Tree Island Steel Ltd.
Annual Report 2013

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A N N U A L R E P O R T 2 0 1 3 Contents Highlights Business Overview Chairman and CEO Reports Financial Report Page 1 2 8 11 HIGHLIGHTS 2013 “Transformational year for shaping and executing Group strategy” Statutory net profit after tax of $2.3 million for the 2013 year compares to a $1.4 million loss in 2012 Consistent strong results from UK operations with profit contribution of $7.8 million before tax Sale of Australian and New Zealand operations for $43 million cash completed on 31 January 2014 Cash assets immediately post sale of $49.4 million with $48.1 million unrestricted and no corporate debt Special fully franked dividend of 3.6 cents per share paid on 19 February 2014 and buyback of up to 10% initiated on 20 February 2014 1 THINKSMART ANNUAL REPORT 2013 BUSINESS OVERVIEW We look to build long term, exclusive distribution agreements and entrenched partnerships which deliver value for some of Europe’s largest retailers and their customers. Our products are executable throughout today’s complex retail channel, creating additional revenue and enhanced margin performance – on and offline. For over 10 years, ThinkSmart has been an exclusive partner for Dixons Retail Plc, during which we have developed compelling Business and Consumer lease finance propositions, most recently introducing Infinity – a first to market offer which enables consumers to upgrade to the very latest Computer or Tablet every 2 years. “Unlocking shareholder value” PERFORMANCE CHART (01 APR 13 - 31 MAR 14) Volume (m) Thinksmart ASX ALL ORDINARIES S&P/ASX 200 FINANCIALS 0.50 0.45 0.40 0.35 0.30 0.25 0.20 A $ - e c i r P e r a h S 0.15 1-Apr 1 6-Apr 1-M ay 1 6-M ay 3 1-M ay 1 7-Jun 2-Jul 1 7-Jul 1-Aug 1 6-Aug 2-Sep 1 7-Sep 2-Oct 1 7-Oct 1-N ov 1 8-N ov 3-D ec 1 8-D ec 2-Jan 1 7-Jan 3-Feb 1 8-Feb -M ar 5 2 0-M ar 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 ) m ( e m u o V l Throughout 2013 the Board conducted a strategic review to determine a go forward strategy for ThinkSmart. A commitment to focus on the UK market opportunity led to the sale of the Australian and New Zealand operations for $43 million cash with the sale transaction completing on 31 January 2014. The announcement of the sale transaction on 12 December 2013 led to an uplift in the Company’s share price from a 12 month low of 19.9 cents to a high of 32.7 cents immediately following the announcement. Part of the proceeds from the sale is intended to return value to • A range of capital management strategies are currently shareholders: under consideration with the intention to optimise overall • Special fully franked dividend of 3.6 cents per share paid returns to shareholders as well as providing sufficient on 19 February 2014. capital to meet the growth aspirations of the business in • On market buyback of issued shares. On 20 February 2014 the UK . the Company announced its intention to buyback up to The balance of the sale proceeds are intended to be used to 10% of issued shares. The initial tranche of shares under fund expansion and growth in our chosen market in the UK. the buyback were acquired on 18 March and up to 11 April 2014 the Company has acquired and cancelled 572,981 shares. 2 THINKSMART ANNUAL REPORT 2013 “Shaping and Executing the Group’s strategy” Since 2003 ThinkSmart has built a strong UK business, with important retail relationships already in place and a powerful platform to build on. UK Operational Snapshot A GROWTH MARKET OPERATIONAL SNAPSHOT • Large Market: 62m consumers • Supportive to business: • Lowest company tax in G7- 20% by 2015 • 2013 GDP growth of 1.9%, fastest since 2007 • Significant Growth Potential in resurgent market $7.8m NPBT FY’13 58,300 Active Customers $25.9m In Originations $50.7m Assets Under Management $4.8m Cash Generation $59.9m Spare funding capacity GROWTH PATH IN 2014 • Organic Growth • Product & market development • Invest in synergistic growth opportunities • Build capability to support growth 3 THINKSMART ANNUAL REPORT 2013 “The UK is the right environment to grow our business” We plan to further develop our current propositions with our existing partner, Dixons. We are working with them to further develop the successful Infinity proposition and broaden its appeal. This will be launched towards the end of H1 2014. ThinkSmart will continue to refresh products aligned to our partners’ commercial objectives to assist them in creating a differentiated proposition in their markets. We continue to work closely with Kingfisher and have a current trial underway providing a funding mechanism for purchase and installation of boilers to residential landlords across UK. There are further opportunities to introduce our existing in store and online point of sale solutions to other retailers with customers who want all the benefits of the latest technology or product features with the flexibility to upgrade products as their need develops. We do not see these opportunities as limited to computing related product sales. Finally, the sale of the Australian and New Zealand operations has provided a significant cash reserve available to fund opportunities that have the potential to accelerate synergistic growth. The evaluation of these opportunities is in its early phase however we believe ThinkSmart’s strong balance sheet and market experience and singular market focus could unlock value in strategically aligned businesses. Ultimately we are positioning the Company for growth in a strengthening UK market place. Our people and their capabilities, along side efficient processes and a unique IP capability have created significant added value and support for our retail partners. We plan to continue to build this capability across an even wider range of innovative financial propositions to a broader base of retail partners. 4 THINKSMART ANNUAL REPORT 2013 “Consistent performance from the UK business” The UK operations contributed $7.8 million net profit before tax for the 2013 year, a consistent performance in a market showing indicators of an economic recovery. UK Profit Contribution ($m) 5.0 4.0 3.0 2.0 1.0 H1 12 H2 12 H1 13 H2 13 Cash flow generation from UK operations increased to $4.8 million, up from $3.8 million in 2012. New originations totalled $25.9 million, a reduction of 8% on a constant currency basis. The 2012 new business volumes were significantly increased by pre Olympics sales activity. In addition, Infinity originations have in part been impacted by a changing sales mix trending towards lower value tablets. The automation of processes has delivered efficiency benefits with operating costs as a percentage of revenue falling from 29.6% to 28.6%. 5 THINKSMART ANNUAL REPORT 2013 “ThinkSmart is well positioned for future growth through its focus on the UK market and capacity to leverage a strong balance sheet” ThinkSmart has once again extended its 10 year partnership with Dixons, the market leading technology retailer in the UK, for a further period to 2017. The success of the important relationship is in part due to our ability to innovate and update the customer proposition ensuring it remains relevant to more customers and more products. In August 2013 ThinkSmart announced it had signed a Heads of Term with the UK’s leading DIY retailer, Kingfisher, opening up a partnership opportunity with significant potential for growth. A trial product is in its early stages of development and the evolution of this partnership is expected to continue throughout 2014. The UK operations are funded through a financing arrangement with Secure Trust Bank. In 2013 the funding limit was increased from GBP40 million to GBP60 million and the facility extended to 2016. There is a focus to move to a multi funder model to support expected future growth and diversification with the stronger balance sheet creating improved opportunities with potential funders and improved pricing. “Prospects for 2014” ThinkSmart is well positioned for future growth through its focus on the UK market and capacity to leverage a strong balance sheet. The opportunities for growth exists organically with current long term partners, by extending our propositions to new sectors and retail partners and also through investments which unlock synergies in strategically aligned businesses. 6 THINKSMART ANNUAL REPORT 2013 “ThinkSmart has once again extended its 10 year partnership with Dixons” 7 THINKSMART ANNUAL REPORT 2013 CHAIRMAN AND CEO REPORTS Executive Chairman’s Report Dear Shareholder “2013 was transformational in shaping and executing strategy” Following a challenging period for shareholders, Directors and staff, improved financial performance together with the sale of the Australian and New Zealand operations for $43 million cash has driven a significant uplift in the market value of ThinkSmart. The Company’s share price closed the 2013 year at $0.36, up 89% from one year earlier. The transformation plan executed in late 2012 delivered improved financial performance and returned the Group to profit in the 2013 year. In addition, the Board completed a comprehensive strategic review in 2013 which led to the acceptance of an offer for the Australian operations which the Board considered to be a fully priced offer. I am pleased that the sale allows your Board to distribute returns to shareholders in the form of a fully franked special dividend of 3.6 cents per share paid on 19 February 2014. In addition, the Company announced its intention to buyback up to 10% of issued shares through an on market buyback. The initial tranche of shares under the buyback were acquired on 18 March and up to 11 April 2014 the Company has acquired and cancelled 572,981 shares. On 3 April 2014, we released a market announcement that the company was reviewing its current position on capital management. In response to shareholder feedback the Board is in the process of considering a range of strategies with the objective of optimising returns to shareholders as well as providing sufficient capital to meet the growth aspirations of the business in the UK. We strongly believe the UK is the place to be to grow our business. ThinkSmart has a strong long term relationship with Dixons, UK’s leading electrical retailer and our leadership team has been strengthened by the appointment of Keith Jones, former Dixons Group Retail Director, who joined our Board in May 2013 and commenced in the Chief Executive Officer role on 1 February 2014. I am delighted to have secured Keith in this capacity and I can think of no better individual to take the reins of the business. I look forward to supporting him in my capacity as Executive Chairman and working with him in this next exciting phase of ThinkSmart’s journey. The UK market is three times the size of Australia with 62 million consumers and ThinkSmart has secured access to these consumers through its strong relationship with Dixons. ThinkSmart’s sector leading intellectual property delivers capability for point of sale financing solutions and facilitates rapid development of innovative products into other retail sectors allowing ThinkSmart to create financing solutions with its chosen partners at relatively low cost and in rapid timeframes. ThinkSmart now has significant cash reserves to invest in strategic growth initiatives. A stronger balance sheet also opens the way to increased funding capacity and more favourable financing rates. Finally, on behalf of the Board of Directors, I would like to thank all of ThinkSmart’s customers, partners, funders and shareholders for their continuing support. I especially want to thank the entire team at ThinkSmart for their ongoing commitment and enthusiasm. Ned Montarello, Executive Chairman 8 THINKSMART ANNUAL REPORT 2013 Chief Executive Officer’s Report Dear Shareholders As a Director and Chief Executive Officer of ThinkSmart, I continue to be excited by the opportunities for the Company in the UK market. The Directors and Executives are actively evaluating the growth opportunities that will maximise long term shareholder value. “Building long term shareholder value in the UK” Our strategic focus is to build long term value in the UK through 3 Pillars of Growth: 1. Organic growth with existing partners 2. Product and market development extending the model with new partners 3. Synergistic opportunities The current plan to refocus, realign and broaden the offer with our principal partner in the UK creates an opportunity to deliver our most exciting product proposition yet to even more customers and product categories. Our partnership with Dixons has recently been extended to 2017. We are working with them to deliver an enhanced Infinity proposition which will be relevant to more customers across more products. It will provide added flexibility and allow customers to benefit from the very latest products in a fast changing technology landscape. It will be great for customers, our partner, their suppliers and obviously for ThinkSmart and its shareholders. We are already working towards replicating the successful partnership we have with retailers who do not directly compete with Dixons. The relationship with Kingfisher announced in 2013 is in development phase as we trial a product in their Kingfisher Future Homes operation. We are encouraged by the partner’s commitment to the evolving relationship. Our focus in the UK opens up the opportunity to create and build additional partnerships and to work alongside retailers to develop innovative, fast and market winning point of sale finance solutions. Significant cash reserves are now available to fund investments in strategically aligned opportunities where we can unlock value and deliver growth. We are actively evaluating a number of opportunities that compliment ThinkSmart’s key competencies and shareholders will be appraised of developments as they arise. Execution of the Group’s strategy occurs at a time of renewed optimism for the UK economy. The economic outlook has turned positive with GDP growth the strongest since 2007 and both employment and inflation ahead of expectation. Finally, I would like to acknowledge the hard work and commitment from the ThinkSmart team based in the UK. I look forward to leading the team, building the capability and driving ahead with the planned growth initiatives for the benefit of all stakeholders. Keith Jones, Chief Executive Officer 9 THINKSMART ANNUAL REPORT 2013 10 FINANCIAL REPORT Contents Directors’ Report Auditor’s Independence Declaration Directors’ Declaration Consolidated Statement of Profit and Loss Consolidated Statement of Comprehensive Income Consolidated Statement of Financial Position Consolidated Statement of Changes In Equity Consolidated Statement of Cash Flow Notes to the Financial Statements Independent Auditor’s Report Shareholder Information Corporate Information Page 12 37 38 39 40 41 42 43 44 104 106 108 ANNUAL REPORT 2013 11 DIRECTORS’ REPORT Your Directors present their report on the consolidated of Dixons Retail plc. At Dixons, Keith was a member of the entity (referred to hereafter as the “Group”) consisting of Group Executive Committee with responsibility for all UK and ThinkSmart Limited (“the Company” or “ThinkSmart”) and Ireland fascias including PC World and Currys. Previously the entities it controlled at the end of, or during, the financial he was Managing Director of PC World Stores Group with year ended 31 December 2013. responsibility for stores in the UK, Spain, France, Italy and DIRECTORS Nordics in addition to Group Service Operations. Keith has a MBA from Manchester Business School. The following persons were Directors of the Company during David Griffiths the financial year and until the date of this report. B. Ec (Hons), M. Ec, D. Ec (Hon), FAICD Non-Executive Director, Deputy Chairman Names, qualifications, experience and special responsibilities Ned Montarello Executive Chairman David joined the Board on 28 November 2000 and was appointed Deputy Chairman on 22 May 2010. David has over 14 years experience in investment banking at Macquarie Bank Limited and previously as Executive Chairman of Porter Western Limited. Prior to that he held Ned was appointed Executive Chairman on 22 May 2010 a number of senior financial positions across a wide range and stepped down as Chief Executive Officer on 31 January of industries. He holds an Honours Degree in Economics 2014. Ned has over 28 years experience in the finance and an honorary Doctor of Economics from The University industry. He founded ThinkSmart in 1996 and through this of Western Australia, a Masters Degree in Economics vehicle has been credited with elevating the Nano-Ticket from Australian National University and is a Fellow of the rental market sector in Australia, receiving the Telstra and Australian Institute of Company Directors. David sits on Australian Government’s Entrepreneur of the Year Award in the Board of the Perth International Arts Festival and is 1998. Ned led the development of the Group’s Australian currently Chairman of Automotive Holdings Group Limited. distribution network by building partnerships with key David is currently Chair of the Audit and Risk Committee of retailers, including JB Hi-Fi and Dick Smith. Ned also steered ThinkSmart. the expansion of the business into Europe, establishing agreements with DSG International and a joint venture with Steven Penglis HBOS to launch in the UK. In 2007 Ned successfully listed B. Juris and B. Law the business in Australia for $204m. In 2010 he developed Non-Executive Director the “Infinity” product with Dixons to move into the “Business to Consumer” market for the first time in the UK. Ned Steven joined the Board on 1 July 2000 and stepped down continued to drive the business to maintain its sector leading as Chairman on 6 May 2007. Until 30 September 2012, IP in point of sale finance with the introduction of e-sign to Steven was a partner of Freehills, having been appointed its process ensuring that it maintained its relevance to the to the partnership on 1 July 1987. Steven now practises fast moving retail environment. solely as a barrister, specialising in the area of Corporate and Keith Jones MBA Bus Chief Executive Officer Corporations Law litigation. He is a part time Senior Member of the Commonwealth Administrative Appeals Tribunal, a former elected member and Chairman of the Legal Practice Board of Western Australia and a former elected member of the Council of the Law Society of Western Australia (having Keith joined the Board on 24 May 2013 and was appointed served from 1 January 2002 to 31 December 2012). Steven Chief Executive Officer on 1 February 2014. Keith has 30 is currently Chairman of the Nomination and Remuneration years of retail experience in Europe including roles as Chief Committee of ThinkSmart. Executive Officer of JJB Sports plc and Group Retail Director 12 DIRECTORS’ REPORT Fernando de Vicente B. Econ, MBA Bus Non-Executive Director was employed with the NAB Group in senior finance roles based in the UK and Australia. Alistair Stevens Fernando is a citizen of Spain who joined the Board on 7 BA (Hons), ACA April 2010 and the Audit and Risk Committee on 18 August Company Secretary and Chief Financial Officer 2013. Fernando has a Degree in Economics (International Development) from the University Complutense in Madrid, Alistair resigned as Company Secretary and Chief Financial and an Executive MBA from IESE Business School in Officer on 12 December 2013. Madrid. Fernando spent nine years at DSG International, one of Europe’s largest electrical retailers, where he most PRINCIPAL ACTIVITIES recently held the role of International Managing Director, with responsibility for DSG’s Central & Southern European The Group’s principal activity during the year was the operations, a A$3 billion business with 350 stores across six provision of lease and rental financing services in Australia countries. and the UK and the supply of interest free payment plans in Australia. Fernando started his career with DSG as Finance Director for PC City Spain, and became the MD for Spain in 2003. In OPERATING AND FINANCIAL REVIEW 2006 he was promoted to Regional Managing Director for South-East Europe based in Greece, before assuming the The Board presents its Operating and Financial Review for role of International Managing Director in 2008. In March the 2013 financial year. This information should be read in 2010, Fernando left DSG to become the Executive Chairman conjunction with the financial statements and accompanying of BodyBell Group, one of Spain’s largest speciality retailers. notes. On 15 February 2012, Fernando was appointed Non- Executive Director of Levantina, a multinational company Business model dealing in natural stone products. Nancy Fox BA, JD (Law), FAICD Non-Executive Director ThinkSmart is a leading international finance company, creating differentiation and competitive advantage in ‘point of sale’ finance. It has an exclusive distribution agreement and partnership with one of the UK’s leading electrical retailers and their customers. ThinkSmart’s products Nancy resigned as Non-Executive Director on 18 March leverage its sector leading software and processing IP for 2013. COMPANY SECRETARY Neil Barker B. Bus, FCPA delivering fast finance solutions in today’s complex retail environment and it offers a compelling and highly profitable value proposition for retail partners, customers and funders. During the year, a decision to sell the Australian and New Zealand operations was taken after a full strategic review by the Board. The sale agreement for the Australian and Neil was appointed Company Secretary on 12 December New Zealand operations for $43m was executed on 12 2013. Neil is a Certified Practicing Accountant (Fellow) December 2013 and settled 31 January 2014. This will with over 30 years experience in banking and finance. He enable the Group to focus on the UK market with its 62 previously worked for ThinkSmart for 6 years until July 2011 million consumers and allow it to continue to build on the in the roles of Chief Operating Officer, Chief Financial Officer strong relationship it has with the UK’s dominant electrical and Company Secretary. Prior to joining ThinkSmart in 2005, retailer – Dixons, to further develop new products and Neil was the Group Financial Controller of Alinta Limited, an markets and invest in synergistic growth opportunities. Australian public listed company. Prior to joining Alinta, he ANNUAL REPORT 2013 13 DIRECTORS’ REPORT Key financial data Continuing operations Discontinued operations Total For year ended 31 December 2013 $000 2012 $000 2013 $000 2012 $000 2013 $000 2012 $000 Total revenue 18,933 19,043 18,758 20,680 37,691 39,723 Indirect customer acquisition costs (4,943) (4,992) (1,361) (3,147) (6,304) (8,139) Operating expenses (9,923) (11,005) (13,039) (14,969) (22,962) (25,974) Depreciation and amortisation Impairment losses Profit / (loss) before tax Income tax (expense) / benefit Profit / (loss) after tax Summary of results (463) (255) 3,349 (752) 2,597 (450) (182) 2,414 (569) 1,845 (2,399) (2,338) (379) 91 (288) (2,786) (2,862) (3,236) (4,098) (2,593) (4,280) (4,320) 1,034 (3,286) 2,970 (661) 2,309 (1,906) 465 (1,441) • Net profit after tax of $2.3m, inclusive of $0.35m after tax expenses in relation to transaction costs with respect to the after balance date sale of the Australian and New Zealand businesses, compared to a loss in 2012 of $1.4m • • • • • Total revenue of $37.7m, down 5% Total expenses of $34.7m, down 16% Operating expenses of $23.0m, down 9% Available cash assets of $7.4m, up 22% Earnings per share of 1.45 cents, compared to a loss per share of 0.95 cents in 2012 • No dividend declared for 2013, however a fully franked special dividend of 3.6 cents per share declared on 31 January 2014 to be paid on 19 February 2014 Review of operations Continuing operations – UK A consistent set of results was delivered by the UK business with profit contribution of $7.8m before tax (2012: $7.7m). Cash flow generation of $4.8m, is up 26.0% from $3.8m in 2012. New originations totalling $25.9m are down 8.0% on a constant currency basis. This is partly as a result of growth in new business volumes having ‘normalised’ relative to the spike experienced in 2012 driven by the London Olympics. In addition, Infinity volumes in the second half of 2013 were below expectations due to a change in computer sales mix. This has reduced growth, particularly in Q4. The Group has now agreed with Dixons to refocus and realign products to broaden categories within Dixons stores. Further, SmartPlan volumes (predominantly computers) have declined by 10% in line with B2B computing volumes. UK average transaction values (ATV’s) have increased from £541 to £663. This was driven by a re-pricing of the Infinity product from May 2013 to include the full service cost within the invoice, increasing Infinity ATV from around £430 to £550. 2013 also saw an increase in repeat business for Infinity with 30% of customers are now upgrading after 2 years and ATV for repeat business is 20% higher than the original contract. Operating costs as a percentage of revenue have fallen to 28.6% from 29.6% as the business model becomes more efficient and continues to leverage scalability. 14 DIRECTORS’ REPORT Continuing operations – Corporate Corporate costs fell by $0.5m to $4.4m from $4.9m in 2012. Excluding one off sale transaction costs incurred during 2013 of $0.5m, the underlying savings of $1.0m was driven by a cost reduction program implemented in H1 2013. Discontinued operations – Australia and New Zealand During 2013, the performance in the Australian operations improved from a loss of $4.3m in 2012 to a loss of $0.4m in the current year. Total revenue was down $1.9m mainly due to the transition of its funding model from a brokerage model to a securitisation model in 2012, causing the commencement of lease accounting for new originations from May 2012. However total costs reduced by $5.8m following the restructure announcement in November 2012. Specifically, customer acquisition costs reduced by $1.8m, credit loss performance improved by $1.8m, the interest charge reduced by $1.1m, other operating costs were lower by $0.8m, and depreciation and amortisation reduced by $0.4m. Key developments and significant changes in state of affairs As set out in notes 8 and 12 of the Financial Report, on 12 December 2013 the Group announced the sale of its Australian and New Zealand operations to FlexiGroup Limited for $43.0m. The settlement of the sale completed on 31 January 2014, with the gain on the sale to be accounted for in FY 2014. Financial position and cash flows Summary financial position As at 31 December Cash and cash equivalents (unrestricted) Cash and cash equivalents (restricted) Loan and lease receivables Other assets Goodwill and intangibles Assets held for sale Total assets Other interest bearing liabilities Other liabilities Liabilities held for sale Total liabilities Equity Net cash from operating activities 2013 $000 2012 $000 7,375 194 - 16,605 16,613 66,617 6,008 12,560 62,414 16,256 17,707 - 107,404 114,945 - 12,677 41,108 54,363 12,561 - 53,785 66,924 53,619 48,021 1,538 690 ANNUAL REPORT 2013 15 DIRECTORS’ REPORT Significant changes in the financial position in the table above reflect the accounting requirement to reclassify in FY 2013 the Australian and New Zealand operation’s assets and liabilities as “held for sale” assets. Cash at 31 December 2013 excludes $12.0m reclassified as “Assets held for Sale” and there are no corporate borrowings as these were fully repaid in H2 2012. Total cash assets immediately after the sale of the Australian and New Zealand business are $49.4m. Closing cash as at 31 December 2013 of $19.6m includes investments in funding arrangements of $12.0m and available cash of $7.4m. Available cash of $7.4m at the end of December is up from $6.0m at 31 December 2012, driven by operating cash generation. Operating cash generation of $1.5m is up from $0.7m in 2012, with UK operations contributing $4.8m (2012: $3.8m) for the year. Investment in infrastructure continues at reduced levels with $1.4m invested in the establishment of new funding facilities and the development of online capability compared to $2.3m in 2012, due to projects nearing completion. No dividend has been declared in respect of 2013. A special dividend of 3.6 cents, fully franked, was declared on 31 January 2014 for payment on 19 February 2014. Business strategies and prospects for future financial years Distribution network ThinkSmart has a 10 year partnership with Dixons, now extended to 2017. During 2013, the Group also entered into a new relationship with Kingfisher, which is in its trial phase. There is now a singular leadership focus on the UK, aimed at establishing additional relationships. Operational capability and efficiency With the recent appointment of a UK based CEO with extensive retail experience, ThinkSmart will, through the use of its market leading IP capability, further develop its multi-channel operating model at an efficient and scalable level. Asset quality Our continued focus on consistent improvements in loss history, which improves the cost of funding, will make ThinkSmart a more attractive proposition to potential new funding partners. Product diversification There will be a renewed focus on the development of the Infinity product, which is anticipated to further broaden the product’s reach in stores. The SmartPlan offering will be revitalised, targeting realignment to meet the changing retail environment in 2014. In addition to existing products, our in-house development capability will be used to develop bespoke products for new partners and markets. Funding platform and cash resources During FY 2013, funding limits with the Group’s UK funding partner have increased to GBP£60m. Further, the Group’s focus will be to move to a multi-funder model enabled by increased group cash balances as it seeks to utilise cash available (in the region of $20m post the sale of the Australian and New Zealand operations) for investment in growth initiatives. 16 DIRECTORS’ REPORT Risks ThinkSmart accepts that risk is an inherent part of doing business and actively identifies, monitors and manages material risks. Key material risks faced by the group are: Credit risk The credit quality of accepted customers and the Group’s policies and procedures to mitigate payment defaults has an impact on the Group’s financial performance either directly through impairment losses or indirectly through funding cost. Robust credit checking and collections processes combined with continual development of our market leading IP capability in this area assist in managing and mitigating this risk. Achievement of Volume Growth The Group’s ability to achieve its growth targets is impacted by Retail partner’s own growth strategies, key relationships with those partners, the ability to establish new partnerships or product lines, and the broader economic environment particularly in the retail sector. Funding The availability and cost of funds impacts the Group’s product pricing decisions, its ability to accept volume growth delivered by its partners and the ultimate profitability of its products. The historic credit quality of ThinkSmart’s lending, market competition for debt and other macro-economic factors also impact this risk. SIGNIFICANT CHANGES IN STATE OF AFFAIRS On 12 December 2013, the Group entered into an agreement to sell its Australian and New Zealand business to FlexiGroup for $43m. The sale was completed 31 January 2014. Other than the matter described above, there has been no transaction or event of a material nature likely, in the opinion of the Directors of the Company, to affect significantly the operations, results or state of affairs of the Group, in future financial years. DIVIDENDS There were no dividends paid during the year (2012: nil) or since the year end. Declared after year end Subsequent to 31 December 2013, the following dividends were declared by the directors. Special dividend 3.6 cents $5,843,055 Fully franked 19 February 2014 Cents per share Total amount Franked/unfranked Date to be paid The financial effect of these dividends has not been brought to account in the financial statements for the year ended 31 December 2013 and will be recognised in subsequent financial reports. ANNUAL REPORT 2013 17 DIRECTORS’ REPORT SIGNIFICANT EVENTS AFTER THE BALANCE DATE In December 2013 the Group entered into an agreement to sell its operations in Australia and New Zealand to FlexiGroup Limited for $43 million. The transaction was completed on 31 January 2014. The operations in Australia and New Zealand have been presented as discontinued operations in the financial statements for the year ended 31 December 2013. DIRECTORS’ MEETINGS The following table sets out the number of Directors’ meetings held during the financial year. Director Board Meetings Audit and Risk Committee Meetings Nomination and Remuneration Committee Meetings N Montarello D Griffiths S Penglis F de Vicente N Fox K Jones A 15 16 16 13 1 13 B 16 16 16 16 1 13 A 2* 2 2 0 1 - B 2 2 2 1 1 - A – Number of meetings attended B – Number of meetings held during the time the Director held office during the year * – Attendance by invitation from the Committee DIRECTORS’ INTERESTS A - 2 2 2 - - B - 2 2 2 - - The relevant interests of each Director in ThinkSmart Limited shares and options at the date of this report are as follows: N Montarello D Griffiths S Penglis F de Vicente K Jones Number of ordinary shares Options granted over ordinary shares 30,559,356 2,592,001 1,272,600 426,000 - - - - - - Unissued Shares under Options At the date of this report there were 1,050,000 unissued ordinary shares of the Company subject to option or performance rights, comprising: 18 DIRECTORS’ REPORT Number of shares under option 300,000 750,000 Exercise price of options $0.19 $0.27 Expiry date of options 09 August 2017 04 July 2018 All options expire on the earlier of their expiry date or the termination of the option holder’s employment. Further details are included in the remuneration report on pages 19 to 30. These options do not entitle the holder to participate in any share issue of the Company or any other body corporate. REMUNERATION REPORT - Audited This Report details the remuneration arrangements for Key Management Personnel. Key Management Personnel encompass all Directors and those Executives that have specific responsibility for planning, directing and controlling material activities of the Group. In this report, “Executives” refers to the Key Management Personnel excluding the Non-Executive Directors. The information provided in this Remuneration Report has been audited as required by Section 308(3C) of the Corporations Act 2001. This Report contains the following sections: A: B: C: D: E: F: Principles of remuneration Key Management Personnel remuneration Service agreements Share-based compensation (loan-funded shares and options) Share-based compensation (shares) Bonus remuneration A. Principles of Remuneration Key Management Personnel have authority and responsibility for planning, directing and controlling the activities of the Company and the Group and comprise for the year ended 31 December 2013: Executive Chairman and Chief Executive Officer N Montarello* Non-Executive Directors D Griffiths (Deputy Chairman) S Penglis (Non-Executive Director) F de Vicente (Non-Executive Director) N Fox (Non-Executive Director) – until 18 March 2013 K Jones (Non-Executive Director)* – from 24 May 2013 until 1 February 2014 Executives A Baum (Group Chief Operating Officer) G Halton (Managing Director (acting) – UK) A Stevens (Group Chief Financial Officer) – until 12 December 2013 G Varma (Group Chief Information Officer) *On 1 February 2014 Mr K Jones became the Group’s Chief Executive Officer. ANNUAL REPORT 2013 19 DIRECTORS’ REPORT The Board recognises that the Company’s performance depends upon the quality of its staff. To achieve its financial and operating objectives, the Company must attract, motivate and retain highly skilled Directors and Executives. To this end, the remuneration structure seeks to: • Provide competitive rewards to attract, retain and motivate talented Directors and Executives; • Align incentive rewards with the Company’s short term and long term objectives by including a significant portion of Executive remuneration “at risk” as short term and long term incentives; • Set demanding performance hurdles which are clearly linked to an Executive’s remuneration; and • Structure remuneration at a level that reflects the Executive’s duties and responsibilities and is competitive within the sector. The remuneration structures take into account: • • • the capability and experience of the individual; the individual’s ability to control the relevant segment’s performance; and the performance of the Group. The Nomination and Remuneration Committee may obtain independent advice on the appropriateness of remuneration packages, trends in comparative companies and markets, both locally and internationally, and the objectives of the Company’s remuneration strategy. Remuneration packages include a mix of fixed and variable remuneration with a blend of short-term and long-term performance-based incentives. The variable remuneration components are directly linked to both the performance of the Group and the performance of the Company’s share price. This ensures close alignment of remuneration of Key Management Personnel and the creation of shareholder value. Non-Executive Directors Fees and payments to Non-Executive Directors reflect the demands which are made on and the responsibilities of the Non- Executive Directors. Non-Executive Directors’ fees and payments are reviewed annually by the Board. Non-Executive Directors do not receive share options or loan-funded shares. Non-Executive Directors’ Fees Non-Executive Directors’ fees are determined within an aggregate Directors’ fee pool of $600,000 and was approved by shareholders at a previous general meeting. The total fees paid in the 2013 financial year were $252,409. In addition to these fees, Directors also receive superannuation contributions as required under government legislation. The Company also pays all reasonable expenses incurred by Directors attending meetings and carrying out their duties. Executive Pay The Group’s executive remuneration structure has four components which comprise the Executive’s total remuneration: • • • • base pay and benefits; short-term performance incentives (STIs); long-term incentives through participation in the ThinkSmart Long Term Incentive Plan (LTIs); and other remuneration such as superannuation. 20 DIRECTORS’ REPORT Base Pay – Fixed Compensation Executives are offered a competitive salary that comprises the components of base pay and benefits. Base pay for Executives is reviewed annually by the Nomination and Remuneration Committee or the Executive Chairman to ensure the Executive’s pay is competitive with the market and appropriate to the Executive’s experience, responsibilities and contribution. An Executive’s pay is also reviewed on promotion. Base pay for the Executive Chairman is reviewed annually by the Nomination and Remuneration Committee. Short-Term Performance Incentive Short-term performance incentives (STIs) vary according to individual contracts, however, for Executives they are broadly based as follows: • a component of the STI is linked to the individual performance of the Executive (this is based on a number of factors, including performance against budgets, achievement of key performance indicators (KPIs) and other personal objectives); and • a component of the STI is linked to the financial performance of the Group determined at the beginning of each financial year. Using various performance targets and personal performance objectives the Group ensures variable reward is only paid when value has been created for shareholders. The performance measures include financial, such as Profit Before Tax and the value of new originations, and non-financial, including KPIs targeting high levels of customer service and new retail partner acquisition. The STI bonus is delivered in the form of cash. The short-term bonus payments may be adjusted up or down in line with under or over achievement against the target performance levels. This is at the discretion of the Nomination and Remuneration Committee or the Executive Chairman. The STI targets are reviewed annually. Information on the STI is detailed in section F of the Remuneration Report. Long-Term Performance Incentive Long-term performance incentives are awarded to Key Management Personnel and other Executives. Prior to 2012, incentives were awarded under the Company’s Executive Share Option Plan. In May 2012, shareholders approved a Long Term Incentive Plan designed to increase the motivation of staff and to create a stronger link between increasing shareholder value and employee award. The details of these schemes are set out on pages 22 to 25. Consequences of Performance on Shareholder Wealth In considering the Group’s performance and benefits for shareholder wealth, the Remuneration Committee have regard to the following indices in respect of the current financial year and the previous four financial years. Profit/(loss) attributable to owners of the company ($000s) Basic EPS Dividends paid Dividend paid per share Share price at year end Change in share price 2013 2012 2011 2010 2009 $2,309 ($1,441) $6,798 $6,773 $5,172 1.45 cents (0.95) cents 5.23 cents 6.52 cents 5.35 cents - - $0.36 $0.17 - $4,545,779 $1,937,788 $2,900,682 - 3.5 cents 2 cents 3 cents $0.19 $0.41 $0.73 ($0.22) ($0.32) ($0.17) $0.90 $0.73 ANNUAL REPORT 2013 21 DIRECTORS’ REPORT The table below sets out the details of the performance options issued to Executives in 2009, 2010 and 2011: Instrument Each option represents an entitlement to one ordinary share. Exercise price Performance Options Tranche 1 - $0.62 Performance Options Tranche 2 - $1.11 Performance Options Tranche 3 - $0.84 Vesting conditions Performance options will vest on, and become exercisable on or after, the Vesting Date to the extent that certain performance conditions that are based on the achievement of pre- determined financial performance of the Group over the performance measurement period, as follows: • 50% of performance options are subject to achievement of Earnings Per Share (EPS) performance condition; and • 50% of performance options are subject to achievement of Total Shareholder Return (TSR) performance condition. Subject to the Executive remaining an employee of the Group. If the Executive ceases to be an employee of the Group before the option is exercised, all options held by the Executive will automatically lapse one month after the date of cessation of employment. EPS performance target The Group’s EPS growth will be measured relative to a target of more than 7.5% per annum compound growth. EPS performance period Performance Options Tranche 1: 3 year period commencing 1 January 2009 with the base year being the period ended 31 December 2008. Performance Options Tranche 2: 3 year period commencing 1 January 2010 with the base year being the period ended 31 December 2009. Performance Options Tranche 3: 3 year period commencing 1 January 2011 with the base year being the period ended 31 December 2010. TSR performance target The Group will be given a percentile ranking having regards to its performance relative to a comparator group consisting of the S&P/ASX Small Ordinaries Index (ASX code: ASO). The percentage of the TSR reward that vests will be determined by the Group’s ranking as follows: • • • TSR rank less than 50th percentile: 0% TSR ranks 50th percentile: 50% TSR rank between 50th and 75th percentile: 50% plus an additional 2% of this award for each additional percentile ranking above 50th percentile • TSR rank at or above 75th percentile: 100% TSR performance period Performance Options Tranche 1: As at 1 January 2009 Performance Options Tranche 2: As at 1 January 2010 Performance Options Tranche 3: As at 1 January 2011 22 DIRECTORS’ REPORT Why vesting conditions are The vesting conditions (EPS and TSR) were chosen as performance conditions as they are chosen aligned to earnings growth and the creation of shareholder value. Vesting date Performance Options Tranche 1: 1 January 2012 Performance Options Tranche 2: 31 December 2012 Performance Options Tranche 3: 31 December 2013 Exercise period Performance Options Tranche 1: From vesting date to expiry date Performance Options Tranche 2: From vesting date to expiry date Performance Options Tranche 3: From vesting date to expiry date Expiry date Performance Options Tranche 1: 31 December 2013 Performance Options Tranche 2: 31 December 2014 Performance Options Tranche 3: 31 December 2015 Disposal restriction No disposal restriction imposed at the time of this grant. 33% of Tranche 1 options vested on 1 January 2012. None of these vested options were converted by the options holders to shares by the expiry date of 31 December 2013. No options vested from Tranche 2 on 31 December 2012 due to not meeting the performance criteria and thus have been cancelled. Tranche 3 options also did not meet the performance criteria at vesting date of 31 December 2013 and have been cancelled. During 2012, the Board implemented a new loan-funded share plan for Executives located in Australia, following shareholder approval in May 2012. The limited recourse loans to acquire shares are issued to Executives and the ability to exercise the shares is conditional on the Group achieving the pre-determined performance criteria. The table below sets out the details of the loan-funded shares issued to Executives in 2012 and 2013: Instrument Each loan-funded share represents an entitlement to one ordinary share. Limited recourse loan The company is providing interest-free, limited recourse loans to Executives to acquire shares. The limited recourse loan means that if the shares do not vest for any reason or the value of the shares is less than the outstanding loan value when it is required to be repaid, the participant’s liability is limited to the value of the shares. Exercise price 2012 loan-funded share issue: $0.1923 2013 loan-funded share issue: $0.2652 ANNUAL REPORT 2013 23 DIRECTORS’ REPORT Vesting conditions Shares will vest at the end of the three years from the issue date if at any time during this period the volume-weighted average price of the Company’s shares on ASX over any consecutive 30 trading days is, or is in excess of, the following performance conditions. Loan-funded share issue Percentage of VWAP target shares vesting 2012 Tranche 1 Tranche 2 Tranche 3 2013 Tranche 1 Tranche 2 Tranche 3 $0.35 $0.55 $0.75 $0.3802 $0.4889 $0.5975 25% 25% 50% 25% 25% 50% Why vesting conditions are The vesting conditions were chosen to align the financial interests of participants with those of Vesting is subject to the Executive remaining an employee of the Group. chosen shareholders. Vesting date 2012 loan-funded share issue: 10 August 2015 2013 loan-funded share issue: 04 July 2016 Performance period 2012 loan-funded share issue: 10 August 2012 to 10 August 2015 2013 loan-funded share issue: 04 July 2013 to 04 July 2016 Exercise period From vesting date until expiry date Expiry date 2012 loan-funded share issue: 09 August 2017 2013 loan-funded share issue: 04 July 2018 For Executives located in the UK, the Group issued share options under a similar structure to the loan-funded share plan outlined on pages 23 and 24. The table below sets out the details of the performance options issued to Executives in 2012 and 2013: 24 DIRECTORS’ REPORT Instrument Each option represents an entitlement to one ordinary share. Exercise price 2012 performance option issue: $0.1923 2013 performance option issue: $0.2652 Vesting conditions Options will vest at the end of the three years from the issue date if at any time during this period the volume-weighted average price of the Company’s shares on ASX over any consecutive 30 trading days is, or is in excess of, the following performance conditions. Performance Percentage of option issue VWAP target shares vesting 2012 Tranche 1 Tranche 2 Tranche 3 2013 Tranche 1 Tranche 2 Tranche 3 $0.35 $0.55 $0.75 $0.3802 $0.4889 $0.5975 25% 25% 50% 25% 25% 50% Why vesting conditions are The vesting conditions were chosen to align the financial interests of participants with those of Vesting is subject to the Executive remaining an employee of the Group. chosen shareholders. Vesting date 2012 performance option issue: 10 August 2015 2013 performance option issue: 04 July 2016 Performance period 2012 performance option issue: 10 August 2012 to 10 August 2015 2013 performance option issue: 04 July 2013 to 04 July 2016 Exercise period From vesting date until expiry date Expiry date 2012 performance option issue: 09 August 2017 2013 performance option issue: 04 July 2018 B. Key Management Personnel Remuneration Services from Remuneration Consultants No remuneration consultants were used in 2013. Amount of Remuneration Details of the remuneration of the Directors and the Key Management Personnel (as defined in AASB 124 Related Party Disclosures) of the Group are set out in the following tables. ANNUAL REPORT 2013 25 DIRECTORS’ REPORT DIRECTORS’ REPORT Short Term Post employment Other long term Share-based payments Salary & fees STI cash bonus Non- monetary benefits Total Super- annuation benefits Termi- nation benefits Long service entitlement Options & rights # Shares Total Proportion of remun- eration perform- ance related Value of options as proportion of remun- eration $ $ $ $ $ $ $ $ $ $ % % Directors Non-Executive Directors D Griffiths S Penglis F de Vicente N Fox* K Jones* Executive Director N Montarello Executives A Baum G Halton A Stevens* G Varma A Deller† J Ferreira† S McDonagh† G Parry† Total Total 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 2013 2012 64,125 66,375 60,325 62,442 62,205 65,400 13,500 59,000 39,674 - 622,305 675,264 413,479 412,157 210,381 176,355 343,924 240,766 236,152 276,601 - 230,773 - 124,439 - - - - - - - - - - - - - - - - - - - - - - - - - - - 90,412 2,066,070 - - - - - - - - - - - - - 64,125 66,375 60,325 62,442 62,205 65,400 13,500 59,000 39,674 - 5,856 5,974 5,509 5,620 - - 1,215 5,310 - - 1,368 1,368 623,673 676,632 25,000 37,500 1,368 1,368 1,627 414,847 413,525 212,008 382 176,737 1,311 1,026 1,368 1,368 - 345,235 241,792 237,520 277,969 - 25,000 25,000 9,909 4,447 25,000 18,351 20,597 24,750 - - - - - - - - - - - - - - - - - - - - - - 1,039 231,812 4,160 93,388 - - - 456 124,895 6,750 - - - - - - 616 91,028 - 60,435 - - - - - - - - - - - - - - - - - - - - - - - - - 10,062 (27,037) - - - - - - - - - - - 69,981 72,349 65,834 68,062 62,205 65,400 14,715 64,310 39,674 - 631,698 56,460 254,895 - 1,025,487 (8,170) 99,319 530,996 5,556 96,333 540,414 - - - - - - 3,732 193 26,878 (8,333) 8,333 478 12,604 28,545 - - - - - - - - - - - (39,595) - (19,253) - (73,749) - - - - - - - - - - - - - - 222,110 208,062 361,902 268,476 262,327 343,868 - 329,360 - - 249,229 - 77,714 - - - - - - - - - - (4%) 25% (2%) 1% - 13% (2%) 3% - 8% - - - - - - - - - - - - - (4%) 25% (2%) 1% - 13% (2%) 3% - 8% - - - - 2% - (95%) (2%) 6% - 8% - (95%) (2%) 6% 221,257 25,000 1,254 247,511 20,971 2,701,241 25,000 8,877 2,735,118 158,833 153,823 69,064 191,610 96,333 3,404,781 7,042 2,073,112 118,086 - 13,794 (42,869) 99,319 2,261,442 92,050 (43%) (43%) The fair value of the options and loan-funded shares is calculated at the date of grant using the Binomial Tree and Monte-Carlo Simulation option and pricing models and allocated to each reporting period evenly over the period from grant date to vesting date. The value disclosed is the portion of the fair value of the options recognised in this reporting period. * - During the year, the Key Management Personnel has either resigned or been appointed. † - This information is provided for comparative purposes. # - Includes loan-funded share rights. 26 DIRECTORS’ REPORT C. Service Agreements A service agreement can be used for the provision of short-term performance incentives, eligibility for the ThinkSmart LTI and other benefits, including the use of a Company motor vehicle, tax advisory fees, payment of benefits forgone at a previous employer and relocation expenses. As announced to the market on 12 November 2013, Keith Jones was appointed Chief Executive Officer, effective 1 February 2014. Ned Montarello will remain Executive Chairman. Remuneration and other terms of employment for the Chief Executive Officer are formalised in a service agreement. Keith Jones’ employment agreement, signed on 11 November 2013, is a rolling agreement which is unlimited in term but capable of termination with six months notice by either party. All other employment agreements are unlimited in term but capable of termination with one to three months notice by either the Company or the Executive. The Company can make a payment in lieu of notice. In the event of retrenchment, the Executives listed in the table on page 26 are entitled to the payment provided for in the service agreement, where applicable. The employment of the Executives may be terminated by the Company without notice by payment in lieu of notice. The service agreements also contain confidentiality and restraint of trade clauses. D. Share-Based Compensation (loan-funded shares and options) Loan-Funded Shares and Options Details of ordinary shares in the Company that were granted as part of the loan-funded share plan to Key Management Personnel in July 2013, and the options over ordinary shares in the Company that were granted to Key Management Personnel in July 2013 and details on options that vested during the reporting period are as follows: Number of options/ shares granted during 2013 Fair value per share at grant date $ Exercise price per share $ Expiry date Grant date Number of options/ shares vested during 2013 1,000,000 04/07/2013 $0.098-$0.118 0.2652 04/07/2018 333,333 04/07/2013 $0.098-$0.118 0.2652 04/07/2018 500,000 04/07/2013 $0.098-$0.118 0.2652 04/07/2018 250,000 04/07/2013 $0.098-$0.118 0.2652 04/07/2018 200,000 04/07/2013 $0.098-$0.118 0.2652 04/07/2018 - - - - - Directors N Montarello Executives A Baum A Stevens G Halton G Varma All shares and options were granted during the financial year. The shares and options are subject to Performance Conditions as set out on pages 22 to 25. The options are provided at no cost to the recipients. No shares have been granted since the end of the financial year. During the financial year, no shares were issued as a result of the exercise of options. ANNUAL REPORT 2013 27 w DIRECTORS’ REPORT Details of vesting profiles of the options and loan-funded shares granted as remuneration to each Director of the Company and other Key Management Personnel are detailed below: Options and loan-funded shares granted Number granted Grant Date % vested in year % forfeited, lapsed or expired in year (a) Financial year in which grant vests Director N Montarello Executives A Baum G Halton A Stevens G Varma 1,000,000 30/06/2009 1,000,000 05/05/2010 1,000,000 11/04/2011 1,000,000 10/08/2012 1,000,000 04/07/2013 333,333 01/09/2010 333,333 11/04/2011 333,333 10/08/2012 333,333 04/07/2013 150,000 30/06/2009 100,000 05/05/2010 100,000 11/04/2011 100,000 10/08/2012 250,000 04/07/2013 500,000 10/08/2012 500,000 04/07/2013 150,000 30/06/2009 100,000 05/05/2010 100,000 11/04/2011 200,000 10/08/2012 200,000 04/07/2013 -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% -% 100% 100% 100% -% -% 100% 100% -% -% 100% 100% 100% -% -% 100% 100% 100% 100% 100% -% -% 2012 2012 2013 2015 2016 2012 2013 2015 2016 2012 2012 2013 2015 2016 2015 2016 2012 2012 2013 2015 2016 (a) The % forfeited, lapsed or expired in the year represents the reduction from the maximum number of loan-funded shares or options available to vest due to either the performance conditions attached to the loan-funded shares or options not being met or the departure of the Executive from the Group. 28 w DIRECTORS’ REPORT Analysis of Movement of Options and Loan-Funded Shares The movement during the reporting period, by value, of options and loan-funded shares over ordinary shares in the Company held by Directors and Key Management Personnel is detailed below: Directors N Montarello Executives A Baum G Halton A Stevens G Varma Granted in year (a) $ Exercised in year (b) $ Lapsed in year (c) $ 105,750 35,250 26,438 52,875 21,150 241,463 - - - - - - 448,271 134,667 44,191 70,375 44,191 741,695 (a) The value of loan-funded shares granted in the year is the fair value of the loan-funded shares calculated at grant date using a monte-carlo option-pricing model. This total amount is allocated to remuneration over the vesting period. (b) The value of options exercised during the year is calculated as the market price of shares of the Company on the Australian Securities Exchange as at close of trading on the date the options were exercised after deducting the price paid to exercise the option. (c) The value of the options/loan-funded shares that lapsed during the year represents the benefit forgone and is calculated at the date the option/loan-funded share lapsed or was forfeited using original fair value. E. Share-Based Compensation (shares) There were no shares granted to Key Management Personnel during the reporting period. No shares were granted since the end of the financial year. Analysis of Shares Granted as Remuneration Details of vesting profiles of the shares granted as remuneration to the Director and Key Management Personnel of the Company are detailed below: Executives A Baum A Baum A Baum Shares granted Number of shares Grant Date % vested in year % forfeited in year (a) Financial year in which grant vest 350,000 01/09/2010 100% 125,000 01/09/2011 125,000 03/10/2012 -% -% -% -% -% 2013 2014 2015 (a) The % forfeited in the year represents the reduction from the maximum number of shares available to vest due to the highest level service criteria not being achieved. ANNUAL REPORT 2013 29 DIRECTORS’ REPORT Analysis of Movement of Shares The movement during the reporting period, by value of shares in the Company held by the Directors and Key Management Personnel is detailed below: Executives A Baum Granted in year (a) $ Vested in year (b) $ Lapsed in year (c) $ - 124,250 - (a) The value of shares granted in the year is the fair value of the shares as determined in reference to the prevailing market price of the Company’s shares on the ASX. (b) The value of shares vested during the year is calculated as the market price of shares of the Company on the ASX as at close of trading on the date the shares vested. (c) The value of the shares that lapsed during the year represents the benefit forgone and is determined in reference to the prevailing market price of the Company’s shares on the ASX at the date the shares lapsed, with no adjustments for whether the service criteria had been achieved. F. Bonus Remuneration Details of the vesting profile of the short-term incentive cash bonuses awarded as remuneration to the Director and Key Management Personnel of the Company are detailed below: Directors N Montarello Executives A Baum G Halton A Stevens G Varma Short term incentive bonus Included in remuneration (a) $ Maximum entitlement $ % vested in year % forfeited in year (b) - - - - - 241,492 153,000 44,207 117,000 55,000 -% -% -% -% -% 100% 100% 100% 100% 100% (a) Amounts included in remuneration for the financial year represent the amount that vested in the financial year based on achievement of personal goals and satisfaction of specified performance criteria pertaining to the 2012 financial year. No amounts vest in future financial years. (b) The amounts forfeited are due to the performance or service criteria not being met in relation to the current financial year. No bonuses were awarded to Key Management Personnel with respect to the 2013 financial year. 30 DIRECTORS’ REPORT CORPORATE GOVERNANCE STATEMENT The Board of Directors of ThinkSmart Limited is responsible for and committed to ensuring that the Company complies with the ASX Corporate Governance Council’s Guide “Corporate Governance Principles and Recommendations”. Board of Directors Composition of the Board At the date of this statement, the Board comprises three Non-Executive Directors, all of whom are independent, an Executive Chairman and a Chief Executive Officer. The names of the Directors, including details of their qualifications and experience, at the date of this report are set out on page 12 and 13 of this report. The composition of the Board is determined using the following principles: • The Board should comprise a majority of independent Non-Executive Directors and comprise Directors with a broad range of skills, expertise and experience from a diverse range of backgrounds. • The Board considers the diversity of existing and potential Directors. The Board’s policy is to seek a diverse range of Directors who have a range of ages, genders and ethnicity which mirrors the environment in which ThinkSmart operates. • The Board does not believe that it should establish a limit on the tenure of the Director. While tenure limits can help to ensure that fresh ideas and viewpoints are available to the Board, they hold the disadvantage of losing the contribution of Directors who have been able to develop, over a period of time, increasing insight in the Company and its operation. The Board regularly reviews the independence of each Director in light of the interests disclosed to the Board. A minimum of three Directors and a maximum of twelve. • • Role of the Board The Board’s primary role is the protection and enhancement of long-term shareholder value. To fulfil this role, the Board has adopted a charter which establishes the relationship between the Board and management and describes their functions and responsibilities. The Board’s charter can be viewed on the Company’s website (www. thinksmartworld.com). The Board’s responsibilities, as set out in the Board Charter, include: • working with management to establish ThinkSmart’s strategic direction; • monitoring management and financial performance; • monitoring compliance and risk management; • reviewing procedures in place for appointment of senior management and monitoring of its performance and for succession planning; and • ensuring effective disclosure policies and procedures. Matters which are specifically reserved for the Board or its Committees under the Board Charter include: • • • • appointment of the Chairman and Directors; appointment and removal of the Chief Executive Officer; development and review of corporate governance principles and policies; and approval of strategic plan operational budgets, major capital expenditure, acquisitions and divestitures in excess of authority levels delegated to management. The Board has delegated responsibility for operations and administration of the Company to the Chief Executive Officer and executive management. Responsibilities are delineated by formal authority delegations. ANNUAL REPORT 2013 31 DIRECTORS’ REPORT Board Committees To assist in the execution of its responsibilities, the Board may delegate responsibility to committees to consider certain issues in further detail and then report back to and advise the Board. Committees established by the Board have adopted charters setting out the authority, responsibilities, membership and operation of the committee. There are currently two committees the Audit and Risk Committee and the Nomination and Remuneration Committee. Each committee has a charter which can be viewed on the Company’s website. Audit and Risk Committee The Committee’s primary role is to assist the Board in carrying out its accounting, auditing and financial reporting responsibilities, including oversight of: • • • • • the integrity of the Company’s external financial reporting and financial statements; the Company’s ongoing risk management program which is designed to effectively identify all areas of potential risk; policies and procedures designed and implemented to manage identified risks; the effectiveness of the internal control framework within the Company; and the appointment, independence and remuneration of the external auditor. The Audit and Risk Committee has a documented charter, approved by the Board, which is available on the website (www. thinksmartworld.com). The Committee must comprise at least three Directors, all of whom must be Non-Executive Directors. The Chairman of the Committee may not be the Chairman of the Board. The members of the Audit and Risk Committee during the year were Non-Executive Directors, and are D Griffiths (Chairman), F de Vicente and S Penglis. The Company maintains a risk management policy which can be found on the Company’s website. The Committee meets as often as the Committee members deem necessary in order to fulfil their role. The external auditors, Chief Executive Officer and Chief Financial Officer, are invited to the Audit Committee meetings at the discretion of the Committee. The external auditor met with the Audit Committee and the Board of Directors twice during the year without management being present. Nomination and Remuneration Committee The Nomination and Remuneration Committee assists and advises the Board on the effective composition, size and capabilities to ensure the Board is prepared to discharge its responsibilities and duties expediently and in the best interests of the Company as a whole. The current members of the Committee are S Penglis (Chairman), D Griffiths and F de Vicente. The Nomination and Remuneration Committee reviews and makes recommendations to the Board on remuneration packages and policies applicable to the Directors and Executives of the Company. The Committee meets as often as the Committee members deem necessary in order to fulfil their role. The Committee consists of a minimum of three members, with the majority being Non-Executive Directors and with an independent Director as Chairman. The Nomination and Remuneration Committee has a documented charter, approved by the Board, which is available on the website. 32 DIRECTORS’ REPORT Diversity The Board is committed to having an appropriate blend of diversity on the Board and in the Group’s senior executive positions. The Board is developing a policy on diversity, to complement and enhance its Anti-Discrimination and Equal Employment Opportunity Policy. The following represents the gender diversity in the Group as at 31 December 2013: Male Female 4 9 68 81 0 1 68 69 Total 4 10 136 150 Male 100% 90% 50% 54% Female 0% 10% 50% 46% Total 100% 100% 100% 100% Board Directors Executives Other Environmental Regulation The Group’s operations are not subject to any significant environmental regulation under both Commonwealth and State legislation in relation to its activities. Ethical Standards All Directors, managers and employees are expected to act with the utmost integrity and objectivity, striving at all times to enhance the reputation and performance of the Group. Every employee has a nominated supervisor to whom they may refer any issues arising from their employment. Conflict of Interest Directors are required to keep the Board advised, on an ongoing basis, of any interest that could potentially conflict with those of the Company. Where the Board believes that a significant conflict exists, the Director concerned does not receive the relevant Board papers and is not present at the meeting whilst the item is considered. Details of Director related entity transactions with the Company and the Group are set out in Note 31 to the financial statements. Code of Conduct The Company has developed a Code of Conduct which applies to all Directors, employees, contractors, consultants and associates of the Company and sets out the ethical standards expected when conducting business with employees, customers, funders, retailers and other external parties. The Code is directed at maintaining high ethical standards and integrity. Employees are expected to adhere to ThinkSmart’s policies, perform their duties diligently, properly use company resources, protect confidential information and avoid conflicts of interest. The Code is acknowledged by all employees. ANNUAL REPORT 2013 33 DIRECTORS’ REPORT Share Trading Policy ThinkSmart’s Guidelines for Dealing in Securities explain and reinforce the Corporations Act 2001 requirements relating to insider trading. The Guidelines apply to all Directors and employees of the Group and their associates (“Relevant Persons”). The Guidelines expressly prohibit Relevant Persons buying or selling ThinkSmart securities where the Relevant Person or ThinkSmart is in possession of price sensitive or ‘inside’ information. The Guidelines establish windows where Relevant Persons (provided they are not in possession of inside information) may buy or sell the Company’s shares in the period from 31 days following: • • • the announcement of half-year results; the announcement of annual results; or the holding of the annual general meeting. Outside the window period, Relevant Persons must receive clearance for any proposed dealing in ThinkSmart’s securities on ASX as follows: • • • • a Director must receive approval from the Chairman; the Chairman must receive approval from the Board or the Deputy Chairman; executives and senior management must receive approval from the Chief Executive Officer; and all other Relevant Persons must receive approval from the Company Secretary. The Guidelines for Dealing in Securities are available to view on the Company’s website. Continuous Disclosure The Company Secretary has been nominated as the person responsible for communication with the Australian Securities Exchange (“ASX”). This role includes responsibility for ensuring compliance with the continuous disclosure requirements in the ASX Listing Rules and overseeing and co-ordinating information disclosure to the ASX, analysts, brokers, shareholders, the media and the public. When analysts are briefed following half-year and full-year results announcements, the material used in the presentations is released to the ASX prior to the commencement of the briefing. The Company ensures that if any price sensitive information is inadvertently disclosed, this information is also immediately released to the market. The Company is committed to ensuring that all stakeholders and the market are provided with relevant and accurate information regarding its activities in a timely manner. Communication with Shareholders The Board provides shareholders with information following the Company’s Disclosure Policy which ensures compliance with the continuous disclosure requirements of the ASX Listing Rules and overseeing and co-ordinating information disclosure to shareholders, the market, media and the public. 34 DIRECTORS’ REPORT The Disclosure Policy includes the following guidelines: • Information is communicated to shareholders through ASX announcements, the annual report, annual general meeting and half-year and full-year results announcements. • Shareholders are able to access information, including media releases, key policies and the terms of reference of the Board Committees through the Company’s website. All relevant ASX announcements will be posted on the website as soon as they have been released to ASX. • The Company encourages participation of shareholders at its annual general meeting. The external auditor will attend the annual general meeting and be available to answer shareholder questions about the conduct of the audit and the preparation and content of the auditor’s report. Financial Reporting The Chief Executive Officer and Group Financial Controller have certified to the Board that the Company’s financial statements are complete and present a true and fair view, in all material respects, of the financial condition and operational results of the Company and are in accordance with relevant accounting standards. The Board receives monthly reports from management on the financial and operational performance of the Group. Performance Assessment The Board undertakes an annual self assessment of its collective performance, the performance of the Chairman, the Directors and of its Committees. Independent Professional Advice Following consultation with the Deputy Chairman, Directors may seek independent professional advice at the Company’s expense. Generally, this advice will be available to all Directors. Indemnification and Insurance During the year ended 31 December 2013, the Company paid insurance premiums in respect of a Directors’ and Officers’ Liability insurance contract. Disclosure of the total amount of the premium and the nature of the liabilities in respect of such insurance is prohibited by the policy. The Company has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer or auditor of the Company or of any related body corporate against a liability incurred by such an officer or Director. ANNUAL REPORT 2013 35 DIRECTORS’ REPORT NON-AUDIT SERVICES During the year KPMG, the Company auditor, has performed certain other services in addition to their statutory duties. The Board has considered the non-audit services provided during the year by the auditor and in accordance with written advice provided by resolution of the Audit and Risk Committee, is satisfied that the provision of those non-audit services during the year is compatible with, and did not compromise, the auditor independence requirements of the Corporations Act 2001 for the following reasons: • All non-audit services are subject to the corporate governance procedures adopted by the Company and have been reviewed by the Audit Committee to ensure they do not impact the integrity and objectivity of the auditor; and • The non-audit services provided do not undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants, as they did not involve reviewing or auditing the auditor’s own work, acting in a management or decision making capacity for the Company, acting as an advocate for the Company or jointly sharing risks and rewards. Details of the amounts paid to the auditor of the Group, KPMG, and its related practices for audit and non-audit services provided during the year are set out in Note 27. AUDITOR’S INDEPENDENCE DECLARATION The auditor’s independence declaration which forms part of this report is included in page 37 of the financial report. ROUNDING ThinkSmart is a Group of the kind referred to in ASIC Class Order 98/100 dated 10 July 1998, as varied by Class Order 05/641 dated 28 July 2005 and Class Order 06/51 dated 31 January 2006. In accordance with those class orders, amounts in the financial statements and the directors’ report have been rounded off to the nearest thousand dollars, unless otherwise indicated. Signed in accordance with a resolution of the Directors made pursuant to s.298 (2) of the Corporations Act 2001. On behalf of the Directors ______________________________ N Montarello Chairman Perth, 18 February 2014 36 AUDITOR’S INDEPENDENCE DECLARATION Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To: The Directors of ThinkSmart Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 31 December 2013 there have been: (i) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and (ii) no contraventions of any applicable code of professional conduct in relation to the audit. KPMG   KPMG   KPMG Matthew  Beevers   Matthew Beevers Partner Matthew  Beevers   Perth 18 February 2014 ANNUAL REPORT 2013 37                 DIRECTORS’ DECLARATION 1. In the opinion of the Directors of ThinkSmart Limited: (a) The consolidated financial statements, notes and disclosures in the Remuneration Report in the Directors’ report, are in accordance with the Corporations Act 2001, including: i. Giving a true and fair view of the Group’s financial position as at 31 December 2013 and of its performance for the financial year ended on that date; and ii. Complying with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Regulations 2001; (b) The financial report also complies with International Financial Reporting Standards as disclosed in Note 2(a); and (c) There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 31 December 2013. Signed in accordance with a resolution of the Directors: ______________________________ N Montarello Chairman Perth, 18 February 2014 38 CONSOLIDATED STATEMENT OF PROFIT AND LOSS FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2013 Continuing operations Revenue Other revenue Total revenue Indirect customer acquisition cost Other operating expenses Depreciation and amortisation Impairment losses Interest expense Profit before tax Income tax expense Profit after tax from continuing operations Loss from discontinued operation, net of tax Profit/(loss) after tax Earnings/(loss) per share Basic (cents per share) Diluted (cents per share) Earnings per share – continuing operations Basic (cents per share) Diluted (cents per share) The attached notes form an integral part of these consolidated financial statements * Refer to Notes 8 and 12 Notes 6(a) 6(b) 6(d) 6(e) 6(f) 6(c) 7 8 33 33 33 33 2013 $000 2012 Restated* $000 16,737 16,999 2,196 2,044 18,933 19,043 (4,943) (4,992) (9,923) (10,765) (463) (255) - 3,349 (752) 2,597 (288) 2,309 1.45 1.44 1.63 1.62 (450) (182) (240) 2,414 (569) 1,845 (3,286) (1,441) (0.95) (0.95) 1.22 1.22 ANNUAL REPORT 2013 39 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2013 Notes 2013 $000 2012 Restated* $000 Profit/(loss) for the year 2,309 (1,441) Other comprehensive income Items that may be reclassified subsequently to profit or loss, net of income tax: Foreign currency translation differences for foreign operations Effective portion of changes in fair value of cash flow hedges, net of tax 8 Total items that may be reclassified subsequently to profit or loss net of income tax Other comprehensive income for the period, net of income tax Total comprehensive income for the period attributable to owners of the Company The attached notes form an integral part of these consolidated financial statements * Refer to Notes 8 and 12 3,158 45 3,203 3,203 5,512 366 118 484 484 (957) 40 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2013 Current assets Cash and cash equivalents Trade receivables Loan and lease receivables Other current assets Assets held for sale Total current assets Non-current assets Loan and lease receivables Plant and equipment Intangible assets Goodwill Deferred tax assets Other non-current assets Total non-current assets Total assets Current liabilities Trade and other payables Deferred service income Other interest bearing liabilities Tax payable Provisions Liabilities held for sale Total current liabilities Non-current liabilities Deferred service income Other interest bearing liabilities Total non-current liabilities Total liabilities Net assets Equity Issued capital Reserves Accumulated profits Total equity The attached notes form an integral part of these consolidated financial statements Notes 24(a) 10 9 12 10 13 14 16 7 11 18 19 21 7 18 12 19 21 2013 $000 2012 $000 7,569 1,154 - 3,802 66,617 79,142 18,568 2,803 39,164 3,571 - 64,106 - 155 23,250 886 12,318 14,080 4,295 4,810 6,684 3,627 2,352 6,644 28,262 50,839 107,404 114,945 2,264 3,843 6,641 2,977 - 34,300 4,520 360 41,108 52,095 1,690 - 1,690 53,785 53,619 516 606 - 45,040 1,821 20,063 21,884 66,924 48,021 22(a) 23 48,091 188 5,340 48,073 (3,083) 3,031 53,619 48,021 ANNUAL REPORT 2013 41 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2013 Equity settled employee benefits reserve $000 Foreign currency translation reserve $000 Fully paid ordinary shares $000 Hedging reserve $000 Accumulated Profit $000 Attributable to equity holders of the parent $000 39,664 770 (4,432) (208) - - - - - 9,100 (714) 23 - - - - - - - - (23) 326 - 366 - 366 366 - - - - 48,073 1,073 (4,066) 48,073 1,073 (4,066) - - - - - - - - - - - 3,158 - 3,158 3,158 - - 118 118 118 - - - - (90) (90) - - 45 45 45 4,472 (1,441) 40,266 (1,441) - - - 366 118 484 (1,441) (957) - - - - 3,031 3,031 2,309 - - - 2,309 9,100 (714) - 326 48,021 48,021 2,309 3,158 45 3,203 5,512 Consolidated Balance at 1 January 2012 Loss for the period Exchange differences arising on translation of foreign operations, net of tax Effective portion of changes in fair value of cash flow hedges, net of tax Total other comprehensive income Total comprehensive income for the period Transactions with owners of the Company, recognised directly in equity Contributions by and distributions to owners of the Company Issue of ordinary shares, net of after tax capital raising costs Capital raising costs Share-based payments held in escrow Recognition of share-based payments Balance at 31 December 2012 Balance at 1 January 2013 Profit for the period Exchange differences arising on translation of foreign operations, net of tax Effective portion of changes in fair value of cash flow hedges, net of tax Total other comprehensive income Total comprehensive income for the period Transactions with owners of the Company, recognised directly in equity Contributions by and distributions to owners of the Company Recognition of share-based payments 18 68 - - - 86 Balance at 31 December 2013 48,091 1,141 (908) (45) 5,340 53,619 The attached notes form an integral part of these consolidated financial statements 42 CONSOLIDATED STATEMENT OF CASH FLOW FOR THE FINANCIAL YEAR ENDED 31 DECEMBER 2013 Notes 2013 $000 2012 $000 Cash Flows from Operating Activities Receipts from customers Payments to suppliers and employees Interest received Interest and finance charges Payments for security guarantee Income tax paid Net cash from operating activities 24(b) Cash Flows from Investing Activities Payments for plant and equipment Payment for intangible assets – Software Payment for intangible assets – Contract rights Net cash used in investing activities Cash Flows from Financing Activities Proceeds from share issue Payment of capital raising costs Proceeds from other interest bearing liabilities Repayment of other interest bearing liabilities Proceeds of borrowings Repayment of borrowings Net cash from financing activities Net increase in cash and cash equivalents Effect of exchange rate fluctuations on cash held Cash and cash equivalents at beginning of the financial year Cash and cash equivalents from discontinued operations Total cash and cash equivalents at the end of the financial year Restricted cash and cash equivalents at the end of the financial year Net available cash and cash equivalents at the end of the financial year 12 24(a) 24(a) The attached notes form an integral part of these consolidated financial statements 58,988 54,026 (53,759) (44,127) 619 1,271 (3,483) (4,735) 27 (2,542) (854) 1,538 (3,203) 690 (215) (603) (588) (418) (919) (965) (1,406) (2,302) - - 9,100 (1,020) 23,940 25,570 (24,020) (15,596) - - 2,500 (5,004) (80) 15,550 52 932 13,938 20 18,568 4,610 (11,983) - 7,569 18,568 (194) (12,560) 7,375 6,008 ANNUAL REPORT 2013 43 NOTES TO THE FINANCIAL STATEMENTS 1. GENERAL INFORMATION ThinkSmart Limited (the “Company” or “ThinkSmart”) is a publicly listed company, incorporated and domiciled in Australia. The consolidated financial statements of the Company as at and for the year ended 31 December 2013 comprise of the Company and its subsidiaries (the “Group”). The Group is a for profit entity and its principal activity during the year was the provision of lease and rental financing services in Australia and the UK and the supply of interest free payment plan products in Australia. The address of the Company’s registered office is 45 Ventnor Avenue, West Perth, WA 6005. 2. BASIS OF PREPARATION (a) Statement of compliance The consolidated financial statements are general purpose financial statements which have been prepared in accordance with the Australian Accounting Standards (AASBs) adopted by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001. The consolidated financial statements comply with International Financial Reporting Standards (IFRSs) and interpretations adopted by the International Accounting Standards Board (IASB). The consolidated financial statements were authorised for issue by the Board of Directors on 18 February 2014. (b) Basis of measurement The financial report has been prepared on the basis of historical cost, except for the derivative financial instruments measured at fair value. Cost is based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian Dollars unless otherwise noted. (c) Assets held for sale and discontinued operations (i) Assets held for sale Non-current assets or disposal groups comprising assets and liabilities are classified as held for sale if it is highly probable that they will be recovered primarily through sale rather than continued use. Immediately before classification as held for sale, the assets, or components of a disposal group are remeasured in accordance with the Group’s other accounting policies. Once classified as held for sale, intangible assets and property, plant and equipment are no longer amortised or depreciated. (ii) Discontinued operations Discontinued operations is a component of the Group’s business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which: - represent a separate major line of business or geographical area of operations; - is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or - is a subsidiary acquired exclusively with a view to re-sale. Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held for sale. When an operation is classified as a discontinued operation, the comparative statement of profit or loss and OCI is re- presented as if the operation had been discontinued from the start of the comparative year. 44 NOTES TO THE FINANCIAL STATEMENTS (d) Functional and presentation currency These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency. ThinkSmart is a Group of the kind referred to in ASIC Class Order 98/100 dated 10 July 1998, as varied by Class Order 05/641 dated 28 July 2005 and Class Order 06/51 dated 31 January 2006. In accordance with those class orders, amounts in the financial statements and the directors’ report have been rounded off to the nearest thousand dollars, unless otherwise indicated. (e) Changes in accounting policies Except for the changes below, the Group has consistently applied the accounting policies set out in Note 3 to all periods presented in these consolidation financial statements. The Group has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of 1 January 2013: 1. AASB 10 Consolidated Financial Statements 2. AASB 13 Fair Value Measurement 3. AASB 119 Employee Benefits 4. Changes to other standards and pronouncements 1. Subsidiaries As a result of AASB 10 (2011), the Group has changed its accounting policy for determining whether it has control over and consequently whether it consolidates its investees. AASB 10 (2011) introduces a new control model that focuses on whether the Group has power over an investee, exposure or rights to variable returns from its involvement with the investee and ability to use its power to affect those returns. This change in accounting policy had no impact on the current treatment of the consolidation of subsidiaries. 2. Fair value measurement AASB 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements when such measurements are required or permitted by other IFRSs. It unifies the definition of fair value as 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. It replaces and expands the disclosure requirements about fair value measurements in other IFRSs, including IFRS 7. As a result the Group has included additional disclosures in this regard (see Note 30(b)). This change in accounting policy has had no material impact on the current or comparative periods. 3. Employee benefits The changes to AASB 119 seek to clarify the definition of short-term employee benefits. Short-term employee benefits are now defined as those benefits expected to be settled wholly within one year after the end of the annual reporting period. This has implications for the measurement of accrued annual leave liabilities. As accrued annual leave is generally not required (or “expected”) to be wholly used (settled) within 12 months after the end of the period, annual leave benefits are no longer classified as short-term employee benefits, rather as “other long-term employee benefits”. “Other long-term employee benefit” measurement techniques specify an actuarial calculation per long service leave liability measurement, with allowances for expected future salary levels, applicable on-costs and actuarial assumptions related to staff turnover rates and leave drawdown rates. The adoption of this standard has had no material impact on the Group’s consolidated financial statements. ANNUAL REPORT 2013 45 4. Changes to other standards and pronouncements The impact of these has been assessed and is not considered material. (f) Accounting policies available for early adoption not yet adopted A number of new standards and interpretations are effective for annual periods beginning after 1 January 2014 and have not been applied in preparing this financial report. Where an assessment has been completed, none of these are expected to have a significant effect on the consolidated financial statements of the Group, except for IFRS 9 Financial Instruments, which becomes mandatory for the Group’s 2015 consolidated financial statements and could change the classification and measurement of financial assets. The Group does not plan to adopt this standard early and the extent of the impact has not been determined. NOTES TO THE FINANCIAL STATEMENTS46 Reference Title Summary Application date of standard Impact on Group financial report Application date for Group AASB 9 Financial AASB 9 includes requirements for the 1-Jan-2015 The Group 1-Jan-2015 Instruments classification and measurement of financial assets resulting from the first part of Phase 1 of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition has not yet determined the extent of the impacts of the amendments, and Measurement). These requirements improve if any. and simplify the approach for classification, measurement and de-recognition of financial assets compared with the requirements of AASB 139. AASB Amendments (a) These amendments arise from the issuance 2009-11 to Australian of AASB 9 Financial Instruments that set Accounting out requirements for the classification and Standards arising measurement of financial assets. from AASB 9 (b) This Standard shall be applied when AASB 9 is applied. AASB Amendments The requirements for classifying and measuring 2010-7 to Australian financial liabilities were added to AASB 9. The Accounting existing requirements for the classification of Standards arising financial liabilities and the ability to use the fair from changes to value option have been retained. However, where AASB 9 the fair value option is used for financial liabilities the change in fair value is accounted for as follows: (a) The change attributable to changes in credit risk are presented in other comprehensive income (OCI). (b) The remaining change is presented in profit or loss if this approach creates or enlarges an accounting mismatch in the profit or loss, the effect of the changes in credit risk are also presented in profit or loss. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 47 Reference Title AASB 1053 Application of Summary This Standard establishes a differential financial Tiers of Australian reporting framework consisting of two Tiers of Accounting reporting requirements for preparing general Standards purpose financial statements. AASB Amendments This Standard makes amendments to many 2010-2 to Australian Australian Accounting Standards, reducing Accounting the disclosure requirements for Tier 2 entities, Standards arising identified in accordance with AASB 1053, from reduced preparing general purpose financial statements. Application date of standard 1-Jul-2013 Impact on Group financial report The Group has Application date for Group 1-Jan-2014 determined there is no material impact on the Group Financial Statements. disclosure requirements Amendments AASB The amendment removes the requirement to 1-Jul-2013 The Group’s 1-Jan-2014 2011-4 to Australian include individual key management personnel Accounting disclosures in the notes to the financial Standards to statement. These disclosures will still need to remove individual be provided in the Remuneration Report under key management s.300A of the Corporations Act 2001. Early adoption is not permitted. personnel disclosure requirements financial statements will exclude these disclosures in the notes to the financial statements but still disclose these in the Directors Report – remuneration report. AASB Amendments The amendments to AASB 132 clarify when an 1-Jan-2014 The Group 1-Jan 2014 2012-3 to Australian entity has a legally enforceable right to set-off Accounting financial assets and financial liabilities permitting Standards arising entities to present balances net on the balance from changes to sheet. AASB 132 AASB Amendments The amendments to AASB 136 include the 1-Jan-2014 2013-3 to Australian requirement to disclose additional information Accounting about the fair value measurement when the Standards arising recoverable amount of impaired assets is based from changes to on fair value less costs of disposal. In addition, AASB 136 a further requirement has been included to has not yet determined the extent of the impacts of the amendments, if any. The Group has not yet determined the extent of the impacts of the amendments, 1-Jan 2014 disclose the discount rates that have been used if any. in the current and previous measurements if the recoverable amount of impaired assets based on fair value less costs of disposal was measured using a present value technique. NOTES TO THE FINANCIAL STATEMENTS48 Reference Title AASB Amendments Summary This Standard makes amendments to AASB 139 2013-4 to Australian to permit the continuation of hedge accounting Accounting in circumstances where a derivative, which Standards arising has been designated as a hedging instrument, from changes to is novated from one counterparty to a central AASB 139 counterparty as a consequence of laws or regulations. 3. SIGNIFICANT ACCOUNTING POLICIES Application date of standard 1-Jan-2014 Impact on Group financial report The Group Application date for Group 1-Jan 2014 has not yet determined the extent of the impacts of the amendments, if any. The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by Group entities. (a) Basis of consolidation (i) Subsidiaries The consolidated financial statements incorporate the financial statements of the company and entities controlled by the company (its subsidiaries). The Group controls an entity when it 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 over the entity. The results of subsidiaries acquired or disposed of during the year are included in the consolidated statement of profit and loss from the effective date of acquisition or up to the effective date of disposal, as appropriate. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. (ii) Transactions eliminated on consolidation Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with those by other members of the Group. All intra-group balances, transactions, income and expenses are eliminated in full on consolidation. (b) Business combinations For every business combination, the Group identifies the acquirer, which is the combining entity that obtains control of the other combining entities or businesses. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, the Group takes into consideration potential voting rights that currently are exercisable. The acquisition date is the date on which control is transferred to the acquirer. Judgement is applied in determining the acquisition date and determining whether control is transferred from one party to another. Measuring goodwill The Group measures goodwill as the fair value of consideration transferred including the recognised amount of any non- controlling interest in the acquiree, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. Consideration transferred includes the fair values of the asset transferred, liabilities incurred by the Group to the previous owners of the acquiree, and equity interests issued by the Group. Consideration transferred also includes the fair value of any contingent consideration and share-based payment awards of the acquiree that are replaced mandatorily in the business combination. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 49 (c) Cash and cash equivalents Cash comprises cash on hand and demand deposits. Cash equivalents are short-term, highly liquid investments that are readily converted to known amounts of cash and which are subject to an insignificant risk of change in value. Bank overdrafts are shown within borrowings in current liabilities in the balance sheet. (d) Plant and equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. When parts of an item of property, plant and equipment have different useful lives they are accounted for as separate items (major components) of property, plant and equipment. The gain or loss on disposal of an item of property, plant and equipment is determined by comparing the proceeds from disposal with the carrying amount of the property, plant and equipment, and is recognised net within other income/other expenses in profit or loss. Depreciation Depreciation is based on the cost of an asset less its residual value. Significant components of individual assets are assessed and if a component has a useful life that is different from the remainder of the asset, that component is depreciated separately. Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful lives of each component of an item of property, plant and equipment. The following estimated useful lives are used in the calculation of depreciation: • Office furniture, fittings, equipment and computers 2.5 to 5 years • Leasehold improvements • Self-funded rental assets • Motor vehicles the lease term 2.5 to 5 years 5 years • Leased computer equipment and software 2.5 to 5 years Depreciation methods, useful lives and residual values are reviewed at each reporting date. (e) Trade and other payables Trade payables are recognised when the consolidated entity becomes obliged to make future payments resulting from the purchase of goods and services. (f) Financial instruments (i) Non-derivative financial assets The Group initially recognises loans and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date at which the Group becomes a party to the contractual provisions of the instrument. NOTES TO THE FINANCIAL STATEMENTS50 The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the right to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Group is recognised as a separate asset or liability. Financial assets and liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. Investments Investments are recognised and derecognised on trade date where purchase or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value net of transaction costs. Subsequent to initial recognition, investments in subsidiaries are measured at cost in the company financial statements, net of accumulated impairment losses. Other financial assets are classified into the following specified categories: financial assets at ‘fair value through profit and loss’, ‘held-to-maturity’ investments, ‘available-for-sale’ financial assets and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Lease receivables The Group has entered into financing transactions with customers and has classified its leases as finance leases for accounting purposes. Under a finance lease, substantially all the risks and benefits incidental to the ownership of the leased asset are transferred by the lessor to the lessee. The Group recognises at the beginning of the lease term an asset at an amount equal to the aggregate of the present value (discounted at the interest rate implicit in the lease) of the minimum lease payments and an estimate of the value of any unguaranteed residual value expected to accrue to the benefit of the Group at the end of the lease term. This asset represents the Group’s net investment in the lease. Finance leases acquired from other parties are recognised at fair value including direct and incremental costs and subsequently remeasured at amortised cost using the effective interest rate method and are presented net of provisions for impairment. Unearned interest Unearned interest on leases and other receivables is brought to account over the life of the lease contract based on the interest rate implicit in the lease using the effective interest rate method. Initial direct transaction costs Initial direct costs or directly attributable, incremental transaction costs incurred in the origination of leases are included as part of receivables in the balance sheet and are amortised in the calculation of lease income and interest income. Allowance for losses The collectability of lease receivables is assessed on an ongoing basis. A provision is made for losses based on historical rates of arrears and the current delinquency position of the portfolio. Effective interest method The effective interest method is a method of calculating the amortised cost of a financial asset and allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset or, where appropriate, a shorter period. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 51 Loan receivables Loan receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. Insurance prepayment In respect to the UK operations, when an equipment insurance policy is issued by Allianz to RentSmart Limited’s customers, RentSmart Limited pays the customer’s insurance premium to Allianz. RentSmart Limited subsequently collects the insurance premium from the customer on a monthly basis over the life of the rental agreement. Where a policy is cancelled, the unexpired premiums are refunded to RentSmart Limited. (ii) Non-derivative financial liabilities The Group initially recognises debt securities issued and subordinated liabilities on the date that they are originated. The Group derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. Financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest rate method. Capitalised borrowing costs consist of legal and other costs that are incurred in connection with the borrowing of funds. These costs are capitalised and then amortised over the life of the loan. Financial guarantee contracts Financial guarantees issued by the Group are recognised as financial liabilities at the date the guarantee is issued. Liabilities arising from financial guarantee contracts, including where applicable, guarantees of subsidiaries through deeds of cross guarantee, are initially recognised at fair value and subsequently at the higher of the amount of projected future losses and the amount initially recognised less cumulative amortisation. The fair value of the financial guarantee is determined by way of calculating the present value of the difference in net cash flows between the contractual payments under the debt instrument and the payments that would be required without the guarantee, or the estimated amount that would be payable to a third party for assuming the obligation. Any increase in the liability relating to financial guarantees is recognised in profit and loss. Any liability remaining is derecognised in profit and loss when the guarantee is discharged, cancelled or expires. (iii) Impairment of assets Financial assets, including finance lease receivables and loan receivables A financial asset is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated future cash flows of that asset. In assessing collective impairment, the Group uses modelling of historical trends of the probability of defaults, timing of recoveries and the amount of loss incurred. Impairment losses on assets carried at amortised cost are measured as the difference between the carrying amount of the financial assets and the present value of the estimated future cash flows discounted at the assets original effective interest rate. NOTES TO THE FINANCIAL STATEMENTS52 An impairment loss in respect of a financial asset measured at amortised cost is calculated as the difference between its carrying amount, and the present value of the estimated future cash flows discounted at the original effective interest rate. Individually significant financial assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that share similar credit risk characteristics. All impairment losses are recognised in profit and loss. An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognised. For financial assets measured at amortised cost, the reversal is recognised in profit and loss. Non-financial assets The carrying amounts of the Group’s non-financial assets, other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill and intangible assets that have indefinite lives or that are not yet available for use, the recoverable amount is estimated at each reporting date. The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For the purpose of impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (the “cash-generating unit”). The goodwill acquired in a business combination, for the purpose of impairment testing, is allocated to cash- generating units that are expected to benefit from the synergies of the combination. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of the other assets in the unit (groups of units) on a pro rata basis. An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in the prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. (g) Intangible assets Intellectual property Intellectual property is recorded at the cost of acquisition over the fair value of the identifiable net assets acquired, and is amortised on a straight line basis over 20 years. Inertia Contracts The Group recognises an intangible asset arising if it has an unconditional contractual right to receive income arising from equipment and rights to the hiring agreement at the end of term. This inertia contract is measured at fair value at the inception of the hiring agreement, and is based on discounted cash flows expected to be derived from the sale or hire of the assets at the end of the term. Subsequent to initial recognition the intangible asset is measured at cost. Amortisation NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 53 is based on cost less estimated residual value. Individual intangible assets are assessed at each reporting period for impairment. Impaired contracts are offset against any unamortised deferred service income with the remainder recognised in profit and loss. At the end of the hiring term the intangible asset is derecognised and the Group recognises the equipment as inventory at the corresponding value. Contract Rights The contractual rights obtained by the Group under financing agreements entered into with its funding partners and operating agreements with its retail partners constitute intangible assets with finite useful lives. These contract rights are recognised initially at cost and amortised over their expected useful lives. In relation to funder contact rights, the expected useful life is the earlier of the initial contract term or expected period until facility limit is reached. At each reporting date a review for indicators of impairment is conducted. Software development Software development predominantly relates to the development of the Group’s proprietary SmartCheck credit application processing software system. Software development costs are capitalised only up to the point when the software has been tested and is ready for use in the manner intended by management. Software development expenditure is capitalised only if the development costs can be measured reliably, the product process is technically and commercially feasible, future economic benefits are probable, and the Group intends to and has sufficient resources to complete development and to use or sell the asset. The expenditure capitalised includes the cost of direct labour and overhead costs that are directly attributable to preparing the asset for its intended use. The intangible asset is amortised on a straight line basis over its estimated useful life, which is 4 years. Capitalised software development expenditure is measured at cost less accumulated amortisation and accumulated impairment losses. (h) Goodwill Goodwill acquired in a business combination is initially measured at its cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognised. Goodwill is subsequently measured at its cost less any impairment losses. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash generating units (CGUs) or groups of CGUs, expected to benefit from the synergies of the business combination. CGUs (or groups of CGUs) to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired. If the recoverable amount of the CGU (or group of CGUs) is less than the carrying amount of the CGU (or group of CGUs), the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or group of CGUs) and then to the other assets of the CGU (or group of CGUs) pro-rata on the basis of the carrying amount of each asset in the CGU (or CGUs). The impairment loss recognised for goodwill is recognised immediately in the profit or loss and is not reversed in the subsequent period. On disposal of an operation within a CGU, the attributable goodwill is included in the determination of the profit or loss of disposal on the operation. NOTES TO THE FINANCIAL STATEMENTS54 (i) Employee benefits A liability is recognised for benefits accruing to employees in respect of wages and salaries and annual leave when it is probable that settlement will be required and they are capable of being measured reliably. The Group’s net obligation in respect of long service leave is the amount of future benefit that employees earned in return for their service in the current and prior periods plus related on-costs; that benefit is discounted to determine its present value, and the fair value of any related assets is deducted. The obligations are presented as current liabilities in the balance sheet as the Group does not have an unconditional right to defer settlement for at least 12 months after the reporting date, regardless of when the actual settlement occurs. Liabilities recognised in respect of employee benefits, which are expected to be settled within 12 months, are measured at their nominal values, using the remuneration rate expected to apply at the time of settlement. Liabilities recognised in respect of employee benefits, which are not expected to be settled within 12 months, are measured at their present value of the estimated future cash flows to be made by the Group. The Group pays defined contributions for post-employment benefit into a separate entity. Obligations for contributions to defined contribution pension plans are recognised as an employee benefit expense in profit or loss in the period during which services are rendered by employees. Termination benefits are recognised as an expense when the Group is committed, it is probable that settlement will be required, and they are capable of being reliably measured. If benefits are payable more than 12 months after the reporting date, then they are discounted to their present value. Share-based payments The grant date fair value of share-based payment awards granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period that the employees unconditionally become entitled to the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non- market vesting conditions are expected to be met, such that the amount ultimately recognised as an expense is based on the number of awards that do not meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. (j) Inventories Inventories are valued at the lower of cost and net realisable value. Net realisable value represents the estimated selling price less all estimated costs of completion and costs necessary to make use for sale. (k) Revenue recognition Revenue is measured at the fair value of the consideration received or receivable and is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 55 Finance lease income Finance lease income is recognised on those leases originated or acquired by the Group where the Group, rather than a third party financier, is the lessor. Finance lease income is recognised on the effective interest rate method at the constant rate of return which amortises over its economic life, the lease asset down to the estimate of any unguaranteed residual value that is expected to be accrued to the Group at the end of the lease. Commission income Commission receivable from funders is recognised at the time finance approval is given to the customer, adjusted for an allowance for loans not expected to proceed to a contract by the funder. Residual interest in equipment (inertia income) • Secondary rental income Rental income from extended rental assets is recognised when receivable usually on a monthly basis. No ongoing rental income is brought to account in respect of the unexpired rental contracts. • Income earned from sale of equipment Proceeds from the sale of rental assets are brought to account at the time of the sale to the extent not already recognised through Finance lease income. Insurance income Insurance income includes commissions received on insurance policies issued by third party insurers to cover theft and damage of rental equipment. In the UK, insurance income is recognised at fair value of the future payments receivable as substantially all of the services to earn that revenue are completed upfront. The revenue recognition policy for the Australian insurance income is consistent with the treatment of commission income from funders. Interest income and expense Interest income and expense for all interest bearing financial instruments is recognised in the profit and loss account using the effective interest rates of the financial assets or liabilities to which they relate. The effective interest rate is the rate that exactly discounts the estimated future cash payments or receipts through the expected life of the financial asset or financial liability. When calculating the effective interest rate the Group includes all amounts paid or received by the Group which are considered to be an integral part of the effective interest rate, including merchant fees received and rebates paid. Deferred service income Income arising on recognition of any intangible inertia asset at the commencement of the lease is deferred and recognised over the lease term on a straight line basis as the services are rendered. (l) Derivative financial instruments, including hedge accounting The Group holds derivative financial instruments to hedge its interest rate risk exposures, predominately in the ThinkSmart Trust. On initial designation of the derivative as the hedging instrument, the Group formally documents the relationship between the hedging instrument and the hedged item, including the risk management objectives and strategy in undertaking the hedge transaction and the hedged risk, together with the methods that will be used to assess the effectiveness of the hedging relationship. NOTES TO THE FINANCIAL STATEMENTS56 The Group makes an assessment, both at the inception of the hedge relationship as well as on an ongoing basis, whether the hedging instruments are expected to be “highly effective” in offsetting the changes in cash flows of the respective hedged items attributable to hedged risk, and whether the actual results of each hedge are within a range of 80 – 125 percent. For a cash flow hedge of a forecast transaction, the transaction should be highly probable to occur and should present an exposure to variations in cash flows that could ultimately affect reported profit or loss. Derivatives are recognised initially at fair value; attributable transaction costs are recognised in profit or loss as incurred. Subsequent to initial recognition, derivatives are measured at fair value and changes therein are accounted for as described below. The fair values of derivates used for hedging purposes are disclosed in Note 30(b). Movements in the hedging reserve in shareholder equity are shown in the Statement of Changes in Equity. Cash flow hedges When a derivative is designated as the hedging instrument in a hedge of the variability in cash flows attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction that could affect profit or loss, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and presented in the hedging reserve in equity. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. When the hedged item is a non-financial asset, the amount recognised in equity is included in the carrying amount of the asset when the asset is recognised. In other cases the amount accumulated in equity is reclassified to profit or loss in the same period that the hedged item affects profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to occur, then the balance in equity is reclassified in profit or loss. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. (m) Income tax Current tax Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax payable for current and prior periods is recognised as a liability to the extent that it is unpaid. Carried forward tax recoverable on tax losses is recognised as a deferred tax asset where it is probably that future taxable profit will be available to offset in future periods. Deferred tax Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 57 Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries and joint ventures except where the Group is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Consolidated Entity expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company/Group intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax for the period Current and deferred tax is recognised as an expense or income in the statement of profit and loss, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess purchase consideration. Tax consolidation The Company and its wholly owned Australian resident entities formed a tax-consolidated group during 2009. As a consequence, all members of the tax-consolidated group are taxed as a single entity from 1 January 2009. The head entity within the tax-consolidated group is ThinkSmart Limited. (n) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST) except: (i) where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; and (ii) receivables and payables which are recognised inclusive of GST. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables. Cash flows are included in the statement of cash flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows. (o) Foreign currency transactions Functional and presentation currency Foreign currency gains and losses are reported on a net basis. NOTES TO THE FINANCIAL STATEMENTS58 Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the year. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are presented in profit or loss on a net basis, except for differences arising on the retranslation of a financial liability designated as a hedge of the net investment in a foreign operation that is effective, which are recognised in other comprehensive income. Foreign operations The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated to the functional currency at exchange rates at the reporting date. The income and expenses of foreign operations, excluding foreign operations in hyperinflationary economies, are translated to Australian dollars at exchange rates at the dates of the transactions. The income and expenses of foreign operations in hyperinflationary economies are translated to the functional currency at the reporting date. Prior to translating the financial statements of foreign operations in hyperinflationary economies, their financial statements for the current period are restated to account for changes in the general purchasing power of the local currency. The restatement is based on relevant price indices at the reporting date. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve in equity. However, if the operation is not a wholly-owned subsidiary, then the relevant proportionate share of the translation difference is allocated to the non-controlling interests. When a foreign operation is disposed of such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve related to that foreign operation is reclassified to the profit or loss as part of the gain or loss on disposal. When the Group disposes of only part of its interest in a subsidiary that includes a foreign operation while retaining control, the relevant proportion of the cumulative amount is reattributed to non-controlling interests. When the Group disposes of only part of its investment in an associate or joint venture that includes a foreign operation while retaining significant influence or joint control, the relevant proportion of the cumulative amount is classified to profit or loss. (p) Earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the year, adjusted for bonus elements in ordinary shares issued during the year. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 59 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 assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. (q) Provisions A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligations. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. (r) Lease payments Payments made under operating leases are recognised in profit or loss on a straight line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant period rate of interest on the remaining balance of the liability. Contingent lease payments are accounted for by revising the minimum lease payments over the remaining term of the lease when the contingency no longer exists and the lease adjustments are known. (s) Segment reporting An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses that relate to transactions with any of the Group’s other components. All operating segments’ operating results are regularly reviewed by the Group’s Chief Executive Officer to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results, assets and liabilities include items attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly loans and borrowings and related expenses, and head office expenses, and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. (t) Determination of fair value A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non-financial assets and liabilities. Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset and liability. NOTES TO THE FINANCIAL STATEMENTS60 Intangible assets The fair value of intangible assets is based on the discounted cash flows expected to be derived from the use and eventual sale of the assets (refer to Note 3(g)). Intangible inertia asset The fair value of inertia asset is measured at inception of the hiring agreement and is based on discounted cash flows expected to be derived from the sale or hire of the assets at the end of the hire term. Trade and other and loan receivables The fair value of trade and other and loan receivables is estimated as the present value of future cash flows, discounted at the market rate of interest at the reporting date. Non-derivative financial liabilities Fair value, which is determined for disclosure purposes, is calculated based on the present value of future principal and interest cash flows, discounted at the market rate of interest at the reporting date. For finance leases, the market rate of interest is determined by reference to similar lease agreements. Share-based payment transactions The fair value of employee share options is measured using a binomial model and loan-funded shares are measured using a monte-carlo simulation model. Measurement inputs include share price on measurement date, exercise price of the instrument, expected volatility (based on weighted average historic volatility adjusted for changes expected due to publicly available information), weighted average expected life of the instruments (based on historical experience and general option holder behaviour), expected dividends, and the risk-free interest rate (based on government bonds). Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value. The fair value of employee shares provided as remuneration is measured using the closing share price on the date the shares are granted. Cash flow hedges The fair value of the interest rate swap is based on broker quotes. Those quotes are tested for reasonableness by discounting estimated future cash flows based on the terms and maturity of the contract and using market interest rates for a similar instrument at the measurement date. Fair values reflect the credit risk of the instrument and included adjustments to take account of the credit risk of the Group entity and counterparty when appropriate. 4. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of the consolidated financial statements in conforming with IFRS requires management to make judgements, estimates and assumptions that effect the application of accounting policies and the reported amount of assets, liabilities, income and expenses. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that may have a financial impact on the entity and that are believed to be reasonable under the circumstances. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 61 Critical accounting estimates and assumptions The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year are discussed below: • Note 7 - measurement and recognition of tax losses • Note 10 - loans and lease receivables, including estimation of unguaranteed residual value and credit losses • Note 14 - fair value at inception of inertia intangible assets and recoverable amount • Note 16 - measurement of the recoverable amount of cash generating units containing goodwill • Note 19 - measurement of deferred services income • Note 22 - measurement of share-based payments 5. FINANCIAL RISK MANAGEMENT Overview The Group has exposure to the following risks from the use of financial instruments: • • Credit risk Liquidity risk • Market risk • Operational risk This note presents information about the Group’s exposure to each of the above risks, the objectives, policies and processes for measuring and managing financial risks, and the management of capital. Further quantitative disclosures are included throughout this financial report. The Board of Directors has overall responsibility for the establishment and oversight of the risk management framework. The Board has established the Audit and Risk Management Committee, which is responsible for developing and monitoring risk management policies. The Committee reports to the Board of Directors on its activities. Risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect the changes in market conditions and the Group’s activities. The Audit and Risk Committee oversees how management monitors compliance with the Group’s risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. Credit Risk Credit risk refers to the risk that a counterparty or customer will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with credit worthy counterparties as a means of mitigating the risk of financial loss from defaults. The Head of Treasury and Risk has day to day responsibility for managing credit risk within the risk appetite of the Board. Appropriate oversight occurs via monthly credit performance reporting to management and the Board. The Group has minimal concentrations of credit risk in relation to debtors and lease receivables with the portfolio comprising a large number of relatively low value receivables. In the case of the special purpose entity funded operations in Australia, ThinkSmart’s exposure to credit risk is limited to the value of its notes in the relevant series of the special purpose entity plus $1.0m. Losses in excess of that are borne by the senior financier’s notes. The notes in the various series of the special NOTES TO THE FINANCIAL STATEMENTS62 purpose entity are structured such that on a probability weighted outcomes basis, ThinkSmart bears the credit risk (refer to Note 30(c) for further information). In the UK, the Group has an obligation to meet the cost of future bad debts incurred by its funders. The funder deposits discussed below represent security for that credit exposure and are recorded net of the Group’s estimate of this credit risk. Further information is provided in Note 28. To manage credit risk in relation to its customers, the Group employs a sophisticated credit assessment and fraud minimisation process delivered through its patented QuickSmart system. The credit underwriting system uses a combination of credit scoring and credit bureau reports as well as electronic identity verification and a review of an applicant’s details against a fraud database. The credit policy is developed and applied by the Group’s Head of Treasury and Risk who monitors ongoing credit performance on different cohorts of customer contracts. The Group has a specialist collections function which manages all delinquent accounts. The Group’s credit risk exposure to funder deposits are more concentrated, however the counterparties are regulated banking institutions and the credit risk exposure is assessed as low. The Group closely monitors the credit risk associated with each funder deposit counterparty. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The consolidated entity manages liquidity risk by maintaining adequate reserve facilities by continuously reviewing its facilities and cash flows. The Group ensures that it has sufficient cash on demand to meet expected operational expenses and financing subordination requirements. In addition, the Group maintains the operational facilities which are shown in Notes 20 and 21. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising return. Currency risk The Group is exposed to currency risk on sales, purchases and borrowings that are denominated in a currency other than the respective functional currencies of the Group entities, primarily the Australian dollar, Sterling and Euro. Interest on borrowings is denominated in currencies that match the cash flows generated by the underlying operations of the Group. This provides an economic hedge and no derivatives are entered into. Liabilities incurred in each respective geographical territory are paid for by the cash flows of the functional currency of that territory. Exposures for singular transactions greater than $50,000 are considered for hedging by management, with forward exchange contracts to mitigate exchange rate risk and are considered separately as they arise. The consolidated entity has no forward exchange contracts as at reporting date (2012: nil). NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 63 In respect of other monetary assets and liabilities denominated in foreign currencies, the management ensures that the Group’s net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address the short term imbalances (refer to Note 30 for further information). Interest rate risk The Group has no current or non-current corporate borrowings as at 31 December 2013. Exposure to interest rate risk on any future corporate borrowings will be assessed by the Board and where appropriate, the exposure to movement in interest rates may be hedged by entering into interest rate swaps, when considered appropriate by the management and the Board. The Group has interest rate risk exposure to the notes in ThinkSmart Trust that it has issued to the financiers of its lease receivables. These notes are floating rate notes with the rate based on a fixed margin above a benchmark interest rate. Interest rate risk results principally from changes in the benchmark interest rate and accordingly the Group mitigates some of this risk by entering into an interest rate swap to hedge against the variability in the cash flows due to changes in the interest rate (refer to Note 30(a) for further information). Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Group’s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks such as those arising from legal and regulatory requirements and generally accepted standards of corporate behaviour. Operational risks arise from all of the Group’s operations. The primary responsibility for the development and implementation of controls to address operational risk is assigned to senior management within each business unit. This responsibility is supported by the development of overall group standards for the management of operational risk in the following areas: • • • • • • • Requirements for appropriate segregation of duties, including the independent authorisation of transactions Requirements for the reconciliation and monitoring of transactions Compliance with regulatory and other legal requirements Documentation of controls and procedures Requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified Ethical and business standards Risk mitigation, including insurance where this is effective Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. Management aims to maintain a capital structure that ensures the lowest cost of capital available to the Group. Management constantly reviews the capital structure to ensure an increasing return on assets. Under the terms of its financing arrangements in ThinkSmart Trust, the Group is required to subscribe to and hold a minimum value of notes based on the value of receivables outstanding to ensure ongoing financing. ThinkSmart Trust is bankruptcy remote in that ThinkSmart’s risk exposure is limited to the amount of capital that it holds within the relevant series of ThinkSmart Trust plus $1.0m. NOTES TO THE FINANCIAL STATEMENTS64 ThinkSmart Finance Limited holds an Australian Financial Services Licence (AFSL) in relation to its role as Trust Manager of ThinkSmart Trust. Under the terms of its AFSL it must have assets that exceed its liabilities and there are also liquidity conditions (measured on a Group basis). The Group’s debt-to-adjusted capital ratio at the end of the reporting period was as follows: Total liabilities Less cash and cash equivalents Net debt Total equity Debt-to-adjusted capital ratio at 31 December 2013 $000 2012 $000 53,785 66,924 (7,569) (18,568) 46,216 48,356 53,619 48,021 0.9 1.0 Other than as described above in relation to ThinkSmart Trust, the Group is not subject to externally imposed capital requirements. For the purposes of capital management, capital consists of share capital, reserves and retained earnings. The Board assesses the Group’s ability to pay dividends from time to time. During 2013 no dividend was paid or declared. Subsequent to year end, the Board has declared a special dividend of $5.843m equating to 3.6 cents per share (refer to Note 32). NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 65 6. CONSOLIDATED STATEMENT OF PROFIT AND LOSS Profit/(loss) is arrived at after crediting/(charging) the following items: (a) Revenue Interest revenue – other entities Surplus unguaranteed residual income Extended rental income Other inertia income Fee revenue – customers Commission income (b) Other revenue Services revenue – insurance Other revenue (c) Interest expense Notes 2013 $000 2012 Restated $000 19 410 2,381 3,845 4,060 364 5,677 321 1,820 2,918 2,438 308 9,194 16,737 16,999 2,085 111 2,196 1,983 61 2,044 Interest expense – corporate banking facilities - 240 (d) Other operating expenses Employees benefits expense: - Payments to employees - Employee superannuation costs - Share-based payment expense - Provision for employee entitlements Occupancy costs Professional services Finance charges Other costs (e) Depreciation and amortisation Depreciation Amortisation (f) Impairment losses 6,270 329 82 77 6,758 390 1,434 184 1,157 9,923 188 275 463 6,456 296 294 - 7,046 407 1,787 129 1,396 10,765 214 236 450 Impairment losses on intangible assets (net) 255 182 NOTES TO THE FINANCIAL STATEMENTS66 7. INCOME TAX The major components of income tax expense/(benefit) for the year ended 31 December are: Current income tax expense Current income tax charge Adjustment for prior period Deferred income tax expense Origination and reversal of temporary differences Adjustment for prior period Income tax expense from continuing operations Income tax benefit from discontinued operations 8 Total income tax expense/(benefit) A reconciliation between tax expense and the product of accounting (loss)/profit before income tax multiplied by the applicable income tax rate is as follows: Accounting profit before tax At the statutory income tax rate of 30% Effect of tax rates in foreign jurisdictions Non deductible expenses: - corporate development - other Overseas tax losses not recognised/(recognised) Adjustments in respect of prior periods Income tax expense from continuing operations Income tax recognised directly in equity Equity raising costs Notes 2013 $000 2012 Restated $000 775 (8) (15) - 752 (91) 661 3,349 1,005 (372) 10 81 3 25 752 617 (120) 69 3 569 (1,034) (465) 2,414 724 (277) 17 245 (84) (56) 569 - 306 Income tax recognised in other comprehensive income and equity Cash flow hedges (24) (51) NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 67 7. INCOME TAX (CONTINUED) Deferred tax asset – continuing operations Loan and lease receivables Accrued expenses Employee entitlements Equity raising costs Borrowing costs Plant & equipment Intangible assets Tax losses Investment in subsidiaries Other Total Deferred tax liability – continuing operations Derivatives Intangible assets Plant and equipment Other Total Net deferred tax asset (i) (i) Deferred tax assets and deferred tax liabilities that relate to the same taxable entity have been netted off. The deductible temporary differences and tax losses do not expire under current tax legislation. Tax Payable Current 2013 $000 - 33 108 260 23 64 738 - 4,437 - 2012 $000 1,192 67 181 433 18 330 - 723 - 82 5,663 3,026 - 853 - - 853 4,810 51 380 241 2 674 2,352 4,520 4,520 516 516 The current tax liability is recognised for income tax payable in respect of all periods to date. The current tax liability for 31 December 2013 includes the estimated capital gains tax liability of $4.4m arising on the sale of the Australian business for which a corresponding deferred tax asset has been recognised. NOTES TO THE FINANCIAL STATEMENTS68 8. DISCONTINUED OPERATIONS On 12 December 2013, the Group announced that it had entered into an agreement to sell its Australian and New Zealand business to FlexiGroup. As set out in Note 12, settlement for the sale occurred on 31 January 2014. The Australian and New Zealand business has not previously been classified as held for sale or as a discontinued operation. The comparative consolidated statement of profit and loss has been restated to show the discontinued operation separately from continuing operations. The balance sheet of the disposal group held for sale as at 31 December 2013 is presented in Note 12. (a) Results of discontinued operations Total revenue Expenses Loss from operating activities Income tax benefit Loss from operating activities, net of tax (b) Cash flows from/(used in) discontinued operations Net cash used in operating activities Net cash from investing activities Net cash from financing activities Net cash flow for the year Earnings per share – discontinued operations Basic (cents per share) Diluted (cents per share) Notes 2013 $000 2012 $000 18,758 20,680 (19,137) (25,000) (379) (4,320) 91 1,034 (288) (3,286) 325 (899) (80) (654) 738 (2,076) 9,974 8,636 33 33 (0.18) (0.18) (2.17) (2.17) Cumulative income or expense included in other comprehensive income The cumulative income or expense included in other comprehensive income relating to the disposal group is as follows: Effective portion of changes in fair value of cash flow hedges, net of tax 45 118 NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 69 9. OTHER CURRENT ASSETS Prepayments Inventories Sundry debtors 10. LOAN AND LEASE RECEIVABLES Current Rental receivables (net of GST) Unguaranteed residuals Unearned finance income Net lease receivables Other lease receivable Loan receivables Allowance for losses Non-current Rental receivables (net of GST) Unguaranteed residuals Unearned finance income Net lease receivables Other lease receivable Loan receivables Gross investment in leases Less than one year One year to five years Less: unearned income Net investment in lease receivables Less than one year One year to five years 2013 $000 2,614 848 340 2012 $000 2,427 185 959 3,802 3,571 - - - - - - - - - - - - - - - - - - - - - - 23,142 4,925 (5,561) 22,506 18,452 2,020 (3,814) 39,164 15,166 1,248 (5,961) 10,453 12,178 619 23,250 28,067 16,414 (11,522) 32,959 22,506 10,453 32,959 NOTES TO THE FINANCIAL STATEMENTS70 10. LOAN AND LEASE RECEIVABLES (CONTINUED) ‘Other lease receivables’ represents the rights to lease receivables assigned by Bendigo and Adelaide Bank (BEN) on 1 October 2011 and 28 June 2012 which were accounted for as a “pass through” arrangement under AASB 139 Financial Instruments: Recognition and Measurement whereby the risks and rewards of the underlying finance lease receivables were transferred to the Group. The liabilities relating to the acquired rights are set out in Note 21. On 31 January 2013, $5.9m of finance lease receivables were acquired from the group of assets held under the “pass through” arrangement by the ThinkSmart Trust. The net carrying value of lease receivables includes the earned portion of any unguaranteed residual value expected to accrue to the Group at the end of the lease, which by its nature introduces estimation uncertainty into the amortised cost calculation. The Group continually assesses current unguaranteed residual value proceeds and includes these as the Group’s best estimate of future unguaranteed residual value. The calculation of the allowance for losses contains a number of elements of judgement. The Group makes judgements as to how the current level of arrears of a loan or lease receivable relate to its probability of future default. The Group also makes judgements as to the recoverable amount in circumstances of default. These estimates are based on historical loss experience and objective experience of historical recoveries for assets with similar characteristics. The methodology and assumptions used for estimating losses are reviewed regularly to reduce the difference between loss estimates and actual loss experience. Further information about the allowance for losses is set out in Note 30(c). Further information about the Group’s exposure to credit risk and interest rate risk in relation to the loan and lease receivables are set out in Note 30. All loan and lease receivables were part of the held for sale assets as at 31 December 2013 (refer to Note 12). 11. OTHER NON-CURRENT ASSETS Insurance prepayments Deposits held by funders (i) 2013 $000 1,747 4,937 6,684 2012 $000 1,564 5,080 6,644 (i) Deposits held by funders for the servicing and management of their portfolios in the event of default. The deposits earn interest at market rates of return for similar instruments. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 71 12. DISPOSAL GROUP HELD FOR SALE On 12 December 2013, the Group announced that it had entered into an agreement to sell its Australian and New Zealand business to FlexiGroup as mentioned in Note 8. Accordingly, these are classified as held for sale. The sale was completed on 31 January 2014 for consideration of $43.0m. Assets and liabilities of disposal group held for sale At 31 December 2013, the disposal group was stated at its carrying value and comprised the following assets and liabilities: Cash and cash equivalents Trade and other receivables Loan and lease receivables Plant and equipment Intangible assets Deferred tax assets Tax receivable Assets held for sale Trade and other payables Other interest bearing liabilities Liabilities held for sale $000 11,983 1,353 47,370 448 4,311 1,151 1 66,617 4,025 37,083 41,108 NOTES TO THE FINANCIAL STATEMENTS72 13. PLANT AND EQUIPMENT Gross Carrying Amount Cost or deemed cost Balance at 1 January 2012 Effect of movement in exchange rate Additions Disposals Balance at 31 December 2012 Effect of movement in exchange rate Additions Disposals Transfer to held for sale Balance at 31 December 2013 Accumulated Depreciation Balance at 1 January 2012 Effect of movement in exchange rate Depreciation expense Balance at 31 December 2012 Effect of movement in exchange rate Disposals Depreciation expense Transfer to held for sale Balance at 31 December 2013 Net Book Value At 31 December 2012 At 31 December 2013 Plant & Equipment $000 Lease equipment & software $000 Notes 1,898 74 199 (2) 982 - 239 - Total $000 2,880 74 438 (2) 12 12 2,169 1,221 3,390 25 176 (37) (465) 1,868 - 54 (10) 25 230 (47) (1,192) (1,657) 73 1,941 (1,453) (553) (2,006) (70) (326) (1,849) - 35 (246) 347 (1,713) 320 155 - (102) (655) - 8 (288) 862 (73) 566 - (70) (428) (2,504) - 43 (534) 1,209 (1,786) 886 155 NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 73 14. INTANGIBLE ASSETS Contract rights $000 Software $000 Distribution network $000 Intellectual Property $000 Inertia Contracts $000 Total $000 Gross carrying amount At cost Balance at 1 January 2012 Additions Disposals/transfer to inventory Effect of movement in exchange rate Transfers 5,531 1,000 - (10) (7) Balance at 31 December 2012 6,514 Additions Disposals/transfer to inventory Effect of movement in exchange rate Transfers 659 (6) 158 (52) 5,784 894 (17) - 7 6,668 747 - - 54 Transfer to assets held for sale (5,694) (7,421) 411 642 - - 10 - 421 - - 77 - - - - - - 642 - - - - - 3,608 4,800 (225) 90 - 8,273 5,293 15,976 6,694 (242) 90 - 22,518 6,699 (2,007) (2,013) 1,101 1,336 - - 2 (13,115) Balance at 31 December 2013 1,579 48 498 642 12,660 15,427 Accumulated amortisation and impairment Balance at 1 January 2012 Amortisation expense Effect of movement in exchange rate Impairment loss Balance at 31 December 2012 Amortisation expense Effect of movement in exchange rate Impairment loss (i) Transfers Transfer to assets held for sale Balance at 31 December 2013 Net book value At 31 December 2012 At 31 December 2013 (2,254) (1,489) (2,253) (1,287) 14 - (3,729) (1,243) (148) - 27 4,077 (1,016) 2,785 563 - - (3,540) (1,208) - - (27) 4,727 (48) 3,128 - (410) - (10) - (420) - (77) - - - (369) (32) - - (401) (32) - - - - (1) - (6) (341) (348) - (138) (629) - - (5,287) (2,808) (2) (341) (8,438) (2,483) (363) (629) - 8,804 (497) (433) (1,115) (3,109) 1 1 241 209 7,925 11,545 14,080 12,318 (i) Impairment loss relates to the write off where the related contract has early terminated principally due to contract default. NOTES TO THE FINANCIAL STATEMENTS74 Inertia contract assets acquired are measured at fair value based on the discounted cash flows expected to be derived from the sale or hire of the assets at the end of the term. This measurement inherently introduces estimation uncertainty. The Group continually assesses current inertia proceeds and includes these in the estimation of inertia assets acquired. As such the fair value measurement for inertia contract assets has been categorised as Level 3 fair value. The following table shows a reconciliation from the opening balances to the closing balances for Level 3 fair values. Valuation technique The Group recognises an intangible Significant unobservable inputs The fair value is based on current levels of Inter-relationship between key unobservable inputs and fair value measurement The estimated fair value would increase asset arising if it has the unconditional return (25%-30%) less an allowance for (decrease) if: · · · · · Expected sale value was higher (lower) Expected secondary hire term was longer (shorter) Expected cancellations/bad debts were lower (higher) Expected realization costs were lower (higher) Discount rate derived from group cost of capital was lower (higher) contractual right to receive income cancellations (10%-30%) and expected arising from equipment and rights to costs (5%-10%) of realization. the hiring agreement at the end of term. This inertia asset is measured at The discount rate applied to the fair value fair value at the inception of the hiring is 13.21%. agreement, and is based on discounted cash flows expected to be derived from the sale or hire of the asset at the end of the minimum term. Subsequent to initial recognition the intangible asset is measured at cost. During the hiring term the valuation is impaired for any assets that have been written off. At the end of the hiring term the intangible asset is derecognised and the group recognises the equipment as inventory at the corresponding value. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 75 15. INTEREST IN SUBSIDIARIES Interest in Subsidiaries Country of Incorporation 2013 2012 % of Equity RentSmart Limited RentSmart Pty Ltd* RentSmart (NZ) Pty Ltd* RentSmart Servicing Pty Ltd* RentSmart Unit Trust* SmartCheck Finance Spain SL SmartCheck Ltd SmartCheck Pty Ltd* SmartPlan Spain SL ThinkSmart Employee Share Trust ThinkSmart Europe Ltd ThinkSmart Finance Ltd* ThinkSmart Financial Services Ltd ThinkSmart Inc UK Australia New Zealand Australia Australia Spain UK Australia Spain Australia UK Australia UK USA ThinkSmart Insurance Services Administration Ltd UK ThinkSmart Italy Srl ThinkSmart LTI Pty Limited ThinkSmart Trust* ThinkSmart UK Ltd Italy Australia Australia UK 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 * The Group has subsequent to 31 December 2013 disposed of these entities as disclosed in Note 32. 16. GOODWILL Balance at beginning of financial year Effect of movement in exchange rate Balance at end of financial year 2013 $000 3,627 668 4,295 2012 $000 3,539 88 3,627 NOTES TO THE FINANCIAL STATEMENTS76 Impairment testing for cash-generating units containing goodwill For the purpose of impairment testing, goodwill is allocated to the UK segment as disclosed in Note 26, which represents the lowest level within the Group at which goodwill is monitored for internal management purposes. The goodwill arose on the acquisition of RentSmart Limited. The recoverable amount of the UK cash-generating unit was based on its value in use using business plan assumptions and a discount rate approximating the weighted average cost of capital of the group and hence includes inherent estimation uncertainty. The recoverable amount of the unit was determined to be significantly higher than the carrying amount, therefore no impairment of goodwill is required, and no further sensitivity analysis is considered necessary. Value in use is determined by discounting the future cash flows generated from the continuing use of the unit and was based on the following key assumptions: • Cash flows were projected based on the forecast operating results for 2014 to 2016 and 2.5% year on year growth for 2017 and 2018, and estimated terminal growth of 2.0%. • A post tax discount rate of 8.5% (11.1% pre tax) was applied in determining the recoverable amount of the unit. 17. ASSETS PLEDGED AS SECURITY As at 31 December 2013, within liabilities held for sale $1.0m of interest bearing liabilities were secured by pledges of the present and future assets of ThinkSmart Limited and ThinkSmart Finance Limited to Westpac. ThinkSmart Europe provide an equitable mortgage over the shares it holds in the main UK operating entity, RentSmart Limited to provide security for ThinkSmart Limited’s Corporate facilities, all of which were un-drawn at 31 December 2013. Both of the above pledges were released on 31 January 2014 in connection with the sale of the Australian and New Zealand operations as set out in Note 32. 18. TRADE AND OTHER PAYABLES, AND PROVISIONS Trade and other payables Hedging derivative Product plan GST Payable Other accrued expenses Provisions Annual leave Long service leave (i) Other 2013 $000 475 - - 548 1,241 2,264 137 222 1 360 2012 $000 3,476 128 20 1,010 2,007 6,641 386 219 1 606 (i) The pro rata entitlement of long service leave is provided for after 7 years of service. The Group’s exposure to currency and liquidity risk related to trade and other payables is disclosed in Note 30. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 77 19. DEFERRED SERVICE INCOME Balance at 1 January Effect of movement in exchange rate Intangible inertia assets acquired Reversal due to intangible asset impairment Notes 14 2013 $000 4,798 (124) 5,293 (374) 2012 $000 2,572 22 4,800 (158) Recognised in Consolidated Statement of Profit and Loss 6(a) (4,060) (2,438) Deferred service income to be recognised within 12 months Deferred service income to be recognised in greater than 12 months 20. FINANCING FACILITIES Corporate financing facilities Secured bank overdraft facility reviewed annually and payable at call: - amount used - amount unused Committed cash advance facility/Secured bill acceptance facility: - amount used - amount unused Other finance facilities (business credit card, payroll facility, term loan, multi-option facility): - amount used - amount unused 5,533 4,798 3,843 1,690 5,533 2,977 1,821 4,798 2013 $000 2012 $000 - 921 921 - 5,000 5,000 21 25 46 - 778 778 - 5,000 5,000 14 25 39 Total corporate financing facility 5,967 5,817 The total corporate facilities of $5.967m (2012: $5.817m) identified above are reviewed annually and secured over the assets of the Group. The committed cash advance facility was terminated on 31 January 2014 in connection with the sale of the Australian and New Zealand operations as set out in Note 32. New corporate facilities for business credit cards, payment processing and foreign exchange derivatives were put into place simultaneously, secured by cash on deposit. NOTES TO THE FINANCIAL STATEMENTS78 21. OTHER INTEREST BEARING LIABILITIES Current Loan advances – secured Financial liability – secured Non-current Loan advances – secured Financial liability – secured Customer financing facilities Secured financing facilities - amount used – lease financing arrangement – series 2 - amount used – lease financing arrangement – series 3 - amount used – brokerage arrangement - amount unused Total facility 2013 $000 2012 $000 - - - - - - - - - - - 18,830 15,470 34,300 8,373 11,690 20,063 18,377 8,827 27,159 113,137 167,500 All interest bearing liabilities were part of the held for sale liabilities as at 31 December 2013 (refer to Note 12). 22. ISSUED CAPITAL (a) Issued and paid up capital 162,307,097 Ordinary Shares fully paid (2012: 159,163,764) 48,091 48,073 2013 $000 2012 $000 2013 Number 2013 $000 2012 Number 2012 $000 Fully Paid Ordinary Shares Balance at beginning of the financial year 159,163,764 48,073 130,004,390 39,664 Issue of new shares for employee loan-funded share plan 3,043,333 Issue of new shares for employee share-based payment 100,000 Issue of new shares Capital raising costs - - - 18 - - 3,033,333 125,000 26,001,041 - - 23 9,100 (714) Balance at end of the financial year 162,307,097 48,091 159,163,764 48,073 During the year no employee share options or loan-funded shares were exercised (2012: nil). NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 79 Ordinary Shares entitle the holder to participate in dividends and the proceeds on winding up the Company in proportion to the number of and amount paid on the Shares held. On a show of hands, every holder of Ordinary Shares present in the meeting in person or by proxy is entitled to one vote, and upon a poll each Share is entitled to one vote. The Company does not have authorised capital or par value in respect to its issued shares. (b)(i) Share options – employee options and loan-funded shares The Company has an ownership-based remuneration scheme for Executives and senior employees. Each employee share option converts to one ordinary share of ThinkSmart Limited on exercise and payment of the exercise price. Each employee loan-funded share converts to one ordinary share of ThinkSmart Limited on exercise and repayment of the loan. The options carry neither rights or dividends nor voting rights. The loan-funded shares carry voting and rights to dividends. Options issued in previous periods: • 2,200,000 and 333,333 options over ordinary shares were issued 5 May 2010 and 1 September 2010 respectively. The options are exercisable at $1.11, with an exercise period between 1 January 2013 and 31 December 2014. Vesting of the options was subject to achievement of the following performance conditions: • • 50% of options are subject to achievement of Earnings per Share (“EPS”) performance conditions; and 50% of options are subject to achievement of Total Shareholder Return (“TSR”) performance conditions. The performance conditions were not met, and no options vested on 31 December 2012. • 2,133,333, 100,000 and 250,000 options over ordinary shares were issued 11 April 2011, 15 June 2011 and 25 July 2011 respectively. The options are exercisable at $0.84, with an exercise period between 1 January 2014 and 31 December 2015. Vesting of the options is subject to achievement of the following performance conditions: • • 50% of options are subject to achievement of Earnings per Share (“EPS”) performance conditions; and 50% of options are subject to achievement of Total Shareholder Return (“TSR”) performance conditions. The performance conditions were not met, and no options vested on 31 December 2013. • 400,000 options over ordinary shares were issued 10 August 2012 and exercisable at $0.1923, vesting and exercisable on 10 August 2015 until 09 August 2017. Vesting of the options is subject to achievement of the following performance conditions: • Tranche 1: 25% of options will vest if the share price hurdle of $0.35 is met in accordance with the performance conditions; • Tranche 2: 25% of options will vest if the share price hurdle of $0.55 is met in accordance with the performance conditions; and • Tranche 3: 50% of options will vest if the share price hurdle of $0.75 is met in accordance with the performance conditions. NOTES TO THE FINANCIAL STATEMENTS80 • 3,033,333 loan-funded shares were issued 10 August 2012 and exercisable at $0.1923, vesting and exercisable on 10 August 2015 until 09 August 2017. Vesting of the loan-funded shares is subject to achievement of the following performance conditions: • Tranche 1: 25% of loan-funded shares will vest if the share price hurdle of $0.35 is met in accordance with the performance conditions; • Tranche 2: 25% of loan-funded shares will vest if the share price hurdle of $0.55 is met in accordance with the performance conditions; and • Tranche 3: 50% of loan-funded shares will vest if the share price hurdle of $0.75 is met in accordance with the performance conditions. Options and loan-funded shares issued in the current period: • 750,000 options over ordinary shares were issued 04 July 2013 and exercisable at $0.2652, vesting and exercisable on 04 July 2016 until 03 July 2018. Vesting of the options is subject to achievement of the following performance conditions: • Tranche 1: 25% of options will vest if the share price hurdle of $0.3802 is met in accordance with the performance conditions; • Tranche 2: 25% of options will vest if the share price hurdle of $0.4889 is met in accordance with the performance conditions; and • Tranche 3: 50% of options will vest if the share price hurdle of $0.5975 is met in accordance with the performance conditions. • 3,243,333 loan-funded shares were issued 04 July 2013 and exercisable at $0.2652, vesting and exercisable on 04 July 2016 until 03 July 2018. Vesting of the loan-funded shares is subject to achievement of the following performance conditions: • Tranche 1: 25% of loan-funded shares will vest if the share price hurdle of $0.3802 is met in accordance with the performance conditions; • Tranche 2: 25% of loan-funded shares will vest if the share price hurdle of $0.4889 is met in accordance with the performance conditions; and • Tranche 3: 50% of loan-funded shares will vest if the share price hurdle of $0.5975 is met in accordance with the performance conditions. The value of these options and loan-funded shares will be expensed over the vesting period in accordance with AASB 2. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 81 Below are options and loan-funded shares issued in 2012 and 2013: Loan-funded shares issued in 2013 Number Grant date Exercise period Exercise price Fair value at grant date Employee loan-funded shares 3,243,333 04/07/2013 04 Jul 2016 to 03 Jul 2018 $0.2652 $0.098 - $0.118 Options series issued in 2013 Number Grant date Exercise period Exercise price Fair value at grant date Employee options 750,000 04/07/2013 04 Jul 2016 to 03 Jul 2018 $0.2652 $0.098 - $0.118 Loan-funded shares issued in 2012 Number Grant date Exercise period Exercise price Fair value at grant date Employee loan-funded shares 3,033,333 10/08/2012 10 Aug 2015 to 09 Aug 2017 $0.1923 $0.02 - $0.06 Options series issued in 2012 Number Grant date Exercise period Exercise price Fair value at grant date Employee options 400,000 10/08/2012 10 Aug 2015 to 09 Aug 2017 $0.1923 $0.02 - $0.06 The weighted average fair value of the share options and loan-funded shares granted in 2013 is $0.106 (2012: $0.035). Options issued before 2012 were priced using a binomial option pricing model. Expected volatility is based on that observed for comparable listed companies over the time period appropriate to the option grant in question. Options and loan-funded shares issued in 2012 were priced using a monte-carlo pricing model. Expected volatility is based on the historic volatility of the market price of the Company’s share and the mean reversion tendency of volatilities. Below are the inputs used to measure the fair value of the options and loan-funded shares: Grant date Fair value at grant date Grant date share price Exercise price Expected volatility Option/loan share life Dividend yield Risk-free interest rate Employee options and loan-funded shares Employee options and loan-funded shares 2013 2012 04/07/2013 10/08/2012 $0.098-$0.118 $0.02-$0.06 $0.27 $0.19 $0.2652 $0.1923 55% 4 years 0% 2.99% 50% 4 years 2.14% 2.5% The following reconciles the outstanding share options/loan-funded shares granted under the employee share option plan and loan-funded shares at the beginning and end of the financial year: NOTES TO THE FINANCIAL STATEMENTS82 2013 2012 Balance at beginning of the financial year Granted during the financial year Number of options/loan funded shares Weighted average exercise price $ 9,200,000 3,993,333 $0.61 $0.27 Number of options 7,166,667 3,433,333 Forfeited during the financial year* (5,265,000) $0.76 (1,400,000) Exercised during the financial year Expired during the financial year Balance at the end of financial year Exercisable at end of the financial year - (801,667) 7,126,666 - - $0.62 $0.23 - - - 9,200,000 - Weighted average exercise price $ $0.84 $0.19 $0.74 - - $0.61 - *The weighted average exercise price is calculated including 1,000,000 loan-funded shares on issue previously allocated and forfeited by Mr A Stevens. These remain in share capital at year end as unallocated shares. The options and loan-funded shares outstanding at 31 December 2013 have an exercise price in the range of $0.1923 to $0.2652 (2012: $0.1923 to $1.11) and a weighted average contractual life of 4.12 years (2012: 2.83 years). The following is the total expense recognised for the period arising from share-based payment transactions: Share options granted in 2006 – equity settled Share options granted in 2009 – equity settled Share options granted in 2010 – equity settled Share options granted in 2011 – equity settled Shares as remuneration granted in 2010, 2011 and 2012 – equity settled Share options/loan-funded shares granted in 2012 – equity settled Share options/loan-funded shares granted in 2013 – equity settled Total expense recognised as employee costs Less discontinued operations Total expense recognised from continuing operations 2013 $000 2012 $000 - - - (96) 99 21 62 86 4 82 (85) (64) 111 212 98 54 - 326 32 294 NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 83 (b)(ii) Share compensation – employee shares Details on shares of the Company that were granted as remuneration to each Key Management Person and details of shares vested during the reporting period are as follows: Executives A Baum A Baum A Baum Number of shares granted Grant date Fair value at grant date ($) Vesting period Number of shares vested during 2013 Number of shares vested during 2012 350,000 01/09/2010 125,000 01/09/2011 125,000 03/10/2012 0.64 0.52 0.18 3 years 3 years 3 years 100% - - - - - The shares are provided at no cost to the recipient as part of his employment contract and are held in escrow. No shares have been granted since the end of the financial year. These shares were issued to A Baum. The shares are ordinary shares in the Company and ordinarily would have vested upon completion of a 3-year service period from the date of issue. As a result of Mr Baum’s role being made redundant during 2014, and under the terms of the grant, he is entitled to retain these shares and they are released from escrow at that point. The fair value of these shares is recorded in the profit and loss on a straight line basis across their vesting term, with $0.099m (2012: $0.098m) expensed during the year. (c) Dividends There were no dividends paid during the year (2012: nil) or since the year end. After 31 December 2013, the following dividends were declared by the directors. The dividends have not been provided for. Special dividend Cents per share Total amount Franked/ unfranked Date to be paid 3.6 cents $5,843,055 Fully franked 19 February 2014 The final effect of these dividends has not been brought to account in the financial statements for the year ended 31 December 2013 and will be recognised in subsequent financial reports. (d) Franking credits Franking credit account balance as at the beginning of the financial year at a tax rate of 30% (2012: 30%) Franking credits from the payment of income tax paid and payable as at the end of the financial year Franking credit account balance as at the end of the financial year at a tax rate of 30% (2012: 30%) 2013 $000 2012 $000 3,063 1,190 3,900 1,873 6,963 3,063 NOTES TO THE FINANCIAL STATEMENTS84 In accordance with the tax consolidation legislation, the Company as the head entity in the tax-consolidated group is allowed to assume the relevant subsidiaries’ franking credits. As at 31 December 2013, the subsidiaries have no franking credits for the benefit of the Company (2012: nil). As noted in Note 22(c), the company will pay a special dividend of 3.6 cents per share on 19 February 2014. This will result in a reduction of franking credits of $2.504m and a balance of $4.459m remaining in the franking credit account. The $4.459m franking balance relates to tax estimated to become payable during 2014 from the 2013 results and the sale of the Australian and New Zealand operations. 23. RESERVES Equity settled employee benefits reserve – options (i) Equity settled employee benefits reserve – shares (i) Foreign currency translation reserve (ii) Hedge reserve (iii) 2013 $000 1,170 (29) (908) (45) 188 2012 $000 1,159 (86) (4,066) (90) (3,083) (i) The share-based remuneration reserve arises on the grant of share options and shares to Executives under the employee share option plan and loan-funded share plan. Amounts are transferred out of the reserves and into issued capital when the options are exercised. For shares issued as remuneration and accounted for as a share-based payment arrangement, the full fair value of the shares are initially recognised in the reserve and share capital, and are subsequently transferred out of the reserve to the profit and loss over the vesting period. Further information about the share-based payments is provided in Note 22(b) to the financial statements. (ii) The translation reserve comprises all foreign currency differences arising from the translation of the financial statements of foreign operations as well as from the translation of liabilities that hedge the Company’s net investment in a foreign subsidiary. (iii) The hedge reserve comprises the effective portion of the cumulative net change in fair value of the cash flow hedge relating to hedged transactions that have not yet occurred. 24. NOTES TO THE CASH FLOW STATEMENT (a) For the purposes of the cash flow statement, cash and cash equivalents includes cash on hand and in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash and cash equivalents at the end of the financial year as shown in the cash flow statement is reconciled to the related items in the balance sheet as follows: Reconciliation of cash and cash equivalents Cash balance comprises: - Available cash and cash equivalents - Restricted cash 2013 $000 2012 $000 7,375 6,008 194 12,560 7,569 18,568 The Group’s exposure to credit risk, interest rate and sensitivity analysis of the financial assets and liabilities are provided in Note 30. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 85 (b) Reconciliation of the profit/(loss) for the year to net cash flows from operating activities: Profit/(loss) after tax Add back non-cash items: Depreciation Amortisation Impairment losses on finance lease receivables Foreign currency loss/(gain) unrealised Provision for employee entitlements Equity settled share-based payment (Increase)/decrease in assets: Trade receivables, deposits held with funders and other movements in lease assets Prepayments Deferred tax asset Other assets Rental asset inventory Increase/(decrease) in liabilities: Trade and other creditors Provision for income tax Deferred tax liability Other payables Net cash from operating activities 2013 $000 2012 $000 2,309 (1,441) 380 2,482 2,323 (49) 244 57 428 2,808 4,098 358 95 326 (3,290) (28) 1,198 811 (2,653) (1,825) 27 (81) 444 (124) (2,533) (4,732) 4,039 (2,151) (1,500) (189) 1,538 493 (96) 690 25. LEASES AND HIRE PURCHASE OBLIGATIONS Operating leases – leasing arrangements Operating leases relate to office facilities with lease terms of up to 6 years. All operating lease contracts contain market review clauses in the event that the consolidated entity exercises its option to renew. The consolidated entity does not have an option to purchase the leased asset at the expiry of the lease period. Non-cancellable operating lease payments: No later than 1 year Later than 1 year and not later than 5 years No provisions have been recognised in respect of non-cancellable operating leases. 2013 $000 2012 $000 448 383 831 871 - 871 NOTES TO THE FINANCIAL STATEMENTS86 26. SEGMENT INFORMATION The Group has three reportable segments which comprise the Group’s two core business units (UK and its discontinued segment, Australia), with the “other” segment presented composing low volume territories. The head office corporate function composes the reconciliation between the two continuing reportable segments and the Group, given that there is no inter-segment revenue. The business units offer predominantly similar products and services, however have separate Executive structures and separate operational teams. For each of the segments, the Board and the CEO review internal management reports on a monthly basis. The composition of the reportable segments is as follows: UK: • • RentSmart Limited ThinkSmart Insurance Services Administration Ltd Other: • • • • • • SmartCheck Finance Spain SL ThinkSmart Europe Ltd ThinkSmart France SARL ThinkSmart Inc ThinkSmart Inc (USA) ThinkSmart Italy Srl Corporate: • ThinkSmart Limited Discontinued operations - Australia: • • • • • ThinkSmart Finance Ltd ThinkSmart Trust RentSmart Servicing Pty Ltd RentSmart Pty Ltd RentSmart (NZ) Pty Ltd NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 87 26. SEGMENT INFORMATION (CONTINUED) Operating Segments Information about reportable segments UK Other Territories Corporate Total Discontinued operations* For the year ended 31 December 2013 2012 2013 Restated * 2012 2013 2012 2013 Restated * 2012 Restated 2012 2013 Revenue Other revenue Total revenue 16,574 16,812 141 2,196 2,044 - 18,770 18,856 141 Indirect customer acquisition costs (4,935) (4,962) (2) 148 - 148 (8) 22 - 22 (6) 39 16,737 16,999 18,751 19,136 - 2,196 2,044 7 1,544 39 18,933 19,043 18,758 20,680 (22) (4,943) (4,992) (1,361) (3,147) Operating expenses (5,377) (5,580) (100) (268) (4,446) (4,917) (9,923) (10,765) (10,145) (10,969) Depreciation and amortisation (418) (394) (45) Impairment losses (Note 6(f)) (255) (182) Interest expense - - - - (56) - (2) - - - - - (463) (255) (450) (2,399) (2,786) (182) (2,338) (4,098) (238) - (240) (2,894) (4,000) Reportable segment profit/(loss) before income tax 7,785 7,738 (6) (186) (4,430) (5,138) 3,349 2,414 (379) (4,320) Reportable segment current assets 9,293 7,588 2,023 295 1,209 574 12,525 8,457 66,617 55,649 Reportable segment non-current assets 16,053 14,731 7,347 2,771 4,862 500 28,262 18,002 - 32,837 Reportable segment liabilities 7,031 8,103 1,537 (1,275) 4,109 345 12,677 7,173 41,108 59,751 Capital expenditure 570 235 - - - - 570 235 1,066 2,097 * See Notes 8 and 12. Major customer Revenues from the Group’s funding partners represent $5.677m (2012: $12.038m) of the Group’s total revenue. NOTES TO THE FINANCIAL STATEMENTS88 27. REMUNERATION OF AUDITORS Audit and review services: Auditors of the Company: Audit and review of financial reports (Australia) Audit and review of financial reports (Overseas) Other regulatory services Services other than statutory audit: Tax compliance and advisory services Accounting advice Advisory services 2013 $ 2012 $ 234,500 344,481 100,111 77,707 9,500 9,500 344,111 431,688 138,081 - 33,000 31,481 16,500 - 171,081 47,981 The Group’s auditors were KPMG in 2013 and 2012. 28. COMMITMENTS AND CONTINGENT LIABILITIES UK Under the terms of its current UK funding agreement, the Group is obliged to purchase delinquent leases from the funder at the funded amount plus any commission previously received. At 31 December 2013, the total funded amount of all leases funded by the funder is $49.648m (31 December 2012: $42.455m). The Group has entered into a Credit Default Swap (CDS) with STB for which it has provided a deposit of $8.252m (31 December 2012: $6.995m) as collateral for the obligation under the funding agreement and CDS. The Group has provided for $3.197m (31 December 2012: $1.881m) which includes some estimation uncertainty as it requires an estimate of the future amount potentially payable for those leases that are likely to become delinquent in the future. The Group estimates this amount based on historical loss experience for assets with similar characteristics. The total balance of deposits recognised with funders, net of associated provisions and financial guarantee contracts, is $4.937m (31 December 2012: $5.080m). NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 89 29. CONTINGENT INERTIA ASSETS Under the Group’s accounting policy, inertia revenue for those assets funded under the brokerage model in the UK, where the Group does not have an unconditional right to the asset and residual lease rights, is not recognised until the conclusion of the initial rental period. At this point, the Group is entitled to acquire the equipment from the funders at a nominal value, and the equipment can be disposed of, or continue to be rented to third parties. The Group does not have control over these future revenue streams and accordingly the revenue is not brought to account until it is received. An estimate of the realisable value of the future revenue streams of $0.112m (31 December 2012: $0.939m) has been made by estimating expected proceeds through sales channels and public auction. Where the Group does have an unconditional right to these future revenue streams it recognises an intangible asset. 30. FINANCIAL INSTRUMENTS Financial instruments included in the below disclosures do not include financial assets and liabilities classified as held for sale. (a) Interest rate risk At the reporting date, the interest rate profile of the Group’s interest bearing financial instruments were: Fixed rate instruments Loan and lease receivables Variable rate instruments Cash and cash equivalents Deposits held by funder (non-current) Secured note facility Net financial assets/(liability) Sensitivity analysis Carrying amount 2013 $000 2012 $000 - - 62,414 62,414 7,569 4,937 18,568 5,080 - (54,363) 12,506 (30,715) A change in 1% in interest rates would have increased or decreased the Group’s profit for continuing operations by the amounts shown below (2012: 1% increase $0.054m, 1% decrease $0.091m). This analysis assumes that all other factors remain constant including foreign currency rates. NOTES TO THE FINANCIAL STATEMENTS90 Variable rate instruments Net profit sensitivity (b) Fair value of financial instruments Profit or Loss Increase 1% Decrease 1% 125 125 (125) (125) The carrying amounts of financial assets and financial liabilities recorded in the financial statements are not materially different to their fair values. In the case of fixed rate loan and lease receivables, changes in market interest rates and other factors influencing their fair value since inception have an immaterial impact on the effective interest rate. Fair value hierarchy The financial instruments carried at fair value have been classified by valuation method. The different levels have been defined as follows: • • Level 1: Level 2: quoted prices (unadjusted) in active markets for identical assets or liabilities inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices) • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs) The only financial liability of the Group measured at fair value is comprised of interest rate swaps used for hedging, classified as Level 2, which is included within liabilities held for sale (see Note 12). Key assumptions in the valuation of the instruments are limited to interpolating interest rates for certain future periods where there is no observable market data. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 91 30. FINANCIAL INSTRUMENTS (CONTINUED) (c) Credit risk management The maximum credit risk exposure of the Group is the sum of the carrying amount of the Group’s financial assets. The carrying amount of the Group’s financial assets that is exposed to credit risk at the reporting date is: Cash and cash equivalents Loan and lease receivables (current) Loan and lease receivables (non-current) Trade receivables Prepayments (current) Sundry debtors Other non-current assets Note 24(a) 10 10 9 11 2013 $000 7,569 - - 1,191 2,107 340 6,684 2012 $000 18,568 39,164 23,250 2,890 1,858 959 6,644 17,891 93,333 The carrying amount of the Group’s financial assets that is exposed to credit risk at the reporting date by geographic region is: Australia UK Other 2013 $000 1,100 16,501 290 2012 $000 79,221 13,886 226 17,891 93,333 The carrying amount of the Group’s financial assets that is exposed to credit risk at the reporting date by types of counterparty is: Banks (i) Funders Insurance partners (ii) Retail finance customers (iii) Others (iii) 2013 $000 7,569 5,029 3,855 2012 $000 18,568 5,080 3,421 - 62,415 1,438 3,849 17,891 93,333 (i) Cash and cash equivalents are held with banks with S&P ratings of A- and AA-. (ii) In 2013, 88% (2012: 86%) of the total prepayment relates to RentSmart Limited’s upfront insurance premium payments to Allianz on behalf of the rental customer. The premiums are recovered from the customer on a monthly basis. In the event the customer defaults, the policy is cancelled and Allianz refunds the unexpired premium. NOTES TO THE FINANCIAL STATEMENTS92 30. FINANCIAL INSTRUMENTS (CONTINUED) (c) Credit risk management (continued) (iii) Included in Others is an amount of $nil (2012: $1.803m) relating to collections from lessee customers in relation to the portfolio of leases acquired by the Group via a “pass through” arrangement from Bendigo and Adelaide Bank. The credit risk exposure from retail customers also includes an amount of $nil (2012: $30.630m) which relates to the same portfolio of leases. The bank account to which collections are deposited is held with Bendigo and Adelaide Bank and accordingly the Group has a credit risk exposure to Bendigo and Adelaide Bank with respect to these amounts. Loan and lease receivables The ageing of the Group’s loan and lease receivables at the reporting date was: Gross 2013 $000 Impairment 2013 $000 Gross 2012 $000 Impairment 2012 $000 Not past due Past due 0-30 days Past due 31-120 days Past due 121-365 days More than 1 year - - - - - - - - - - - - 53,711 4,598 3,698 3,826 395 66,228 The movement in the allowance for impairment in respect of lease receivables during the year was as follows: - 20 749 2,735 310 3,814 2012 $000 1,589 4,284 2013 $000 3,814 2,550 (1,800) (2,059) (4,564) - - 3,814 Balance at 1 January Impairment loss recognised Bad debt written off Transfer to assets held for sale Balance at 31 December The management of credit risk in relation to its customers is described in Note 5. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 93 30. FINANCIAL INSTRUMENTS (CONTINUED) (c) Credit risk management (continued) Trade receivables The ageing of the Group’s trade receivables at the reporting date was: Not past due Past due 0-30 days Past due 31-120 days Past due 121-365 days Gross 2013 $000 Impairment 2013 $000 - 1,104 70 17 1,191 - - 28 9 37 Gross 2012 $000 1,803 1,000 87 - 2,890 The movement in the allowance for impairment in respect of trade receivables during the year was as follows: Balance at 1 January Impairment loss recognised Bad debt written off Effect of exchange rate movement Transfer to assets held for sale Balance at 31 December 2013 $000 87 118 (147) 8 (29) 37 Impairment 2012 $000 - - 87 - 87 2012 $000 85 217 (216) 1 - 87 Trade receivables are reviewed and considered for impairment on a periodic basis, based on the number of days outstanding and number of payments in arrears. NOTES TO THE FINANCIAL STATEMENTS94 30. FINANCIAL INSTRUMENTS (CONTINUED) (d) Currency risk management Exposure to currency risk The Group’s exposure to foreign currency risk at balance date was as follows, based on notional amounts: Cash and cash equivalents Trade receivables Trade and other payables Net exposure Cash and cash equivalents Trade receivables Trade and other payables Net exposure The following significant exchange rates applied during the year: AUD EUR GBP USD NZD GBP £000 3,407 746 (1,107) 3,046 GBP £000 2,301 646 (1,903) 1,044 31 December 2013 EUR €000 120 16 (37) 99 NZD $000 - - - - 31 December 2012 EUR €000 60 16 (53) 23 NZD $000 14 - - 14 USD $000 7 - (3) 4 USD $000 8 - (3) 5 Average rate Reporting date spot rate 2013 0.7293 0.6146 0.9679 1.1795 2012 0.8061 0.6536 1.0358 1.2787 2013 0.6485 0.5429 0.8948 1.0879 2012 0.7868 0.6428 1.0384 1.2608 NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 95 30. FINANCIAL INSTRUMENTS (CONTINUED) (d) Currency risk management (continued) Sensitivity analysis A 10% strengthening of the Australian dollar against the following currencies at 31 December would have increased/ (decreased) equity and profit and loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. The analysis is performed on the same basis for 2012: 31 December 2013 EUR GBP USD NZD 31 December 2012 EUR GBP USD NZD Equity $000 (16) (2,570) - (2) (10) (1,820) (1) (2) Profit or loss $000 (7) (626) (221) 4 3 (513) (205) 4 A 10% weakening of the Australian dollar against the above currencies at 31 December would have had an equal but opposite effect on the above currencies to the amounts shown above, on the basis that all other variables remain constant. NOTES TO THE FINANCIAL STATEMENTS96 30. FINANCIAL INSTRUMENTS (CONTINUED) (e) Liquidity risk management The following are the contractual maturities of financial liabilities, including estimated interest payments and excluding the impact of netting agreements: Non-derivatives 31 December 2013 Trade and other payables 31 December 2012 Trade and other payables Secured note facility Carrying Amount Contractual cash flow Less than 1 year 1-2 years 2-5 years $000 $000 $000 $000 $000 2,264 2,264 (2,264) (2,264) (2,264) (2,264) 6,513 (6,513) (6,513) - - - - - - 54,363 (57,967) (37,009) (16,634) (4,323) 60,876 (64,480) (43,522) (16,634) (4,323) 31. RELATED PARTY DISCLOSURES The following were Key Management Personnel of the Group at any time during the reporting period and unless otherwise indicated were Key Management Personnel for the entire period: Non-Executive Directors D Griffiths (Deputy Chairman) S Penglis F de Vicente N Fox – until 18 March 2013 K Jones – appointed 24 May 2013 Executive Directors N Montarello (Executive Chairman and Chief Executive Officer) Executives A Baum (Group Chief Operating Officer) G Halton (Managing Director (acting) – UK) A Stevens (Group Chief Financial Officer) – until 12 December 2013 G Varma (Group Chief Information Officer) NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 97 The Key Management Personnel remuneration included in ‘employee benefits expense’ in Note 6(d) is as follows: Short-term employee benefits Post-employment benefits Other long-term benefits Share-based payments 2013 $ 2012 $ 2,073,112 2,735,118 118,086 312,656 13,794 69,064 56,450 287,943 2,261,442 3,404,781 The Key Management Personnel receive no remuneration in relation to management of the Company (2012: nil). Individual Directors and Executives Remuneration Disclosures Information regarding individual Directors and Executives remuneration and some equity instruments disclosures as permitted by Corporations Regulations 2M.3.03 is provided in the Remuneration Report section of the Directors’ Report. Apart from the details disclosed in this note, no Director has entered into a material contract with the Group since the end of the previous financial year and there were no material contracts involving Directors’ interests existing at year-end. Loans to Key Management Personnel and their related parties There have been no loans provided to Key Management Personnel and their related parties as at 31 December 2013 (2012: nil), with the exception of the limited recourse loans in relation to the loan-funded share scheme (refer to Note 22(b)(i) and the Remuneration Report section of the Directors’ Report). Other Key Management Personnel transactions During the year and previous year, there has been no transaction with entities in which the Key Management Personnel has significant control or influence over those entities’ financial or operating policies. Options and rights over equity instruments The movement during the reporting period in the number of options over ordinary shares in ThinkSmart Limited held, directly, indirectly or beneficially, by each Key Management Person, including their related parties, is as follows: NOTES TO THE FINANCIAL STATEMENTS98 31. RELATED PARTY DISCLOSURES (CONTINUED) Employee options Held at date of new appoint- ment Held at 1 January 2013 2013 Directors Granted as compen- sation Other movement Lapsed, forfeited or expired Held at 31 December 2013 Vested during the year Vested and exercisable at 31 December 2013 N Montarello 3,000,000 D Griffiths S Penglis F de Vicente N Fox K Jones Executives A Baum G Halton A Stevens G Varma 2012 Directors - - - - - 666,666 450,000 - 350,000 Held at 1 January 2012 N Montarello 3,000,000 D Griffiths S Penglis F de Vicente N Fox Executives A Baum G Halton A Stevens G Varma J Ferreira S McDonagh G Parry - - - - 666,666 - - 350,000 400,000 250,000 700,000 - - - - - - - - - - - - - - - - - 250,000 - - - - - - - - - - - - (3,000,000) - - - - - (666,666) - - - - n/a - - (350,000) 350,000 - (350,000) - - - - - - - - - - - - - - - - - - - - - - Granted as compen- sation Other movement Lapsed, forfeited or expired Held at 31 December 2012 Vested during the year Vested and exercisable at 31 December 2012 - - - - - - - - - - - - - - - - - - - - - - - - - (400,000) (250,000) - - (700,000) 3,000,000 1,000,000 1,000,000 - - - - 666,666 - - - - - - - - - - 450,000 150,000 150,000 - 350,000 - - - - - - - - - - - - - 350,000 100,000 - - - - - - - - - - Held at date of new appoint- ment - - - - - - Movements in loan-funded shares granted as compensation are set out in the following movements in shares table. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 99 NOTES TO THE FINANCIAL STATEMENTS 31. RELATED PARTY DISCLOSURES (CONTINUED) Movement in shares The movement during the reporting period in the number of ordinary shares in ThinkSmart Limited held, directly, indirectly or beneficially, by each Key Management Person, including their related parties, is as follows: Held at 1 January 2013 2013 Directors Purchases Rights issue Sales Received on exercise of options Loan- funded share issue Loan funded share issue lapsed, forfeited or expired Granted as compensation Held at 31 December 2013 N Montarello 29,559,356 D Griffiths 2,592,001 S Penglis 1,272,600 - - - F de Vicente 356,500 69,500 N Fox K Jones 81,600 - Executives A Baum 1,459,465 A Stevens G Varma 500,000 200,000 Held at 1 January 2012 2012 Directors - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,000,000 - - - - - 333,333 - - - - - - - 500,000 (1,000,000) 200,000 - - 30,559,356 - - - - - - - - 2,592,001 1,272,600 426,000 n/a - 1,792,798 n/a 400,000 - - - - - Purchases Rights issue Sales Received on exercise of options Loan- funded share issue Loan funded share issue lapsed, forfeited or expired Granted as compensation Held at 31 December 2012 N Montarello 22,520,297 1,535,000 4,504,059 D Griffiths 2,160,000 S Penglis 1,272,600 - - F de Vicente - 356,500 432,001 - - N Fox 68,000 - 13,600 Executives A Baum A Stevens G Varma S McDonagh G Parry 751,910 100,000 149,222 - - 11,000 25,357 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1,000,000 - - - - 333,333 500,000 200,000 200,000 - - - - - - - - - - - - 29,559,356 - - - - 2,592,001 1,272,600 356,500 81,600 125,000 1,459,465 - - - - 500,000 200,000 n/a n/a n/a: Where personnel are no longer employed on the report date, the share movement only relates to the period up to their respective resignation dates. NOTES TO THE FINANCIAL STATEMENTS100 NOTES TO THE FINANCIAL STATEMENTS 31. RELATED PARTY DISCLOSURES (CONTINUED) The following shares are subject to escrow as at 31 December 2013 (refer to Note 22(b)(ii)): Executive A Baum 32. SUBSEQUENT EVENTS Held at 31 December 2013 Held at 31 December 2012 250,000 600,000 In December 2013 the Group entered into an agreement to sell its operations in Australia and New Zealand to FlexiGroup Limited for $43 million. The transaction was completed on 31 January 2014. The operations in Australia and New Zealand have been presented as discontinued operations in the financial statements for the year ended 31 December 2013. As a result of the transaction, the Group re-negotiated some of its security pledges and financing facilities. Details are set out in Note 17 and 20 respectively. On 31 January 2014 the Group declared a special dividend as set out in Note 22(c). ANNUAL REPORT 2013 101 NOTES TO THE FINANCIAL STATEMENTS 33. EARNINGS PER SHARE Profit/(loss) after tax attributable to ordinary shareholders (basic and diluted) Weighted average number of ordinary shares (basic) Weighted average number of ordinary shares (diluted) Earnings per share Basic earnings/(loss) per share (cents) Diluted earnings/(loss) per share (cents) Earnings per share from continuing operations: Basic earnings/(loss) per share (cents) Diluted earnings/(loss) per share (cents) Earnings per share from discontinued operations: Basic earnings/(loss) per share (cents) Diluted earnings/(loss) per share (cents) 2013 $000 2012 $000 Continuing operations Discon- tinued operations Continuing operations Restated Discontinued operations Restated Total Total 2,597 (288) 2,309 1,845 (3,286) (1,441) 2013 2012 Number Number 159,259,106 151,546,324 159,919,271 151,546,324 2013 2012 1.45 1.44 1.63 1.62 (0.95) (0.95) 1.22 1.22 (0.18) (0.18) (2.17) (2.17) At 31 December 2013 there were no options or loan-funded shares (2012: 6,366,667) that were excluded from the diluted weighted average number of ordinary shares calculation as their effect would have been anti-dilutive. 102 NOTES TO THE FINANCIAL STATEMENTS 34. PARENT ENTITY DISCLOSURES As at, and throughout, the financial year ending 31 December 2013, the parent entity of the Group was ThinkSmart Limited. Result of parent entity (Loss)/profit for the period Other comprehensive income Total comprehensive income for the period Financial position of parent entity at year end Current assets Total assets Current liabilities Total liabilities Total equity of the parent entity comprising of: Share capital Share-based payment reserve Retained earnings Total equity Parent entity contingencies 2013 $000 2012 $000 1,164 (186) - - 1,164 (186) 1,209 574 53,101 41,878 4,109 4,109 337 345 48,091 48,289 1,118 (217) 526 (7,282) 48,992 41,533 The parent entity has provided a commitment to continue its financial support of ThinkSmart Europe Ltd to enable the subsidiary to pay its debts as and when they fall due. The Company will not call for the repayment of its loan until ThinkSmart Europe Ltd is in a financial position to make such a payment without affecting its operational capabilities. The parent entity has issued an unlimited parental guarantee in favour of its UK clearing bank to guarantee the obligations of RentSmart Limited with respect to its Direct Debit and corporate credit card facilities. The Directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement. ANNUAL REPORT 2013 103 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF THINKSMART LIMITED Report on the financial report We have audited the accompanying financial report of ThinkSmart Limited (the company), which comprises the consolidated statement of financial position as at 31 December 2013, consolidated statement of profit and loss, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, notes 1 to 34 comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the Group comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In note 2, the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Satements, that the financial statements of the Group comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 104 INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF THINKSMART LIMITED Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. Auditor’s opinion In our opinion: (a) the financial report of ThinkSmart Limited is in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 31 December 2013 and performance for the year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001. (b) the financial report also complies with International Financial Reporting Standards as disclosed in note 2. Report on the remuneration report We have audited the Remuneration Report included in pages 19 to 30 of the directors’ report for the year ended 31 December 2013. 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 auditing standards. Auditor’s opinion In our opinion, the remuneration report of ThinkSmart Limited for the year ended 31 December 2013, complies with Section 300A of the Corporations Act 2001. KPMG   KPMG KPMG   Matthew  Beevers   Matthew Beevers Partner Perth Matthew  Beevers   18 February 2014 ANNUAL REPORT 2013 105                 SHAREHOLDER INFORMATION The shareholder information set out below was applicable as at 31 March 2014. Distribution of Equity Security 1 – 1,000 1,001 – 5,000 5,001 – 10,000 10,001 – 100,000 100,001 and over There were 172 holders of less than a marketable parcel of ordinary shares. Equity Security Holders Twenty largest quoted equity security holders The names of the 20 largest holders of quoted equity securities are listed below: Name Mainwest Pty Ltd National Nominees Limited Mr Natale Ronald Montarello JAWP Pty Ltd Mr Natale Ronald Montarello ThinkSmart LTI Pty Ltd Kemast Investments Pty Ltd J P Morgan Nominees Australia Limited Bond Street Custodians Limited Phoenix Properties International Pty Ltd HSBC Custody Nominees (Australia) Limited Longfellow Nominees Pty Ltd Darju Pty Ltd Wroxby Pty Ltd Mr Noel D’Souza Wulura Investments Pty Ltd Mr Michael McPherson Stewart & Mrs Judith Stewart Wulura Investments Pty Ltd JP Morgan Nominees Australia Limited Mr Natale Ronald Montarello & Mrs Kimberly Montarello Number of equity security holders Ordinary Shares Options 112 686 475 1,057 165 - - - - 3 Ordinary Shares Number held 11,691,278 9,717,337 9,563,606 5,800,000 5,767,072 4,999,259 4,752,000 4,289,656 3,658,329 3,600,000 3,306,519 3,303,167 2,107,239 1,838,754 1,719,170 1,636,118 1,601,139 1,566,948 1,552,308 1,535,000 Percentage of issued shares (%) 7.20 5.99 5.89 3.57 3.55 3.08 2.93 2.64 2.25 2.22 2.04 2.04 1.30 1.13 1.06 1.01 0.99 0.97 0.96 0.95 Total 84,004,899 51.76 106 SHAREHOLDER INFORMATION Unquoted Equity Securities Options issued under the ESOP to take up ordinary shares The Company has no other unquoted equity securities. Substantial Holders Substantial holders in the Company are set out below: Include those above 5% Mainwest Pty Ltd National Nominees Limited Mr Natale Ronald Montarello Voting Rights The voting rights attaching to equity securities are set out below: Number on issue Number of holders 1,050,000 3 Number of ordinary shares 11,691,278 9,717,337 9,563,606 Percentage % 7.20 5.99 5.89 (a) Ordinary shares On a show of hands, every holder of Ordinary Shares present in the meeting in person or by proxy is entitled to one vote, and upon a poll each Share is entitled to one vote. (b) Loan-Funded Ordinary Shares issued under the Long-Term Incentive Plan Shares under the plan rank equally in all respects with Ordinary Shares, including voting rights. (c) Options There are no voting rights attached to the options. NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 107 CORPORATE INFORMATION ABN 24 092 319 698 Directors N R Montarello (Executive Chairman) D Griffiths (Deputy Chairman) S Penglis F de Vicente K Jones (Chief Executive Officer) Company Secretary N Barker Registered and Principal Office 45 Ventnor Avenue West Perth WA 6005 Australia Phone: +61 8 9389 4403 Share Register Computershare Investor Services Pty Limited Level 2, 45 St Georges Terrace Perth WA 6000 Australia Phone: 1300 850 505 ThinkSmart Limited shares are listed on the Australian Securities Exchange (ASX code: TSM) Solicitors Herbert Smith Freehills 250 St Georges Terrace Perth WA 6000 Australia Auditors KPMG 235 St Georges Terrace Perth WA 6000 Australia Bankers Westpac Banking Corporation 109 St Georges Terrace Perth WA 6000 Australia 108 NOTES TO THE FINANCIAL STATEMENTS ANNUAL REPORT 2013 109 45 Ventnor Avenue West Perth WA 6005 Australia

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