI clients transitioned to Advantage December 2015 July 2016 August 2016 PBI clients transitioned to Advantage May 2017 August 2017 October 2017 Larger Corporate clients transitioned to Smartsalary Smaller Corporate clients transitioned to Autopia † Diagram excludes non-salary packaging and novated leasing offerings of Smartfleet, Smartequity, Smartsalary Payroll Solutions and Health-e Workforce Solutions 6 Expanding our client base The number of Smartgroup clients has grown to c.3,900, up from c.2,400 clients at the end of 2016. This has allowed us to continue to diversify our client portfolio, with 54% of our revenue coming from a larger pool of small and medium-sized clients, compared to 31% in 2013. CY13 – CY17: Revenues by client mix 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0 31% 18% 51% 54% 17% 29% 2013A 2017PF Top 5 Top 6-20 Ex Top 20 7 Serving all sectors of the salary packaging market We work with employers in all market segments to provide salary packaging to their employees. ‘Caring’ professions, including the not-for-profit, hospitals 1 and education 2 sectors, account for more than half our overall salary packaging employer client base, and 86% of our salary packaging customers. Employer client segmentation Employee customer segmentation Education2 7% Corporate 38% Government 7% Hospitals1 3% Not-for-profit 45% Corporate 4% Government 10% Hospitals1 33% Education2 12% Not-for-profit 41% 1. ‘Hospitals’ includes public and private not-for-profit hospitals. 2. ‘Education’ includes public and private not-for-profit educational institutions. Broadening our service offering to the not-for-profit sector Smartgroup has a large number of not-for-profit salary packaging clients, and is well positioned to build deeper relationships with this sector through an expanded service offering. 26 overlapping clients c.1,700 NFP salary packaging clients c.800 NFP fleet management clients 60 overlapping clients 5 overlapping clients c.180 NFP fleet product extension clients 8 Customers first Our dedication to our clients and customers has meant that we’ve retained our standing as a leading customer service provider. For the third consecutive year, Smartsalary achieved the highest ever audit score recorded by the Customer Service Industry Association (CSIA) to be recognised as the 2017 Service Champion at the CSIA Australian Service Excellence Awards. 2012 National Winner 7.88 2013 State Winner 8.04 2011 State Winner 7.38 2014 State Winner 8.24 8.44 8.52 7 8.89 Highest score achieved in CSIA history Highest score achieved in CSIA history Highest score achieved in CSIA history 6.83 6.17 5.45 10 9 8 7 6 5 4 3 2 1 2006 2009 2010 2011 2012 2013 2014 2015 2016 2017 I would like to thank our entire team, from our incredibly loyal longer-term employees to the new people who’ve joined us, for embracing the customer-centric Smartgroup way. Our service-led culture, and the many warm client references that flow, enable the company to continue to grow and better serve our customers, our employees and our shareholders. Deven Billimoria Managing Director & Chief Executive Officer 9 What We Do Smartgroup has a strong presence in all segments of the salary packaging and novated leasing market. We also deliver fleet management services to all market segments, workforce optimisation solutions to the health sector, share plan administration to the corporate sector, and payroll administration to the corporate and not-for-profit sectors. FLEET MANAGEMENT NOVATED LEASING SHARE PLAN ADMINISTRATION SALARY PACKAGING ADMINISTRATION PAYROLL ADMINISTRATION WORKFORCE OPTIMISATION 10 Who We Help Not-for-profits This sector includes charitable organisations with public benevolent institution (PBI) status. We have a strong presence in this sector through our existing brand Advantage Salary Packaging, which was enhanced this year by the addition of AccessPay to the group. Smartgroup-owned PBI Solutions retains market leadership in the distribution of salary packaging cards. Fleet West and Smartsalary Payroll Solutions provide services specifically designed for not-for-profit organisations. Hospitals public and private not-for-profit A significant proportion of our salary packaging customers are nurses and medical professionals located in the private and public hospital sector. Health-e Workforce Solutions also supports our many hospital clients with the provision of workforce modelling and consultancy services to drive staffing efficiencies. Education public and private not-for-profit Smartgroup has developed specific expertise working with public, private and religious education institutions, and our salary packaging customers include teachers and other professionals working in primary, secondary and tertiary education. Government organisations Smartgroup retained Government sector coverage at local, State and Federal level in 2017. Novated leasing continues to be a popular benefit in this sector. Private and corporate This sector includes private and public companies, from boutique operations to large corporations. Sector specialist Autopia delivers novated leasing solutions to small and medium-sized organisations, while Smartleasing serves the larger clients within our portfolio. Smartequity also provides flexible equity plan administration for private, public, start-up and international companies. 11 Environmental, Social and Governance Report Environment As an administrative services company, Smartgroup has a relatively low direct effect on the environment. Our biggest direct environmental impacts come from travel, energy and consumables (such as paper, waste consumption and waste management). We endeavour to reduce these impacts as explained here. Benefits of new cars Making cars more affordable for our customers means that the majority buy new rather than used cars. A new car tends to be more fuel efficient, so over its lifetime its fuel usage should have a lower impact on the environment. New cars have far more safety features than a decade ago, with technology improving dramatically. Better crash-test ratings, more airbags, ABS, electronic stability control and back-up cameras all contribute to reducing the number and severity of car accidents. Transformation and efficiency projects We are committed to improving efficiency in all aspects of our business, not just to reduce cost and streamline our processes, but also to minimise our environmental impact. Wherever possible, we replace print and paper-based processes with online systems, both for internal administration and finance, and externally (for client-facing processes). 12 Greenfleet partnership One of our two core businesses is novated leasing – enabling our clients’ employees to save money on car purchases. We take our corporate responsibilities seriously and, as such, we have partnered with Greenfleet since 2008 to offset carbon emissions. Greenfleet is a carbon offset provider whose mission is to protect the climate by restoring forests. Smartgroup was Greenfleet’s largest contributor in 2017. Thanks to Smartleasing customers donating funds to offset their novated leasing emissions, 300,000 trees will be planted. Since 2008, Smartgroup and its customers have contributed to have 1.7 million trees planted, offsetting 400,000 tonnes of CO2 emissions. Our work with Greenfleet continues; reducing the carbon footprint of our customers’ vehicles and supporting great initiatives such as the Low Glow project – a joint initiative between Greenfleet, the Prince’s Trust Australia and the Walt Disney Company (Australia) to protect the local endangered sea turtle population in Bundaberg, Queensland. Waste reduction Air travel In every office in Australia, we facilitate waste separation and recycling. Through various office initiatives, we continue to strive to reduce electricity, office and print waste across our business. Smartgroup has offices in most States in Australia, and also has a large remotely based sales team. As such, air travel is a necessary part of running our business. We are continuing our focus on improving technology and remote networking capabilities for our staff with the aim of enhancing workplace efficiencies, lessening our travel spend and reducing our travel-related carbon footprint. We acknowledge and proactively manage issues that affect the long-term sustainability of our business, the environment and the community. We know that our long-term success depends upon maintaining our good reputation, enhancing employee morale, finding new revenue streams to diversify our risks, and continuing our focus on efficiency. Social, staff and community Smartgroup has always been a very people-focused business, both in relation to staff and clients. Volunteering Employees are entitled to one day of leave per year to volunteer for charitable work. As a partner of and donor to Greenfleet, Smartgroup’s staff are invited to attend tree-planting days, which are popular and well-attended. Employee engagement Several times a year, with the assistance of an external consultant, we monitor employee engagement and closely analyse the results. We see this as very important, given the challenge of maintaining strong communication between employees and senior management, and particularly so in the context of numerous business acquisitions with offices across the country. Smartgroup has always undertaken regular business briefings at which staff are briefed about strategy and corporate developments. UN Women National Committee (NC) Australia partnership Autopia continued to partner with UN Women NC Australia in 2017, helping to raise over $57,000 for the UN Women NC Australia Tax Appeal. Autopia’s workplace response to domestic and family violence was published in UN Women NC Australia’s report Taking the first step: Workplace Responses to Domestic and Family Violence. The report is available here: unwomen.org.au/resource/taking-the-first-step-workplace-responses-to-domestic-and-family-violence/. 13 Environmental, Social and Governance Report continued Royal Melbourne Hospital (RMH) Foundation For the fifth consecutive year, Smartsalary was proud to support the RMH Foundation, which delivers better health through research, innovation and education. In 2017, we supported key RMH Foundation events and activities, including sponsoring the Celebrating Excellence Awards in November, where Smartgroup CEO Deven Billimoria presented the Chief Executive’s Leadership Award. We also supported the foundation’s Prevention of Alcohol and Risk Related Trauma in Youth (PARTY) program. Review of policies Learning and development Smartgroup continues to ensure that it, and all the businesses that it has acquired over the last three years, have high quality policies in place, which are designed to bolster employee morale, encourage loyalty to the business and ensure all employees have equal opportunities at work. This year Smartgroup introduced a Domestic Violence Policy, which was well received across the business. Next year Smartgroup will review other policies, including its Parental Leave Policy. Smartgroup knows that an employee’s perception of their professional development and career prospects is key to their engagement. In response to feedback that employees would like more support and information regarding career development, Smartgroup has put in place various new learning and development initiatives throughout 2017 to improve engagement and capitalise on employees’ enthusiasm and commitment to their work. Employee share plan Diversity and gender balance To encourage share ownership, loyalty and involvement in the business and its direction, Smartgroup continues to offer employees the ability to subscribe for shares. Employees salary sacrifice $500 and Smartgroup matches this with a further $500, issuing the subscribing employees with $1000 worth of Smartgroup shares each year. Smartgroup has several gender objectives in place, supported by a number of policies. We have reported against those objectives in our Corporate Governance Statement (found at: ir.smartgroup.com.au/ Investors/?page=Corporate-Governance). Supporting staff with their causes Throughout 2017, Smartgroup supported several staff-initiated awareness and fundraising activities for worthy causes, including Fighting Chance, RSPCA, Cancer Council Victoria and Cancer Council Tasmania. Governance Smartgroup believes that good corporate governance is key to maximising company performance and delivering high returns to shareholders. Smartgroup has always had a strong corporate governance framework in place, which is reported on in detail in the Corporate Governance Statement (found at: ir.smartgroup.com.au/Investors/?page=Corporate-Governance). 14 Directors’ Report 2017 Remuneration Report Auditor’s Independence Declaration 21 34 Directors’ Report The Directors present their report, together with the financial statements, on the consolidated entity (referred to hereafter as the ‘Group’) consisting of Smartgroup Corporation Ltd (referred to hereafter as the ‘Company’ or ‘parent entity’) and the entities it controlled at the end of, or during, the year ended 31 December 2017. For the year ended 31 December 2017 Directors The following people were Directors of the Company during the whole of the financial year and up to the date of this report, unless otherwise stated: Michael Carapiet Deven Billimoria John Prendiville Gavin Bell Andrew Bolam Ian Watt Deborah Homewood Principal activities During the financial year the principal activities of the Group consisted of outsourced administration, being primarily salary packaging, novated leasing, payroll administration, fleet management and software, distribution and group services. Dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 31 December 2016 of 15.0 cents (2015: 8.7 cents) per ordinary share Consolidated 2017 $’000 18,223 2016 $’000 9,022 Interim dividend for the year ended 31 December 2017 of 16.5 cents (2016: 9.8 cents) per ordinary share 20,379 11,901 38,602 20,923 On 21 February 2018, the Directors declared a fully franked dividend of 18.5 cents per ordinary share. The final dividend will be paid on 30 March 2018 to shareholders registered on 15 March 2018, resulting in a financial distribution of $22,794,000. The financial effect of dividends declared after the reporting date is not reflected in the 31 December 2017 financial statements and will be recognised in subsequent financial reports. Review of operations The profit for the Group after providing for income tax amounted to $41,309,000 (31 December 2016: profit of $32,788,000). Refer to the Chairman’s Report and the Managing Director and CEO’s Report of Operations for further commentary on the results. Business objectives and cash use The Company has used cash and cash equivalents to fund its day-to-day operations, pay down debt and to acquire shares and assets of three new businesses. 16 Significant changes in the state of affairs The Group undertook three acquisitions of salary packaging businesses during 2017. Collectively these businesses were acquired for $56,668,000 and contributed approximately 79,500 salary packages and 6,600 novated leases from around 1,300 employer clients. A further acquisition of a fleet management company was completed in January 2018. Acquisitions Acquisition of AccessPay Pty Ltd (AccessPay) On 2 May 2017, the Group acquired a 100% interest in the AccessPay Group for $15,000,000. AccessPay is based in Adelaide and provides salary packaging services to clients in the PBI sector across Australia. It administers approximately 40,000 salary packages and 600 novated leases for around 500 employer clients. The consideration provided was $13,700,000 in cash (from cash reserves) plus $1,000,000 retained in escrow until 9 November 2018 and 46,225 shares issued at a price of $6.49 each to a vendor of AccessPay. Acquisition of ABM Corporation Pty Ltd (Aspire) On 23 August 2017, the Group acquired a 100% interest in Aspire for $6,700,000 plus $500,000 retained in escrow. Aspire provides novated leasing services to the corporate sector, administering approximately 1,500 novated leases and servicing over 100 employer clients. The consideration was paid in cash from cash reserves. Acquisition of RACV Salary Solutions (Salary Solutions) On 20 October 2017, the Group acquired the Salary Solutions business from RACV for $27,468,000 plus $7,000,000 retained in escrow. Salary Solutions is based in Adelaide and provides salary packaging and novated leasing services to all segments of the market. It administers approximately 38,000 salary packages and 4,500 novated leases for around 700 employer clients. The consideration was paid in cash and was funded from cash reserves and existing debt facilities. There were no other significant changes in the state of affairs of the Group during the financial year. Matters subsequent to the end of the financial year On 4 January 2018, the Group completed the acquisition of 100% of the shares of Fleet West Pty Ltd (Fleet West) for $9,000,000. Fleet West is based in Perth and provides fleet management services to clients in the not-for-profit sector. It manages approximately 3,000 vehicles for around 200 employer clients. The consideration paid was $8,000,000 in cash and 99,206 shares issued at a price of $10.08 each to the principal vendor. On 21 February 2018, the Directors declared a fully-franked dividend of 18.5 cents per ordinary share. The final dividend will be paid on 30 March 2018 to shareholders registered on 15 March 2018, resulting in a financial distribution of $22,794,000. No other matter or circumstance has arisen since 31 December 2017 that has significantly affected or may significantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs in future financial years. Likely developments and expected results of operations Likely developments in the operations of the Group and the expected results of those operations are contained in the Managing Director and CEO’s Report of Operations. Environmental regulation The Group is not subject to any significant environmental regulation under Australian Commonwealth or State law. The glossary on page 98 contains a list of defined terms. 17 Board of Directors The following persons were directors of Smartgroup Corporation Ltd during the whole of the financial year and up to the date of this report, unless otherwise stated. Michael Carapiet Chairman and Non-Executive Director Deven Billimoria Managing Director and Chief Executive Officer Ian Watt AC Non-Executive Director Qualifications: Deven holds a Master of Business Administration from Northwestern University’s Kellogg School of Management and a Bachelor of Science in Mechanical Engineering from the University of California, Los Angeles. Experience and expertise: Deven has worked with Smartgroup for 18 years. He was appointed Managing Director and CEO of Smartgroup Corporation in 2014. Prior to that, Deven was Managing Director and CEO of Smartsalary Pty Ltd, a position he held from 2001. Deven began his career as an engineering consultant, before moving to management consulting with Booz Allen Hamilton. Former publicly listed directorships (last 3 years): None Special responsibilities: None Interests in shares: 2,518,367 Interests in options: 1,208,504 Qualifications: Michael holds a Master of Business Administration from Macquarie University. Experience and expertise: Michael has more than 30 years’ experience in the financial sector. Michael is the Chairman of Link Group (ASX:LNK), a global provider of share registry, corporate market data analytics and asset management services and is the largest provider of administration services to the Australian superannuation sector. Michael is Chair of Insurance and Care NSW (icare NSW), which includes the activities of the NSW Workers Compensation Scheme, Lifetime Care & Support, Dust Diseases and the NSW Government’s self insurance activities. He is also Chair of Adexum Capital Limited, a private equity fund manager and an Advisory Board Member of Pyrolyx AG, a dual listed company in Germany and Australia. Previously Michael held numerous senior roles at Macquarie Group, until his retirement in 2011. Former publicly listed directorships (last 3 years): None Special responsibilities: Member of HRRC and Member of ITIC Interests in shares: 2,047,816 Interests in options: None Qualifications: Ian holds a Bachelor of Commerce (Hons) from the University of Melbourne, a Master of Economics and PhD in Economics from La Trobe University, and has completed the Advanced Management Program at Harvard Business School. Experience and expertise: Ian has worked for nearly 20 years at very senior levels of the Australian public service. His most recent appointment was as Secretary of the Department of Prime Minister and Cabinet and head of the Australian Public Service, a position he held from 2011 to 2014. Prior to that, he was Secretary of the Departments of Defence, Finance, and Communications, Information Technology and the Arts between 2001 and 2011. Before that, Ian was Deputy Secretary of the Department of the Prime Minister and Cabinet. Ian is currently the Chair of the International Centre for Democratic Partnerships, BAE Systems Australia Pty Ltd, the Smart Infrastructure Facility of the University of Wollongong and the Prader-Willi Research Foundation of Australia. Ian is on the boards of Citigroup Australia, the Grattan Institute (University of Melbourne), the Australian Governance Masters Index Fund and O’Connell Street Associates Pty Ltd. Ian is also a member of Male Champions of Change. Former publicly listed directorships (last 3 years): None Special responsibilities: Chairman of ITIC and Member of ARC Interests in shares: 62,142 Interests in options: None 18 Andrew Bolam Non-Executive Director Deborah Homewood Non-Executive Director John Prendiville Non-Executive Director Gavin Bell Non-Executive Director Qualifications: Andrew holds a Bachelor of Commerce from the University of Tasmania and is a Certified Practising Accountant (CPA). Experience and expertise: Andrew has more than 20 years of experience in financial and general management. He is currently the Chief Financial Officer of Fetch TV Pty Ltd. He was previously the Chief Financial Officer of Usaha Tegas, a private investment holding company based in Malaysia. He was also Commercial Director of Bumi Armada Berhad, an associate of Usaha Tegas group. Andrew was the Chief Financial Officer of Astro All Asia Networks plc (the then holding company of MEASAT Broadcast Network Systems Sdn Bhd that launched the Astro Pay-TV services) shortly following its launch in late 1996. Former publicly listed directorships (last 3 years): None Special responsibilities: Member of ARC and Member of ITIC Interests in shares: 200,000 Interests in options: None Qualifications: Deborah completed her registered nurse training at St Andrews Hospital (Qld), as well as a Masters of Management from Macquarie Graduate School of Management. Experience and expertise: Deborah has many years of experience in management in various sectors, including retail, the medical industry and communications. She is currently Managing Director of MAX Solutions. Prior to working for MAX Solutions, Deborah was CEO of Pacnet, Australia and New Zealand, an Asian-headquartered telecommunications carrier. She was with Pacnet for 10 years and held various senior roles including Vice President Sales, South Asia. She is a current member of Chief Executive Women, and chaired the Membership Committee from 2010 to 2012. Former publicly listed directorships (last 3 years): None Special responsibilities: Member of ITIC and Member of HRRC Interests in shares: 4,444 Interests in options: None Qualifications: John holds a Bachelor of Science (Hons in Astrophysics) from the Royal Military College, Duntroon, and Master of Business Administration from the University of Western Australia and the Institute for International Finance in Japan. Experience and expertise: John is currently a Director of the University of Notre Dame (and Member of the University’s Audit and Finance Committee) and Chairman-elect of the privately-owned Global Advanced Metals Limited (and Member of the company’s Audit and Finance Committee). John is also a director of 1300 Australia Limited and GetCapital Pty Limited. Previously John held numerous senior roles at Macquarie Group, where he worked until 2011. Former publicly listed directorships (last 3 years): None Special responsibilities: Chairman of ARC and Member of HRRC Interests in shares: 852,902 Interests in options: None Qualifications: Gavin holds a Bachelor of Laws from the University of Sydney and Master of Business Administration (Executive) from the Australian Graduate School of Management. Experience and expertise: Gavin is an experienced director, CEO and lawyer. He is a Board Member of icare NSW and a Director of IVE Group Limited (ASX:IGL). Gavin was Managing Partner and Chief Executive Officer of law firm Herbert Smith Freehills (formerly Freehills). He was also a partner in the firm for 25 years. Former publicly listed directorships (last 3 years): None Special responsibilities: Chairman of HRRC and Member of ARC Interests in shares: 74,850 Interests in options: None 19 Company secretaries General Counsel and Joint Company Secretary Amanda Morgan was appointed General Counsel and Company Secretary in June 2014. Amanda previously worked for IRESS Limited as General Counsel and prior to that for King & Wood Mallesons as a Senior Associate. Prior to that, she worked at Minter Ellison. Amanda holds a Bachelor of Laws and Bachelor of Commerce from the University of Melbourne, a Graduate Diploma of Applied Finance from the Securities Institute of Australia, and is a Graduate of the Australian Institute of Company Directors. Chief Legal Officer and Joint Company Secretary Sophie MacIntosh was appointed Chief Legal Officer on 7 November 2016 and was appointed Joint Company Secretary on 13 December 2016. Sophie previously worked for Ashurst as a Senior Associate. Prior to that, she worked at DLA Phillips Fox. Sophie holds a Master of Laws from the University of Sydney and a Bachelor of Business and a Bachelor of Law (Honours) from the University of Technology Sydney. She has also completed the Observership Program and the Not-for-Profit Directors course with the Australian Institute of Company Directors. Meetings of Directors The number of meetings of the Company’s Board of Directors and of each Board committee held during the year ended 31 December 2017, and the number of meetings attended by each Director were: Full Board Human Resources and Remuneration Committee (HRRC) Audit and Risk Committee (ARC) IT and Innovation Committee (ITIC) Attended Held Attended Held Attended Held Attended Held Michael Carapiet Deven Billimoria John Prendiville Gavin Bell Andrew Bolam Ian Watt Deborah Homewood 18 18 16 15 18 17 17 18 18 18 18 18 18 18 3 - 2 3 - - 3 3 - 3 3 - - 3 - - 3 4 4 4 - - - 4 4 4 4 - 4 - - - 4 4 4 4 - - - 4 4 4 Held: represents the number of meetings held during the time the Director held office or was a member of the relevant committee. 20 Remuneration Report The remuneration report, which has been audited, describes the remuneration arrangements for the Key Management Personnel of the Group, in accordance with the requirements of the Corporations Act 2001(Cth) and its regulations. (Audited) Introduction The Remuneration Report is designed to provide shareholders with an understanding of Smartgroup’s remuneration policies and how these are linked to the Group’s remuneration philosophy and strategy. The Remuneration Report specifically focuses on the Smartgroup remuneration arrangements for 2017. At the AGM held in May 2017, the remuneration framework received strong support from shareholders, with a very strong majority vote in favour of the resolution to adopt the 2016 Remuneration Report. Principles used to determine the nature and amount of remuneration The Board ensures that executive reward satisfies the following key criteria for good governance practices: • Competitiveness and reasonableness; • Acceptability to shareholders; • Performance linkage/alignment of executive compensation; and • Transparency. The Company has a Human Resources and Remuneration Committee (HRRC), whose role is to assist the Board in fulfilling its corporate governance responsibilities and to review and make recommendations, in relation to the remuneration arrangements for its Directors and executives. The HRRC must have at least three members, a majority of whom must be independent non-executive Directors. The HRRC has structured an executive remuneration framework that is competitive with the market and complementary to the reward strategy of the Group. In late 2017, the Board commissioned Minter Ellison to provide benchmarking advice in relation to executive remuneration for 2018. The Group’s remuneration policies and practices are designed to align the interests of staff and shareholders, while attracting and retaining staff members who are critical to the organisation’s growth and success. The remuneration strategy: • Focuses on sustained growth in EBITDA and NPATA, as well as focusing the executive on key non-financial drivers of value; • Is intended to attract, motivate and retain high-calibre executives; • Rewards team and individual performance, capability and experience; • Reflects competitive rewards for contribution to growth in shareholder wealth; and • Provides a clear structure for earning rewards. As the Company has grown, there has been a need to review and redesign the organisational structure to support and facilitate delivery of the current and future strategic goals. Early 2017 saw the first phase of a group-wide reorganisation where all business support functions were integrated to form a single Smartgroup structure. This included the finance, IT, human resources and risk and audit functions. The prime goal was to ensure a common and consistent approach in functional support and service delivery, as well as driving efficiencies and adopting best practice standards across the group. The reorganisation was very successful and is well on its way to realising the goals of the structural changes. October saw the second phase of organisational restructuring where business unit reporting lines moved from separate entities reporting directly into the CEO, to all salary packaging business units reporting into the Chief Executive, Salary Packaging and all novated leasing and fleet business units reporting into the Chief Executive, Novated Leasing and Fleet. This change is in line with the strategic goal of driving efficiencies through the integration of common processes and removing duplication. In accordance with best-practice corporate governance, separate structures apply to the remuneration of non-executive Directors and executives. 21 A. Non-executive Directors’ remuneration Fees and payments to non-executive Directors reflect the demands that are made on, and the responsibilities of, these Directors. The Board decides the total amount paid to each non-executive Director as remuneration for their services as a Director. The total amount of fees paid to all Directors for their services (excluding, for these purposes, the salary of any executive Director) must not exceed in aggregate in any financial year the amount fixed by the Company at a general meeting. The aggregate remuneration for non-executive Directors was set by shareholders at the AGM in May 2017 at $1,150,000. The fees paid are $210,000 per annum for the Chairman of the Board and $100,000 per annum for each non-executive Director. In addition to the above, the Chairmen of the ITIC and HRRC respectively are paid $20,000 annually for services provided to each of those committees. Each member of those two standing committees (other than the committee Chairman) is paid $10,000 annually for the services provided to that committee. The Chairman of the ARC is paid $25,000, and each other member of that committee is paid $12,500 per annum. In addition to the fees, superannuation and GST, if applicable, are paid in each case. There are no retirement benefit schemes for non- executive Directors, other than statutory superannuation contributions. Any change to the aggregate annual sum referred to above must be approved by shareholders. The aggregate sum includes any special and additional remuneration for special exertions and additional services performed by a Director as determined appropriate by the Board. Directors may be paid additional or substituted remuneration if they, at the request of the Board and for the purpose of the Company, perform any additional or special duties. B. Executive remuneration The Group aims to reward executives with a level and mix of remuneration based on their position and responsibility. This remuneration has both fixed and variable components. The executive remuneration and reward framework consists of four components: • Current base pay and non-monetary benefits; • Short-term performance incentives; • Long-term performance incentives; and • Other statutory entitlements remuneration such as superannuation and long-service leave. In combination, these comprise an executive’s total remuneration. In alignment with its remuneration strategy, the Board’s policy on executive remuneration is that, broadly, it comprises a fixed component and an ‘at-risk’ or performance-based component (STIP and LTIP), where a significant component of the executive remuneration is at risk. The two charts below show the relative proportion of the executives’ total remuneration package for the 2017 financial year: CEO TFR 42% Other executives STIP 24% STIP 18% TFR 62% LTIP 34% LTIP 20% In calculating the ‘at risk’ compensation as a proportion of total remuneration for the 2017 financial year for each executive, the maximum entitlement that could potentially be awarded under the STIP or LTIP was taken into account. a) Total fixed remuneration (TFR) Fixed remuneration, consisting of base salary, superannuation and non-monetary benefits, is reviewed annually by the HRRC, based on individual and business unit performance, the overall performance of the Group and comparable market remuneration. b) Short term incentive plan (STIP) The Executive KMP are eligible to participate in the STIP in a manner determined by the Board. The STIP puts a proportion of the remuneration ‘at risk’ subject to meeting specific, pre-determined performance measures linked to the Company’s objectives, which are set annually. This aligns employee interests with the Group’s financial performance, as well as the Group’s organisational values. As with fixed remuneration, the Board and the HRRC rely on comparative data from companies of a similar size. In addition, data from competitors has been considered, to ensure that the STIP remains competitive and attractive, and to incentivise the executive team to stay and to strive for exceptional performance. 22 Participants in the STIP have a target cash payment that is set every year as a percentage of their TFR. In 2017 it was subject to a maximum target of 60% for the CEO and 30% for each other executive KMP. Payments under the STIP in any given year depend on the achievement of a range of financial and non-financial key performance indicators and objectives (KPIs) as approved by the Board on an annual basis. These KPIs are tested annually after the end of the relevant year. The 2017 STIP provided for financial and non-financial KPIs, with the achievement of the financial KPI as the gateway to a STIP payment. The 2017 STIP provided for financial and non-financial KPIs to be weighted at 50% each. Year on year, the STIP and associated KPIs have been designed to compensate and reward the executive team for achieving the Company’s short-term business strategy. The 2017 strategic goals were primarily designed to ensure ongoing business growth as measured by the financial KPI. An emphasis on driving efficiencies across business units also featured strongly with other non-financial KPIs. These KPIs ensured a focus on delivering efficiencies in IT systems, human resources, and operational and functional processes, with best practice standards adopted consistently across the Group. A focus on excellence in customer service and maintaining optimal standards around risk and audit were also important strategic drivers. Financial KPI: The financial KPI is required to be met by all members of the executive KMP. In 2017, the percentage of the payment was set to vary depending on the Net Profit After Tax, adjusted to exclude the non-cash tax effected amortisation of intangibles and significant non-operating items (NPATA) achieved by the Group. Table 1 below describes the arrangement. Table 1: Financial KPI NPATA for 2017 1. 2. 3. 4. $60m or more $58.5m or more but less than $60m $57m or more but less than $58.5m Less than $57m % of STIP 50% 25% 12.5% 0% This target range represented a significant increase over 2016 NPATA which was $44m. The financial performance of the Group in 2017 saw a growth of 46% from 2016. NPATA for the year ended 31 December 2017 was $64.1m compared to $44.0m in 2016. As a result, 50% of the STIP will be paid out in total to the executive KMP in relation to this KPI. Unless NPATA was at least $57m (see number 4 in the table above), no STIP was payable for the non-financial KPIs below. As indicated above, this requirement was satisfied. 23 Non-financial KPIs: The non-financial KPIs are performance objectives that apply to the executive KMP and are summarised in Table 2 below. Actual performance against objectives has also been provided. The Board’s assessment of performance against KPIs in 2017 is presented in the following table. Table 2: List of non-financial KPIs: who is subject to them, how they are measured and to what extent they were achieved Non-financial KPI Relevant executive How it is measured Actual achievement 1. New business: a) Win large clients CESP, CENL Targets set on number of new packages with stretch targets in place b) Increase B2B cross-sell CESP Target set for achieving cross sell opportunities 2. Existing clients: a) Retain 100% of key CESP Retention of identified key clients clients b) Increase package and CEO, CESP, CENL leasing uptake 3. Operational excellence: Targets set for achieving organic growth with stretch targets in place a) Increase operational CHRO, CENL HR plan delivered and approved by HRRC Chairman efficiency b) Maintain IT capabilities CIO Specific operational efficiency projects delivered on time and on budget Delivery of the group IT security plan and achievement of specific milestones 4. M&A: a) Acquire new businesses to grow and diversify b) Integrate and manage acquired businesses 5. Risk – Manage and embed risk management and audit All Payment of STIP CEO, CFO, CLO As approved by Chairman All except for CENL Delivery of integration plan including the successful organisational restructure across the Group and delivery of the technology roadmap Risk & Audit plan remediation plans closed in agreed time period 100% 100% 100% 100% 100% 100% 100% 67% 80% Any amount that may be paid to the participants under the STIP is subject to the absolute discretion of the Board, after taking into account performance against KPIs and any other matters determined by the Board to be relevant to its discretion including, without limitation, the participant’s conduct. A total of $851,764 of the 2017 STIP will be paid to the CEO and other executive KMP upon finalisation of the Financial Report for the year ended 31 December 2017. Of this amount, $304,983 will be paid to the CEO. The table below shows the actual STIP outcome for each executive as a percentage of their maximum STIP opportunity. Table 3: 2017 STIP outcomes Name of Executive Deven Billimoria – Chief Executive Officer Clarence Yap – Chief Information Officer Michael Ellies – Chief Executive Salary Packaging Dave Adler – Chief Executive Novated Leasing & Fleet Houda Lebbos – Chief Human Resources Officer Sophie MacIntosh – Chief Legal Officer Timothy Looi – Chief Financial Officer 2017 94% 95% 100% 100% 95% 94% 94% c) Long-Term Incentive Plan (LTIP) In early 2015 the Board established an LTIP for the CEO and executive KMP, which was approved for adoption by shareholders at the 2015 AGM. At the Company’s AGM in May 2017, the shareholders approved the issue of shares to the CEO pursuant to that plan. 24 The LTIP aligns rewards with shareholder value by tying this component of executive remuneration to the achievement of performance measures that underpin sustainable long-term growth. It is proposed that LTIP grants will be made once a year. Each year the CEO’s grant of LTIP shares will be put to a shareholder vote at the Company’s AGM. In 2018, in accordance with the ASX Listing Rules, the LTIP will be put to shareholders for approval again. The LTIP is a loan-funded share plan. Shares are purchased by the participant and funded by a loan provided by the Company. The shares are held by the participant until they vest or are forfeited, and are eligible for dividends. All dividends paid or distributions made by the Company to the participant are applied to repay the loan and to meet the tax liability on those dividends or distributions. The loan is for a period of five years from issue, is subject to limited recourse and is interest-free, as required by ASIC Class Order CO14/1000 and consistent with ASIC’s policy published in Regulatory Guide 49. The loan is repayable in full on the earlier of the termination date of the loan or the date on which the shares are sold. If the vesting/performance conditions are not met and shares do not vest for any other reason, the shares will be acquired by the Company for the value of the outstanding loan. The shares are forfeited if the performance hurdles are not met or the participant ceases employment prior to vesting. It is not proposed that the performance hurdles be re-tested. Where there is a change of control event, the Board may at its discretion determine that some or all of a participant’s unvested shares may vest. The Board may consider amending the vesting terms and the performance hurdles, from time to time, to ensure that they are aligned to market practices and to ensure the best outcomes for the Company. It is envisaged that each year the LTIP grant will have an EPS and TSR hurdle. Further, the Board has the absolute discretion to replace the LTIP in any one or more years with an equivalent STIP or any other program. 2017 grant under the LTIP The number of shares granted is based on a proportion of the relevant executive’s fixed remuneration. For 2017, the LTIP grant to the CEO was 94% of TFR, and to the executive KMP was between 48% and 58% of TFR, as measured by the fair value of the shares on the grant allocation date (i.e. when the number of shares to be issued was determined). Under the 2017 LTIP grant, the executive KMP and the CEO purchased shares at $6.39 and $6.50 respectively, being the market value on the date of issue. ‘Market value’ for the CEO’s shares was the 20-day VWAP of the shares, up to and including the trading day immediately prior to the date of the AGM. ‘Market value’ for the executive KMP (other than the CEO) shares was the 20-day VWAP of the shares, up to and including the trading day immediately prior to the date of issue, where in calculating the VWAP, the VWAP for the period prior to the declared cum dividend date was reduced by the amount of the declared dividend relating to that cum dividend date. Under the 2017 LTIP grant, the vesting period is three years ending on 31 December 2019. The vesting of the shares is subject to two performance hurdles, being an earnings growth hurdle (based on NPATA per share) and a TSR hurdle, explained below. The two performance hurdles are described below in relation to the 2017 grant, and were explained to shareholders in the 2017 Notice of AGM, and subsequently approved by shareholders. Because the shares awarded under the LTIP are economically equivalent to options, the principal value to the CEO and executive KMP comes through the increase in market value of the shares above market value at the time of issue. This provides further alignment with shareholder wealth and further links remuneration with Company performance. Earnings per share (EPS) performance hurdle The EPS performance hurdle applies to 75% of the total number of LTIP shares that may vest at the end of the vesting period. The Board’s view is that the 2017 EPS performance hurdle set out below is a challenging target. In addition, the main benefit of the LTIP shares arises from share price growth which, in effect, acts as a further performance requirement. The following method was used to determine the EPS hurdle. It is based on achievement of the CAGR of EPS (measured on the Company’s NPATA per share) from the 2016 audited financial results, adjusted to include the 2016 full year earnings of the acquisitions of Autopia Group Pty Ltd and Selectus Pty Ltd (acquisitions that occurred in 2016). That is, the actual base year NPATA is increased so the NPATA growth that must be achieved is higher than if the actual base year NPATA were used. Table 4: EPS Performance Hurdle EPS Performance Hurdle Applies to a maximum of 75% of the total number of shares issued under the 2017 LTIP grant Measure Vesting period EPS CAGR EPS target Loan-Funded Shares subject to vesting EPS CAGR The period of 3 calendar years ending 31 December 2019* Below 10.0% 10.0% $0.56 Nil 50% Between 10.0% – 15% Straight line between 50% and 100% 15% or greater $0.64 100% (capped) *Or such other date on which the Board decides whether the vesting condition has been met. 25 Total shareholder return (TSR) performance hurdle The TSR performance hurdle applies to 25% of the total number of LTIP shares that may vest at the end of the relevant vesting period. TSR measures the growth in the price of the shares plus cash distributions notionally reinvested in shares. Each of the companies in the S&P/ASX Small Ordinaries Index are ranked from highest to lowest based on their TSR over the performance measurement period (which is the same as the vesting period). For the purpose of calculating the TSR measurement, the relevant share prices are determined by reference to the VWAP over the 20 trading days up to and including 1 January 2017 (the performance measurement period start-date for the 2017 grant) and the 20 trading days up to and including the performance measurement period end-date (as specified in Table 5). Accordingly, the TSR hurdle is based on the TSR performance (ranking) of the Company as determined over the vesting period compared to the TSR of companies in the S&P/ASX Small Ordinaries Index (S&P-/-ASX 300 Index excluding S&P-/-ASX 100 Index) as explained in Table 5. The Board believes it is appropriate to have a proportion of the shares awarded under the LTIP to be subject to a TSR performance hurdle to provide a market-based hurdle. In 2017 (as in previous years) it was restricted to 25% of the LTIP shares. Note: The Small Ordinaries Index contains several companies outside the Company’s industry. The Board’s view was that Small Ordinaries Index was an appropriate comparator group for the Company in 2017. However, given the growth in the Company’s market capitalisation, the Board has re-assessed what is the most appropriate comparator group for the Company for the purposes of setting the TSR hurdle in 2018. The comparator group will be the ASX 200. The Board’s view is that there are not enough usefully comparable companies to create a company-specific comparator group, which would require at least 10, and ideally 20, companies. Table 5: Relative TSR Performance Hurdle TSR Performance Hurdle Applies to a maximum of 25% of the total number of shares issued under the 2017 LTIP grant Measure Vesting period Smartgroup TSR performance compared to Index Loan-Funded Shares subject to vesting Relative TSR (ranking) The period of 3 calendar years ending 31 December 2019* 0 to 49th percentile 50th percentile 51st to 74th percentile 75th to 100th percentile Nil 50% Straight line between 50% and 100% 100% *Or such other date on which the Board makes a determination as to whether the vesting condition has been met. The fair value used for grant allocation purposes included an estimate of the impact of the performance hurdles. For the shares subject to the EPS performance hurdle, the best estimate of the vesting percentage for the shares subject to the 10% and 15% EPS CAGR hurdles was assumed to be 100% and 75% respectively. For the shares subject to the TSR hurdle, a discount of approximately 10% was applied. 2015 grant under the LTIP – shares vesting as at 31 December 2017 The 2015 LTIP grant was split into two tranches, the first tranche (Tranche A) having a vesting period ending on 31 December 2016, and the second tranche (Tranche B) having a vesting period ending on 31 December 2017. The vesting of both tranches of shares is subject to the achievement of an EPS hurdle and a TSR hurdle. EPS hurdle: The EPS hurdle applies to a maximum of 75% of this tranche of shares, and is based on achievement of a CAGR of EPS (measured on the Company’s NPATA per share) from the 2014 audited financial results (adjusted to exclude the once-off expenses arising from the initial public offer of shares in the Company). As at 31 December 2017, the EPS was 52.0 cents per share and therefore, the EPS target of 21.1 cents per share was exceeded. Under the terms of the 2015 LTIP grant, that result entitles the relevant executives to receive 100% of that parcel of LTIP shares. TSR hurdle: The TSR hurdle applies to 25% of the LTIP shares in the first tranche. The Company’s TSR performance was measured to be in the top percentile (i.e. 100th percentile) of the index. Under the terms of the 2015 LTIP grant, that result entitles the relevant executives to receive 100% of that parcel of LTIP shares. The Company engaged Minter Ellison as remuneration consultants to provide external verification of the above calculations. Accordingly, all five executives participating in the 2015 grant had Tranche B of their 2015 LTIP shares vest in full in accordance with the column headed ‘Vested in Year’ in Table 13. Remuneration outcomes in 2017 and link to 2017 financial year performance In considering the Group’s performance, the benefit to shareholders and appropriate remuneration for the executives, the Board, through the HRRC, has regard to financial and non-financial indices, including the indices shown in the below table in respect of the current financial year and the previous two financial years. 26 Table 6 – Indices relevant to the Board’s assessment of the Group’s performance and the benefit to shareholders Index NPATA ($m) EPS (cents) Dividends declared in respect of the financial year – per share (cents) Share price – year end ($) 3 year TSR performance compared to index (percentile) 2015 26.2 25.3 16.6 5.11 N/A 2016 44.0 36.2 24.8 6.28 N/A 2017 64.1 52.0 35.0 10.85 100% As shown above, the Company’s 3 year TSR to 31 December 2017 was the highest of all companies in the Small Ordinaries Index. The graph below illustrates the relationship between the Group’s performance and STIP awards in respect of the current financial year and the preceding two financial years. In 2016 NPATA grew by 68% to $44.0m, and in 2017 NPATA grew by 46% to $64.1m, so in both these years, the executive KMP earned awards in full in respect of this measure. Relationship between Group performance and STIP outcomes NPATA ($’000) STIP paid ($’000) 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 NPATA STIP paid 1000 900 800 700 600 500 400 300 200 100 0 2015 2016 2017 The graph below illustrates the relationship between the Group’s performance and LTIP awards in respect of the current financial year and the preceding two financial years. As explained in the previous sections describing the terms of the LTIP grants, the LTIP has two hurdles, of which the most significant is EPS. In the last two years, the EPS achieved exceeded the relevant EPS hurdle and, as a consequence, the LTIP fully vested for each of the relevant years. Relationship between Group performance and LTIP outcomes EPS (NPATA/shares) $0.55 $0.50 $0.45 $0.40 $0.35 $0.30 $0.25 $0.20 $0.15 $0.10 $0.05 $0.00 LTIP vested shares (000’s) 1,400 1,200 EPS LTIP vested 1,000 800 600 400 200 0 2015 2016 2017 27 2017 remuneration structure Use of remuneration consultants As noted above, in late 2017 the Group engaged the remuneration consulting arm of Minter Ellison to undertake a benchmarking exercise, to assist in setting executive remuneration for 2018. That remuneration will be reported in the 2018 Annual Report. That engagement was arranged and supervised directly by the Chairman of the HRRC. Advice was discussed directly with the Chairman and/or the Board. Details of remuneration Amounts of remuneration Details of the remuneration of the KMP of the Group are set out in the following tables in accordance with the requirements of the Corporation Act 2001 (Cth) and the Accounting Standards. The KMP of the Group consisted of the Directors of Smartgroup Corporation Ltd and the following persons: • Timothy Looi – Chief Financial Officer • Dave Adler – Chief Executive Novated Leasing & Fleet • Michael Ellies – Chief Executive Salary Packaging • Houda Lebbos – Chief Human Resources Officer • Clarence Yap – Chief Information Officer • Sophie MacIntosh – Chief Legal Officer. Table 7: 2017 Remuneration Short-term benefits Post-employment benefits Long-term benefits Cash salary and fees $ Bonus $ Superannuation $ Change in employee benefit provision $ Options $ Total $ 2017 Non-Executive Directors: Michael Carapiet John Prendiville Gavin Bell Ian Watt Andrew Bolam Deborah Homewood Executive KMP Deven Billimoria Timothy Looi Dave Adler Michael Ellies Houda Lebbos Clarence Yap Sophie MacIntosh 230,000 135,000 132,500 132,500 122,500 120,000 - - - - - - 21,850 12,825 12,588 12,588 11,638 11,400 518,837 304,983 22,391 302,669 291,806 289,444 286,617 293,490 305,366 91,495 94,245 94,245 88,065 85,671 93,060 22,391 22,391 26,238 22,391 18,525 19,757 - - - - - - - - - - - - 5,305 (2,329) 438,382 146,552 10,765 125,279 13,333 125,279 (5,131) 20,648 2,398 123,564 49,725 49,952 251,850 147,825 145,088 145,088 134,138 131,400 1,289,898 560,778 544,486 548,539 515,506 468,059 470,533 Total 3,160,729 851,764 236,973 44,989 1,058,733 5,353,188 28 Table 8: 2016 Remuneration 2016 Non-Executive Directors: Michael Carapiet John Prendiville Gavin Bell Andrew Bolam Ian Watt Deborah Homewood* Executive KMP Deven Billimoria Timothy Looi Dave Adler Michael Ellies Houda Lebbos Total Short-term benefits Post-employment benefits Long-term benefits Cash salary and fees $ Bonus $ Superannuation $ Change in employee benefit provision $ Options $ Total $ 226,667 130,000 128,333 118,333 121,667 77,419 515,387 299,801 288,939 278,939 283,792 - - - - - - 275,783 77,868 75,396 75,396 77,775 21,533 12,350 12,192 11,242 11,558 7,355 22,727 22,727 25,000 32,579 25,000 2,469,277 582,218 204,263 - - - - - - - - - - - - 248,200 142,350 140,525 129,575 133,225 84,774 (13,839) 342,642 1,142,700 23,427 15,337 13,024 18,925 56,874 98,665 88,114 88,114 86,938 522,488 492,786 488,052 492,430 704,473 4,017,105 * Represents remuneration from 9 May 2016 (the date of appointment) to 31 December 2016. The proportion of remuneration linked to performance is as follows: Table 9: Proportion of Remuneration Name 2017 2016 2017 2016 2017 2016 Fixed remuneration At risk – STIP At risk – LTIP Non-Executive Directors: Michael Carapiet John Prendiville Gavin Bell Ian Watt Andrew Bolam Deborah Homewood Executive KMP: Deven Billimoria Timothy Looi Dave Adler Michael Ellies Houda Lebbos Clarence Yap Sophie MacIntosh 100% 100% 100% 100% 100% 100% 42% 58% 60% 60% 59% 71% 69% 100% 100% 100% 100% 100% 100% 46% 66% 67% 67% 67% - - - - - - - - 24% 16% 17% 17% 17% 18% 20% - - - - - - 24% 15% 15% 15% 15% - - - - - - - - 34% 26% 23% 23% 24% 11% 11% - - - - - - 30% 19% 18% 18% 18% - - 29 Service agreements Non-executive Directors Non-executive Directors do not have fixed-term contracts with the Company. On appointment to the Board, all non-executive Directors enter into a service agreement with the Company in the form of a letter of appointment. The letter summarises the Board policies and terms, including compensation. Remuneration and other terms of employment for the Executive Director are formalised in service agreements. Details of these agreements are as follows: Name: Title: Deven Billimoria Managing Director & Chief Executive Officer Agreement commenced: 1 June 2014 Term of agreement: Open ended Details: Deven Billimoria is entitled to: • Receive fixed annual remuneration of $540,750 inclusive of superannuation contributions, and • Participate in the STIP with target participation under the STIP capped at a maximum of 60% of his fixed annual remuneration. Payments under the STIP in any given year depend on the achievement of a range of financial and non-financial KPIs as approved by the Board on an annual basis. The employment contract may be terminated by either party giving 12 months’ written notice or in the case of the Group by payment in lieu of notice. The Group may terminate the employment contract immediately and without payment in lieu of notice in the event of serious misconduct or other specified circumstances. There is no entitlement to termination payments in the event of termination. Non-compete provisions upon termination of employment exist for a period of 12 months from the date of termination of employment, as determined by the Board (in its sole discretion), depending on the circumstances of termination. The enforceability of the restraint clause is subject to all usual legal requirements. Other executive key management personnel Other executive KMP have employment agreements setting out the terms and conditions of their employment. The agreements are not of a fixed duration. These agreements provide for: • Total compensation inclusive of a base salary and superannuation contribution; • Eligibility to participate in the STIP, with target participation in the STIP capped at a maximum of 30% of total fixed annual remuneration; • Termination by either party giving three months’ written notice, or in the case of the Group, payment in lieu of notice; • Immediate termination by the Group without payment in lieu of notice in the event of serious misconduct or other specific circumstances; • No entitlement to termination payments in the event of termination; and • Non-compete provisions upon termination of employment for a maximum of six months from the date of termination of employment, as determined by the Board (in its sole discretion), depending on the circumstances of termination. The enforceability of the restraint clause is subject to all usual legal requirements. Share-based compensation Bonus shares and cash offers Details of shares issued to Directors and other KMP as part of compensation during the year ended 31 December 2017 are set out below: Table 10: Bonus Shares and Cash Offers 2017 Nil 2016 Nil 30 LTIP or Loan Funded Share (LFS) Plan As described above, the Board established an LTIP for the executive KMP and other senior management. The securities issued under the LTIP are not options. However, the terms of the LTIP are such that the benefits to participants are similar to the benefits that would be received had the participant been granted options – that is, the participant benefits from the increase in the market price over the purchase price of the share. Accordingly, the Company provides a summary below of the terms of the LTIP for the purposes of compliance with the Corporations Act in relation to the disclosure of details of options granted during 2017. The terms and conditions of each LTIP grant affecting compensation in the current or a future reporting period are disclosed in Table 4 and Table 5. Table 11: Terms and Conditions of the shares granted under the LTIP in 2017 Issue date of LFS Vesting period Exercise date Expiry date Number of shares granted Price of shares granted Value of option at grant date* 17 Mar 2017 5 May 2017 3 calendar years to 31 December 2019 3 calendar years to 31 December 2019 1 Jan 2020 16 Mar 2022 1,208,501 $6.39 $1.65 1 Jan 2020 4 May 2022 338,628 $6.50 $1.67 * Reflects the fair value at the issue date as part of remuneration granted as valued by Minter Ellison. % Vested at 31 December 2017 n/a n/a Performance achieved To be determined To be determined As noted above, the LFS issued under the LTIP are not options. However, for the purposes of compliance with the Corporations Act 2001, the Company provides a summary below of the LFS issued under the LTIP in 2015 that have a vesting period ending on 31 December 2017. Table 12: LTIP shares with a vesting period ending on 31 December 2017 Exercise date Expiry date Number of shares vesting (first tranche) Price of shares granted Value of option at grant date Performance achieved % Vested at 31 December 2017 † 1 Jan 2018 17 Mar 2020 602,262 $1.60 $0.31 yes 100% 1 Jan 2018 26 Apr 2020 516,224 $1.65 $0.40 yes 100% Issue date of LFS 18 Mar 2015 27 Apr 2015 Vesting period (first tranche) 3 calendar years to 31 December 2017 3 calendar years to 31 December 2017 † As determined by the Board on 21 February 2018. 31 Table 13: Shares granted under the LTIP in 2017 and the vesting profile of long term incentives granted as remuneration Name and grant dates Deven Billimoria Timothy Looi Dave Adler Michael Ellies Houda Lebbos Clarence Yap Sophie MacIntosh Balance at the start of the year (unvested) Granted as compensation Vested in year Forfeited in year Balance at end of the year Balance at the end of the year (unvested) LTIP vested and not exercised at end of year Total LTIP (vested and unvested) 869,876 283,325 257,471 257,471 253,861 - - 338,628 124,792 105,374 105,374 103,646 105,996 106,480 (516,224) (154,867) (149,951) (149,951) (147,493) - - - - - - - - - - 692,280 253,250 212,894 212,894 210,014 105,996 106,480 516,224 154,867 149,951 149,951 147,493 - - 1,208,504 408,117 362,845 362,845 357,507 105,996 106,480 1,793,808 1,118,486 2,912,294 Total executive KMP 1,922,004 990,290 (1,118,486) Senior management - 556,839 - (313,507) 243,332 - 243,332 Total 1,922,004 1,547,129 (1,118,486) (313,507) 2,037,140 1,118,486 3,155,626 There were no options over ordinary shares issued to Directors and other KMP as part of compensation as at 31 December 2017. Additional disclosures relating to Key Management Personnel In accordance with Class Order 14/632 issued by the Australian Securities and Investment Commission, relating to ‘Key management personnel equity instrument disclosures’, the following disclosures relate only to the equity instruments in the Company and its subsidiaries. Equity instrument details relating to KMP The number of shares in the Company held during the financial year by each Director and other KMP, including their personally related parties, is set out below: Table 14: Director and executive KMP shareholding Balance at start of the year 2,022,816 852,902 74,850 159,284 52,142 - Ordinary shares Michael Carapiet John Prendiville Gavin Bell Andrew Bolam Ian Watt Deborah Homewood Deven Billimoria 2,002,142 Timothy Looi Dave Adler Michael Ellies Houda Lebbos Clarence Yap Sophie MacIntosh 384,306 29,998 259,895 164,361 - - LTIP exercised Purchases / (disposals) Balance at end of the year LTIP vested and not exercised at end of year Balance at end of year including vested LTIP - - - - - - 516,225 154,868 149,951 149,951 147,493 - - 25,000 2,047,816 - - 40,716 10,000 4,444 852,902 74,850 200,000 62,142 4,444 - 2,518,367 (188,421) (79,949) (102,142) (164,361) - 140 350,753 100,000 307,704 147,493 - 140 - - - - - - 516,224 154,867 149,951 149,951 147,493 - - 2,047,816 852,902 74,850 200,000 62,142 4,444 3,034,591 505,620 249,951 457,655 294,986 - 140 Total 6,002,696 1,118,488 (454,573) 6,666,611 1,118,486 7,785,097 This excludes shares from the LTIP that are not yet vested as at 31 December 2017. This concludes the remuneration report, which has been audited. 32 Shares under option As at 31 December 2017, there were 2,037,140 unvested shares issues to employees under the LTIP program. The LTIP shares are legally held by the employees, however they cannot deal in the shares until the vesting conditions are satisfied and the loan is fully repaid. These have been treated as options in accordance with AASB 2 ‘Share-based Payment’ issued by Australian Accounting Standards Board. Shares issued on the exercise of options There were no ordinary shares of Smartgroup Corporation Ltd issued on the exercise of options during the year ended 31 December 2017 and up to the date of this report. Indemnity and insurance of officers The Company has indemnified the Directors and executives of the Company for costs incurred, in their capacity as a Director or executive, for which they may be held personally liable, except where there is a lack of good faith. During the financial year, the Group paid a premium in respect of a contract to insure the Directors and executives of the Company against a liability to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. Indemnity and insurance of auditor The Company has not, during or since the end of the year, indemnified or agreed to indemnify the auditor of the Company or any related entity against a liability incurred by the auditor. During the year, the Company has not paid a premium in respect of a contract to insure the auditor of the Company or any related entity. Proceedings on behalf of the Company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the Company, or to intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. Non-audit services Details of the amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in note 40 to the financial statements. The Directors are satisfied that the provision of non-audit services during the financial year, by the auditor (or by another person or firm on the auditor’s behalf), is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are of the opinion that the services as disclosed in note 40 to the financial statements do not compromise the external auditor’s independence requirements of the Corporations Act 2001 for the following reasons: • All non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and • None of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional and Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards. Officers of the Company who are former partners of PricewaterhouseCoopers There are no officers of the Company who are former partners of PricewaterhouseCoopers. Rounding of amounts The Company is of a kind referred to in ASIC Legislative Instrument 2016/191, relating to the ‘rounding off’ of amounts in the Directors’ report. Amounts in the Directors’ Report have been rounded off in accordance with the instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on the following page. Auditor PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. This report is made in accordance with a resolution of Directors, pursuant to section 298(2)(a) of the Corporations Act 2001. On behalf of the Directors Michael Carapiet, Chairman 21 February 2018, Sydney 33 Auditor’s Independence Declaration As lead auditor for the audit of Smartgroup Corporation Ltd for the year ended 31 December 2017, I Auditor’s Independence Declaration declare that to the best of my knowledge and belief, there have been: no contraventions of the auditor independence requirements of the Corporations Act 2001 in (a) As lead auditor for the audit of Smartgroup Corporation Ltd for the year ended 31 December 2017, I relation to the audit; and declare that to the best of my knowledge and belief, there have been: (b) (a) no contraventions of any applicable code of professional conduct in relation to the audit. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and This declaration is in respect of Smartgroup Corporation Ltd and the entities it controlled during the period. (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Smartgroup Corporation Ltd and the entities it controlled during the period. Sam Hinchliffe Partner PricewaterhouseCoopers Sam Hinchliffe Partner PricewaterhouseCoopers Sydney 21 February 2018 Sydney 21 February 2018 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 Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 PricewaterhouseCoopers, ABN 52 780 433 757 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au 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. Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au 34 Liability limited by a scheme approved under Professional Standards Legislation. Auditor’s Independence Declaration As lead auditor for the audit of Smartgroup Corporation Ltd for the year ended 31 December 2017, I declare that to the best of my knowledge and belief, there have been: Auditor’s Independence Declaration (a) As lead auditor for the audit of Smartgroup Corporation Ltd for the year ended 31 December 2017, I no contraventions of the auditor independence requirements of the Corporations Act 2001 in declare that to the best of my knowledge and belief, there have been: relation to the audit; and (b) (a) no contraventions of any applicable code of professional conduct in relation to the audit. no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and This declaration is in respect of Smartgroup Corporation Ltd and the entities it controlled during the period. (b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Smartgroup Corporation Ltd and the entities it controlled during the period. PricewaterhouseCoopers Sam Hinchliffe Partner Sam Hinchliffe Partner PricewaterhouseCoopers Sydney 21 February 2018 Sydney 21 February 2018 This page has intentionally been left blank 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 Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 PricewaterhouseCoopers, ABN 52 780 433 757 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au 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. Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation. 35 Reconciliation of Statutory Results to Adjusted Results $ mil Revenue Operating EBITDA Joint venture contribution EBITDA Depreciation Amortisation Net finance costs PBT Income tax expense NPAT Add back: Amortisation (tax effected) Cash tax benefit NPATA Shares (#millions) NPATA per share ($) Statutory Financials CY 2017 Reclassify: equity share of investments Add back: Acquisition costs Add back: net fair value loss (1) Add back: GST adjustment Reclass corporate interest revenue Adjusted: CY 2017 205.4 86.7 0.3 87.0 (1.6) (17.7) (5.6) 62.1 (20.8) 41.3 12.4 3.1 56.8 - - 0.4 0.4 - (0.3) - 0.1 (0.1) - 0.2 - 0.2 - 1.6 - 1.6 - - - 1.6 (0.3) 1.3 - - 1.3 - 4.9 - 4.9 - - - 4.9 - 4.9 - - 4.9 0.8 1.2 - 1.2 - - - 1.2 (0.3) 0.9 - - 0.9 (0.8) 205.4 (0.8) - (0.8) - - 0.8 - - - - - - 93.6 0.7 94.3 (1.6) (18.0) (4.8) 69.9 (21.5) 48.4 12.6 3.1 64.1 123.2 0.52 1 Includes $6.1m fair value loss from Selectus deferred consideration and a $1.2m fair value gain on the Smartequity deferred consideration. 36 Financial Report 2017 Consolidated Statement of Profit or Loss and other Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flows Notes to the Consolidated Financial Statements Smartgroup Corporation Ltd Directors’ Declaration 31 December 2017 ABN 48 126 266 831 Independent Auditor’s Report to the Members of Smartgroup Corporation Ltd Shareholder Information Corporate Directory 38 39 40 41 42 85 86 94 97 Consolidated Statement of Profit or Loss and Other Comprehensive Income For the year ended 31 December 2017 Consolidated Revenue Share of after tax profits of joint ventures accounted for using the equity method Expenses Product costs Employee benefits expense Administration and corporate expenses Occupancy expenses Advertising and marketing expenses Depreciation expense Amortisation of acquired intangible assets Other expenses Operating profit Fair value (loss)/gain on revaluation of financial liabilities Mergers and acquisitions transaction costs Finance costs Profit before income tax expense Income tax expense Profit after income tax expense for the year Other comprehensive income Items that may be reclassified subsequently to profit or loss Net change in the fair value of cash flow hedges taken to equity, net of tax Other comprehensive income for the year, net of tax Total comprehensive income for the year Profit/(loss) for the year is attributable to: Non-controlling interest Owners of Smartgroup Corporation Ltd Total comprehensive income for the year is attributable to: Non-controlling interest Owners of Smartgroup Corporation Ltd Basic earnings per share Diluted earnings per share Restated * 2017 $’000 2016 $’000 Note 7 205,443 147,960 348 513 (4,826) (75,024) (24,187) (4,107) (3,027) (1,589) (3,599) (56,323) (17,721) (3,152) (2,667) (1,412) (17,741) (12,512) (1,114) 74,176 (4,906) (1,624) (5,571) 62,075 (20,766) 41,309 (302) 50,785 1,569 (2,074) (4,106) 46,174 (13,386) 32,788 (65) (65) 264 264 41,244 33,052 (4) 41,313 - 32,788 41,309 32,788 (4) 41,248 - 33,052 41,244 33,052 34.5 34.2 29.8 29.4 8 8 19 8 9 16 16 * Refer to note 6 for detailed information on Restatement of comparatives. The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. 38 Consolidated Statement of Financial Position As at 31 December 2017 Assets Current assets Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables Other current assets Total current assets Non-current assets Investments accounted for using the equity method Derivative financial instruments Deferred tax assets Property and equipment Intangible assets Other non-current assets Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Customer salary packaging liability Income tax payable Provisions Deferred consideration Other current liabilities Total current liabilities Non-current liabilities Deferred tax liabilities Provisions Borrowings Contingent consideration Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Equity attributable to the owners of Smartgroup Corporation Ltd Non-controlling interest Total equity Consolidated 2017 $’000 2016 $’000 Note 10 39 18 20 24 21 9 35 5 36 39 9 37 19 22 9 38 11 19 12 13 30,876 67,644 21,959 4,770 79,990 39,493 15,885 7,025 125,249 142,393 6,348 226 1,879 3,155 326,736 516 338,860 464,109 30,883 67,644 6,827 8,296 - 2,758 116,408 - 1,995 140,853 - 142,848 259,256 6,751 307 - 3,150 285,523 508 296,239 438,632 26,427 39,493 8,848 5,550 9,541 1,336 91,195 175 1,636 150,118 1,244 153,173 244,368 204,853 194,264 176,883 4,570 23,370 204,823 30 170,940 2,631 20,693 194,264 - 204,853 194,264 The above consolidated statement of financial position should be read in conjunction with the accompanying notes. 39 Consolidated Statement of Changes in Equity For the year ended 31 December 2017 Consolidated Issued capital $’000 Reserves $’000 Retained profits $’000 Non-controlling interest $’000 Balance at 1 January 2016 62,013 11,664 8,828 Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year - - - - 264 264 32,788 - 32,788 Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (note 12) 108,927 (10,360) Share-based payments (note 13) Dividends paid (note 15) - - 1,063 - (20,923) - - Balance at 31 December 2016 170,940 2,631 20,693 - - - - - - - - Consolidated Issued capital $’000 Reserves $’000 Retained profits $’000 Non-controlling interest $’000 Balance at 1 January 2017 170,940 2,631 20,693 Profit/(loss) after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year - - - Transactions with owners in their capacity as owners: Contributions of equity, net of transaction costs (note 12) 5,943 Share-based payments (note 13) Non-controlling interests arising on acquisition Dividends paid (note 15) - - - - (65) (65) - 2,004 41,313 - 41,313 - - - - (34) (38,602) Balance at 31 December 2017 176,883 4,570 23,370 - (4) - (4) - - 34 - 30 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 40 Total equity $’000 82,505 32,788 264 33,052 98,567 1,063 (20,923) 194,264 Total equity $’000 194,264 41,309 (65) 41,244 5,943 2,004 - (38,602) 204,853 Consolidated Statement of Cash flows For the year ended 31 December 2017 Cash flows from operating activities Receipts from customers Payments to suppliers and employees Transaction costs relating to business acquisitions Interest received from operations Interest paid Income taxes paid Net cash from operating activities excluding salary packaging receipts and payments Receipts in restricted cash Payments of customer salary packaging liability Net cash from operating activities Cash flows from investing activities Payment for business acquisitions (net of cash acquired) Contingent consideration on acquisition paid Payments for joint venture capital invested Payments for purchase of property and equipment Proceeds from sale of property and equipment Interest received from investments Dividends received from joint venture Net cash from/(used in) investing activities Cash flows from financing activities Proceeds from issuance of shares Share issue transaction costs Proceeds from long term incentive plan Proceeds from borrowings (net of borrowing costs) Repayments of borrowings Dividends paid Net cash from/(used in) financing activities Net increase/(decrease) in cash and cash equivalents Restricted cash and cash equivalents at the beginning of the financial year Cash and cash equivalents at the beginning of the financial year Restricted cash and cash equivalents at the end of the financial year Cash and cash equivalents at the end of the financial year Total Consolidated Note 2017 $’000 212,244 (117,811) (3,276) 1,855 (4,734) (27,845) 60,433 1,230,627 2016 $’000 154,446 (94,208) (2,888) 1,639 (3,251) (13,202) 42,536 950,862 (1,222,072) (948,644) 68,988 44,754 (35,691) (9,541) - (423) - 909 751 (87,631) - (175) (674) 11 784 - (43,995) (87,685) - - 2,646 22,000 (32,000) (38,602) (45,956) (20,963) 39,493 79,990 67,644 30,876 98,520 66,915 (1,088) 359 100,495 (3,500) (20,923) 142,258 99,327 749 19,407 39,493 79,990 119,483 41 33 23 24 15 39 10 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. Notes to the Consolidated Financial Statements 31 December 2017 Note 1. General information The financial statements cover Smartgroup Corporation Ltd (referred to as the ‘Company’ or ‘parent entity’) and its subsidiaries (collectively referred to as the ‘Group’). The financial statements are presented in Australian dollars, which is Smartgroup Corporation Ltd’s functional and presentation currency. Smartgroup Corporation Ltd is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is: Level 8, 133 Castlereagh Street Sydney, Australia, 2000 A description of the nature of the Group’s operations and its principal activities is included in the Directors’ Report, which is not part of the financial statements. The financial statements were authorised for issue, in accordance with a resolution of Directors, on 21 February 2018. The Directors have the power to amend and reissue the financial statements. Note 2. Significant accounting policies The principal accounting policies adopted in the preparation of the financial statements are set out in note 41 and in the respective notes. These policies have been consistently applied to all the years presented, unless otherwise stated. New or amended Accounting Standards and Interpretations adopted The Group has adopted all of the new or amended Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) that are mandatory for the current reporting period. The adoption of these Accounting Standards and Interpretations did not have any significant impact on the financial performance or position of the Group. Except for early adoption of AASB 15 ‘Revenue from Contracts with Customers’, any new or amended Accounting Standards or Interpretations that are not yet mandatory have not been early adopted. The following Accounting Standards and Interpretations are early adopted by the Group: AASB 15 Revenue from contracts with customers The AASB has issued a new standard for the recognition of revenue. AASB 15 outlines a single comprehensive model of accounting for revenue arising from Contracts with Customers that supersedes the revenue recognition requirements that are included in AASB 118. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer. The standard is effective from annual reporting periods beginning on or after 1 January 2018 and permits either a full retrospective or a modified retrospective approach for the adoption. The Group has early adopted AASB 15 using the full retrospective approach with a date of initial application of 1 January 2016. Basis of preparation These general purpose consolidated financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the AASB and the Corporations Act 2001, as appropriate for for-profit oriented entities. These consolidated financial statements also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). Historical cost convention The financial statements have been prepared under the historical cost convention, except for, where applicable, the revaluation of financial assets and liabilities (including derivative instruments) at fair value through profit or loss. 42 Note 2. Significant accounting policies (continued) Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 3. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of the Group only. Supplementary information about the parent entity is disclosed in note 26. Rounding of amounts The Company is of a kind referred to in Corporations Instrument 2016/191, issued by the Australian Securities and Investments Commission, relating to ‘rounding-off’. Amounts in this report have been rounded off in accordance with that Corporations Instrument to the nearest thousand dollars, or in certain cases, the nearest dollar. Note 3. Critical accounting judgements, estimates and assumptions The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other factors that management believes to be reasonable under the circumstances, including expectations of future events. The resulting accounting judgements and estimates will seldom equal the eventual actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below. Goodwill and other indefinite life intangible assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired, in accordance with the accounting policy stated in note 5 and note 41. The recoverable amounts of cash-generating units have been determined based on value- in-use calculations. These calculations require the use of assumptions, including estimated discount rates based on the current cost of capital and growth rates of the estimated future cash flows. Operations provision The Group exercises judgement in measuring and recognising provisions relating to the operations, including potential customer and supplier disputes. Judgement is necessary in assessing the likelihood that a claim will arise, and to quantify the possible range of financial settlement. Because of the inherent uncertainty in this evaluation process, actual losses may be different from the originally estimated provision. Note 4. Operating segments Identification of reportable operating segments The Group has identified its segments based on the internal reports that are reviewed and used by the Managing Director and Chief Executive Officer and the Chief Financial Officer (who are identified as the Chief Operating Decision Makers (CODM) in assessing performance and in determining the allocation of resources. There is no aggregation of operating segments. The CODM reviews EBITDA (earnings before interest, tax, depreciation and amortisation). The accounting policies adopted for internal reporting to the CODM are consistent with those adopted in the financial statements. The information reported to the CODM is on at least a monthly basis. Types of products and services The principal products and services of each of these operating segments are as follows: Outsourced administration (OA) This part of the business provides outsourced salary packaging services, novated leasing, share plan administration and outsourced payroll services. Vehicle services (VS) This part of the business provides end-to-end fleet management services. Software, distribution and group services (SDGS) This part of the business provides salary packaging software solutions, the marketing of salary packaging debit cards, distribution of vehicle insurances and workforce management software to the healthcare industry. 43 Note 4. Operating segments (continued) Intersegment transactions Intersegment transactions were made at market rates. Intersegment transactions are eliminated on consolidation. Intersegment receivables, payables and loans Intersegment loans are initially recognised at the consideration received. Intersegment loans receivable and loans payable that earn or incur non-market interest are not adjusted to fair value based on market interest rates. Intersegment loans are eliminated on consolidation. Operating segment information Consolidated – 2017 Revenue Management and administrative fees Products, services and commissions Trailing commissions and rebates Other revenue Intersegment sales Total revenue Segment results (EBITDA) Depreciation Amortisation Finance costs Profit before income tax expense Income tax expense Profit after income tax expense Assets Segment assets Total assets Liabilities Segment liabilities Total liabilities OA $’000 51,061 119,456 10,105 - - 180,622 67,176 VS $’000 3,907 - 726 - 2,435 7,068 3,684 SDGS $’000 333 17,639 1,419 - 14,357 33,748 Intersegment eliminations/ unallocated - - - 797 (16,792) (15,995) 21,934 (5,818) 185,779 12,761 19,856 245,713 101,640 5,154 7,700 144,762 Total $’000 55,301 137,095 12,250 797 - 205,443 86,976 (1,589) (17,741) (5,571) 62,075 (20,766) 41,309 464,109 464,109 259,256 259,256 44 Note 4. Operating segments (continued) Consolidated – 2016 Revenue (Restated) Management and administrative fees Products, services and commissions Trailing commissions and rebates Other revenue Intersegment sales Total revenue Segment results (EBITDA) Depreciation Amortisation Finance costs Profit before income tax expense Income tax expense Profit after income tax expense Assets Segment assets Total assets Liabilities Segment liabilities Total liabilities OA $’000 41,848 79,209 6,793 - - 127,850 49,473 VS $’000 3,773 - 545 - 2,489 6,807 3,291 Intersegment eliminations/ unallocated $’000 - - - 897 (14,443) (13,546) SDGS $’000 384 13,156 1,355 - 11,954 26,849 18,157 (6,717) 145,492 10,245 15,711 267,184 67,947 4,558 6,353 165,510 Total $’000 46,005 92,365 8,693 897 - 147,960 64,204 (1,412) (12,512) (4,106) 46,174 (13,386) 32,788 438,632 438,632 244,368 244,368 Accounting policy for operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the CODM. The CODM is responsible for the allocation of resources to operating segments and assessing their performance. Note 5. Non-current assets – intangible assets Consolidated Goodwill – at cost Customer contracts and relationships – at cost Less: Accumulated amortisation Software and website – at cost Less: Accumulated amortisation Brand names and logos – at cost 2017 $’000 260,646 60,829 (32,380) 28,449 73,761 (37,424) 36,337 1,304 326,736 2016 $’000 217,453 51,729 (25,045) 26,684 67,100 (27,018) 40,082 1,304 285,523 45 Note 5. Non-current assets – intangible assets (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 January 2016 Goodwill $’000 90,867 Additions through business combinations (note 23) 126,586 Amortisation expense Balance at 31 December 2016 - 217,453 Additions through business combinations (note 23) 43,193 Amortisation expense - Customer contracts and relationship $’000 Software and website $’000 Brand names and logos $’000 Total $’000 17,299 14,700 (5,315) 26,684 9,100 (7,335) 13,935 33,344 (7,197) 40,082 6,661 (10,406) 1,300 123,401 4 - 174,634 (12,512) 1,304 285,523 - - 58,954 (17,741) Balance at 31 December 2017 260,646 28,449 36,337 1,304 326,736 Impairment testing The Group monitors its business through cash-generating units (CGU) being Outsourced administration, Vehicle services, Software distribution and group services (SDGS), Advantage Salary Packaging (Advantage), Autopia Group Pty Ltd (Autopia), Selectus Pty Ltd (Selectus), AccessPay Pty Ltd (AccessPay), ABM Corporation Pty Limited (Aspire) and Salary Solutions Australia Pty Ltd (Salary Solutions). Goodwill acquired through business combinations have been allocated to the following CGUs: Consolidated Goodwill CGU1: Outsourced administration CGU2: Vehicle services CGU3: SDGS CGU4: Advantage CGU5: Autopia CGU6: Selectus CGU7: AccessPay CGU8: Aspire CGU9: Salary Solutions Total goodwill 2017 $’000 42,377 3,911 7,650 38,659 22,523 102,333 9,063 4,989 29,141 260,646 Brand names and logos have been allocated to the following CGUs: Consolidated Brand names and logos CGU1: Outsourced administration CGU2: Vehicle services CGU6: Selectus 46 2017 $’000 1,285 15 4 1,304 2016 $’000 42,377 3,911 7,650 38,659 22,523 102,333 - - - 217,453 2016 $’000 1,285 15 4 1,304 Note 5. Non-current assets – intangible assets (continued) The recoverable amount of a CGU is determined based on value-in-use calculations which require the use of assumptions. The calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. These growth rates do not exceed the long- term average growth rates for the country in which each CGU operates. The following key assumptions were used in the discounted cash flow model for different CGUs: Projected growth rate of 2.8% (2016: 2.8%) for all CGUs. Discount rate: CGU1: Outsourced administration CGU2: Vehicle services CGU3: SDGS CGU4: Advantage CGU5: Autopia CGU6: Selectus CGU7: AccessPay CGU8: Aspire CGU9: Salary Solutions 2017 $’000 17.9% 19.1% 18.4% 14.4% 18.9% 17.1% 16.7% 20.6% 17.1% 2016 $’000 14.4% 15.8% 14.9% 11.9% 12.9% 14.0% - - - In performing the value-in-use calculations for each CGU, the Group has applied post-tax discount rates to discount the estimated future post-tax cash flows. The equivalent pre-tax discount rates are disclosed above. The recoverable amount of net assets of each CGU is greater than the carrying value of the assets and, therefore, the intangible assets are not considered to be impaired. Sensitivity analysis For CGU’s 1, 3, 4, 5, 6, 7, 8 and 9: any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the CGU’s carrying amount to exceed its recoverable amount. This assessment is on the assumption that there will be no significant changes to legislation for the salary packaging concession. Should the relevant legislation change, depending on the impact of the changes, there may be a different impairment testing conclusion. For CGU2: Any reasonable possible change in the key assumptions on which the recoverable amount is based would not cause the CGU’s carrying amount to exceed its recoverable amount. Accounting policy for intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the derecognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is recognised in the statement of profit or loss and other comprehensive income in the year in which the expenditure is incurred. Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Customer contracts and relationships Customer contracts and relationships acquired in a business combination are amortised on a straight-line basis over the period of their expected benefit, being their finite life of 5 to 6 years. Software and website Research costs are expensed in the period in which they are incurred. Development costs are capitalised when it is probable that the project will be a success considering its commercial and technical feasibility; the Group is able to use or sell the asset; and when the Group has sufficient resources and intent to complete the internal development and their costs can be measured reliably. The software costs are amortised on a straight-line basis over the period of their expected benefit, being their finite useful lives of between 2 and 5 years. 47 Note 5. Non-current assets – intangible assets (continued) Brand names and logos Brand names and logos acquired in a business combination are recognised separately to goodwill and included in other intangible assets. They have been assessed as having an indefinite useful life on the basis that the asset is allocated to businesses that are expected to continue into perpetuity. Note 6. Restatement of comparatives Change in basis of revenue recognition The Group has changed its interpretation of the current accounting policy for certain salary packaging products to recognise revenue on a gross rather than net basis. In respect of these products, the Group acts in the capacity of a principal rather than agent and the Group is considered to have primary responsibility for contract fulfilment, which amongst others, are indicators that the Group meets the control criteria under AASB 15 ‘Revenue from Contracts with Customers’. In accordance with AASB 108 ‘Accounting Policies, Changes in Accounting Estimates, and Errors’, the change in interpretation of accounting policy has been applied retrospectively and the quantitative impact for each financial statement line item is detailed below. The change in the basis of revenue recognition has no impact on the consolidated statement of financial position. The adjustment to periods before those presented below would be similarly to recognise revenue and expenses on a gross basis. Statement of profit or loss and other comprehensive income Consolidated 2016 $’000 $’000 2016 $’000 Reported Adjustment Restated 144,361 3,599 147,960 - (3,599) 46,174 (13,386) 32,788 264 33,052 - - - - - (3,599) 46,174 (13,386) 32,788 264 33,052 Cents Cents Cents Reported Adjustment Restated 29.8 29.4 - - 29.8 29.4 Extract Revenue Expenses Product costs Profit before income tax expense Income tax expense Profit after income tax expense for the year Other comprehensive income for the year, net of tax Total comprehensive income for the year Basic earnings per share Diluted earnings per share 48 Note 7. Revenue Sales revenue Management and administrative fees Products, services and commissions Trailing commissions and rebates Other revenue Other income Revenue Consolidated 2017 $’000 55,301 137,095 12,250 204,646 797 205,443 Restated 2016 $’000 46,005 92,365 8,693 147,063 897 147,960 Impact of change in accounting policy As a result of the change in interpretation of the current accounting policy referred to in note 6, the revenue for the year ended 31 December 2017 increased by $4,826,000 (2016: $3,599,000) with a corresponding increase in product cost disclosed in the consolidated statement of profit or loss and other comprehensive income. Accounting policy for revenue recognition The Group recognises revenue when it transfers control over a product or a service to a customer. Revenue is measured based on the consideration specified in a contract with a customer and excludes amounts collected on behalf of third parties. Amounts disclosed as revenue are net of returns, trade allowances, rebates and amounts collected on behalf of third parties. Nature of goods and services The following is a description of the principal activities, separated by reportable segments, from which the Group generates its revenue. For more detailed information about reportable segments, see note 4. Management and administration fees The Group generates revenue from arranging and administering outsourced salary packaging and fleet management services on behalf of employers. Administration fees for salary packaging are paid by the employers through amounts deducted from their employees’ pre-tax salary. Revenue is recognised over the period of administration and includes interest earned from cash held on behalf of customers. Fleet management fees are paid by employers in respect of fleet management services and revenue is recognised over the period of administration. Share plan administration revenue is recognised over the period of administration. Revenue on customer contributions is recognised when contributions occur. Revenue from the license of in-house salary packaging software is recognised monthly based on a monthly fee per user. Products, services and commissions The Group earns upfront commissions and rebates from suppliers relating to financing and sourcing of vehicles, sale of certain insurance products and fees for the sale of certain auxiliary products. Revenue is recognised upon delivery of the service and product to the customer. Trailing commissions and rebates The Group generates revenue from arranging and providing salary packaging products and services. The Group earns ongoing trailing commissions and rebates from various suppliers relating to maintenance of a vehicle finance book, the arrangement of certain insurance products, and fees for the arrangement or provision of ancillary vehicle consumables. The Group also acts as a distributor of salary packaging debit cards for a major financial institution. Revenue is recognised in the period the services are rendered. Other income Interest income on corporate accounts is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. 49 Note 7. Revenue (continued) Contract balances Contract assets primarily relate to the Group’s rights to consideration for products and services provided and not billed at the reporting date. Contract liabilities primarily relate to consideration received in advance from customer contracts for which revenue is recognised on satisfaction of outstanding performance obligations. Receivable and contract asset balances at the reporting date are disclosed in note 18 as trade receivables and accrued revenue, respectively, and contract liability balances are disclosed in note 22 as income received in advance. Significant changes in contract assets and liabilities during the period resulted from satisfaction of performance obligations. All opening contract liability balance pertaining to income received in advance was recognised as revenue during the period. Transaction price allocated to the remaining performance obligations The Group applies the practical expedients available in AASB 15 and does not disclose information about its remaining performance obligations, amount of the transaction price allocated to the remaining performance obligations and an explanation of when the Group expects to recognise that amount as revenue for the year ended 31 December 2017. Note 8. Expenses Consolidated 2017 $’000 740 141 490 211 7 1,589 7,335 10,406 17,741 19,330 5,571 3,783 5,611 1,173 2016 $’000 789 176 304 135 8 1,412 5,315 7,197 12,512 13,924 4,106 2,908 4,151 704 Profit before income tax includes the following specific expenses: Depreciation Leasehold improvements Furniture, fixtures and fittings Computer equipment Office equipment Other assets Total depreciation Amortisation Customer contracts and relationships Software and website Total amortisation Total depreciation and amortisation Finance costs Interest and finance charges paid/payable Rental expense relating to operating leases Minimum lease payments Superannuation expense Defined contribution superannuation expense Share-based payments expense Share-based payments expense 50 Note 9. Income tax Income tax expense Current tax Deferred tax – origination and reversal of temporary differences Aggregate income tax expense Deferred tax included in income tax expense comprises: Increase in deferred tax assets Numerical reconciliation of income tax expense and tax at the statutory rate Profit before income tax expense Tax at the statutory tax rate of 30% Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Share-based payments Share of profits – joint venture Non-deductible expenses Fair value loss/(gain) on revaluation of financial liability Sundry items Prior year temporary differences not recognised now recognised Prior year tax claims not recognised now recouped Consolidated 2017 $’000 24,939 (4,173) 20,766 2016 $’000 15,777 (2,391) 13,386 4,173 2,391 62,075 18,623 352 (104) 422 1,472 (65) 20,700 240 (174) 46,174 13,852 211 (154) 550 (471) 23 14,011 (244) (381) Income tax expense 20,766 13,386 Amounts charged/(credited) directly to equity Deferred tax assets Consolidated 2017 $’000 (54) 2016 $’000 175 51 Note 9. Income tax (continued) Deferred tax asset/(liability) Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Impairment of receivables Property and equipment Employee benefits Accruals and other provisions Revenue received in advance Acquisition and transaction costs Intangible assets Prepayments Accrued revenue Derivative financial instruments Sundry items Total temporary differences Amounts recognised in equity: Share issue transaction costs Derivative financial instruments Total recognised in equity Deferred tax asset/(liability) Movements: Opening balance Credited to profit or loss Credited/(charged) to equity Additions through business combinations (note 23) Closing balance Consolidated 2017 $’000 2016 $’000 107 87 2,135 4,329 828 2,062 (7,392) (10) (151) 68 (130) 1,933 - (54) (54) 1,879 (175) 4,173 54 (2,173) 1,879 Consolidated 2017 $’000 82 71 1,645 2,911 391 2,472 (7,460) (14) (160) (205) (83) (350) 62 113 175 (175) 1,135 2,391 (175) (3,526) (175) 2016 $’000 Income tax payable Income tax payable Accounting policy for income tax 6,827 8,848 The income tax expense for the year is the tax payable on the current period’s taxable income based on the applicable income tax rate for each jurisdiction adjusted for changes in deferred tax assets and liabilities to temporary differences, unused tax losses and the adjustment recognised for prior periods, when applicable. Current tax liabilities are measured at the amount expected to be recovered from or paid to taxation authorities at the tax rates and tax laws enacted or substantively enacted at the reporting date. 52 Note 9. Income tax (continued) Deferred tax Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates that are enacted or substantively enacted, except for: • when the deferred income tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or • when the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. The carrying amount of recognised and unrecognised deferred tax assets is reviewed at each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset current tax assets against current tax liabilities and deferred tax assets against deferred tax liabilities; and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Current and deferred tax for the year Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Tax consolidation group Smartgroup Corporation Ltd (the ‘head entity’) and its wholly owned Australian subsidiaries have formed an income tax consolidated group under the tax consolidation regime, from 6 June 2012. The head entity and each subsidiary in the tax consolidated group continue to account for their own current and deferred tax amounts. The tax consolidated group has applied the ‘separate taxpayer within group’ approach in determining the appropriate amount of taxes to allocate to members of the tax consolidated group. In addition to its own current and deferred tax amounts, the head entity also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from each subsidiary in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the tax consolidated group. The tax funding arrangement ensures that the intercompany charge equals the current tax liability or benefit of each tax consolidated group member, resulting in neither a contribution by the head entity to the subsidiaries nor a distribution by the subsidiaries to the head entity. Note 10. Current assets – cash and cash equivalents Cash at bank Term deposits Consolidated 2017 $’000 30,283 593 30,876 2016 $’000 22,528 57,462 79,990 Accounting policy for cash and cash equivalents Cash and cash equivalents includes cash on hand, term deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. 53 Note 11. Non-current liabilities – borrowings Bank loan Borrowing costs prepaid Refer to note 17 for further information on financial instruments. Total secured liabilities The total secured liabilities (current and non-current) are as follows: Bank loan The following bank facilities are available to the Group: • A three year facility of $142,000,000; • A three year working capital facility of $3,000,000; • A three year letter of credit facility of $3,000,000; and • Ancillary facilities: credit card and electronic pay away facility of $12,500,000. Consolidated 2017 $’000 142,000 (1,147) 140,853 2016 $’000 152,000 (1,882) 150,118 Consolidated 2017 $’000 2016 $’000 142,000 152,000 The banking facilities are guaranteed and secured by the Company and certain of the Company’s subsidiaries. The facilities are subject to a variable interest rate, which is based on the BBSY plus a margin. The banking facilities mature on 29 July 2019. The Group is subject to certain financing covenants and meeting these is given priority in all capital risk management decisions. These covenants include leverage and interest cover ratios with reference to recurring earnings before interest, tax, depreciation and amortisation, and with distribution restrictions on dividends. There have been no events of default on the financing arrangement during the year. Financing arrangements Unrestricted access was available at the reporting date to the following lines of credit: Consolidated Total facilities Bank loan Letter of credit facility Used at the reporting date Bank loan Letter of credit facility Unused at the reporting date Bank loan Letter of credit facility 54 2017 $’000 145,000 3,000 148,000 142,000 2,741 144,741 3,000 259 3,259 2016 $’000 155,000 3,000 158,000 152,000 1,901 153,901 3,000 1,099 4,099 Note 11. Non-current liabilities – borrowings (continued) Accounting policy for borrowings Loans and borrowings are initially recognised at the fair value of the consideration received, net of transaction costs. They are subsequently measured at amortised cost using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the years of the facility to which it relates. Accounting for finance costs Finance costs attributable to qualifying assets are capitalised as part of the asset. All other finance costs are expensed in the period in which they are incurred, including interest on short-term and long-term borrowings. Note 12. Equity – issued capital Ordinary shares – fully paid 123,213,010 121,487,051 Less: Shares associated with the loan funded share plan (LFSP) (3,155,626) (3,040,492) 2017 Shares 2016 Shares 2017 $’000 189,224 (12,341) 2016 $’000 178,242 (7,302) Consolidated 120,057,384 118,446,559 176,883 170,940 Movements in ordinary share capital Details Balance Issuance of shares – LFSP Issuance of shares Share issue transaction costs, net of tax Date 1 January 2016 18 March 2016 9 May 2016 18 March 2016 29 July 2016 2 August 2016 8 September 2016 19 September 2016 Shares 103,698,124 449,866 353,652 2,808,989 7,650,000 4,573,169 1,909,236 44,015 - $’000 65,644 1,988 1,683 10,360 53,550 32,424 13,365 250 (1,022) Balance 31 December 2016 121,487,051 178,242 Issuance of shares – LFSP 17 March 2017 5 May 2017 Buyback of shares – LFSP 6 December 2017 Issuance of shares 2 May 2017 23 August 2017 1,208,501 338,628 (313,507) 46,225 446,112 7,722 2,201 (3,069) 300 3,828 Balance 31 December 2017 123,213,010 189,224 55 Note 12. Equity – issued capital (continued) Movements in loan funded share plan Details Balance Shares issued for LFSP Balance Exercising of LFSP Shares issued for LFSP Shares of LFSP Buyback of shares - LFSP Balance Ordinary shares Date 1 January 2016 18 March 2016 9 May 2016 31 December 2016 15 February 2017 17 March 2017 5 May 2017 6 December 2017 31 December 2017 Shares (2,236,974) (449,866) (353,652) (3,040,492) 1,118,488 (1,208,501) (338,628) 313,507 (3,155,626) $’000 (3,631) (1,988) (1,683) (7,302) 1,815 (7,722) (2,201) 3,069 (12,341) Ordinary shares entitle the holder to participate in dividends and the proceeds on the winding up of the Company in proportion to the number of and amounts paid on the shares held. The fully paid ordinary shares have no par value and the Company does not have a limited amount of authorised capital. On a show of hands, every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Loan funded share plan (LFSP) Shares are granted to the management team under the LFSP at the market price. The shares purchased as part of a LSFP are eligible for dividends and are held by the participant until they vest or are forfeited. Should the Company pay dividends or make capital distributions in the future, any dividends paid or distributions made to the participant will be applied to repay the loan and to meet the tax liability on those dividends or distributions. The vesting of the shares is subject to two performance hurdles, being an earnings growth hurdle based on NPATA (Net Profit After Tax, adjusted to exclude the non-cash tax effect amortisation of intangibles and significant non-operating items) per share and a total shareholder return hurdle. The shares issued under the LFSP have been treated as contingently issuable as they have not been exercised at balance date. As such, the shares issued under the LFSP are excluded from basic earnings per share and included in the calculation of diluted earnings per share. LFSP shares forfeited For the year ended 31 December 2017, the Group paid $3,069,000 to buy back shares issued under the LFSP, because the vesting conditions on those shares had not been met and the shares were forfeited. 313,507 shares were bought back and cancelled, resulting in a reduction of ordinary shares on issue. Share buy-back There is no current on-market share buy-back of the Company’s shares. Capital risk management The Group’s objectives when managing capital are to safeguard its ability to continue as a going concern, so that it can provide returns for shareholders and benefits for other stakeholders and to maintain an optimum capital structure to reduce the cost of capital. The Group’s debt and capital includes ordinary share capital and financial liabilities, supported by financial assets. Capital is regarded as total equity, as recognised in the statement of financial position, plus net debt. Net debt is calculated as total borrowings excluding borrowing costs prepaid less cash and cash equivalents, and excludes restricted cash and cash equivalents. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. The Group would look to raise capital when an opportunity to invest in a business or company was seen as value adding relative to the current Company’s share price at the time of the investment. The capital risk management policy remains unchanged from the 31 December 2016 Annual Report. Accounting policy for issued capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. 56 Note 13. Equity – reserves Hedging reserve – cash flow hedges Share-based payments reserve Consolidated 2017 $’000 199 4,371 4,570 2016 $’000 264 2,367 2,631 Hedging reserve – cash flow hedges The reserve is used to recognise the effective portion of the gain or loss of cash flow hedge instruments that is determined to be an effective hedge. Share-based payments reserve The reserve is used to recognise the value of equity benefits provided to executive KMP and other senior management as part of their remuneration. Deferred share capital reserve The reserve is used to recognise equity benefits provided to the vendors on acquisition of a business. This includes the fair value of shares which are expected to be issued in the future. Movements in reserves Movements in each class of reserve during the current and previous financial year are set out below: Consolidated Balance at 1 January 2016 Movement in hedges Deferred tax Share-based payments Shares issued to vendors Balance at 31 December 2016 Movement in hedges Deferred tax Share-based payments LFSP exercised LFSP forfeited Balance at 31 December 2017 Cash flow hedge $’000 Share-based payments $’000 Deferred share capital $’000 - 397 (133) - - 264 (93) 28 - - - 199 1,304 10,360 - - 1,063 - 2,367 - - 3,904 (1,815) (85) 4,371 - - - (10,360) - - - - - - - Total $’000 11,664 397 (133) 1,063 (10,360) 2,631 (93) 28 3,904 (1,815) (85) 4,570 57 Note 14. Share-based payments Loan Funded Share Plan (LFSP) The LFSP is a long term incentive plan for the senior management team. Refer to note 12 for terms of LFSP. The LFSP shares are legally held by the employees, however they cannot trade in the shares until the vesting conditions are satisfied and the loan is fully repaid. These have been treated as options in accordance with AASB 2 ‘Share-based Payment’. Set out below are summaries of loan funded shares granted under the Company’s LFSP: 2017 Grant date Vesting date 25 Feb 2015 31 Dec 2016 25 Feb 2015 31 Dec 2017 27 Apr 2015 31 Dec 2016 27 Apr 2015 31 Dec 2017 18 Mar 2016 31 Dec 2018 09 May 2016 31 Dec 2018 17 Mar 2017 31 Dec 2019 05 May 2017 31 Dec 2019 Exercise price Balance at the start of the year Granted Exercised Expired/ forfeited/ other Balance at the end of the year $1.60 $1.60 $1.65 $1.65 $4.42 $4.76 $6.39 $6.50 602,263 602,262 516,225 516,224 449,866 353,652 - - - - - - - - 1,208,501 338,628 (602,263) - (516,225) - - - - - - - - - - - (313,507) - - 602,262 - 516,224 449,866 353,652 894,994 338,628 3,040,492 1,547,129 (1,118,488) (313,507) 3,155,626 Weighted average exercise price $2.40 $6.41 $1.62 $6.39 $4.25 2016 Grant date Vesting date 25 Feb 2015 31 Dec 2016 25 Feb 2015 31 Dec 2017 27 Apr 2015 31 Dec 2016 27 Apr 2015 31 Dec 2017 18 Mar 2016 31 Dec 2018 09 May 2016 31 Dec 2018 Exercise price Balance at the start of the year $1.60 $1.60 $1.65 $1.65 $4.42 $4.76 602,263 602,262 516,225 516,224 - - 2,236,974 Granted Exercised Expired/ forfeited/ other Balance at the end of the year - - - - 449,866 353,652 803,518 - - - - - - - - - - - - - - 602,263 602,262 516,225 516,224 449,866 353,652 3,040,492 Weighted average exercise price $1.62 $4.56 $0.00 $0.00 $2.40 The weighted average share price during the financial year was $7.87 (2016: $5.66). The loan funded shares have an expiry date of 5 years from the date of issue and their weighted average remaining contractual life outstanding at the end of the financial year was 3.3 years (2016: 3.5 years). For the loan funded shares granted during the current financial year, the valuation model inputs used to determine the fair value at the grant date, are as follows: Grant date Vesting date Share price at grant date Exercise price Expected volatility Dividend yield Risk-free interest rate Fair value at grant date 17 Mar 2017 31 Dec 2019 5 May 2017 31 Dec 2019 $6.62 $6.69 $6.39 $6.50 36.83% 37.09% 3.79% 3.67% 2.33% 2.18% $1.65 $1.67 58 Note 15. Equity – dividends Dividends Dividends paid during the financial year were as follows: Final dividend for the year ended 31 December 2016 of 15.0 cents (2016: 8.7 cents) per ordinary share Interim dividend for the year ended 31 December 2017 of 16.5 cents (2016: 9.8 cents) per ordinary share Consolidated 2017 $’000 18,223 20,379 38,602 2016 $’000 9,022 11,901 20,923 On 21 February 2018, the Directors declared a fully franked dividend of 18.5 cents per ordinary share. The final dividend will be paid on 30 March 2018 to shareholders registered on 15 March 2018 with an expected total distribution of $22,794,000. The financial effect of dividends declared after the reporting date is not reflected in the 31 December 2017 financial statements and will be recognised in subsequent financial reports. Franking credits Franking credits available at the reporting date based on a tax rate of 30% Franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date based on a tax rate of 30% Franking credits available for subsequent financial years based on a tax rate of 30% Consolidated 2017 $’000 41,920 6,827 48,747 2016 $’000 31,311 8,848 40,159 Of the existing franking account balance $24,130,000 (2016: $24,130,000) is an exempt credit account and is not available to frank dividends to new Australian shareholders. Accounting policy for dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the Company. 59 Note 16. Earnings per share Profit after income tax Non-controlling interest Profit after income tax attributable to the owners of Smartgroup Corporation Ltd Consolidated 2017 $’000 41,309 4 41,313 2016 $’000 32,788 - 32,788 Number Number Weighted average number of ordinary shares used in calculating basic earnings per share 119,613,751 110,026,709 Adjustments for calculation of diluted earnings per share: Options over ordinary shares 1,194,317 1,604,137 Weighted average number of ordinary shares used in calculating diluted earnings per share 120,808,068 111,630,846 Basic earnings per share Diluted earnings per share Accounting policy for earnings per share Basic earnings per share Cents 34.5 34.2 Cents 29.8 29.4 Basic earnings per share is calculated by dividing the profit attributable to the owners of Smartgroup Corporation Ltd, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding, excluding shares issued under the LFSP, during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of shares, including shares issued under the LFSP, assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. Note 17. Financial instruments Financial risk management objectives The Group’s activities expose it to a variety of financial risks: market risk (including foreign currency risk, price risk and interest rate risk), credit risk and liquidity risk. The Group’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of the Group. The Group may use derivative financial instruments such as interest rate swap contracts to hedge certain risk exposures. Derivatives are exclusively used for risk management purposes, i.e. not as trading or other speculative instruments. The Group uses different methods to measure different types of risk to which it is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks, ageing analysis for credit risk and rolling cash flow forecasts for analysis of liquidity risk. Risk management is carried out centrally by the management team under oversight from the Board. These policies include identification and analysis of the risk exposure of the Group and appropriate procedures, controls and risk limits. The management team identifies, evaluates and may hedge financial risks within the Group’s operating units. Market risk Foreign currency risk The Group is not exposed to any significant foreign currency risk. Price risk The Group is not exposed to any significant price risk. 60 Note 17. Financial instruments (continued) Interest rate risk The Group’s main interest rate risk arises from long-term borrowings, cash and cash equivalents, and restricted cash and cash equivalents, which are subject to variable interest rates. The exposure to interest rate risk on long-term borrowings is managed through the use of interest rate swaps. As at the reporting date, the Group had the following variable rate borrowings, cash and cash equivalents, restricted cash and cash equivalents and interest rate swap contracts outstanding: 2017 2016 Weighted average interest rate % 3.31% 1.54% 1.65% 1.84% Weighted average interest rate % 3.84% 2.19% 2.05% 2.12% Balance $’000 142,000 (30,876) (67,644) (66,750) (23,270) Balance $’000 152,000 (79,990) (39,493) (77,750) (45,233) Consolidated Bank loans Cash and cash equivalents Restricted cash and cash equivalents Interest rate swaps (notional principal amount) Net exposure to cash flow interest rate risk Sensitivity An increase/decrease in interest rates of 100 (2016: 100) basis points would have a favourable/adverse effect on profit before tax and equity of $233,000 (2016: $452,000) per annum. The percentage change is based on the expected volatility of interest rates using market data and analysts’ forecasts. Derivatives interest rate swap The Group has entered into interest rate swap contracts with notional/principal value as at 31 December 2017 of $66,750,000 (2016: $77,750,000). The interest rate contracts hedge the Group’s risk against an increase in variable interest rate. Weighted average fixed rate is 1.84% (2016: 2.12%). Sensitivity – derivative valuation An increase/decrease in interest rates of 100 (2016:100) basis points would have a favourable/adverse effect on derivative financial instruments value and total equity by $1,005,000 (2016: $1,739,000). Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has procedures in place to monitor credit risk, which include obtaining references and setting appropriate credit limits. The Group obtains guarantees where appropriate to mitigate credit risk. The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. The Group does not hold any collateral. At 31 December 2017, the Group had 5 customers (2016: 6 customers) with trade receivables balances greater than $300,000 each and accounted for approximately 43% (2016: 44%) of total trade receivables. This balance was within its terms of trade and no impairment was made as at 31 December 2017. There are no guarantees against these receivables but management closely monitors the receivables balance on a monthly basis and is in regular contact with these customers to mitigate risk. Liquidity risk Prudent liquidity risk management requires the Group to maintain sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. The Group manages liquidity risk by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. 61 Note 17. Financial instruments (continued) Financing arrangements Unused borrowing facilities at the reporting date: Bank loan Letter of credit facility Consolidated 2017 $’000 3,000 259 3,259 2016 $’000 3,000 1,099 4,099 Remaining contractual maturities The following tables detail the Group’s remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Consolidated – 2017 Non-derivatives Non-interest bearing Trade payables Customer salary packaging liability Interest-bearing – variable Bank loans Total non-derivatives Consolidated – 2016 Non-derivatives Non-interest bearing Trade payables Customer salary packaging liability Deferred consideration Contingent consideration on business combinations Interest-bearing – variable Bank loans Total non-derivatives 1 year or less $’000 >1 to 2 years $’000 >2 to 5 years $’000 5,617 67,644 - - 14,700 87,961 133,996 133,996 - - - - 1 year or less $’000 >1 to 2 years $’000 >2 to 5 years $’000 Over 5 years $’000 Remaining contractual maturities $’000 - - - - Over 5 years $’000 5,617 67,644 148,696 221,957 Remaining contractual maturities $’000 4,711 39,493 9,541 - 10,835 64,580 - - - 1,244 5,646 6,890 - - - - 149,478 149,478 - - - - - - 4,711 39,493 9,541 1,244 165,959 220,948 The cash flows in the maturity analysis above are not expected to occur significantly earlier than contractually disclosed above. 62 Note 18. Current assets – trade and other receivables Consolidated Trade receivables Less: Provision for impairment of receivables Accrued revenue Other receivables Impairment of receivables The ageing of the impaired receivables provided for above are as follows: 0 to 3 months overdue Between 3 and 6 months overdue Over 6 months overdue Movements in the provision for impairment of receivables are as follows: Opening balance Additional provisions recognised Additions through business combinations Unused amounts reversed Closing balance Past due but not impaired 2017 $’000 10,845 (358) 10,487 7,353 4,119 21,959 Consolidated 2017 $’000 200 45 113 358 Consolidated 2017 $’000 272 341 8 (263) 358 2016 $’000 6,533 (272) 6,261 7,023 2,601 15,885 2016 $’000 197 45 30 272 2016 $’000 63 458 2 (251) 272 Customers with balances past due but without provision for impairment of receivables amount to $2,110,000 as at 31 December 2017 ($1,595,000 as at 31 December 2016). The Group did not consider a credit risk on the aggregate balances after reviewing the credit terms of customers based on recent collection practices. The ageing of the past due but not impaired receivables are as follows: 0 to 3 months overdue Between 3 and 6 months overdue Over 6 months overdue Consolidated 2017 $’000 2,061 49 - 2,110 2016 $’000 1,169 423 3 1,595 63 Note 18. Current assets – trade and other receivables (continued) Accounting policy for trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost using the effective interest method, less any provision for impairment. Trade receivables are generally due for settlement within 14 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable may be impaired. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of management’s estimate of future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. Other receivables are recognised at amortised cost, less any provision for impairment. Note 19. Fair value measurement Fair value hierarchy The following tables detail the Group’s assets and liabilities, measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability. Consolidated – 2017 Assets Interest rate swap contracts – cash flow hedges Total assets Consolidated – 2016 Assets Interest rate swap contracts – cash flow hedges Total assets Liabilities Deferred consideration Contingent consideration Total liabilities Level 1 $’000 - - Level 1 $’000 - - - - - Level 2 $’000 226 226 Level 2 $’000 307 307 - - - Level 3 $’000 - - Level 3 $’000 - - 9,541 1,244 10,785 Total $’000 226 226 Total $’000 307 307 9,541 1,244 10,785 There were no transfers between levels during the financial year. The carrying amounts of trade and other receivables and trade and other payables approximate their fair values due to their short-term nature. The fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial liabilities. Valuation techniques for fair value measurements categorised within level 2 and level 3 Derivatives – interest rate swap contracts Derivative financial instruments have been valued using quoted market rates. This valuation technique maximises the use of observable market data where it is available and relies as little as possible on entity specific estimates. Fair value (loss)/gain on revaluation of financial liabilities For the year ended 31 December 2017, a net fair value loss of $4,906,000 is recognised in the profit and loss which is attributable to the following: (a) Deferred consideration – Selectus For the 12 month period to 30 June 2017, Selectus achieved an Adjusted EBITDA of $14,737,000 and satisfied other operational performance metrics which, together with the increase in the Company share price from $6.28 at 31 December 2016 to $8.58 at settlement on 23 August 2017, increased the final consideration payable to $15,691,000. As a result, a fair value loss of $6,150,000 is recognised in the profit and loss for the year ended 31 December 2017. 64 Note 19. Fair value measurement (continued) The total deferred share entitlement of the Selectus vendors is 2,131,442 shares. On 23 August 2017, 79.07% of the total share entitlement (1,685,331 shares) was settled in cash at $6.56 ($11,100,000) and the remaining 20.93% (446,111) was settled via the issuance of Company shares at $8.58 per share ($3,800,000). In addition, cash in lieu of dividends foregone of $800,000 was paid to the vendors of Selectus. (b) Contingent consideration – Smartequity In the event profit before tax (PBT) for Smartequity exceeds $864,000 for the year ended 31 December 2018, additional consideration may be payable. The fair value of contingent consideration of $1,244,000 at the acquisition date was determined by calculating a probability adjusted PBT for 31 December 2018 of between $1,100,000 and $1,300,000 and discounted to present value at acquisition date. Based on actual performance to date and forecast for the year ending 31 December 2018, Smartequity is not expected to exceed PBT of $864,000 and on that basis the fair value of the liability is nil at 31 December 2017. As a result, fair value gain of $1,244,000 is recognised in the profit and loss for the year ended 31 December 2017. Level 3 assets and liabilities Movements in level 3 assets and liabilities during the previous financial year are set out below: Consolidated Balance at 1 January 2016 Contingent consideration recognised on business combinations Fair value loss on revaluation of financial liabilities Balance at 31 December 2016 Fair value loss on revaluation of financial liabilities Fair value loss on revaluation of financial liabilities – Smartequity contingent consideration Deferred consideration settled – Selectus Balance at 31 December 2017 Accounting policy for fair value measurement Contingent consideration $’000 - (12,354) 1,569 (10,785) (6,150) 1,244 15,691 - When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and assumes that the transaction will take place either in the principal market or, in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset, or liability, assuming they act in their economic best interests. Valuation techniques that are appropriate in the circumstances, and for which sufficient data is available to measure fair value, are used maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuers may be used either when internal expertise is not available or when the valuation is deemed to be significant. External valuers are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. 65 Note 20. Current assets – other current assets Prepayments Other current assets Note 21. Derivative financial instruments Non-current assets Interest rate swap contracts – cash flow hedges Refer to note 19 for further information on fair value measurement. Accounting policy for derivative financial instruments Consolidated 2017 $’000 3,553 1,217 4,770 Consolidated 2017 $’000 226 2016 $’000 5,672 1,353 7,025 2016 $’000 307 Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Cash flow hedges Cash flow hedges are used to cover the Group’s exposure to variability in cash flows that is attributable to particular risks associated with a recognised asset or liability or a firm commitment which could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income through the cash flow hedges reserve in equity, whilst the ineffective portion is recognised in profit or loss. Amounts taken to equity are transferred out of equity and included in the measurement of the hedged transaction when the forecast transaction occurs. Cash flow hedges are tested for effectiveness on a regular basis both retrospectively and prospectively to ensure that each hedge is highly effective and continues to be designated as a cash flow hedge. If the forecast transaction is no longer expected to occur, the amounts recognised in equity are transferred to profit or loss. If the hedging instrument is sold, terminated, expires, is exercised without replacement or rollover, or if the hedge becomes ineffective and is no longer a designated hedge, the amounts previously recognised in equity remain in equity until the forecast transaction occurs. Note 22. Current liabilities – other current liabilities Consolidated 2017 $’000 2,758 2016 $’000 1,336 Income received in advance Note 23. Business combinations Current period acquisition AccessPay Group (AccessPay) On 2 May 2017, the Group acquired 100% of the ordinary shares of AccessPay Pty Ltd, Fleet Solutions Pty Ltd and 50% of the ordinary shares of AccessPay Payroll Solutions Pty Ltd for the total consideration of $15,000,000. AccessPay, based in Adelaide, provides salary packaging services principally to public benevolent institutions across Australia. The goodwill of $9,063,000 represents the synergies expected to be obtained by the Group from this acquisition. The acquired business contributed revenues of $7,242,000 and profit after tax of $1,527,000 to the Group for the period from 2 May 2017 to 31 December 2017. If the acquisition occurred on 1 January 2017, the full year contributions would have been revenues of $9,993,000 and profit after tax of $1,951,000, subject to adjustments arising as a result of purchase price allocation. 66 Note 23. Business combinations (continued) ABM Corporation Pty Limited (Aspire) On 23 August 2017, the Group acquired 100% of the ordinary shares of ABM Corporation Pty Limited for the total consideration of $7,200,000. Aspire, based in Sydney, provides specialist novated leasing services. The goodwill of $4,989,000 represents the synergies expected to be obtained by the Group from this acquisition. The acquired business contributed revenues of $923,000 and profit after tax of $55,000 to the Group for the period from 23 August 2017 to 31 December 2017. If the acquisition occurred on 1 January 2017, the full year contributions would have been revenues of $2,888,000 and profit after tax of $533,000, subject to adjustments arising as a result of purchase price allocation. RACV Salary Solutions (Salary Solutions) On 20 October 2017, the Group acquired certain assets of RACV Salary Solutions for the total consideration of $34,468,000. Salary Solutions, based in Adelaide, is a national provider of salary packaging and novated leasing services. The goodwill of $29,141,000 represents the synergies expected to be obtained by the Group from this acquisition. The acquired business contributed revenues of $2,872,000 and profit after tax of $557,000 to the Group for the period from 20 October 2017 to 31 December 2017. If the acquisition occurred on 1 January 2017, the full year contributions would have been revenues of $16,100,000 and profit after tax of $1,611,000 subject to adjustments arising as a result of purchase price allocation. The values identified for the above acquisitions are provisional as at 31 December 2017. Details of the acquisition are as follows: Cash and cash equivalents Restricted cash and cash equivalents Trade receivables Other current assets Plant and equipment Other intangible assets Deferred tax liability Trade and other payables Customer salary packaging liability Provision for income tax Employee benefits Other provisions Net assets acquired Goodwill AccessPay Fair value $’000 12 - 121 156 757 7,261 (757) (694) - (221) (639) (59) 5,937 9,063 Acquisition-date fair value of the total consideration transferred 15,000 Representing: Cash paid or payable to vendor Smartgroup Corporation Ltd shares issued to vendor Acquisition costs expensed to profit or loss Cash used to acquire business, net of cash acquired: Cash paid to vendor Less: cash and cash equivalents Less: restricted cash and cash equivalents 14,700 300 15,000 172 14,700 (12) - Aspire Fair value $’000 1,069 - 30 44 13 1,500 (150) (67) - (35) (154) (39) 2,211 4,989 7,200 7,200 - 7,200 304 7,200 (1,069) Salary Solutions Fair value $’000 Total Fair value $’000 - 19,596 - 867 407 7,000 (1,266) (900) 1,081 19,596 151 1,067 1,177 15,761 (2,173) (1,661) (19,596) (19,596) - (758) (23) 5,327 29,141 34,468 34,468 - 34,468 798 34,468 - (256) (1,551) (121) 13,475 43,193 56,668 56,368 300 56,668 1,274 56,368 (1,081) (19,596) Net cash used 14,688 6,131 14,872 35,691 67 - (19,596) Note 23. Business combinations (continued) Comparative year acquisition In the previous year, the Group acquired 100% interest in Autopia Group Pty Ltd (Autopia), Selectus Pty Ltd (Selectus) and selected assets of Trinity Management Group (TMG) for the total consideration of $176,182,000. The comparative year business combinations were finalised in the current financial year. Finalisation of provisional accounting did not impact the comparative year statement of financial position, statement of profit or loss and other comprehensive income or opening retained profits. Details of the comparative year acquisitions are as follows: Autopia Fair value $’000 Selectus Fair value $’000 TMG Fair value $’000 Total Fair value $’000 - - 270 - - 1,500 - - - (523) (25) - 1,222 1,730 2,952 1,708 - 1,244 2,952 31 1,708 - - 6,997 36,526 3,637 1,757 584 48,048 (4,428) (36,526) (1,414) (3,526) (843) (1,216) 49,596 126,586 176,182 131,154 32,674 12,354 176,182 2,896 131,154 (6,997) (36,526) 89,266 (74) (28,605) 60,587 1,708 87,631 Cash and cash equivalents Restricted cash and cash equivalents Trade receivables Other current assets Plant and equipment Other intangible assets Trade and other payables Customer salary packaging liability Provision for income tax Deferred tax liability Employee benefits Other provisions Net assets acquired Goodwill 6,923 7,921 668 - 139 13,897 (1,124) (7,921) (875) (903) (818) - 17,907 22,523 74 28,605 2,699 1,757 445 32,651 (3,304) (28,605) (539) (2,100) - (1,216) 30,467 102,333 Acquisition-date fair value of the total consideration transferred 40,430 132,800 Representing: Cash paid or payable to vendor Smartgroup Corporation Ltd shares issued to vendor Contingent consideration 40,180 250 - 89,266 32,424 11,110 40,430 132,800 Acquisition costs expensed to profit or loss 572 2,293 Cash used to acquire business, net of cash acquired: Cash paid to vendor Less: cash and cash equivalents Less: restricted cash and cash equivalents Net cash used 40,180 (6,923) (7,921) 25,336 68 Note 24. Non-current assets – investments accounted for using the equity method Investment in joint venture – Health-e Workforce Solutions Pty Ltd Consolidated 2017 $’000 6,348 2016 $’000 6,751 Interests in joint ventures Interests in joint ventures are accounted for using the equity method of accounting. Information relating to joint ventures that are material to the Group are set out below: Name Principal place of business/ Country of incorporation Health-e Workforce Solutions Pty Ltd Australia Ownership interest 2017 % 50% 2016 % 50% Summarised financial information Summarised statement of financial position Current assets Non-current assets Total assets Current liabilities Total liabilities Net assets Summarised statement of profit or loss and other comprehensive income Revenue Amortisation expense Other expenses Profit before income tax Income tax expense Profit after income tax Other comprehensive income Total comprehensive income Reconciliation of the Group’s carrying amount Opening carrying amount Share of dividends paid Investments during the year Share of profit after income tax Closing carrying amount 2017 $’000 2,031 1,783 3,814 423 423 3,391 3,626 (572) (2,059) 995 (299) 696 - 696 6,751 (751) - 348 6,348 Health-e Workforce Solutions Pty Ltd 2016 $’000 2,438 2,363 4,801 548 548 4,253 3,756 (557) (1,732) 1,467 (440) 1,027 - 1,027 6,029 - 209 513 6,751 69 Note 24. Non-current assets – investments accounted for using the equity method (continued) Contingent liabilities Share of contingent liabilities relating to joint venture as at 31 December 2017: $nil (2016: $nil). Commitments Share of commitments relating to joint venture as at 31 December 2017: $nil (2016: $nil). Accounting policy for joint venture A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are accounted for using the equity method. Under the equity method, the share of the after tax profits or losses of the joint venture is recognised in the statement of profit or loss and the share of the movements in equity is recognised in other comprehensive income. Investments in joint ventures are carried in the statement of financial position at cost plus post-acquisition changes in the Group’s share of net assets of the joint venture. Goodwill relating to the joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. Income earned from joint venture entities increase the carrying amount of the investment. Note 25. Related party transactions Parent entity Smartgroup Corporation Ltd is the parent entity. Subsidiaries Interests in subsidiaries are set out in note 27. Joint ventures Interests in joint ventures are set out in note 24. Key management personnel Disclosures relating to key management personnel are set out in note 28 and the Remuneration Report included in the Directors’ Report. Transactions with related parties There were no transactions with related parties during the current and previous financial year. Receivable from and payable to related parties There were no trade receivables from or trade payables to related parties at the current and previous reporting date. Loans to/from related parties There were no loans to or from related parties at the current and previous reporting date. Note 26. Parent entity information Set out below is the supplementary information about the parent entity. Statement of profit or loss and other comprehensive income Parent 2017 $’000 35,763 35,763 2016 $’000 18,713 18,713 Profit after income tax Total comprehensive income 70 Note 26. Parent entity information (continued) Statement of financial position Total current assets Total assets Total current liabilities Total liabilities Equity Issued capital Hedging reserve – cash flow hedges Share-based payments reserve Retained profits Total equity Parent 2017 $’000 335,947 426,483 85,911 226,771 176,883 199 4,243 18,390 199,715 2016 $’000 363,273 452,462 107,849 257,662 170,940 264 2,367 21,229 194,800 Guarantees entered into by the parent entity in relation to the debts of its subsidiaries The parent entity and certain of its subsidiaries are party to a deed of cross guarantee under which each company guarantees the debts of the others. No deficiencies of assets exist in any of these subsidiaries. Refer to note 32 for further details. The parent entity has also provided guarantees in respect of banking facilities provided to the Group. Contingent liabilities The parent entity has given bank guarantees as at 31 December 2017 of $1,255,000 (2016: $316,000). Capital commitments – Property and equipment The parent entity had no capital commitments for property and equipment as at 31 December 2017 and 31 December 2016. Significant accounting policies The accounting policies of the parent entity are consistent with those of the Group, as disclosed in note 2 and note 41, except for the following: • Investments in subsidiaries are accounted for at cost, less any impairment, in the parent entity. • Dividends received from subsidiaries are recognised as other income by the parent entity. 71 Note 27. Interests in subsidiaries The consolidated financial statements incorporate the assets, liabilities and results of the following subsidiaries in accordance with the accounting policy described throughout the financial statements: Ownership interest Name Advantage Leasing Holdings Pty Ltd* Australian Vehicle Consultants Pty Ltd Autopia Group Pty Limited Autopia Management Pty Limited National Tax Manager Pty Ltd* PBI Benefit Solutions Pty Limited Salary Packaging Solutions Pty Ltd Selectus Employee Benefits Pty Ltd Selectus Financial Services Pty Ltd Selectus Pty Ltd Smartsalary Software Solutions Pty Ltd Smartequity EIS Pty Ltd Smartequity Pty Ltd Smartfleet Management Pty Ltd Smartgroup Benefits Pty Ltd Smartsalary Pty Limited Radiant Capital Pty Ltd ABM Corporation Pty Limited AccessPay Pty Ltd Fleet Solutions Pty Ltd** Salary Solutions Australia Pty Ltd Smartsalary Payroll Solutions Pty Ltd*** * Denotes entity deregistered during the year. ** Denotes entity acquired and deregistered during the year. Principal place of business/ Country of incorporation Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia Australia 2017 % - 100% 100% 100% - 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - 100% 50% 2016 % 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% - - - - - *** The consolidated financial statements incorporate the assets, liabilities and results of Smartsalary Payroll Solutions Pty Ltd. SmartSalary Payroll Solutions Pty Ltd is considered to be a subsidiary as the Group has control over the entity and therefore, the results of this entity are included in the consolidated results of the Group. Summarised financial information of the subsidiary with non-controlling interests are not provided as they are not material to the Group. Note 28. Key management personnel disclosures Compensation The aggregate compensation made to Directors and other members of key management personnel of the Group is set out below: Consolidated 2017 $ 4,012,493 236,973 44,989 1,058,733 5,353,188 2016 $ 3,051,495 204,263 56,874 704,473 4,017,105 Short-term employee benefits Post-employment benefits Long-term benefits Share-based payments 72 Note 29. Contingent liabilities The Group has given bank guarantees as at 31 December 2017 of $3,633,000 (2016: $2,595,000). The Group has given guarantees for performance of contracts to its customers as at 31 December 2017 of $500,000 (2016: $500,000). Note 30. Commitments Lease commitments – operating Committed at the reporting date but not recognised as liabilities, payable: Within 1 year Between 1 and 5 years Over 5 years Consolidated 2017 $’000 5,098 8,668 119 13,885 2016 $’000 3,288 6,616 428 10,332 Operating lease commitments includes contracted amounts for various offices under non-cancellable operating leases expiring within 1 to 6 years with, in some cases, options to extend. The leases have various escalation clauses. On renewal, the terms of the leases are renegotiated. Note 31. Events after the reporting period On 4 January 2018, the Group completed the acquisition of 100% of the shares of Fleet West Pty Ltd (Fleet West) for $9,000,000. Fleet West is based in Perth and provides fleet management services to clients in the not-for-profit sector. The consideration paid was $8,000,000 in cash and 99,206 shares issued at a price of $10.08 each to the principal vendor. Apart from the dividend declared as disclosed in note 15, no other matter or circumstance has arisen since 31 December 2017 that has significantly affected, or may significantly affect the Group’s operations, the results of those operations, or the Group’s state of affairs in future financial years. Note 32. Deed of cross guarantee The following entities are party to a deed of cross guarantee under which each company guarantees the debts of the others: Smartgroup Corporation Ltd AccessPay Pty Ltd Autopia Group Pty Limited Autopia Management Pty Limited Salary Packaging Solutions Pty Ltd Salary Solutions Australia Pty Ltd Selectus Pty Ltd Smartfleet Management Pty Ltd Smartgroup Benefits Pty Ltd Smartsalary Pty Limited By entering into the deed, the wholly-owned entities have been relieved from the requirement to prepare financial statements and Directors’ report under Corporations Instrument 2016/785 issued by the Australian Securities and Investments Commission. The above companies represent a ‘Closed Group’ for the purposes of the Corporations Instrument, and as there are no other parties to the deed of cross guarantee that are controlled by Smartgroup Corporation Ltd, they also represent the ‘Extended Closed Group’. Set out below is a consolidated statement of profit or loss and other comprehensive income and statement of financial position of the ‘Closed Group’. 73 Note 32. Deed of cross guarantee (continued) Statement of profit or loss and other comprehensive income Revenue Product costs Employee benefits expense Administration and corporate expenses Depreciation expense Amortisation of acquired intangible assets Advertising and marketing expenses Occupancy expenses Other expenses Operating profit Finance costs Profit before income tax expense Income tax expense Profit after income tax expense Other comprehensive income Net change in the fair value of cash flow hedges taken to equity, net of tax Other comprehensive income for the year, net of tax 2017 $’000 198,337 (4,819) (73,591) (23,631) (1,588) (17,560) (3,016) (4,015) (6,535) 63,582 (5,571) 58,011 (19,887) 38,124 (65) (65) 2016 $’000 142,719 (3,599) (55,576) (17,251) (1,412) (11,748) (2,649) (3,142) (2,320) 45,022 (4,105) 40,917 (12,146) 28,771 264 264 Total comprehensive income for the year 38,059 29,035 Equity – retained profits Retained profits at the beginning of the financial year Profit after income tax expense Dividends paid Retained profits at the end of the financial year 2017 $’000 11,696 38,124 (38,602) 11,218 2016 $’000 3,848 28,771 (20,923) 11,696 74 Note 32. Deed of cross guarantee (continued) Statement of financial position Current assets Cash and cash equivalents Restricted cash and cash equivalents Trade and other receivables Other current assets Total current assets Non-current assets Investments Derivative financial instruments Deferred tax assets Property and equipment Intangible assets Total non-current assets Total assets Current liabilities Trade and other payables Customer salary packaging liability Income tax payable Provisions Other current liabilities Total current liabilities Non-current liabilities Provisions Borrowings Contingent consideration Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Retained profits Total equity 2017 $’000 29,537 67,644 31,710 4,723 133,614 27,746 226 2,116 3,143 302,136 335,367 468,981 48,407 67,644 7,199 8,181 2,750 134,181 1,947 140,853 - 142,800 276,981 192,000 176,212 4,570 11,218 192,000 2016 $’000 78,767 39,493 16,425 7,024 141,709 45,361 307 69 3,151 240,871 289,759 431,468 30,176 39,493 8,848 5,518 9,631 93,666 1,623 150,118 1,244 152,985 246,651 184,817 170,490 2,631 11,696 184,817 75 Note 33. Reconciliation of profit after income tax to net cash from operating activities Consolidated 2017 $’000 41,309 (348) 1,173 (61) (909) 735 - 1,589 17,741 4,906 (5,782) (4,227) 2,455 3,595 (2,277) 534 60,433 8,555 68,988 2016 $’000 32,788 (513) 704 (70) (897) 368 28 1,412 12,512 (1,569) (569) (2,187) (3,460) 323 2,371 1,295 42,536 2,218 44,754 Borrowings $’000 52,756 100,495 (3,500) 367 150,118 22,000 (32,000) 735 140,853 Profit after income tax expense for the year Adjustments for: Share of profit – joint ventures Share-based payments Fair value change to derivative financial instruments Finance revenue – disclosed under investing activities Amortisation of borrowing costs Loss on disposal of property and equipment Depreciation Amortisation Fair value change to contingent consideration Change in operating assets and liabilities: (Increase) in trade and other receivables (Increase) in net deferred tax assets Decrease/(increase) in other current assets Increase in trade and other payables Increase/(decrease) in provision for income tax Increase in provisions and other liabilities Increase/(decrease) in customer salary packaging liability Net cash from operating activities Note 34. Changes in liabilities arising from financing activities Consolidated Balance at 1 January 2016 Proceeds from borrowings (net of transaction costs) Repayments of borrowings Amortisation of borrowing costs (non-cash) Balance at 31 December 2016 Proceeds from borrowings (net of transaction costs) Repayments of borrowings Amortisation of borrowing costs (non-cash) Balance at 31 December 2017 76 Note 35. Non-current assets – property and equipment Leasehold improvements – at cost Less: Accumulated depreciation Furniture, fixtures and fittings – at cost Less: Accumulated depreciation Computer equipment – at cost Less: Accumulated depreciation Office equipment – at cost Less: Accumulated depreciation Other assets – at cost Less: Accumulated depreciation 2017 $’000 4,966 (3,399) 1,567 1,095 (735) 360 6,061 (5,271) 790 1,378 (971) 407 46 (15) 31 3,155 Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Consolidated Balance at 1 January 2016 Additions Additions through business combinations (note 23) Disposals Write off of assets Depreciation expense Balance at 31 December 2016 Additions Additions through business combinations (note 23) Write off of assets Depreciation expense Balance at 31 December 2017 Leasehold improvements $’000 Furniture, fixtures and fittings $’000 Computer equipment $’000 Office equipment $’000 Other assets $’000 2,092 493 28 - (7) (789) 1,817 65 425 - (740) 1,567 564 26 11 (5) (23) (176) 397 101 3 - (141) 360 262 269 379 - - 244 29 166 (2) (2) (304) (135) 606 197 480 (3) (490) 790 300 52 269 (3) (211) 407 21 22 - - (5) (8) 30 8 - - (7) 31 2016 $’000 4,476 (2,659) 1,817 991 (594) 397 5,427 (4,821) 606 1,057 (757) 300 38 (8) 30 3,150 Total $’000 3,183 839 584 (7) (37) (1,412) 3,150 423 1,177 (6) (1,589) 3,155 77 Note 35. Non-current assets – property and equipment (continued) Accounting policy for property and equipment Property and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property and equipment over their expected useful lives as follows: Leasehold improvements Furniture, fixtures and fittings Computer equipment Office equipment Other assets Over unexpired period of lease 5–10 years 2–3 years 3–6 years 4–8 years The residual values, useful lives and depreciation methods are reviewed annually and adjusted if appropriate. Property and equipment under lease are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property and equipment is de-recognised upon disposal or when there is no future economic benefit to the Group. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. Note 36. Current liabilities – trade and other payables Trade payables Accrued expenses Other payables Consolidated 2017 $’000 5,617 17,906 7,360 30,883 2016 $’000 4,711 14,994 6,722 26,427 Refer to note 17 for further information on financial instruments. Accounting policy for trade and other payables These amounts represent liabilities for goods and services provided to the Group prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. Note 37. Current liabilities – provisions Employee benefits Operations provision Employee benefits Consolidated 2017 $’000 6,000 2,296 8,296 2016 $’000 3,982 1,568 5,550 The provision for employee benefits relates to the Group’s liability for annual leave and long service leave. Operations provision The provision relates to negative employee salary packaging account balances which may be uncollectable, and customer and supplier disputes. 78 Note 37. Current liabilities – provisions (continued) Amounts not expected to be settled within the next 12 months The current provision for employee benefits includes all unconditional entitlements where employees have completed the required period of service and also those where employees are entitled to pro-rata payments in certain circumstances. The entire amount is presented as current, since the Group does not have an unconditional right to defer settlement. However, based on past experience, the Group does not expect all employees to take the full amount of accrued leave or require payment within the next 12 months. The following amounts reflect leave that is not expected to be taken within the next 12 months: Employee benefits obligation expected to be settled after 12 months Consolidated 2017 $’000 727 2016 $’000 339 Accounting policy for provisions Provisions are recognised when the Group has a present (legal or constructive) obligation as a result of a past event, it is probable the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Note 38. Non-current liabilities – provisions Employee benefits Make good provision Make good provision Consolidated 2017 $’000 1,298 697 1,995 2016 $’000 939 697 1,636 The provision represents the present value of the estimated costs to make good the premises leased by the Group at the end of the respective lease terms. Movements in provisions Movements in each class of provision (current and non-current) during the current financial year, other than employee benefits, are set out below: Consolidated – 2017 Carrying amount at the start of the year Additional provisions recognised Additions through business combinations (note 23) Carrying amount at the end of the year Make good provision $’000 Operations provision $’000 697 - - 697 1,568 607 121 2,296 79 Note 39. Cash held on behalf of customers and associated liabilities Cash held on behalf of customers recognised in the statement of financial position: Current assets – Restricted cash and cash equivalents Restricted cash and cash equivalents Current liabilities – Customer salary packaging liability Customer salary packaging liability Consolidated 2017 $’000 2016 $’000 67,644 39,493 Consolidated 2017 $’000 2016 $’000 (67,644) (39,493) The restricted cash accounts are held with Australia’s major financial institutions. Depending on commercial arrangements, the Group may earn interest income from these accounts. The Group has recognised finance revenue of $593,000 (2016: $355,000) from restricted cash. Refer to note 17 for interest rate sensitivity analysis on restricted cash balances. Cash held on behalf of customers not recognised in the statement of financial position: Accounts established by the Group as for cash held on behalf of customers Weighted average interest rate 1.70% Consolidated 2017 $’000 87,207 Weighted average interest rate 1.66% 2016 $’000 84,678 Accounts established by customers directly 0.03% 74,794 0.03% 71,368 Total 162,001 156,046 Cash held on behalf of salary packaging and share plan administration customers is deposited by customers into segregated bank accounts to be used only to settle their employees’ salary packaging obligations to suppliers or for contributions into share plans. The Group cannot use these funds for any other purpose than as directed by its customers. Customers are liable to ensure adequate funds are kept in the segregated bank accounts for salary packaging and share plan payments. The Group has assessed that these assets are held in a fiduciary capacity rather than being assets of the Group and, as such, have excluded it from the statement of financial position. The segregated bank accounts used for cash held on behalf of customers are with Australia’s major financial institutions. Depending on commercial arrangements, the Group may earn interest income from these accounts. The Group recognised interest revenue of $1,831,300 (2016: $1,280,000) from those accounts established by the Group as cash held on behalf of customers, and $25,000 (2016: $21,000) from those accounts established by customers directly. These amounts are recognised within management and administration revenue. Accounting policy for restricted cash and cash equivalents The restricted cash and cash equivalents disclosed above and in the statement of cash flows represents funds held by the Group on behalf of certain customers. The use of these funds is restricted to the making of salary packaging payments on behalf of those customers only and therefore not available for general use. The Group recognises a liability for all restricted cash balances to reflect the amounts owing to its customers. 80 Note 40. Remuneration of auditors During the financial year the following fees were paid or payable for services provided by PricewaterhouseCoopers, the auditor of the Company, and unrelated firms: Audit services – PricewaterhouseCoopers Audit or review of the financial statements Other services – PricewaterhouseCoopers Taxation services Risk and governance Audit services – unrelated firms Audit or review of the financial statements Other services – unrelated firms Tax compliance services Consolidated 2017 $ 2016 $ 457,500 381,000 26,000 142,000 168,000 625,500 - - - 37,000 121,000 158,000 539,000 55,000 12,500 67,500 Note 41. Other accounting policies Principles of consolidation The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Smartgroup Corporation Ltd as at 31 December 2017 and the results of all subsidiaries for the year then ended. Subsidiaries are all those entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between entities in the Group are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. A change in ownership interest, without the loss of control, is accounted for as an equity transaction, where the difference between the consideration transferred and the book value of the share of the non-controlling interest acquired is recognised directly in equity attributable to the parent. Non-controlling interest in the results and equity of subsidiaries are shown separately in the statement of profit or loss and other comprehensive income, statement of financial position and statement of changes in equity of the Group. Losses incurred by the Group are attributed to the non-controlling interest in full, even if that results in a deficit balance. Where the Group loses control over a subsidiary, it derecognises the assets including goodwill, liabilities and noncontrolling interest in the subsidiary together with any cumulative translation differences recognised in equity. The Group recognises the fair value of the consideration received and the fair value of any investment retained, together with any gain or loss in profit or loss. Current and non-current classification Assets and liabilities are presented in the statement of financial position based on current and non-current classification. An asset is current when: it is expected to be realised or intended to be sold or consumed in the entity’s normal operating cycle; it is held primarily for the purpose of trading; it is expected to be realised within 12 months after the reporting period; or the asset is cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least 12 months after the reporting period. All other assets are classified as non-current. A liability is current when: it is expected to be settled in the entity’s normal operating cycle; it is held primarily for the purpose of trading; it is due to be settled within 12 months after the reporting period; or there is no unconditional right to defer the settlement of the liability for at least 12 months after the reporting period. All other liabilities are classified as noncurrent. Deferred tax assets and liabilities are always classified as non-current. 81 Note 41. Other accounting policies (continued) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. A distinction is made between finance leases, which effectively transfer from the lessor to the lessee substantially all the risks and benefits incidental to ownership of leased assets, and operating leases, under which the lessor effectively retains substantially all such risks and benefits. The Group does not have any finance leases. Operating lease payments, net of any incentives received from the lessor, are charged to profit or loss on a straight-line basis over the term of the lease. Impairment of non-financial assets Goodwill and other intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other non-financial assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs of disposal and value-in-use. The value-in-use is the present value of the estimated future cash flows relating to the asset using a pre-tax discount rate specific to the asset or cash-generating unit to which the asset belongs. Assets that do not have independent cash flows are grouped together to form a cash-generating unit. Employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits, annual leave and long service leave expected to be settled within 12 months of the reporting date are recognised in current liabilities in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when the liabilities are settled. Other long-term employee benefits The liability for long term employee benefits is measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. Defined contribution superannuation expense Contributions to defined contribution superannuation plans are expensed in the period in which they are incurred. Share-based payments Equity-settled share-based compensation benefits are provided to employees. Equity-settled transactions are awards of shares, or options over shares, that are provided to employees in exchange for the rendering of services. The cost of equity-settled transactions is measured at fair value on grant date. Fair value is independently determined using the Black- Scholes option pricing model that takes into account the exercise price, the term of the option, the impact of dilution, the share price at grant date, expected price volatility of the underlying share, the expected dividend yield and the risk free interest rate for the term of the option, together with non-vesting conditions that do not determine whether the Group receives the services that entitle the employees to receive payment. No account is taken of any other vesting conditions. The cost of equity-settled transactions is recognised as an expense with a corresponding increase in equity over the vesting period. The cumulative charge to profit or loss is calculated based on the grant date fair value of the award, the best estimate of the number of awards that are likely to vest and the expired portion of the vesting period. The amount recognised in profit or loss for the period is the cumulative amount calculated at each reporting date, less amounts already recognised in previous periods. Market conditions are taken into consideration in determining fair value. Therefore, any awards subject to market conditions are considered to vest irrespective of whether that market condition has been met, provided all other conditions are satisfied. If equity-settled awards are modified, as a minimum an expense is recognised as if the modification has not been made. An additional expense is recognised, over the remaining vesting period, for any modification that increases the total fair value of the share-based compensation benefit as at the date of modification. If the non-vesting condition is within the control of the Group or employee, the failure to satisfy the condition is treated as a cancellation. If the condition is not within the control of the Group or employee and is not satisfied during the vesting period, any remaining expense for the award is recognised over the remaining vesting period, unless the award is forfeited. 82 Note 41. Other accounting policies (continued) If equity-settled awards are cancelled they are treated as if they have vested on the date of cancellation, and any remaining expense is recognised immediately. If new replacement awards are substituted for the cancelled awards, the cancelled and new awards are treated as if they were a modification. Business combinations The acquisition method of accounting is used to account for business combinations regardless of whether equity instruments or other assets are acquired. The consideration transferred is the sum of the acquisition-date fair values of the assets transferred, equity instruments issued or liabilities incurred by the acquirer to former owners of the acquiree and the amount of any non-controlling interest in the acquiree. For each business combination, the non-controlling interest in the acquiree is measured at either fair value or at the proportionate share of the acquiree’s identifiable net assets. All acquisition costs are expensed as incurred to profit or loss. On the acquisition of a business, the Group assesses the financial assets acquired and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic conditions, the Group’s operating or accounting policies and other pertinent conditions in existence at the acquisition-date. Where the business combination is achieved in stages, the Group remeasures its previously held equity interest in the acquiree at the acquisition-date fair value and the difference between the fair value and the previous carrying amount is recognised in profit or loss. Contingent consideration to be transferred by the acquirer is recognised at the acquisition-date fair value. Subsequent changes in the fair value of contingent consideration classified as an asset or liability is recognised in profit or loss. Contingent consideration classified as equity is not remeasured and its subsequent settlement is accounted for within equity. The difference between the acquisition-date fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree and the fair value of the consideration transferred and the fair value of any pre-existing investment in the acquiree is recognised as goodwill. If the consideration transferred and the pre-existing fair value is less than the fair value of the identifiable net assets acquired, being a bargain purchase to the acquirer, the difference is recognised as a gain directly in profit or loss by the acquirer on the acquisition- date, but only after a reassessment of the identification and measurement of the net assets acquired, the non-controlling interest in the acquiree, if any, the consideration transferred and the acquirer’s previously held equity interest in the acquirer. Business combinations are initially accounted for on a provisional basis. The acquirer retrospectively adjusts the provisional amounts recognised and also recognises additional assets or liabilities during the measurement period, based on new information obtained about the facts and circumstances that existed at the acquisition-date. The measurement period ends on either the earlier of (i) 12 months from the date of the acquisition or (ii) when the acquirer receives all the information possible to determine fair value. Goods and Services Tax (GST) and other similar taxes Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the tax authority. In this case it is recognised as part of the cost of the acquisition of the asset or as part of the expense. Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position. Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the tax authority, are presented as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the tax authority. New Accounting Standards and Interpretations not yet mandatory or early adopted Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet mandatory, have not been early adopted by the Group, with the exception of AASB 15 ‘Revenue from Contracts with Customers’, for the annual reporting period ended 31 December 2017. The Group’s assessment of the impact of these new or amended Accounting Standards and Interpretations, most relevant to the Group, are set out below. AASB 9 Financial Instruments AASB 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets. The Group has decided not to adopt AASB 9 until it becomes mandatory on 1 January 2018. The Group does not expect the new accounting standard to have a significant impact on the classification and measurement of its financial assets and financial liabilities. The derecognition rules have been transferred from AASB 139 ‘Financial Instruments: Recognition and Measurement’ and have not been changed. The new hedge accounting rules will align the accounting for hedging instruments more closely with the Group’s risk management practices. The Group is currently assessing the potential impact of the new impairment model. 83 Note 41. Other accounting policies (continued) New Accounting Standards and Interpretations not yet mandatory or early adopted (continued) AASB 16 Leases This standard is applicable to annual reporting periods beginning on or after 1 January 2019. For lessee accounting, the standard eliminates the ‘operating lease’ and ‘finance lease’ classification required by AASB 117 ‘Leases’. Subject to exceptions, a ‘right-of-use’ asset will be capitalised in the statement of financial position, measured as the present value of the unavoidable future lease payments to be made over the lease term. The exceptions relate to short-term leases of 12 months or less and leases of low-value assets (such as personal computers and office furniture) where an accounting policy choice exists whereby either a ‘right-of-use’ asset is recognised or lease payments are expensed to profit or loss as incurred. A liability corresponding to the capitalised lease will also be recognised, adjusted for lease prepayments, lease incentives received, initial direct costs incurred and an estimate of any future restoration, removal or dismantling costs. Straight-line operating lease expense recognition will be replaced with a depreciation charge for the leased asset (included in operating costs) and an interest expense on the recognised lease liability (included in finance costs). For classification within the statement of cash flows, the lease payments will be separated into both a principal (financing activities) and interest (either operating or financing activities) components. For lessor accounting, the standard does not substantially change how a lessor accounts for leases. The Group expects to adopt this standard from 1 January 2019 and the impact of its adoption will be that operating leases, such as those detailed in note 30, will be brought onto the statement of financial position with a corresponding liability. 84 Directors’ Declaration In the Directors’ opinion: • the attached financial statements and notes comply with the Corporations Act 2001, the Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; • the attached financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board as described in note 2 to the financial statements; • the attached financial statements and notes give a true and fair view of the Group’s financial position as at 31 December 2017 and of its performance for the financial year ended on that date; • there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable; and • at the date of this declaration, there are reasonable grounds to believe that the members of the extended closed group will be able to meet any obligations or liabilities to which they are, or may become, subject by virtue of the deed of cross guarantee described in note 32 to the financial statements. The Directors have been given the declarations required by section 295A of the Corporations Act 2001. Signed in accordance with a resolution of Directors made pursuant to section 295(5)(a) of the Corporations Act 2001. On behalf of the Directors Michael Carapiet Chairman 21 February 2018 Sydney 85 Independent Auditor’s Report Independent auditor’s report To the members of Smartgroup Corporation Ltd Independent auditor’s report Report on the audit of the financial report To the members of Smartgroup Corporation Ltd Report on the audit of the financial report Our opinion In our opinion: Our opinion The accompanying financial report of Smartgroup Corporation Ltd (the Company) and its controlled In our opinion: entities (together the Group) is in accordance with the Corporations Act 2001, including: The accompanying financial report of Smartgroup Corporation Ltd (the Company) and its controlled (a) giving a true and fair view of the Group's financial position as at 31 December 2017 and of its entities (together the Group) is in accordance with the Corporations Act 2001, including: financial performance for the year then ended (a) giving a true and fair view of the Group's financial position as at 31 December 2017 and of its (b) complying with Australian Accounting Standards and the Corporations Regulations 2001. 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: What we have audited  The Group financial report comprises:       the consolidated statement of financial position as at 31 December 2017 the consolidated statement of changes in equity for the year then ended the consolidated statement of financial position as at 31 December 2017 the consolidated statement of cash flows for the year then ended the consolidated statement of changes in equity for the year then ended the consolidated statement of profit or loss and other comprehensive income for the year then the consolidated statement of cash flows for the year then ended ended     the consolidated statement of profit or loss and other comprehensive income for the year then the notes to the consolidated financial statements, which include a summary of significant ended accounting policies the notes to the consolidated financial statements, which include a summary of significant the directors’ declaration. accounting policies the directors’ declaration. Basis for opinion  We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under Basis for opinion those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report. 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 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for report section of our report. our opinion. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for Independence our opinion. 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 Independence Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant We are independent of the Group in accordance with the auditor independence requirements of the to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical in accordance with the Code. 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 PricewaterhouseCoopers, ABN 52 780 433 757 Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 Liability limited by a scheme approved under Professional Standards Legislation. T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au 86 Liability limited by a scheme approved under Professional Standards Legislation. 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. Smartgroup’s financial report consolidates the businesses of Smartsalary, Smartfleet, Advantage Salary Packaging (Advantage), Autopia, Selectus, AccessPay, Royal Automobile Club of Victoria Salary Solutions (RACVSS), Aspire and other smaller Smartgroup businesses located in Sydney, Adelaide and Melbourne. The Group provides outsourced administration (primarily salary packaging administration and novated leasing), vehicle services (fleet management) and software, distribution and services to a wide range of government, health and corporate customers across Australia. The group has a substantially centralised finance function with recent acquisitions still being integrated. Materiality  For the purpose of our audit we used overall Group materiality of $3.1 million, which represents approximately 5% of the Group’s profit before tax.  We applied this threshold, together with qualitative considerations, to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the financial report as a whole.  We chose Group profit before tax as the benchmark because, in our view, profit before tax (which is a generally accepted benchmark for profit oriented entities) is a key metric against which the performance of the Group is measured. We adjusted profit before tax for business combination related costs as these were infrequently occurring items impacting the profit before tax.  We selected 5% based on our professional judgement, noting that it is within the range of commonly acceptable profit related materiality thresholds. 87 Audit Scope  Our audit focused on where the Group made subjective judgements; for example, significant accounting estimates involving assumptions and inherently uncertain future events.  We ensured that the audit team possessed the appropriate skills and competencies which are needed for the audit of the Group. This included adequate industry expertise, as well as the involvement of valuation and taxation specialists.  Due to their financial significance, we performed an audit of the financial information of the main operating entities of the following businesses: Smartsalary, Smartfleet and Selectus.  Due to their smaller size and contribution to the Group's results, we performed selected audit procedures and analytical procedures over certain balances of non-trading holding entities and remaining trading entities of the Group (Advantage, Autopia, AccessPay, RACVSS, Aspire and Smartgroup Corporation).  At the Group level, we performed further audit procedures over the consolidation process and the preparation of the financial report.  The combination of all these procedures provided us with sufficient and appropriate audit evidence to express an opinion on the Group’s financial report as a whole. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit and Risk Committee. Key audit matter Business combinations (Refer to note 23) How our audit addressed the key audit matter During the year, the Group acquired three new businesses: Royal Automobile Club of Victoria Limited Salary Solutions (RACVSS), AccessPay and Aspire Benefits Management. The Group also finalised the accounting for the acquisition of Selectus Limited, which was acquired in 2016. The acquisition of a business is complex and the accounting standards require the Group to identify all assets and liabilities of the newly acquired businesses and estimate the fair value of each item. We read the relevant sale and purchase agreements and due diligence reports in relation to the acquisitions. The accounting for the acquisitions was consistent with the sale and purchase agreements. For the provisional initial accounting, we reviewed the take on balances and confirmed these against the completion statements and due diligence reports and reviewed the financial statements for the appropriate disclosures. We also assessed the competency and objectivity of the external valuers. We focused on the accounting for these acquisitions due to: In relation to our assessment of the Group’s accounting treatment for funds held on behalf of customers, our procedures included: 88 Key audit matter the judgement required to value the software and customer contract assets acquired of RACVSS, AccessPay and Aspire benefits management. The Group accounted for the acquisitions provisionally as the measurement for intangible assets was still in progress.  the judgement required to determine whether funds held on behalf of certain customers represent an asset of the business and thus should be recognised in the statement of financial position. Accounting appropriately for funds held on behalf of customers is complex because it requires detailed consideration of the substance and legal form of relevant factors relating to control and economic benefits of the asset.  the judgement required to estimate the fair value of the contingent consideration for Smartequity and the settlement for Selectus. Key judgements included forecasts of Smartequity’s Net Profit Before Tax and assessment of Selectus final settlement based on 2016 results. How our audit addressed the key audit matter  inspecting a sample of customer contracts and assessing the key characteristics of these contracts in relation to the classification of the funds as either restricted cash or cash held on behalf of customers  developing an understanding of the relevant  transaction process flows and the key differences between restricted cash and cash held on behalf of customers assessing the qualitative and quantitative disclosures made in the financial report in relation to each of the different types of funds held on behalf of customers.  In relation to the valuation/settlement of the contingent consideration in respect of the Smartequity and Selectus businesses, and in order to assess whether the conditions required for the contingent consideration to be paid or settlement paid were likely to be met in the future, our procedures included:  assessing if the calculation of the contingent consideration/settlement was in accordance with the contractual arrangements and the requirements of accounting standards assessing the governance supporting the Group’s forecasting process assessing the Group’s forecasting accuracy by comparing past forecasts with actual performance and developing an understanding of the causes of differences  developing an understanding of the Group’s perspective on the future growth of the Smartequity business. considering the sensitivity of the deferred consideration liability to reasonably possible changes in key profit assumptions   Group’s goodwill and other indefinite life intangible asset impairment assessment (Refer to note 5) The Group’s goodwill and other indefinite life intangible assets are required by Australian Accounting Standards to be tested at year end We considered the adequacy of the business combination disclosures in light of the reporting requirements. . Our audit procedures included:  assessing whether the Group’s identification of CGUs was consistent with our knowledge of the operations, internal reporting lines 89 Key audit matter How our audit addressed the key audit matter for impairment at the cash generating unit (CGU) level. We focused on the impairment assessment due to the size of the goodwill and other indefinite life intangible assets balances and the judgement involved in assessing whether an impairment was required. The Group performed an impairment assessment over goodwill and other indefinite life intangible assets by calculating the value in use for each CGU, using discounted cash flow models (the models). Key judgements in the models included discount rates, annual revenue and terminal growth rates and the assumption that there will be no significant changes to the legislation governing the provision of products and services within the salary packaging administration and novated leasing industries in the forecast periods . Restricted cash and cash equivalents held on behalf of customers (Refer to note 39)       and the level of integration of the newly acquired businesses evaluating the process by which the cash flow forecasts were developed comparing the cash flow forecasts to Board approved budgets and confirming that key assumptions in the forecasts were subject to oversight from the directors assessing the accuracy of the forecasts by comparing previous forecasts with actual business results comparing these forecasts with forecasts used in the contingent consideration calculations for consistency considering the sensitivity of the key assumptions in the models by analysing the impact on the recoverable amount from changes in key assumptions. These recalculations did not suggest an impairment was required for the tested CGUs considering whether there had been any published plans from mainstream Australian political parties relating to any potential changes to legislation governing the provision of products and services within the salary packaging administration and novated leasing industries. We did not identify plans for significant changes in this area. We also compared the Group’s net assets of $204.9 million as at 31 December 2017 to its market capitalisation of $1.2 billion on the same date. We also considered the adequacy of the Group’s disclosures on goodwill and other infinite life intangible assets impairment in light of the requirements of Australian Accounting Standards . As described in note 39, the provision of salary packaging services involves the Group holding funds on behalf of certain customers, either as restricted cash or cash equivalents held on behalf of customers. Considered to be a Key Audit Matter as the Group may be responsible Our audit procedures included:  performing tests over a sample of key controls in the EUM cash transaction process and assessing whether these controls had been designed appropriately and operated effectively during the year. We 90 Key audit matter for any shortfall in these accounts, significant volume of transactions impacting restricted cash and cash held on behalf of customers’ accounts throughout the year and due to the large volume of accounts and employees under management (EUM). How our audit addressed the key audit matter   determined that we could place reliance on the tested controls for the purposes of our audit testing a sample of restricted cash and cash held on behalf of customers bank account reconciliations and obtaining confirmations directly from banks of the outstanding balances at year end reading board minutes, enquiring with management and obtaining a written description from the Group’s lawyers of current legal matters to understand whether there were any material claims from EUMs or employers. We further considered the adequacy and accuracy of the Group’s disclosures in relation to restricted cash and cash held on behalf of customer’s balances in the light of the requirements of Australian Accounting Standards. Other information The directors are responsible for the other information. The other information comprises: Who we are, 2017 Company Snapshot, Chairman’s Report, 2017 Financial Highlights, Managing Director and CEO Report of Operations, What We Do, Who We Help, Environmental, Social and Governance Report, Directors’ Report, Shareholder Information, Four Year Summary, Corporate Directory and Glossary included in the Group’s annual report for the year ended 31 December 2017 but does not include the Financial Report and our auditor’s report thereon. Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon. In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the directors for the financial report The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and 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. 91 In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the financial report Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report. A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar2.pdf. This description forms part of our auditor's report. Report on the remuneration report Our opinion on the remuneration report We have audited the remuneration report included in pages 21 to 33 of the directors’ report for the year ended 31 December 2017. In our opinion, the remuneration report of Smartgroup Corporation Ltd for the year ended 31 December 2017 complies with section 300A of the Corporations Act 2001. Responsibilities The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. PricewaterhouseCoopers Sam Hinchliffe Partner Sydney 21 February 2018 92 This page has intentionally been left blank 93 Shareholder Information This section contains additional information required by the ASX Listing Rules not disclosed anywhere else in this report, as at 24 January 2018. Shareholdings Substantial Shareholders The following information is extracted from the Company’s Register of Substantial Shareholders. Name SMART PACKAGES PTE LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED BNP PARIBAS NOMS PTY LTD Number of ordinary shares Percentage of total shares issued 32,608,245 19,951,889 12,568,928 8,532,962 7,742,107 7,282,013 26.44 16.18 10.19 6.92 6.28 5.91 Class of shares and voting rights At 24 January 2018 there were 2,169 holders of ordinary shares in the Company. The voting rights attached to the ordinary shares set out in the Company’s Constitution are that on a show of hands, every member present at a meeting in person or by proxy shall have one vote and upon a poll each share shall have one vote. Distribution of shareholders of shares as at 24 January 2018 Ordinary shareholders 849 796 230 239 55 2,169 125 Size of holding 1–1,000 1,001–5,000 5,001–10,000 10,001–100,000 100,001 and over Total shareholders Holding less than a marketable parcel 94 Twenty largest shareholders of ordinary shares as at 24 January 2018 Ordinary shares SMART PACKAGES PTE LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED J P MORGAN NOMINEES AUSTRALIA LIMITED CITICORP NOMINEES PTY LIMITED NATIONAL NOMINEES LIMITED BNP PARIBAS NOMS PTY LTD HEATHERWOOD COURT PTY LTD HSBC CUSTODY NOMINEES (AUSTRALIA) LIMITED APINTO PTY LTD DEVENDRA BILLIMORIA JENNY ELIZABETH GAUDRY GENTILLY HOLDINGS 2 PTY LIMITED ANTON JEROME GAUDRY KPB ENTERPRISES PTY LTD BNP PARIBAS NOMINEES PTY LTD UBS NOMINEES PTY LTD POINT CAPITAL PTY LTD AOTEAROA INVESTMENT COMPANY PTY LIMITED TIMOTHY LOOI AMP LIFE LIMITED Total Restricted securities or securities subject to voluntary escrow The following are all fully paid ordinary shares. Escrow release date Date after the audited financial statements of the Company for the year ended 2017 are released Date after the audited financial statements of the Company for the first half of 2018 are released 1 January 2019 Date after the audited financial statements of the Company for the year ended 2018 are released Date after the audited financial statements of the Company for the first half of 2019 are released 1 January 2020 Date after the audited financial statements of the Company for the year ended 2019 are released Total Number 32,608,245 19,951,889 12,568,928 8,532,962 7,742,107 7,282,013 2,492,003 2,011,990 2,002,142 1,724,729 1,687,535 1,610,401 1,125,738 1,017,711 912,180 844,939 689,469 678,715 625,117 398,918 % 26.44 16.18 10.19 6.92 6.28 5.91 2.02 1.63 1.62 1.40 1.37 1.31 0.91 0.83 0.74 0.69 0.56 0.55 0.51 0.32 106,507,731 86.38 Number of shares 1,449,614 2,532,748 697,150 49,618 223,055 1,129,976 49,618 6,131,779 95 Four Year Summary 2017 2016 2015 2014 205.4 93.6 41.3 64.1 464.1 259.2 204.9 (111.1) 147.1 63.3 32.8 44.0 438.6 244.3 194.3 (72.0) 94.5 37.4 20.2 26.2 167.4 84.9 82.5 (33.5) 75.4 24.1 (1.0) 17.4 110.5 44.6 65.9 5.8 123.2 121.5 103.7 101.5 16.5 18.5 35.0 10.85 52.0 67% 99% 1.2 9.8 15.0 24.8 6.28 36.2 68% 103% 1.1 7.9 8.7 16.6 5.11 25.3 66% 106% 0.9 - 6.1 6.1 1.47 17.1 35% 138% (0.2) 706 325,000 62,500 544 221,000 53,000 398 182,500 34,000 343 118,700 30,900 Income statement ($m) Revenue EBITDA NPAT (statutory) NPATA Statement of financial position ($m) Assets Liabilities Net assets Net (debt)/cash Share information Ordinary shares (million shares) Dividends per share (cents per share) Interim Final Total dividends Share price at 31 December ($) NPATA/ordinary shares (cents per share) Ratios Dividend payout ratio Operating cashflow/NPATA Net debt/EBITDA Operational metrics FTEs Packages Novated leases under management 96 Corporate Directory Directors Michael Carapiet Deven Billimoria Gavin Bell Andrew Bolam Deborah Homewood John Prendiville Ian Watt Company secretaries Amanda Morgan Sophie MacIntosh Registered office Smartgroup Corporation Ltd Level 8, 133 Castlereagh Street Sydney, Australia, 2000 Tel: 1300 665 855 Principal place of business Smartgroup Corporation Ltd Level 8, 133 Castlereagh Street Sydney, Australia, 2000 Tel: 1300 665 855 Share register Link Market Services Limited Level 12, 680 George Street, Sydney, Australia, 2000 Tel: 1300 368 664 Annual general meeting 2 May 2018 at 11am. Please refer to the website for further details. Auditor Solicitors Bankers PricewaterhouseCoopers One International Towers Watermans Quay, Barangaroo Sydney, Australia, 2000 Minter Ellison Lawyers Level 23, 525 Collins Street Melbourne, Australia, 3000 Tel: +61 3 8608 2000 Australia and New Zealand Banking Group Limited 242 Pitt Street Sydney, NSW, 2000 Stock exchange listing Smartgroup Corporation Ltd shares are listed on the Australian Securities Exchange (ASX code: SIQ) Website smartgroup.com.au Corporate Governance Statement The Corporate Governance Statement, which was approved at the same time as the Annual Report, can be found at http://ir.smartgroup.com.au/ Investors/?page=Corporate-Governance 97 Glossary of Terms AGM ARC Board Annual General Meeting of the Company Audit and Risk Committee Board of Directors Company Smartgroup Corporation Ltd ABN 48 126 266 831 CAGR CENL CEO CESP CFO CHRO CIO CGU CLO Director EBITDA EPS ESG Group GST HRRC ITIC KMP KPI LFS LTIP Compound Annual Growth Rate Chief Executive, Novated Leasing and Fleet Managing Director & Chief Executive Officer Chief Executive, Salary Packaging Chief Financial Officer Chief Human Resources Officer Chief Information Officer Cash Generating Unit Chief Legal Officer Director means a director of the Company Earnings Before Interest, Tax, Depreciation and Amortisation adjusted for significant non-operating items. Earnings Per Share Environmental, Social and Governance The consolidated Smartgroup Corporation entity consisting of the Company and the entities it controlled at the end of or during the year ended 31 December 2017 Goods and Services Tax Human Resources and Remuneration Committee IT and Innovation Committee Key Management Personnel, being those employees who had authority and responsibility for planning, directing and controlling the activities of the Group during the 2017 financial year, and includes the Directors. Key Performance Indicator Loan Funded Shares Long Term Incentive Plan Net debt Cash and cash equivalents less borrowings, adjusted to exclude capitalised borrowing costs NFP NPAT NPATA NPS Operating activities Not-for-profit organisation Net Profit After Tax Net Profit After Tax, adjusted to exclude the non-cash tax effected Amortisation of intangibles and significant non-operating items Net Promoter Score, which is a measure of how likely a customer is to provide a word of mouth referral, mea- sured on a scale of -100 to +100. Cash flow excluding receipts and payments from customers’ salary packaging accounts and significant non-operating items. PBI PBT Public Benevolent Institution Profit Before Tax Smartgroup Smartgroup Corporation Ltd ABN 48 126 266 831 STIP TSR VWAP 98 Short Term Incentive Plan Total Shareholder Return Volume-Weighted Average Price Initial establishment of Smartsalary.com 1999 2001 Investment by Macquarie Bank and other investors; Smartsalary Pty Ltd established Launched vehicle lease broking business 2004 2006 Acquired by Paxys Australia Pty Ltd Acquired Melbourne Systems Group assets and Seqoya 2009 2010 Acquired Webfleet Acquired Australian Vehicle Consultants and creation of Smartfleet 2011 Acquired PBI Solutions 2012 2013 2014 2015 Paxys Australia sold to Smartgroup Investments (currently known as Smartgroup Corporation) Smartgroup Corporation lists on the ASX Acquired Advantage Salary Packaging Acquired TAINS business (Insurance products distribution) Acquired 50% of Health-e Workforce Solutions Acquired Selectus 2016 Acquired Trinity Management Group assets. Trading as Smartequity Acquired Autopia Acquired AccessPay 2017 Acquired RACV Salary Solutions and renamed to Salary Solutions Acquired Aspire Benefits Management Acquired Fleet West Fleet & Finance Solutions Smartgroup Corporation Ltd National Head Office Level 8, 133 Castlereagh Street Sydney NSW 2000 smartgroup.com.au Annual Report 2017 

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