Introduction

This section analyses the financial performance of the Group for the year ended 30 June 2019.

2.1: Expenses

2.1A: Employee benefits

Accounting Policy

Liabilities for ‘short-term employee benefits’ (as defined in AASB 119 Employee Benefits) and termination benefits due within 12 months of the end of reporting period are measured at their nominal amounts.

The nominal amount is calculated with regard to the rates expected to be paid on settlement of the liability.

Leave

The liability for employee benefits includes provision for annual leave and long service leave. No provision has been made for sick leave as all sick leave is non-vesting and the average sick leave taken in future years by employees of the Group is estimated to be less than the annual entitlement for sick leave.

When an employee has rendered service to the Group during the period, the Group recognises the undiscounted amount of short-term benefits expected to be paid in exchange for that service as a liability, calculated on the basis of employees’ remuneration at the estimated salary rates that will be applied at the time the leave is taken, including the Group’s employer superannuation contribution rates.

The liability for long service leave is recognised and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows.

Separation and redundancy

Provision is made for separation and redundancy benefit payments. The Group recognises a provision for termination when it has developed a detailed formal plan for the terminations and has informed those employees affected that it will carry out the terminations.

Superannuation

The Group’s staff are members of various defined contribution plans to which the Group must contribute in accordance with the Superannuation Guarantee (Administration) Act 1992 (Cth). The liability for superannuation recognised as at 30 June represents outstanding contributions for the final payroll periods of the year.

2.1B: Suppliers

Leasing commitments

The Group has entered into operating leases for office premises which expire between 28 February 2021 and 30 September 2022.

Commitments for minimum lease payments in relation to non-cancellable operating leases are payable as follows:

Accounting Policy

The determination of whether an arrangement is a lease, or contains a lease, is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset.

Group as lessee

Leases that do not transfer to the Group substantially all the risks and benefits incidental to ownership of the leased items are operating leases. Operating lease payments are recognised as an expense in the statement of comprehensive income on a straight-line basis over the lease term. Contingent rental payable is recognised as an expense in the period in which it is incurred.

2.1C: Concessional loan charges

Accounting Policy

The Group is required to record a non-cash concessional loan charge when it makes a loan at a discount to the prevailing market equivalent rates or terms. This non-cash charge is recorded as a liability at loan origination and offset to loans and advances when the loan is drawn down. The charge will unwind over the term of the underlying loan and be shown as concessional loan income. Over the full life of the loan, the impact on the reported profit or loss of the Group from the charge and income will net to $Nil.

Accounting Judgements and Estimates

For each investment, the Group will attempt to maximise its return and provide only the level of discount from market rates/terms that is required to ensure the project proceeds; however, this may involve the Group taking a position that is not generally offered by other market participants (e.g. longer term fixed-rate debt, subordinated debt, unsecured or mezzanine debt, lending to thinly capitalised entities or companies with less strong credit ratings, etc) and at rates that are below those that an equivalent market participant would demand if it were to participate in this market. The Group is required to record a concessional loan discount in relation to such loans and this requires extensive judgement in determining the ‘market equivalent rate’ so as to ascertain the extent of the implicit discount attached to the loan. This involves benchmarking to market rates for similar facilities and adjusting for specific differences in tenor, credit worthiness, security, etc. Further judgement is also required to be exercised in relation to the anticipated pattern under which loans will be drawn down, as well as the rate at which they are expected to amortise, so the extent of concessionality being offered in the transactions can be estimated.

2.1D: Impairment loss allowance on financial instruments

Accounting Judgements and Estimates

Impairment charge on loans and debt securities carried at Amortised Cost

The Group reviews its individually significant loans carried at Amortised Cost at each reporting date to assess whether an impairment loss should be recorded in the statement of comprehensive income. In particular, Management’s judgement is required in the estimation of the amount and timing of future cash flows when determining the impairment loss. These estimates are based on assumptions about a number of factors and actual results may differ, resulting in future changes to the allowance.

Loans and other debt securities at Amortised Cost that have been assessed individually (and found not to be impaired) are assessed together with all individually insignificant loans and advances in groups of assets with similar risk characteristics. The calculation of the impairment provision under AASB 9 includes judgements about:

• Shadow Credit Ratings (SCR) and Forward-looking macro-economic indicators, from which the Probability of Default (PD) is derived;
• Loss given default (LGD);
• Future cash flows, used to determine Exposure at Default (EAD);
• Performance rating and indicators of a Significant Increase in Credit Risk (SICR), which determines whether an asset is moved to provisioning Stage 2;
• Portfolio segmentation; and
• Scenarios and their relative weighting.

The Group has selected a combination of Performance Rating (PR) and change in Shadow Credit Rating (SCR), beyond predetermined thresholds, as indicators of SICR.

Loans and other debt securities with the following performance ratings are deemed to have a SICR for the purpose of calculating AASB 9 statistical impairment provision:

• PR3 or worse for loans with current SCR BB+ and below
• PR4 or worse for loans with current SCR AAA to BBB–

The current SCR of each debt instrument is compared with the SCR at origination and the following notch downgrades are taken as indicators of SICR:

• Three notch downgrade in loans with origination SCRs of AAA to A+
• Two notch downgrade in loans with origination SCRs of A to BBB+
• One notch downgrade in loans with origination SCR of BBB and below

The Group’s impairment provisioning methodology is discussed further in Note 3.1.

2.1E: Fair value losses on financial instruments

Accounting Judgements and Estimates

Fair value losses on loans and financial investments carried at FVTPL

Loans and Financial Investments carried at FVTPL are individually revalued (marked-to-market) each period-end with any decrease in value recorded as a Fair value loss.

Further information on the valuation methodology can be found at Note 2.2C: Fair value gains on Financial Instruments.

2.1F: Provision for irrevocable loan commitments

Accounting Judgements and Estimates

Provision for irrevocable loan commitments

In prior periods, the Group calculated a loan loss provision for the undrawn component of loans that were not yet fully drawn and where future drawdowns were unconditional. In the current year this forms part of the Impairment loss allowance calculation under AASB 9.

2.2: Own-Source Revenue and Gains

2.2A: Interest and loan fee revenue

Accounting Policy

Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured.

Interest revenue

Interest revenue is recognised as interest accrues using the effective interest method as set out in AASB 9 Financial Instruments. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Deferred income received in cash at the start of a loan is brought to income on an effective yield basis over the life of the loan by reducing the carrying amount. Interest revenue on assets held at FVTPL is calculated with reference to the amortised cost of the asset, ignoring the impact of fair value gains and losses on the asset’s carrying value.

Establishment fees

Establishment fees relating to the successful origination or settlement of a loan are deferred and recognised as an adjustment to the effective interest rate on the loan.

Commitment fees

Commitment fees are recognised on an accrual basis over the period during which the credit is made available to the customer but is not drawn down.

2.2B: Distributions from trusts and equity investments

Accounting Policy

Distributions from trusts and equity investments are recognised as revenue upon the Group becoming irrevocably entitled to the relevant distributions.

2.2C: Fair value gains on financial instruments

Accounting Judgements and Estimates

Loans, Other Debt Securities (comprising Bank and other bonds) and Equities and Units in Trusts carried at FVTPL are individually revalued to their fair value each period-end with any increase in value recorded as a Fair value gain.

In revaluing these assets, the Group uses publicly-quoted prices (for example from Bloomberg in the case of Bank and other publicly traded bonds) at the period end wherever possible.

Where quoted prices are not available for a particular asset the Group adopts an internally generated valuation. Judgement is applied in selecting some of the variables applied in arriving at a valuation.

For non-publicly traded bonds and loans, the valuation is determined by applying the most appropriate market interest rate curve to the predicted future cash flows from the instrument.

For unquoted equities valuations are undertaken consistent with the APRA Prudential Practice Guide SPG 531 – Valuation and the International Private Equity and Venture Capital Valuation Guidelines recommended by the Australian Investment Council (formerly Australian Private Equity and Venture Capital (AVCAL)).

2.2D: Profit from sale of assets

Accounting Policy

Upon adoption of AASB 9 on 1 July 2018, financial assets carried at FVTPL are measured at fair value with unrealised gains or losses recognised as fair value gains/(losses) on financial instruments until the asset is derecognised, at which time the cumulative gain or loss is recognised as a profit/(loss) on disposal of assets.

2.3: Gains/(losses) included in other comprehensive income and reserves

2.3A: Gains on available-for-sale financial assets

Accounting Policy

Prior to the adoption of AASB 9 on 1 July 2018, after initial measurement, AFS financial assets were subsequently measured at fair value with unrealised gains or losses recognised as other comprehensive income and credited in the reserves until the investment was derecognised, at which time the cumulative gain or loss was recognised in other gains in the statement of comprehensive income, or the investment was determined to be impaired when the cumulative loss was reclassified from the reserves to the statement of comprehensive income as a write-down and impairment of assets.

2.3B: Reconciliation of unrealised gains/(losses) in reserves at 30 June 2019