NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED
ABN 96 087 651 992
ANNUAL FINANCIAL REPORT
FOR THE YEAR ENDED 30 JUNE 2018 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED
ABN 96 087 651 992
ANNUAL FINANCIAL REPORT
FOR THE YEAR ENDED 30 JUNE 2018
CONTENTS
Directors' report 1
Auditor's independence declaration 6
Income statements 7
Statements of comprehensive income 8
Balance sheets 9
Statements of changes in equity 10
Statements of cash flows 11
Notes to the financial statements 12
Directors' declaration 53
Independent audit report to the members 54
The annual financial report was authorised for issue by the Directors on 21 September 2018. Newcastle Permanent Building Society Limited has the power to amend and reissue the annual financial report. NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED DIRECTORS' REPORT 30 JUNE 2018
The Directors present their report on the consolidated entity consisting of Newcastle Permanent Building Society Limited ("Newcastle Permanent") and the entities it controlled at the end of, or during, the year ended 30 June 2018.
DIRECTORS
The following persons were Directors of Newcastle Permanent during the financial year and, unless otherwise indicated, up to the date of this report:
J.R. Eather R.E. Griffiths M.A. Haseltine Appointed 8 March 2018 J.M. Leslie S.J. Martin-Williams P.J. Neat D.E. Shanley M.D. Slater Passed away 11 July 2017
INFORMATION ON DIRECTORS
Jeffrey R. Eather BCom, CPA, FGIA, MAICD Chair Board Member since May 2013 Chair of the Corporate Governance & Nominations Committee. Member of the Audit and Risk Committees
Jeff is a qualified accountant with strong governance credentials and hands-on business experience, having overseen some of Newcastle’s leading corporations including in his former role as CEO of NBN Television. He is also the Chair of Newcastle Friendly Society Ltd, the Managing Director of The Callaghan Institute and was formerly Chairman of the University of Newcastle Foundation and Deputy Chairman of Hunter Water Corporation. Jeff holds a Bachelor of Commerce from the University of Newcastle and is a Certified Practising Accountant, a Fellow of the Governance Institute of Australia and a Member of the Australian Institute of Company Directors.
Ross E. Griffiths Dip Bus Studies (Acc), MBA, FCA (Aust), GAICD Board Member since January 2015 Chair of the Risk Committee from 1 December 2017. Member of the Audit and Corporate Governance & Nominations Committees
Ross is a Chartered Accountant with extensive retail banking, finance and risk management experience. Ross had 28 years’ experience at one of Australia’s major banks before retiring in 2014. His appointments at that bank included Group Chief Credit Officer and Head of Credit Management. Ross is a Director of Targus Australia Pty Ltd and a former Director of Mirabela Nickel Limited and Commonwealth Managed Investments Limited, which was the Responsible Entity for two ASX listed Property Trusts. He holds a Diploma of Business Studies (Accounting) and Master of Business Administration. Ross is also a Fellow of Chartered Accountants Australia and New Zealand and a Graduate of the Australian Institute of Company Directors.
Margaret A. Haseltine BA, FAICD Board Member since March 2018 Member of the Audit and Risk Committees
Margie forged a successful executive career with Mars Incorporated and led the company as its CEO for 5 years. She is an experienced and proven leader with more than 14 years’ experience as a Director on boards across a range of industries including education, retail, hospitality and freight. Margie is a Fellow of the Australian Institute of Company Directors, completed the General Manager School program tailored for Mars at Harvard University and holds a number of other leadership qualifications. She has expertise in change management, information technology, supply chain management and strategic planning and procurement.
Jennifer M. Leslie BCom, CFP, FCA (Aust) - FPS, MAICD, TFASFA Board Member since June 2015 Chair of the Audit Committee. Member of the Corporate Governance & Nominations and Remuneration & People Committees
Jennifer is a Fellow of Chartered Accountants Australia and New Zealand, Certified Financial Planner, a Member of the Australian Institute of Company Directors and a Trustee Fellow of the Association of Superannuation Funds of Australia. She has a well-established career forged in the Hunter Region, including over 13 years as Managing Director of Pitcher Partners Newcastle and Hunter Wealth Management. Jennifer holds a Bachelor of Commerce (Accounting) and Diploma of Financial Planning. She is also a Director of Newcastle Permanent Community Foundation Company Ltd, which is the Trustee of Newcastle Permanent Charitable Foundation, Newcastle Friendly Society Ltd, the Hillross Advisors Association and a member of the University of Newcastle's Alumni Advisory Council. She is a former Director of Mai Wel Ltd and a former Advisory Board Member of the Maitland- Newcastle Catholic Development Fund.
1 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED DIRECTORS' REPORT (continued) 30 JUNE 2018
INFORMATION ON DIRECTORS (continued)
Samantha J. Martin-Williams B.Bus, M.HR&IR, M.CommLaw, FAICD, GIA (Cert) Board Member since February 2012 Chair of the Remuneration & People Committee from 1 January 2018. Member of the Corporate Governance & Nominations and Risk Committees
Samantha has had a career with over 25 years of diverse business experience in complex and highly regulated industries including financial services, education, health, resources and logistics. Samantha is a former CEO with expertise in strategic transformation, commercial change and business growth. She has degrees in Business, Industrial Relations and Commercial Law, is a Fellow of the Australian Institute of Company Directors and member of the Chartered Institute of Transport and Logistics. She currently serves on the Salvation Army Advisory Board, and is a conjoint lecturer and member of the MBA Advisory Board at the University of Newcastle Business School.
Philip J. Neat MBA, MAICD, FAMI, CPM, GIA (Cert) Board Member since July 2003 Member of the Remuneration & People and Risk Committees
Phil was an adviser for over 30 years to major Australian and international corporations involved in the infrastructure, property development and resource/mining sectors. He had a background in journalism before establishing his own consultancy and group of associated companies. Phil is also the Chair of the Board of Newcastle Permanent Community Foundation Company Ltd, which is the Trustee of Newcastle Permanent Charitable Foundation. He is a former Chair of the Risk Management and Remuneration Committees. He holds a Master of Business Administration, is a Member of the Australian Institute of Company Directors and the Governance Institute of Australia and a Fellow of the Australian Marketing Institute. Phil was a former Chairman of the Hunter Olympic Committee and was awarded the NSW Olympic Council’s Order of Merit in 2010.
David E. Shanley BCom, CFP, GAICD, GIA (Cert) Board Member since July 2003 Member of the Audit and Remuneration & People Committees
David has more than 35 years’ experience in the finance sector with a background in the building society and credit union industries. For over 25 years David has been an adviser to personal and corporate clients on technical financial planning issues. He is a Certified Financial Planner (CFP), a member of the Financial Planning Association and a Graduate of the Australian Institute of Company Directors. David holds a Bachelor of Commerce and Certificate in Governance and Risk Management from the Governance Institute of Australia. David is also a Director of Newcastle Friendly Society Ltd and Newcastle Permanent Community Foundation Company Ltd, which is the Trustee of Newcastle Permanent Charitable Foundation.
The Late MICHAEL D. SLATER BCom, MBA, FCPA, FCIS, FGIA, FAICD, FTIA, FAIM, FCIM Board Member from October 2007 until 11 July 2017
Michael was a Director until passing away in July 2017. Michael was also a former Chairman of Newcastle Permanent Building Society Ltd until October 2016 and a former Chairman and Director of Newcastle Permanent Community Foundation Company Ltd and Newcastle Friendly Society Ltd, as well as a former Chairman of Regional Development Australia Hunter and Director of the Hunter Westpac Rescue Helicopter Service Ltd.
Michael was a qualified accountant and had financial and management experience with expertise in financial and management analysis, commercial and organisational reviews and audits, due diligence and corporate governance.
COMPANY SECRETARIES
The following persons were Company Secretaries of Newcastle Permanent as at the end of the financial year:
Christopher Cockburn BEc, LLB, Grad Dip Leg Prac, Grad Dip ACG, AGIA, ACIS
Christopher Cockburn is the Company Secretary & General Counsel of Newcastle Permanent and was initially appointed as a Company Secretary on 16 December 2016. He is a Chartered Secretary and a qualified lawyer. Chris holds Economics and Law degrees, a Graduate Diploma in Applied Corporate Governance and is admitted to practice law in the Supreme Court of NSW and the High Court of Australia. He has practised law for 12 years in private practice and corporate legal roles and is a member of the Law Society of NSW and an Associate of the Governance Institute of Australia and the Institute of Chartered Secretaries and Administrators. Prior to his appointment as Company Secretary, Chris held the position of Assistant Company Secretary & Deputy General Counsel for Newcastle Permanent.
Melissa Robinson BSc, LLB, Grad Dip Leg Prac, Grad Dip CSA, AGIA, ACIS
Melissa Robinson was appointed as the Assistant Company Secretary of Newcastle Permanent on 14 June 2018. She is a Chartered Secretary and a qualified lawyer. Melissa holds Science and Law degrees, a Graduate Diploma in Corporate Governance, is admitted to practice law in the Supreme Court of NSW and is a notary public. She has practised law for more than 10 years in private practice and in-house legal roles and is a member of the Law Society of NSW and an Associate of the Governance Institute of Australia and the Institute of Chartered Secretaries and Administrators. Prior to her appointment with Newcastle Permanent, Melissa held similar positions with listed financial services entities.
2 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED DIRECTORS' REPORT (continued) 30 JUNE 2018
MEETINGS OF DIRECTORS
The numbers of meetings of Newcastle Permanent's Board of Directors and of each Board committee held during the year ended 30 June 2018 and the numbers of meetings attended by each Director were:
Committee Attendance Corporate 1 Board Governance Remuneration Audit1 Risk and & People Nominations No. of No. No. of No. No. of No. No. of No. No. of No. Meetings Attended Meetings Attended Meetings Attended Meetings Attended Meetings Attended Jeffrey Eather 13 13 8 8 4 4 4 4 ~ ~ Ross Griffiths3 13 13 8 8 4 4 2 2 ~ ~ Margaret Haseltine2,4 4 3 2 2 2 1 ~ ~ ~ ~ Jennifer Leslie4 13 13 8 8 ~ ~ 4 3 4 3 Samantha Martin-Williams3,4 13 12 ~ ~ 4 3 2 1 4 4 Philip Neat3,4 13 11 ~ ~ 4 4 2 2 4 2 David Shanley3,4 13 13 8 8 ~ ~ 2 2 4 3
Notes: 1. Michael Slater was a Director and member of the Audit Committee until his passing on 11 July 2017. There were no Board or Committee meetings held in the period from 1 to 11 July 2017. 2. Margaret Haseltine was appointed as a Director and as a member of the Audit and Risk Committees on 8 March 2018. 3. On 1 January 2018, Ross Griffiths and Samantha Martin-Williams were appointed to the Corporate Governance & Nominations Committee and Philip Neat and David Shanley stood down from that Committee. 4. Leave of absence may be granted by the Board in advance to excuse a Director from attending a particular meeting.
- Number of meetings noted is the number of meetings of the Board or relevant Committee that were held while that Director was on the Board or relevant Committee. - In addition to the formal Board meetings noted, two Board strategy workshops were held on 12 December 2017 and 15 March 2018 and the Audit Committee held two planning workshops on 23 May and 27 June 2018; and one circulating resolution was distributed to and signed by the Board on 25 August 2017.
OFFICERS
The following persons were Senior Executives of Newcastle Permanent during the financial year and up to the date of this report and are, therefore, considered to also be officers of the company:
T.B. Millett C. Cockburn Commenced as a Senior Executive on 5 February 2018 D.J. Harney S.O. Hassall F.E. Laczina M.D. Leach L.N.C. Rees M.B. Williams A.M. Yost
OBJECTIVES
The mission of Newcastle Permanent is to be here for the good of its three key stakeholders, namely its customers, people and communities, and ensure that it has a sustainable business in perpetuity. The vision of Newcastle Permanent is to be the leading retail banking business in Australia from the customers’ perspective. The current strategies in place to achieve these short and long term objectives include:
(i) maintaining a strong retail banking Customer Value Proposition; (ii) continuing to be recognised as a leading retail banking organisation in Australia; (iii) effectively managing risk and compliance requirements; and (iv) continuing to contribute meaningfully to the community.
Newcastle Permanent measures its performance against a balanced scorecard of key performance indicators (KPIs) across each of the customer, people, community and long term business health focus areas. The main KPIs are:
• customer: customer satisfaction levels, overall customer value and the number of products per customer; • people: employee engagement; • community: brand consideration; • long term business health: capital position, net profit after tax and the cost to income ratio.
3 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED DIRECTORS' REPORT (continued) 30 JUNE 2018
PRINCIPAL ACTIVITIES
During the year the principal continuing activities of the consolidated entity consisted of the provision of a range of financial products and services to members and the operation of a charitable trust. There has been no significant change in the nature of these activities during the year ended 30 June 2018.
The key focus areas for Newcastle Permanent during the financial year were sustainably growing the home loan and deposit portfolios and continuing to invest in a number of major projects and initiatives to enhance the business and support its current and future performance. This included projects and initiatives that:
• continued the development of Newcastle Permanent’s digital sales and service capability to strengthen the competitiveness of the customer value proposition; • supported the effective management of the retail banking fundamentals, risk and compliance requirements; • involved the launch of a strategic People and Culture Roadmap to support the growth and development of Newcastle Permanent’s employees; and • invested more than $2 million in community programs and events to support Newcastle Permanent’s communities.
REVIEW OF OPERATIONS
The consolidated entity has delivered a solid and consistent performance for the year ended 30 June 2018 with net profit after tax attributable to members of Newcastle Permanent being $43,768,000 (2017: $38,948,000), an increase of 12.4%.
Total equity of the consolidated entity increased from $909,071,000 at 30 June 2017 to $954,293,000 at 30 June 2018 (an increase of 5.0%).
SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS
There were no significant changes in the state of affairs of the consolidated entity during the financial year.
LIABILITY OF MEMBERS
Newcastle Permanent is a company limited by shares and guarantee, however there are no shares currently on issue. Under the Constitution, the liability of each person who became a member of Newcastle Permanent after 29 September 2000 is limited to an obligation to contribute a maximum amount of $1 if Newcastle Permanent is wound up while they are a member or within one year after they cease to be a member. The member liability provision of the Constitution does not apply to those persons who became members of Newcastle Permanent prior to 29 September 2000. The total amount that the members of Newcastle Permanent are liable to contribute if it is wound up is $194,272.
DIVIDENDS OR DISTRIBUTIONS
Newcastle Permanent is a mutual company operated for the benefit of its members. It does not pay dividends or distributions to its members, but reinvests its profits for the future benefit of its members.
MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR
No other matters or circumstances have arisen since 30 June 2018 that have significantly affected, or may significantly affect: i) the consolidated entity's operations in future financial years; ii) the results of those operations in future financial years; or iii) the consolidated entity's state of affairs in future financial years.
LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS
There are no likely developments that would be expected to have a material impact on the operations of the consolidated entity as at the date of this report. The consolidated entity expects to continue operating profitably during the next financial year whilst continuing to undertake its principal activities.
ENVIRONMENTAL REGULATION
The consolidated entity has assessed whether there are any particular or significant environmental regulations which apply to it and has determined that there are none.
DIRECTORS' AND OFFICERS' INDEMNITIES
All past and present Directors, Company Secretaries and Senior Executives of Newcastle Permanent and its wholly owned subsidaries are indemnified under Newcastle Permanent's Constitution, on a full indemnity basis and to the extent permitted by law, against:
(i) every liability incurred by them in their respective capacities (except a liability for legal costs); and (ii) all legal costs incurred by them in defending or resisting a proceedings in which the person becomes involved because of that capacity.
Newcastle Permanent has also executed:
(i) Deeds of Indemnity with each current Director and a number of former Directors; and (ii) employment agreements with the Company Secretary, Chief Risk Officer, Assistant Company Secretary and Newcastle Permanent's in-house lawyers, that provide them with indemnification in substantially the same terms to that provided in the Constitution.
In the case of the Directors, the indemnification extends to any liabilities incurred by them as a result of being a Director of another company in the consolidated group of Newcastle Permanent.
4
NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED INCOME STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017* 2018 2017* Note $'000 $'000 $'000 $'000
Interest revenue 2.1(a) 418,919 405,222 381,232 371,210 Interest expense 2.1(a) (228,422) (228,145) (189,555) (192,627)
Net interest income 190,497 177,077 191,677 178,583
Fee and commission revenue 2.1(b) 16,541 18,753 16,430 18,715 Fee and commission expense (7,079) (6,440) (7,079) (6,440)
Net fee and commission income 9,462 12,313 9,351 12,275
Other operating income 2.1(c) 3,895 3,243 4,347 3,243
Impairment losses on loans and advances to members 3.2(a) (487) (725) (487) (725) Depreciation and amortisation expense 2.2(a) (8,228) (7,649) (8,228) (7,649) Personnel related expenses 2.2(b) (85,654) (84,870) (85,670) (84,893) Operating expenses 2.2(c) (46,644) (43,778) (48,949) (45,488)
Profit before income tax 62,841 55,611 62,041 55,346
Income tax expense 2.3(a) (19,073) (16,663) (19,029) (16,671)
Profit for the year 43,768 38,948 43,012 38,675
Attributable to:
Non-controlling interests - - (756) (273)
Members of Newcastle Permanent Building Society Limited 43,768 38,948 43,768 38,948
* The comparative statement has been restated. Refer to Note 7.1(i) for further details.
The above income statements should be read in conjunction with the accompanying notes. 7 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017 2018 2017 Note $'000 $'000 $'000 $'000
Profit for the year 43,768 38,948 43,012 38,675
Other comprehensive income, net of tax
Items that may be reclassified to profit or loss: Changes in the fair value of cash flow hedges 6.8(b)(ii) (1,664) (7,466) (1,664) (7,466) Changes in the fair value of available-for-sale financial assets 6.10(b)(i) - - 343 -
Items that will not be reclassified to profit or loss: Changes in the fair value of property 6.8(b)(iii) 3,531 - 3,531 -
Other comprehensive income for the year, net of tax 1,867 (7,466) 2,210 (7,466)
Total comprehensive income for the year 45,635 31,482 45,222 31,209
Attributable to:
Non-controlling interests - - (413) (273)
Members of Newcastle Permanent Building Society Limited 45,635 31,482 45,635 31,482
The above statements of comprehensive income should be read in conjunction with the accompanying notes. 8 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED BALANCE SHEETS AS AT 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017* 2018 2017* Note $'000 $'000 $'000 $'000
Assets
Cash and cash equivalents 4.1 532,353 731,650 636,473 856,663 Prepayments and other receivables 6.4 24,490 27,470 5,618 6,898 Derivative financial instruments 4.3 214 48,602 214 48,602 Held-to-maturity investments 4.2 2,261,424 2,385,182 915,023 1,203,746 Loans and advances to members 3.1 9,066,123 8,703,912 9,066,123 8,703,912 Available-for-sale financial assets 4.2 - - 23,080 - Other financial assets 4.2 294 294 294 294 Net deferred tax assets 2.3 6,521 6,723 6,545 6,749 Intangible assets 6.1 13,026 9,259 13,026 9,259 Property, plant and equipment 6.2 47,955 45,095 47,955 45,095 Investment properties 6.3 1,749 2,061 1,749 2,061 Total assets 11,954,149 11,960,248 10,716,100 10,883,279
Liabilities
Payables 6.5 21,129 18,333 17,417 12,737 Derivative financial instruments 4.3 1,546 3,366 1,546 3,366 Deposits 4.4 8,248,096 8,179,488 8,242,302 8,164,204 Life investment contract liabilities 6.6 - - 672 652 Life insurance contract liabilities 6.6 - - 15,785 17,931 Borrowings 4.5 2,743,735 2,865,489 1,469,201 1,760,725 Current tax liabilities 1,615 1,118 1,619 1,256 Provisions 6.7 13,261 13,322 13,265 13,337 Total liabilities 11,029,382 11,081,116 9,761,807 9,974,208
Net assets 924,767 879,132 954,293 909,071
Equity
Reserves 6.8 32,313 30,584 32,313 30,584 Retained profits 6.9 892,454 848,548 892,454 848,548 Parent entity interest 924,767 879,132 924,767 879,132
Non-controlling interests 6.10 - - 29,526 29,939
Total equity 924,767 879,132 954,293 909,071
* The comparative statement has been restated. Refer to Note 7.1(i) for further details.
The above balance sheets should be read in conjunction with the accompanying notes. 9 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED STATEMENTS OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2018
Attributable to members of Newcastle Permanent Building Society Limited Non- Retained controlling Reserves earnings Total interests Total equity Consolidated entity Note $'000 $'000 $'000 $'000 $'000
Balance at 1 July 2017 30,584 848,548 879,132 29,939 909,071
Profit for the year 6.9 - 43,768 43,768 (756) 43,012 Other comprehensive income 1,867 - 1,867 343 2,210
Total comprehensive income for the year 1,867 43,768 45,635 (413) 45,222
Transfers between reserves and retained earnings 6.8(b) (138) 138 - - -
Balance at 30 June 2018 32,313 892,454 924,767 29,526 954,293
Balance at 1 July 2016 37,283 809,906 847,189 30,212 877,401
Profit for the year 6.9 - 38,948 38,948 (273) 38,675 Other comprehensive income (7,466) - (7,466) - (7,466)
Total comprehensive income for the year (7,466) 38,948 31,482 (273) 31,209
Transfers between reserves and retained earnings 6.8(b) 767 (767) - - - Deferred tax adjustment on disposal of assets 6.9 - 461 461 - 461
Balance at 30 June 2017 30,584 848,548 879,132 29,939 909,071
Retained Reserves earnings Total equity Parent entity Note $'000 $'000 $'000
Balance at 1 July 2017 30,584 848,548 879,132
Profit for the year 6.9 - 43,768 43,768 Other comprehensive income 1,867 - 1,867
Total comprehensive income for the year 1,867 43,768 45,635
Transfers between reserves and retained earnings 6.8(b) (138) 138 - Deferred tax adjustment on disposal of assets 6.9 - - -
Balance at 30 June 2018 32,313 892,454 924,767
Balance at 1 July 2016 37,283 809,906 847,189
Profit for the year 6.9 - 38,948 38,948 Other comprehensive income (7,466) - (7,466)
Total comprehensive income for the year (7,466) 38,948 31,482
Transfers between reserves and retained earnings 6.8(b) 767 (767) - Deferred tax adjustment on disposal of assets 6.9 - 461 461
Balance at 30 June 2017 30,584 848,548 879,132
The above statements of changes in equity should be read in conjunction with the accompanying notes. 10 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017* 2018 2017* Note $'000 $'000 $'000 $'000 Inflows Inflows Inflows Inflows (Outflows) (Outflows) (Outflows) (Outflows)
Cash flows from operating activities Interest received 420,623 406,092 382,885 372,110 Other income 3,724 1,862 4,028 1,862 Fees and commissions received 20,245 21,527 20,133 21,489 Interest paid (228,582) (229,562) (190,085) (190,654) Donations paid - - (1,459) (1,460) Payments to suppliers and employees (inclusive of goods and services tax) (136,064) (129,071) (136,449) (135,114) Income tax paid (19,175) (17,904) (19,258) (18,125)
(Increase)/decrease in operating assets: Net movement in held-to-maturity investments 123,758 (352,450) 288,847 (254,281) Net movement in loans and advances to members (361,038) (656,544) (362,699) (654,626)
Increase/(decrease) in operating liabilities: Life insurance contract contribution receipts - - 25 67 Life insurance contract withdrawal payments - - (2,178) (2,185) Life investment contract contribution receipts - - 37 40 Life investment contract withdrawal payments - - (19) (120) Net increase in deposits 68,608 870,998 78,097 866,340 Net cash inflow/(outflow) from operating activities 4.1(b) (107,901) (85,052) 61,905 5,343
Cash flows from investing activities Payments on unwinding of interest rate swaps (1,123) (1,740) (1,123) (1,740) Net movement in available-for-sale investments - - (22,712) - Payments for intangible assets (6,835) (3,190) (6,835) (3,190) Payments for property, plant and equipment (4,764) (5,884) (4,764) (5,884) Proceeds from disposal of intangibles 108 - 108 - Proceeds from sale of investment property 401 - 401 - Proceeds from sale of property, plant and equipment 1,289 4,543 1,289 4,543 Net cash outflow from investing activities (10,924) (6,271) (33,636) (6,271)
Cash flows from financing activities Net increase/(decrease) in borrowings (80,472) 314,307 (248,449) 223,566 Net cash inflow/(outflow) from financing activities (80,472) 314,307 (248,449) 223,566
Net increase/(decrease) in cash and cash equivalents (199,297) 222,984 (220,180) 222,638
Cash and cash equivalents at the beginning of financial year 731,650 508,666 856,653 634,015
Cash and cash equivalents at the end of financial year 4.1 532,353 731,650 636,473 856,653
* The comparative statement has been restated. Refer to Note 7.1(i) for further details.
The above statements of cash flows should be read in conjunction with the accompanying notes. 11 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
1. Basis of preparation 1.1 Corporate information……………………………………………………………………………………………… 13 1.2 Basis of accounting………………………………………………………………………………………………… 13 1.3 Significant accounting estimates and judgements……………………………………………………………… 13
2. Financial performance 2.1 Income…………………………………………………………………………………………………………………13 2.2 Expenses………………………………………………………………………………………………………………14 2.3 Income tax expense…………………………………………………………………………………………………15
3. Loans and advances to members 3.1 Classification…………………………………………………………………………………………………………17 3.2 Provision for impairment…………………………………………………………………………………………… 17 3.3 Loans to related parties and key management personnel………………………………………………………17 3.4 Accounting policies……………………………………………………………………………………………………18
4. Funding and liquidity 4.1 Cash and cash equivalents…………...…………………….……………..……………………………………… 18 4.2 Financial assets…………...…………………….……………..…………………………………………………… 19 4.3 Derivative financial instruments.…………………….……………..………………………………………………21 4.4 Deposits…...…………………….……………..………………………………………………………………...……22 4.5 Borrowings…...…………………….……………..………………………………………………………………...…22 4.6 Securitisation..…………………….……………..………………………………………………………………...…22
5. Financial risk management 5.1 Risk management framework…………….……………..…………………………………………………………23 5.2 Credit risk…………….……………..………………………………………………………………………………. 24 5.3 Liquidity risk…………….……………..………………………………………………………………………………26 5.4 Market risk - interest rate risk…………….……………..………………………………………………….………29 5.5 Market risk - foreign exchange risk…………….……………..………………………………………………….…31 5.6 Capital management…………….……………..………………………………………………….…………………32 5.7 Life insurance risk…………….……………..………………………………………………….……………………32 5.8 Fair value measurements…………….……………..………………………………………………….……………33 5.9 Maturity analysis…………….……………..………………………………………………….………………………34
6. Other notes 6.1 Intangible assets…………….……………..…………………………………………………………………………36 6.2 Property, plant and equipment…………….……………..…………………………………………………………36 6.3 Investment properties…………….……………..……………………………………………………………………38 6.4 Prepayments and other receivables…………….……………..……………………………………………………39 6.5 Payables…...…………….……………..…………………………………………………………………………… 39 6.6 Life insurance and life investment contract liabilities…...…………….……………..……………………………40 6.7 Provisions………...…...…………….……………..…………………………………………………………………42 6.8 Reserves………...…...…………….……………..………………………………………………………………… 43 6.9 Retained profits attributable to members of Newcastle Permanent……………………………………………43 6.10 Non-controlling interests……….………………………………………………………………………………….44 6.11 Key management personnel disclosures……………………………………………..……………………...… 44 6.12 Remuneration of auditors……………………………………………..……………………………………………45 6.13 Interests in other entities……………………………………………..……………………………………………45 6.14 Related party transactions……………………………………………..………………………………………… 46 6.15 Matters subsequent to end of financial year……………..…………………………………………………..… 48 6.16 Member guarantee……………..………………………………………………………………...…………………48
7. Accounting policies and new accounting standards 7.1 Accounting policies…………….……………..………………………………………………………………………48 7.2 New accounting standards and interpretations.………………………………………………………………… 50
12 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
1. Basis of preparation
1.1 Corporate information
Newcastle Permanent Building Society Limited is a mutual organisation, incorporated and domiciled in Australia. Its registered office and principal place of business is:
307 King Street, Newcastle West, NSW, 2302
Newcastle Permanent is a for-profit entity for the purposes of preparing the financial statements. The financial statements cover both Newcastle Permanent Building Society Limited ("Newcastle Permanent") as an individual entity and the consolidated entity consisting of Newcastle Permanent and its controlled entities ("consolidated entity"). Newcastle Permanent is a public company limited by shares and guarantee.
The financial statements were authorised for issue in accordance with a resolution of the Directors on 21 September 2018.
1.2 Basis of accounting
These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (AASB) and the Corporations Act 2001 .
These financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial assets, certain classes of property, plant and equipment, derivative financial instruments and life insurance and life investment contracts which have been measured at fair value.
The consolidated financial statements of the Newcastle Permanent group and the separate financial statements of Newcastle Permanent also comply with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
1.3 Significant accounting judgements and estimates
The preparation of financial statements in conformity with Australian Accounting Standards requires the use of certain critical accounting estimates. Management is also required to exercise its judgement in the process of applying the consolidated entity’s accounting policies.
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.
(a) Critical accounting estimates and assumptions
The consolidated entity 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 amounts of assets and liabilities within the next financial year are discussed below.
(b) Critical judgements in applying the entity's accounting policies
The most significant use of judgements has been applied to the following areas. Refer to the respective notes for additional details.
Reference
Provision for impairment Note 3.2 Held-to-maturity investments Note 4.2(a) Securitisation Note 4.6 Life investment and life insurance contract liabilities Note 6.6(f)
Parent Entity Consolidated Entity 2018 2017* 2018 2017* $'000 $'000 $'000 $'000
2. Financial performance
2.1 Income
(a) Net interest income
Interest revenue: Loans and advances to members 342,616 334,190 344,156 335,406 Cash and liquid assets 76,303 71,032 37,076 35,804 418,919 405,222 381,232 371,210 Interest expense: Deposits 141,920 141,555 141,796 141,415 Borrowings 86,502 86,590 47,759 51,212 228,422 228,145 189,555 192,627
Total net interest income 190,497 177,077 191,677 178,583
Cash and liquid assets include cash and cash equivalents, held-to-maturity and available-for-sale investments as detailed in Note 4.2.
* The comparative statement has been restated. Refer to Note 7.1(i) for further details. 13 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017* 2018 2017* $'000 $'000 $'000 $'000
2.1 Income (continued)
(b) Fee and commission income
Fee revenue 13,996 15,734 13,885 15,696 Commission revenue 2,462 2,918 2,462 2,918 Government subsidies 83 101 83 101 16,541 18,753 16,430 18,715
* The comparative statement has been restated. Refer to Note 7.1(i) for further details.
(c) Other operating income
Net gain on disposal of property, plant and equipment 318 1,211 318 1,211 Net gain on disposal of investments 21 - 171 - Rental income 174 302 174 302 Bad debts recovered 266 230 266 230 Insurance recoveries 756 30 756 30 Partnership income 1,941 1,062 1,941 1,062 Other income 419 408 721 408 3,895 3,243 4,347 3,243
* The comparative statement has been restated. Refer to Note 7.1(i) for further details.
(d) Recognition and measurement
Interest revenue and expense Interest revenue and expense are recognised in the income statement for all instruments measured at amortised cost using the effective interest rate method. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. When calculating the effective interest rate, the consolidated entity estimates cash flows considering all fees paid or received between parties, transaction costs, premiums incurred or discounts received in relation to the contract that are an integral part of the effective interest rate.
Government subsidies Government subsidies were received during the year. There are no unfulfilled conditions attaching to these subsidies.
Fee and commission revenue and expense Fees and commissions are generally recognised on an accruals basis when the service has been provided or incurred. Loan fees received in relation to the origination of loans are deferred and recognised as an adjustment to the effective interest rate on loans. The outstanding balance of the deferred origination income is recognised in the balance sheet as a decrease in the value of loan balances outstanding.
Fee income includes transactional based fees charged to customer accounts in accordance with the terms and conditions of the particular account type. Commission income is received from third parties as a result of the provision of services to customers, or where the consolidated entity acts as an intermediary in providing a service to customers on behalf of third parties.
Rental income Rental income arising from operating leases on investment properties is accounted for on a straight-line basis over the lease term (Note 6.3).
Bad debts recovered Bad debts recovered represent subsequent recoveries of financial assets that have previously been written off.
2.2 Expenses
(a) Depreciation and amortisation
Buildings 585 590 585 590 Plant and equipment 4,140 4,008 4,140 4,008 Leasehold improvements 797 1,085 797 1,085 Investment properties 34 59 34 59 5,556 5,742 5,556 5,742
Intangible assets 2,672 1,907 2,672 1,907
8,228 7,649 8,228 7,649
(b) Personnel related expenses
Employee salaries and directors' fees 69,357 68,271 69,372 68,294 Employee related on-costs 11,599 11,524 11,600 11,524 Other personnel related expenses 4,698 5,075 4,698 5,075 85,654 84,870 85,670 84,893
14 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017* 2018 2017* Note $'000 $'000 $'000 $'000
2.2 Expenses (continued)
(c) Operating expenses
Rental expense relating to operating leases - minimum lease payments 9,750 9,687 9,750 9,687 Net loss on disposal of investments - 16 - 16 Marketing and communication costs 9,278 9,971 9,278 9,971 Donations paid by controlled entity - - 1,459 1,460 Administration and other operating expenses 27,616 24,104 28,462 24,354 46,644 43,778 48,949 45,488
* The comparative statement has been restated. Refer to Note 7.1(i) for further details.
2.3 Income tax expense
(a) Amounts recognised in income statements
Current tax 19,391 16,735 19,344 16,742
Deferred tax: Increase in deferred tax assets (302) (68) (299) (67) Decrease in deferred tax liabilities (16) (4) (16) (4) (318) (72) (315) (71)
19,073 16,663 19,029 16,671
(b) Reconciliation of tax expense
A reconciliation between the tax expense and accounting profit before income tax multiplied by the group's applicable income tax rate is as follows:
Accounting profit before income tax 62,841 55,611 62,041 55,346
At Australia's statutory income tax rate of 30% (2017: 30%) 18,852 16,683 18,612 16,604
Adjust for tax effect of: Non-deductible expenses (44) 125 (40) 125 Non-assessable income of exempt entities - - 192 195 Non-deductible bonuses paid to members - - - 32 18,808 16,808 18,764 16,956
Other reconciling items: Income tax (over)/under provided in prior years 265 (40) 265 (180) Refundable tax offset - (105) - (105)
19,073 16,663 19,029 16,671
Deferred income tax related to items charged or credited to other comprehensive income during the year Gain on revaluation of land and buildings 6.8(b)(iii) 1,512 - 1,512 - Net loss on cash flow hedges 6.8(b)(ii) (1,223) (3,649) (1,223) (3,649) Net gain on unwound swaps 6.8(b)(ii) 511 449 511 449 800 (3,200) 800 (3,200)
(c) Deferred tax balances
(i) Deferred tax liabilities
Amounts recognised in profit and loss: Prepayments 26 42 26 42
Amounts recognised directly in other comprehensive income: Revaluation of property 5,481 4,069 5,481 4,069 Cash flow hedges - 1,491 - 1,491 Revaluation of available-for-sale financial assets - - - - 5,481 5,560 5,481 5,560
Total deferred tax liabilities 5,507 5,602 5,507 5,602
15 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017 2018 2017 Note $'000 $'000 $'000 $'000
2.3 Income tax expense (continued)
(c) Deferred tax balances (continued)
(ii) Deferred tax assets
Amounts recognised in profit or loss: Provision for impairment 576 617 576 617 Employee leave entitlements 3,864 3,759 3,864 3,759 Retirement benefit obligations 114 237 115 242 Accrued expenses 52 48 75 69 Employee benefits 1,599 1,406 1,599 1,406 Lease incentives 42 56 42 56 Cash flow hedges 15 4 15 4 Property, plant and equipment 5,433 5,266 5,433 5,266 11,695 11,393 11,719 11,419 Amounts recognised directly in other comprehensive income: Cash flow hedges 333 932 333 932
Total gross deferred tax assets 12,028 12,325 12,052 12,351
Less: Offset of deferred tax liabilities pursuant to set-off provisions (5,507) (5,602) (5,507) (5,602)
Total net deferred tax assets 6,521 6,723 6,545 6,749
(d) Deferred tax balance movements
(i) Deferred tax liability
Opening balance at 1 July 5,602 10,872 5,602 10,872 Charged to the income statement (16) (4) (16) (4) Credited to other comprehensive income (79) (5,266) (79) (5,266) 5,507 5,602 5,507 5,602
Maturity analysis: Deferred tax liabilities to be settled within 12 months 26 1,533 26 1,533 Deferred tax liabilities to be settled after more than 12 months 5,481 4,069 5,481 4,069 5,507 5,602 5,507 5,602 (ii) Deferred tax asset
Opening balance at 1 July 12,325 13,507 12,351 13,566 Credited to the income statement 302 68 300 35 Charged directly to other comprehensive income (599) (1,250) (599) (1,250) Closing balance at 30 June 12,028 12,325 12,053 12,351
Maturity analysis: Deferred tax assets to be recovered within 12 months 4,069 3,882 4,093 3,908 Deferred tax assets to be recovered after more than 12 months 7,959 8,443 7,959 8,443 12,028 12,325 12,052 12,351
(e) Recognition and measurement
Income tax expense comprises current and deferred tax. Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted, at the reporting date. Current income tax is recognised in profit and loss in the income statement except to the extent that it relates to items recognised directly in equity or in other comprehensive income. Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction that at the time of the transaction affects neither accounting nor taxable profit or loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Investment allowances and similar tax incentives The consolidated entity may be entitled to claim special tax deductions for investments in qualifying assets or in relation to qualifying expenditure (e.g. the Research and Development Tax Incentive regime in Australia). The consolidated entity accounts for such allowances as tax credits, which means that the allowance reduces income tax payable and current tax expense. 16 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017 2018 2017 Note $'000 $'000 $'000 $'000
3. Loans and advances to members
3.1 Classification
Overdrafts 6,754 7,714 6,754 7,714 Credit cards 34,533 35,155 34,533 35,155 Personal loans 54,300 59,933 54,300 59,933 Retail mortgages 8,897,139 8,521,751 8,897,139 8,521,751 Commercial loans 75,319 81,415 75,319 81,415 Gross loans and advances 9,068,045 8,705,968 9,068,045 8,705,968 Allowance for impairment losses 3.2 (1,922) (2,056) (1,922) (2,056) Net loans and advances 9,066,123 8,703,912 9,066,123 8,703,912
(a) Maturity analysis
Details on the expected maturity of loans and advances to members based on historical behaviour is outlined in the table below. The amounts will differ from the table in Note 5.9, which presents the contractual maturity of loans and advances to members.
Expected maturities within 12 months 1,952,790 1,813,666 1,952,790 1,813,666 Expected maturities greater than 12 months 7,115,255 6,892,302 7,115,255 6,892,302 Total gross loans and advances to members 9,068,045 8,705,968 9,068,045 8,705,968
3.2 Provision for impairment
(a) Analysis of provision for impairment by classification
Personal Retail Commercial Overdrafts Credit Cards Loans Mortgages Loans Total Parent and Consolidated Entity - 2018 $'000 $'000 $'000 $'000 $'000 $'000
Specific provision Opening balance - 416 139 61 226 842 Charges to income statement - (101) (36) (45) (65) (247) Closing balance - 315 103 16 161 595
Collective provision Opening balance 1 440 301 466 6 1,214 Charges to income statement - (14) 9 119 (1) 113 Closing balance 1 426 310 585 5 1,327
Total provision for impairment 1 741 413 601 166 1,922
Impaired loans written off 80 409 132 - - 621 Movement in allowance for impairment losses - (115) (27) 74 (66) (134) Total impairment of loans and advances 80 294 105 74 (66) 487
Parent and Consolidated Entity - 2017 $'000 $'000 $'000 $'000 $'000 $'000
Specific provision Opening balance - 448 291 156 83 978 Charges to income statement - (32) (152) (95) 143 (136) Closing balance - 416 139 61 226 842
Collective provision Opening balance 25 475 290 364 7 1,161 Charges to income statement (24) (35) 11 102 (1) 53 Closing balance 1 440 301 466 6 1,214
Total provision for impairment 1 856 440 527 232 2,056
Impaired loans written off - 257 478 73 - 808 Movement in allowance for impairment losses (24) (67) (141) 7 142 (83) Total impairment of loans and advances (24) 190 337 80 142 725
3.3 Loans to related parties and key management personnel
Further information in relation to loans to related parties and key management personnel is set out in Note 6.11.
17 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
3.4 Accounting policies
Classification, recognition and measurement
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when the consolidated entity provides money directly to a debtor with no intention of trading the receivables.
Loans and advances to members are recognised when cash is advanced. Loans and advances to members are initially recognised at fair value and subsequently carried at amortised cost using the effective interest rate method less any allowance for impairment losses. Interest is calculated using the effective interest rate method and is recognised in profit or loss (refer to Note 2.1).
Impairment
Loan portfolios are subject to continuous management review to assess whether there is any objective evidence that any specific loan or group of loans is impaired. The consolidated entity makes judgements as to whether there is any observable data indicating a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group.
If the consolidated entity determines that no objective evidence of impairment exists for an individually assessed loan, whether significant or not, it includes the loan in a portfolio of loans with similar credit risk characteristics and collectively assesses them for impairment. Loans that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in the collective assessment of impairment. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions are reviewed regularly.
If there is objective evidence that an impairment loss on loans has been incurred, the amount of the loss is measured as the difference between the carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the loan’s original effective interest rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract.
When a loan is uncollectable, it is written off against the related allowance for impairment loss. Such loans are written off after all the necessary procedures have been completed and the amount of the loan loss has been determined by management and approved by the Board of Directors. Subsequent recoveries of amounts previously written off are reversed directly or by adjusting the allowance for impairment loss. The reversal shall not result in a carrying amount of the loan that exceeds what the amortised cost would have been had the impairment not been recognised at the date the impairment is reversed. The amount of the reversal is recognised in the income statement.
Parent Entity Consolidated Entity 2018 2017 2018 2017 $'000 $'000 $'000 $'000
4. Funding and liquidity
4.1 Cash and cash equivalents
Cash at financial institutions and on hand 71,102 166,342 158,067 277,093 Investment securities 401,185 565,217 405,335 566,363 Deposits at call 60,066 91 73,071 13,207 532,353 731,650 636,473 856,663
(a) Accounting policies
Recognition and measurement
For the purposes of presentation in the statement of cash flows, cash and cash equivalents includes cash on hand, deposits held at call with other financial institutions and other short-term highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
Restrictions over cash and cash equivalents
Cash and cash equivalents of the consolidated entity include an amount of $17,877,000 (2017: $19,949,000) relating to life insurance and life investment operations carried on by a controlled entity. These cash and cash equivalents back specific policy liabilities and accordingly, the use of this amount is limited to meeting the specific policy liabilities and expenses of the controlled entity under the Life Insurance Act 1995 .
In addition, cash and cash equivalents of the consolidated entity includes an amount of $5,057,000 (2017: $7,562,000) relating to the activities of a charitable trust which are only available to be utilised in accordance with the respective trust deed.
Cash and cash equivalents of the consolidated entity includes an amount of $78,258,000 (2017: $97,694,000) relating to the activities of a self- securitisation trust which operates as a contingent liquidity facility. This cash balance is restricted for specific purposes within the self-securitisation structured entity.
Cash flows presented on a net basis
Cash flows arising from the following activities are presented on a net basis in the cash flow statement:
- customer deposits to and withdrawals from deposit accounts; - borrowings and repayments on loans and advances to members; - short term funds; and - proceeds from and repayment of borrowings. 18 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017* 2018 2017* $'000 $'000 $'000 $'000
4.1 Cash and cash equivalents (continued)
(b) Notes to the statement of cash flows
Reconciliation of profit for the year to net cash provided by/(used in) operating activities:
Profit after tax from continuing operations 43,768 38,948 43,012 38,675
Non-cash adjustment to reconcile profit before tax to net cash flows: Amortisation and depreciation expense 8,228 7,649 8,228 7,649 Gain on sale of property, plant and equipment and intangible assets (318) (1,211) (318) (1,211) Net gain on disposal of investments - - (149) - Unwound swap losses 1,705 1,497 1,705 1,497 Bonuses allocated to members - - 13 106 Movement in death benefit provision - - (5) (4)
Changes in operating assets and liabilities: Increase/(decrease) in provision for employee entitlements (62) 18 (73) 19 Increase/(decrease) in tax liability 496 (815) 365 (1,062) Increase/(decrease) in deferred tax liability (795) (1,709) (795) (1,709) Increase in deposits 68,608 870,998 78,097 866,340 Decrease in life investment and life insurance contracts - - (2,135) (2,198) Decrease in deferred tax asset 197 1,282 200 1,317 Increase in loans and advances to members (360,416) (656,544) (362,077) (654,626) Decrease in allowance for impairment (135) (83) (135) (83) Decrease in derivatives 1,039 215 1,039 215 (Increase)/decrease in prepayments and other receivables 2,593 (3,167) 2,194 149 (Increase)/decrease in held-to-maturity assets 123,758 (352,450) 288,847 (254,281) Increase/(decrease) in payables 4,964 8,714 5,423 2,944 Increase/(decrease) in borrowings (1,531) 1,606 (1,531) 1,606
Net cash inflow/(outflow) from operating activities (107,901) (85,052) 61,905 5,343
* The comparative statement has been restated. Refer to Note 7.1(i) for further details.
4.2 Financial assets
(a) Held-to-maturity investments
Certificates of deposit 144,685 488,724 144,685 488,724 Mortgage-backed securities 1,349,715 1,203,057 3,314 3,825 Fixed and floating rate notes 419,236 344,422 419,236 362,218 Semi-government securities 347,788 348,979 347,788 348,979 2,261,424 2,385,182 915,023 1,203,746
(b) Available-for-sale financial assets
Investments in managed funds - - 23,080 -
(c) Other financial assets
Unlisted securities - carried at cost 294 294 294 294
(d) Accounting policies
Recognition
Regular purchases and sales of financial assets are recognised on the settlement date, i.e. the date that the consolidated entity settles the instrument with the counterparty. This includes "regular way trades" - purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace.
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and the consolidated entity has transferred substantially all the risks and rewards of ownership.
Classification
The consolidated entity classifies its financial assets in the following categories: loans and receivables, held-to-maturity investments and available-for- sale financial assets. The classification depends on the purpose for which the investments were acquired. Management determines the classification of its financial assets at initial recognition and in the case of assets classified as held-to-maturity, re-evaluates this designation at each reporting date.
19 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
4.2 Financial assets (continued)
Measurement
Held-to-maturity Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities of greater than three months that the consolidated entity has the positive intention and ability to hold to maturity. If the consolidated entity were to sell other than an insignificant amount of held-to-maturity financial assets, the entire category would be tainted and reclassified as available-for-sale.
Held-to-maturity financial assets are initially recognised at fair value plus transaction costs and subsequently measured at amortised cost using the effective interest rate method. Interest is calculated using the effective interest rate method and is recognised in profit or loss (refer to Note 2.1).
The consolidated entity follows the guidance of AASB 139 Financial Instruments: Recognition and Measurement on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgement. In making this judgement, the consolidated entity evaluates its intention and ability to hold such investments to maturity.
If the consolidated entity fails to keep these investments to maturity other than for specific circumstances - for example, selling an insignificant amount close to maturity, it will be required to classify the entire class as available-for-sale. The investments would therefore be measured at fair value not amortised cost. If the entire class of held-to-maturity investments were to become tainted and could not be held to maturity, there would be no material impact to the income statement as these investments are predominately interest bearing deposits which would continue to be measured at amortised cost. However, the tainting would impact on the classification from held-to-maturity to available-for-sale. Furthermore, the consolidated entity would not be able to classify any financial assets as held-to-maturity for the following two annual reporting periods.
Available-for-sale financial assets Investments are designated as available-for-sale financial assets if they do not have fixed maturities and fixed or determinable payments, and management intends to hold them for the medium to long term. Financial assets that are not classified into any of the other categories are also included in the available-for-sale category.
After initial recognition, available-for-sale financial assets are measured at fair value. Gains and losses arising from changes in the fair value of monetary securities denominated in a foreign currency are recognised in other comprehensive income, except for translation differences related to changes in the amortised cost of the security which are recognised in profit or loss. Gains and losses arising from changes in fair value of other monetary items and non-monetary securities classified as available-for-sale are recognised in other comprehensive income.
Other financial assets These financial assets are carried at cost as their fair value cannot be measured reliably. This asset represents unlisted shares held in Newcastle Permanent's provider of settlement services.
Fair value measurement
Details on how the fair value of financial instruments is determined are disclosed in Note 5.8.
Reclassification
The consolidated entity may choose to reclassify a non-derivative trading financial asset out of the held-for-trading category if the financial asset is no longer held for the purpose of selling it in the near term. Financial assets other than loans and receivables are permitted to be reclassified out of the held-for-trading category only in rare circumstances arising from a single event that is unusual and highly unlikely to recur in the near term. In addition, the consolidated entity may choose to reclassify financial assets that would meet the definition of loans and receivables out of the held-for-trading or available-for-sale categories if the consolidated entity has the intention and ability to hold these financial assets for the foreseeable future or until maturity at the date of reclassification.
Reclassifications are made at fair value as of the reclassification date. Fair value becomes the new cost or amortised cost as applicable, and no reversals of fair value gains or losses recorded before reclassification date are subsequently made. Effective interest rates for financial assets reclassified to loans and receivables and held-to-maturity categories are determined at the reclassification date. Further increases in estimates of cash flows adjust interest rates prospectively.
Impairment of financial assets
The consolidated entity assesses at each balance date whether there is objective evidence that a financial asset or group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of a security below its cost is considered an indicator of impairment. If any such evidence exists for available-for-sale financial assets, the cumulative loss (measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss) is reclassified from equity and recognised in profit or loss as a reclassification adjustment. Impairment losses on equity instruments that were recognised in profit or loss are not reversed through profit or loss in a subsequent period.
If there is evidence of impairment for any of the consolidated entity's financial assets carried at amortised cost, the loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows, excluding future credit losses that have not been incurred. The cash flows are discounted at the financial assets original effective interest rate. The loss is recognised in profit or loss.
20 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Parent and Consolidated Entity 2018 2017 Note $'000 $'000
4.3 Derivative financial instruments
Interest rate swap contracts - cash flow hedges 4.3(a) (1,332) (3,363) Interest rate swap contracts - cross currency 4.3(b) - 48,599 (1,332) 45,236
Disclosed in the balance sheet as: Assets 214 48,602 Liabilities (1,546) (3,366) (1,332) 45,236
(a) Interest rate swap contracts - cash flow hedges
The consolidated entity enters into either receive fixed/pay variable or pay fixed/receive variable interest rate swap contracts to meet its risk management objectives. These interest rate swaps are designated in cash flow hedging relationships. These hedging relationships are described below:
(i) Receive fixed/pay variable interest rate swap contracts
It is the policy of the consolidated entity to protect interest rate sensitive assets from exposure to decreasing interest rates. Accordingly, the consolidated entity has entered into interest rate swap contracts under which it is obliged to receive interest at fixed rates and to pay interest at variable rates. The contracts require settlement of net interest receivable or payable each 30 days in line with the maturity of the assets being hedged. The contracts are settled on a net basis.
(ii) Pay fixed/receive variable interest rate swap contracts
It is the policy of the consolidated entity to protect interest rate sensitive liabilities from exposure to increasing interest rates. Accordingly, the consolidated entity has entered into interest rate swap contracts under which it is obliged to receive interest at variable rates and to pay interest at fixed rates. The contracts require settlement of net interest receivable or payable each 90 days in line with the maturity of the liabilities being hedged. The contracts are settled on a net basis.
(iii) Maturity profile of notional principal amounts
Receive fixed/pay variable contracts: Less than 1 year 910,000 625,000
Pay fixed/receive variable contracts: Less than 1 year 75,000 35,000 1 - 5 years 485,000 495,000 560,000 530,000
(iv) Fair value of interest rate swap contracts
At balance sheet date for both the consolidated entity and the parent entity, the carrying amount of the derivatives equals their fair value.
(b) Interest rate swap contracts - cross currency
The consolidated entity has entered into cross currency interest rate swap contracts. Under these swap contracts, the consolidated entity receives fixed semi-annual USD coupons and in return pays the 90 day bank bill swap rate plus a margin. On maturity of the swap contracts, the consolidated entity receives the USD principal at the spot exchange rates and in return pays a fixed amount of AUD. These swaps are designated against fixed rate liabilities denominated in USD and have the effect of converting these liabilities into floating rate AUD liabilities. These contracts are settled between the parties on a gross basis. These contracts have all matured during the year.
At balance sheet date for both the consolidated entity and the parent entity, the carrying amount of the derivatives equals their fair value.
(c) Recognition and measurement
Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The consolidated entity only hedges particular risks associated with the cash flows of recognised assets and liabilities and highly probable forecast transactions, and therefore designates all hedges as cash flow hedges.
The consolidated entity documents at the inception of the hedging transaction the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The consolidated entity also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions have been and will continue to be highly effective in offsetting changes in cash flows of hedged items.
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated reserves in equity, net of tax. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. The ineffectiveness recorded during the year was an expense of $50,869 (2017 expense: $13,793).
When a hedging instrument expires, is terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately reclassified to profit or loss. 21 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017 2018 2017 Note $'000 $'000 $'000 $'000
4.4 Deposits
Deposits from other financial institutions 380 36,337 380 36,337 At call deposits 4,847,676 4,661,013 4,842,345 4,654,435 Term deposits 3,297,674 3,196,328 3,297,674 3,196,328 Other deposits 102,366 285,810 101,903 277,104 8,248,096 8,179,488 8,242,302 8,164,204
(a) Recognition and measurement
Deposits are initially recognised at fair value (being fair value of consideration received) and are subsequently measured at amortised cost using the effective interest rate method (refer to Note 2.1).
4.5 Borrowings
Secured Interest bearing notes issued by securitisation SPVs* 4.5(a) 1,507,214 1,445,733 232,680 341,977
Unsecured Short and medium term floating rate notes* 1,236,521 1,122,872 1,236,521 1,121,864 Long term fixed rate certificates of deposit - 296,884 - 296,884 2,743,735 2,865,489 1,469,201 1,760,725 * The comparative statement has been restated. Refer to Note 7.1(i) for further details.
(a) Details of interest bearing notes
Secured borrowings of the consolidated entity are secured by the underlying mortgages held in the consolidated entity's structured entities. Refer to Note 4.6 for further details on the consolidated entity's securitisation programs.
Interest bearing notes of the consolidated entity have been issued from external funding warehouse facilities that expire on 15 October 2018. The process to renew the warehouse facilities with the warehouse providers has commenced and is intended to be completed prior to 15 October 2018. Both parties have shown intent to rollover the facility and it is considered probable that the facilities will be rolled over on maturity by the funding providers under normal terms and conditions for an additional period ending 15 October 2019.
In the unlikely event that the existing funding providers did not extend the facilities, the Trust would seek to refinance the facilities with another provider. If the funding warehouse was not refinanced, then an event of default would be declared and the security trustee would be appointed to realise the assets of the Trust for the benefit of the secured and unsecured creditors.
(b) Accounting policies
Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest rate method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates.
4.6 Securitisation
Newcastle Permanent sponsors the formation of structured entities primarily for the purpose of raising funding through securitisation of mortgage loans and accessing a contingent liquidity facility with the Reserve Bank of Australia. Newcastle Permanent does not consolidate a structure entity that it does not control. In determining whether Newcastle Permanent does control a structured entity, it makes judgements about its exposure to the risks and rewards, as well as about its ability to make operational decisions for the structured entity in question. In all instances, elements are present that indicate control over structured entities and therefore Newcastle Permanent has consolidated the results, assets and liabilities of the structured entities.
Due to the securitisation structures adopted by the consolidated entity, mortgage loans selected for sale in securitisation tranches do not qualify for derecognition. Only mortgage loans which meet selection criteria are eligible for selection in securitisation tranches. The selection criteria requires review of loan serviceability profiles, maximum loan terms, loan valuation ratios, level of interest rates charged, adequacy of loan documentation, quality and valuation of collateral. The consolidated entity is still exposed to the credit and interest rate risks associated with securitised loans, and is entitled to receive all interest and principal payments in relation to these loans.
The carrying amount of assets transferred by Newcastle Permanent to structured entities and that are consolidated by the group at balance sheet date was $1,507,213,558 (2017: $1,445,733,324). The underlying liabilities of the consolidated entity issued as a result of the securitisation of assets at balance sheet date was $232,680,068 (2017: $341,977,319).
(a) Recognition and measurement
Equitably assigned mortgage loans relating to Newcastle Permanent's securitisation programs are recognised in the balance sheet of the parent with a corresponding loan payable to the relevant structured entity. The associated liabilities arising from the securitisation program include trust notes, secured over the securitised mortgage loans. Income relating to the equitably assigned mortgage loans is recognised in the income statement of Newcastle Permanent and measured at amortised cost using the effective interest rate method. Interest expense on the loan to the structured entity is recognised in the profit or loss using the effective interest rate method which equates to the coupon payable on the loan from the structured entity and includes terms and conditions of the arrangements and services between Newcastle Permanent and the structured entity adjusted for fees paid directly by the structured entity to external party providers. These fees include servicing, liquidity fees and residual income.
22 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5. Financial risk management
This note explains the nature and extent of risks arising from financial instruments and how these risks could affect the consolidated entity's financial performance. The consolidated entity's major risk categories are detailed below:
Nature of Risk Exposure arising from Measurement Governance Refer Note Lending Credit Risk • Loans and advances • Ageing and arrears analysis • Lending Credit Risk Policy 5.2(a) • Financial guarantees • Lending credit stress testing • Lending Policy Manuals and • Undrawn loan commitments • Monitoring of portfolio risk Delegations metrics and concentrations • Reporting to Board and Management Committees • Risk Appetite Statement and Risk Management Strategy Investment Credit Risk • Cash and cash equivalents • Counterparty credit ratings • Investment Credit Risk and 5.2(b) • Held-to-maturity investments • Large exposure monitoring Large Exposures Policy • Available-for-sale financial assets • Portfolio tolerances • Reporting to Board and • Other receivables • Stress testing Management Committees • Derivative financial instruments • Collateral management • Risk Appetite Statement and Risk Management Strategy Liquidity Risk • Retail deposits from customers • Scenario analysis and stress • Liquidity Risk Policy 5.3 • Wholesale borrowings testing • Funding Strategy • Derivative financial instruments • Minimum liquidity ratios and • Liquidity Management • Financial guarantees risk limits Strategy • Undrawn loan commitments • Daily monitoring of liquidity • Contingency Funding Plan metrics relative to tolerances • Reporting to Board and • Maintenance of contingent Management Committees liquidity sources • Risk Appetite Statement and Risk Management Strategy Interest Rate Risk • Cash and cash equivalents • Modelling impact due to • Interest Rate Risk Policy 5.4 • Held-to-maturity investments movements in interest rates on • Use of derivative financial • Loans and advances Net Interest Income (NII) and instruments • Available-for-sale financial assets Economic Value (EV) • Reporting to Board and • Other receivables • Repricing and Maturity Gap Management Committees • Derivative financial instruments Analysis • Risk Appetite Statement and • Retail deposits from customers • Stress testing Risk Management Strategy • Wholesale borrowings Market Risk - Foreign • Wholesale borrowings not • Sensitivity analysis • Foreign Exchange Risk Policy 5.5 Exchange Risk denominated in Australian dollars • Use of derivative financial instruments • Risk Appetite Statement and Risk Management Strategy • Reporting to Board and Management Committees Non-Financial Risk (i.e.: • Operational risks, being the risk • Corporate and Business Unit • Non-Financial Risks Policy 5.1 operational, compliance of loss resulting from inadequate Risk matrices and profiles • Business Continuity and legal risk) or failed internal processes, • Key Risk Indicators Management Policy people and systems, or from • Incident and breach reporting • Strategic Plan external events • Scenario analysis • Reporting to Board and • Strategic risks, being those that Management Committees threaten to disrupt the • Risk Appetite Statement and assumptions at the core of the Risk Management Strategy organisation's strategy
5.1 Risk management framework
The Board of Directors has overall responsibility for the establishment and oversight of the consolidated entity’s risk management framework. The Board sets and approves the risk appetite, risk management strategy and a framework for the management of each material business risk.
(a) Risk management strategy
The Risk Appetite Statement (RAS) documents the types and levels of risks that the Board considers acceptable in pursuit of the consolidated entity’s strategic objectives. The Risk Management Strategy (RMS) sets out the strategy and approach to managing the risks associated with its activities by establishing and documenting a set of high level Board approved risk management principles, the risk governance framework, risk culture expectations and the high level strategy for the management of each material business risk.
Detailed risk policies for each material risk support the RAS and RMS by setting out a range of more granular risk limits to manage exposures and concentrations and by detailing specific requirements for the measurement, management, monitoring and reporting of each material risk. All elements of the risk management framework are reviewed regularly (at least annually) to reflect changes in market conditions and/or the consolidated entity's operations, with changes approved by the Board.
(b) Risk governance framework
The risk governance framework refers to the formal structure that has been established by the Board to support risk-based decision making and oversight across all operations of the consolidated entity and to support the Board's desired risk culture. Oversight of the risk management framework is facilitated by the Risk Committee (RC), Remuneration and People Committee (RPC) and Audit Committee (AC). Each operates in accordance with a Board approved Charter and plays an integral role in the governance framework to support the Board to fulfill its responsibilities in respect of the risk management framework. 23 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.1 Risk management framework (continued)
(b) Risk governance framework (continued)
The consolidated entity has established a Three Lines of Defence risk governance model:
- The First Line of defence consists of the consolidated entity’s business divisions which are responsible for making material business decisions and who assume ownership of, and accountability for the management of, the material risks faced by the consolidated entity and the effective implementation of the risk management framework. - The Second Line of defence consists of an independent Risk Management function that is responsible for assisting the Board, RC and Senior Management to develop and maintain the risk management framework. The Chief Risk Officer (CRO) is designated as the person responsible for the Risk Management function. - The Third Line of defence consists of an independent Internal Audit function which regularly reviews, tests and validates the operation and effectiveness of the risk management framework and supporting systems and controls.
5.2 Credit risk
Credit risk arises from the consolidated entity's lending and pre-settlement activities, which includes residential mortgages, commercial loans, personal loans, credit cards and overdrafts. Credit risk also arises from the financial instruments held for liquidity management purposes and to hedge interest rate risk.
The maximum exposure to credit risk, after taking into consideration of collateral or other credit enhancements, is capped to the carrying value reported on the balance sheet for the related assets, or the maximum contractually committed amount for undrawn loan commitments and financial institution guarantees.
(a) Lending credit risk
The Board has established and approved policies that together form the consolidated entity’s lending credit risk management framework. These policies set out the approach to managing lending credit risks including effective governance structures, delegations, responsibilities, systems, controls, procedures and specific limits that support compliance with the Board’s risk appetite.
The independent Risk Management function form part of the framework and support the Board approved policies. These policies set out the consolidated entity’s lending standards including credit assessment and verification procedures, acceptable borrower types and minimum loan servicing standards, delegation structures for credit approval, collateral requirements and reporting and escalation procedures.
The primary means of reducing the potential loss given borrower default on these loans is through obtaining collateral, as follows:
- for residential mortgage loans : charges over borrowers' residential property, other properties or cash and lenders mortgage insurance for loans with higher loan-to-valuation (LVR) ratios; and - for commercial loans : charges over specified assets such as commercial and residential property, inventory, trade receivables or cash and guarantees.
The primary means of reducing the probability of borrowers to default is through the application of prudent minimum lending standards and assessment of each borrower’s capacity to meet their obligations and withstand periods of stress. Loan serviceability is assessed using a net surplus income model, defined as the ratio of total income (after income haircuts, taxation and living expenses) to total sensitised commitments.
All loans are subject to ongoing review for impairment in accordance with the consolidated entity’s provisioning policies which comply with AASB 139 Financial Instruments: Recognition and Measurement . Refer to Note 3.2 for further information in respect of the consolidated entity’s provisioning and impairment policies.
(i) Distribution of loans and advances by credit quality
A past due loan is defined as a loan where a counterparty has failed to make a contractual payment by the due date, but is not considered impaired. An impaired loan is defined as a loan where the entity has determined that objective evidence of impairment exists for the loan on an individual basis and is included in the specific provision component of the entity's allowance for impairment losses on loans and advances. The following tables outline the distribution of loans and advances at different credit quality bands: Parent and Consolidated Entity Overdrafts Credit Cards Personal Retail Commercial Total Loans Mortgages Loans As at 30 June 2018 $'000 $'000 $'000 $'000 $'000 $'000
Loans and advances neither past due nor impaired Mortgage insured - - - 2,464,018 2,714 2,466,732 Uninsured, neither past due nor impaired 6,283 31,054 53,706 6,293,322 71,633 6,455,998 Total 6,283 31,054 53,706 8,757,340 74,347 8,922,730
Loans and advances past due but not impaired Past due up to 30 days 306 2,540 966 107,121 640 111,574 Past due 30-60 days 2 548 162 9,612 16 10,340 Past due greater than 60 days 164 76 159 4,554 139 5,092 Total 472 3,164 1,287 121,287 795 127,006
Loans and advances individually impaired Individually impaired loans - 315 103 16 161 596
Net effective interest rate adjustments - - (796) 18,495 15 17,715
Gross loans and advances 6,755 34,533 54,300 8,897,138 75,318 9,068,048 24 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.2 Credit risk (continued)
(a) Lending credit risk (continued)
(i) Distribution of loans and advances by credit quality (continued) Parent and Consolidated Entity Overdrafts Credit Cards Personal Retail Commercial Total Loans Mortgages Loans As at 30 June 2017 $'000 $'000 $'000 $'000 $'000 $'000
Loans and advances neither past due nor impaired Mortgage insured - - - 2,569,975 3,571 2,573,546 Uninsured, neither past due nor impaired 7,532 31,500 58,453 5,794,357 74,707 5,966,549 Total 7,532 31,500 58,453 8,364,332 78,278 8,540,095
Loans and advances past due but not impaired Past due up to 30 days 15 1,972 1,460 126,884 475 130,806 Past due 30-60 days 3 653 333 6,498 164 7,651 Past due greater than 60 days 164 614 166 6,256 2,265 9,465 Total 182 3,239 1,959 139,638 2,904 147,922
Loans and advances individually impaired Individually impaired loans - 416 139 60 227 842
Net effective interest rate adjustments - - (618) 17,721 6 17,109
Gross loans and advances 7,714 35,155 59,933 8,521,751 81,415 8,705,968
(ii) Concentration of loans and advances by geography
The consolidated entity's loans and advances can be analysed by the following geographical regions. Where the loan is secured, the geographical location disclosed is based on the location of the security:
2018 2017 Parent and Consolidated Entity $'000 $'000 $'000 $'000 New South Other New South Other Wales Australian Wales Australian Credit cards 34,533 - 35,155 - Personal loans 53,058 1,242 58,666 1,267 Retail mortgages 8,185,042 712,097 7,887,746 634,005 Commercial loans and overdrafts 81,488 585 88,773 356 8,354,121 713,924 8,070,340 635,628 Total gross loans and advances 9,068,045 8,705,968
(iii) Repossessed collateral
Repossessed property is sold as soon as practicable, with proceeds used to reduce the outstanding balance. As at 30 June 2018 the consolidated entity was not in possession of any properties (2017: 6 properties in possession with a valuation of $3,240,000).
(b) Investment credit risk
The Board has established and approved the Investment Credit Risk and Large Exposures Policy which sets out the approach to managing investment credit risks including effective governance structures, delegations, responsibilities, systems, controls, procedures and specific limits. This policy addresses credit risk arising from investment securities held for the purpose of maintaining a liquid asset portfolio (refer Note 5.3) and derivative transactions undertaken for the purpose of hedging exposure to market risks (refer Note 4.3).
The Board’s risk appetite for investment credit risk is expressed through a range of specific limits that address acceptable investment and counterparty types, minimum acceptable counterparty credit quality, maximum individual counterparty concentrations and portfolio concentrations. These limits are based on individual counterparty credit ratings issued by recognised external credit rating bodies. Investment in debt securities is limited to high quality liquid assets and to APRA regulated institutions. Derivative transactions are limited to recognised financial intermediaries, regulated by APRA and with acceptable credit ratings.
Investment credit risk is managed by the Treasury Department in accordance with the limit framework approved by the Board. The operations of the Treasury department in respect of investment credit risk, and the investment credit risk profile are subject to oversight by the Chief Financial Officer (CFO), Risk Management function and Asset and Liability Committee (ALCO).
The following table presents an analysis of debt securities by rating agency designation, based on Standard & Poor's long term rating or their equivalent, except where otherwise stated:
25 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.2 Credit risk (continued)
(b) Investment credit risk (continued)
(i) Distribution of debt securities by credit quality
Corporate Mortgage Semi- Due from Credit Rating Deposits & Bank Backed Floating Rate Government Investment Financial Bills Securities Notes Securities Securities Institutions Total Consolidated Entity $'000 $'000 $'000 $'000 $'000 $'000 $'000
As at 30 June 2018 AAA - - - 126,934 - 27,000 153,934 AA- to AA+ 127,209 3,314 148,630 220,854 325,510 164,212 989,729 A- to A+ 9,958 - 191,199 - 34,903 890 236,950 BBB to BBB+ 7,518 - 79,406 - 44,922 - 131,846 Unrated - - - - - 31,864 31,864 Total 144,685 3,314 419,235 347,788 405,335 223,966 1,544,323
As at 30 June 2017 AAA - - - 60,319 31,260 111,000 202,579 AA- to AA+ 424,292 3,825 118,144 288,660 308,654 129,038 1,272,613 A- to A+ - - 142,976 - 159,551 - 302,527 BBB to BBB+ 64,432 - 101,098 - 66,898 - 232,428 Unrated - - - - - 26,341 26,341 Total 488,724 3,825 362,218 348,979 566,363 266,379 2,036,488
Parent Entity $'000 $'000 $'000 $'000 $'000 $'000 $'000
As at 30 June 2018 AAA - - - 126,934 - 27,000 153,934 AA- to AA+ 127,209 3,314 148,630 220,854 321,360 65,132 886,499 A- to A+ 9,958 - 191,199 - 34,903 - 236,059 BBB to BBB+ 7,518 - 79,406 - 44,922 - 131,846 Unrated - 1,346,401 - - - 31,864 1,378,265 Total 144,685 1,349,715 419,234 347,788 401,185 123,996 2,786,603
As at 30 June 2017 AAA - - - 60,319 31,260 111,000 202,579 AA- to AA+ 424,292 3,825 112,412 288,660 307,508 5,171 1,141,868 A- to A+ - - 136,848 - 159,551 - 296,399 BBB to BBB+ 64,432 - 95,162 - 66,898 - 226,492 Unrated - 1,199,232 - - - 26,341 1,225,573 Total 488,724 1,203,057 344,422 348,979 565,217 142,512 3,092,911
(ii) Concentration of risk by geography
In determining the geographical concentration of other financial assets, the consolidated entity allocates exposures to regions based on the country of incorporation of counterparties. As at the balance sheet date, the consolidated entity does not have any material exposures to any region outside of Australia.
5.3 Liquidity risk
Liquidity risk is the risk that the consolidated entity is unable to meet its obligations as they fall due during normal operating conditions and stressed conditions.
The Board has established and approved a Liquidity Risk Management Framework, being the totality of the strategies, policies, plans and operating standards that document how the consolidated entity identifies, measures, monitors and mitigates its liquidity risk to a prudent level. It has been formulated to ensure the consolidated entity maintains sufficient liquidity to deliver its strategic objectives and to withstand a prolonged period of stress. The framework consists of:
- the Liquidity Risk Policy , which defines the Board's liquidity risk appetite, risk tolerance and funding diversification requirements. It details the roles, responsibilities and delegated authorities for managing, monitoring and reporting liquidity risk; as well as the liquidity risk stress testing framework, and methodologies used to measure liquidity risk; - the Liquidity Risk Management Strategy , which documents the strategies, processes and policies implemented by management to ensure that liquidity risk is managed in accordance with the Liquidity Risk Policy and the Board's risk tolerance; - a Funding Strategy that supports the business strategy and objectives over a three year time horizon, provides for appropriate diversification in the funding base and ensures the consolidated entity maintains a presence in its chosen funding markets; and - a Contingency Funding Plan , which sets out the strategies, processes and procedures the consolidated entity employs to manage liquidity shortfalls in a range of stressed liquidity scenarios.
All elements of the Liquidity Risk Management Framework are reviewed on a regular (at least annual) basis and are approved by the Board. A centralised Treasury department is responsible for implementing the liquidity risk management strategies approved by the Board, subject to oversight by the Chief Financial Officer (CFO), Risk Management function, ALCO, RC and Board.
26 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.3 Liquidity risk (continued)
(a) Maturity analysis of monetary liabilities
The following tables present the cash flows payable by the consolidated entity by remaining contractual maturities, at balance sheet date. The balances in the tables will not necessarily agree to amounts presented on the face of the balance sheet as amounts in the table incorporate cash flows on an undiscounted basis and include both principal and associated future interest payments.
At call & up to Consolidated Entity 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total As at 30 June 2018 $'000 $'000 $'000 $'000 $'000 $'000
On balance sheet future cash flows Payables 17,078 - - - - 17,078 Deposits from other financial institutions - - - - 380 380 Deposits due to members Call deposits 4,842,312 - - - - 4,842,312 Term deposits 561,607 1,015,159 1,409,182 356,074 - 3,342,022 Other deposits Corporate wholesale deposits 2,882 12,007 48,506 40,769 - 104,164 Other 1 1 5 26 - 33 Life insurance & investment contracts 16,456 - - - - 16,456 Borrowings Debt issuance 48,663 227,313 616,132 585,000 - 1,477,108 5,488,999 1,254,480 2,073,825 981,869 380 9,799,553
Off balance sheet future commitments Loans approved not advanced 305,774 - - - - 305,774 Guarantees 2,402 - - - - 2,402 Operating lease commitments 792 1,546 6,665 23,770 1,406 34,179 308,968 1,546 6,665 23,770 1,406 342,355
Derivatives settled on a net basis Cash flow hedges 120 938 (5,040) (10,251) - (14,233)
As at 30 June 2017 $'000 $'000 $'000 $'000 $'000 $'000
On balance sheet future cash flows Payables 12,552 - - - - 12,552 Deposits from other financial institutions 35,957 - - - 380 36,337 Deposits due to members Call deposits 4,654,395 - - - - 4,654,395 Term deposits 540,080 1,166,072 1,185,293 351,561 - 3,243,006 Other deposits Corporate wholesale deposits 43,845 84,660 95,028 55,039 - 278,572 Other 1 2 7 30 - 40 Life insurance & investment contracts 18,583 - - - - 18,583 Borrowings Debt issuance 32,911 114,625 671,213 665,651 - 1,484,400 Fixed term certificates of deposits - - 315,790 - - 315,790 5,338,324 1,365,359 2,267,331 1,072,281 380 10,043,675
Off balance sheet future commitments Loans approved not advanced 294,380 - - - - 294,380 Guarantees 2,402 - - - - 2,402 Operating lease commitments 766 1,539 6,568 26,806 3,572 39,251 297,548 1,539 6,568 26,806 3,572 336,033
Derivatives settled on a net basis Cash flow hedges (61) 536 (3,799) (5,396) - (8,720)
Derivatives settled on a gross basis Cross currency interest rate swaps - (2,472) 52,978 - - 50,506
27 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.3 Liquidity risk (continued)
(a) Maturity analysis of monetary liabilities (continued)
At call & up to Parent Entity 1 month 1-3 months 3-12 months 1-5 years Over 5 years Total As at 30 June 2018 $'000 $'000 $'000 $'000 $'000 $'000
On balance sheet future cash flows Payables 20,790 - - - - 20,790 Deposits from other financial institutions - - - - 380 380 Deposits due to members Call deposits 4,847,643 - - - - 4,847,643 Term deposits 561,607 1,015,159 1,409,182 356,074 - 3,342,022 Other deposits Corporate wholesale deposits 2,882 12,007 48,506 40,769 - 104,164 11am deposits 463 - - - - 463 Other 1 1 5 26 - 33 Borrowings Debt issuance 48,663 227,313 569,785 585,000 1,261,566 2,692,327 5,482,049 1,254,480 2,027,478 981,869 1,261,946 11,007,822
Off balance sheet future commitments Loans approved not advanced 305,774 - - - - 305,774 Guarantees 2,402 - - - - 2,402 Operating lease commitments 792 1,546 6,665 23,770 1,406 34,179 308,968 1,546 6,665 23,770 1,406 342,355
Derivatives settled on a net basis Cash flow hedges 120 938 (5,040) (10,251) - (14,233)
As at 30 June 2017 $'000 $'000 $'000 $'000 $'000 $'000
On balance sheet future cash flows Payables 18,148 - - - - 18,148 Deposits from other financial institutions 35,957 - - - 380 36,337 Deposits due to members Call deposits 4,660,973 - - - - 4,660,973 Term deposits 540,080 1,166,072 1,185,293 351,561 - 3,243,006 Other deposits Corporate wholesale deposits 43,845 86,478 95,028 56,057 - 281,408 11am deposits 5,869 - - - - 5,869 Other 1 2 7 30 - 40 Borrowings Debt issuance 32,911 114,625 670,520 666,658 1,109,824 2,594,538 Fixed term certificates of deposits - - 315,790 - - 315,790 5,337,784 1,367,177 2,266,638 1,074,306 1,110,204 11,156,109
Off balance sheet future commitments Loans approved not advanced 294,380 - - - - 294,380 Guarantees 2,402 - - - - 2,402 Operating lease commitments 766 1,539 6,568 26,806 3,572 39,251 297,548 1,539 6,568 26,806 3,572 336,033
Derivatives settled on a net basis Cash flow hedges (61) 536 (3,799) (5,396) - (8,720)
Derivatives settled on a gross basis Cross currency interest rate swaps - (2,472) 52,978 - - 50,506
(b) Contingent sources of liquidity
To ensure that the consolidated entity is able to meet liquidity requirements to cover unexpected levels of demands, the consolidated entity has credit standby arrangements and contingent sources of liquidity as follows:
- An uncommitted facility of $20,000,000 (2017: $20,000,000). This is an uncommitted line of credit with a major Australian bank (overnight facility). Access to the facility is immediate, but subject to approval processes from the facility provider.
- An internal securitisation program which provides potential access to a significant amount of contingent liquidity. At 30 June 2018, the parent entity has sold loans of $1.2 billion into a related special purpose vehicle for the purposes of internal securitisation. The financial performance and financial position of the special purpose vehicle is included within the financial performance and financial position of the consolidated entity. The related special purpose vehicle, in turn, has issued $1.2 billion of notes to the parent entity which are eligible for repurchase with the Reserve Bank of Australia.
The facilities and contingent liquidity sources were not used during the current or previous financial year. 28 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.3 Liquidity risk (continued)
(c) Off-balance sheet items
(i) Loan commitments
The dates of the contractual amounts of the consolidated entity's off balance sheet financial instruments are summarised in the table in section (a) above. These amounts commit the consolidated entity to extend credit to customers and other facilities in line with the relevant contracts.
(ii) Financial guarantees and other financial facilities
The consolidated entity offers financial institution guarantees for members to external parties. The guarantees are secured over assets of the member unless specific authorisation from the Board is obtained. The guarantees held by the consolidated entity at year end on behalf of the members is outlined in section (a) above, based on the earliest contractual maturity date. Of this amount $NIL (2017: $NIL) is unsecured. A fee is charged to the member on the balance of these guarantees semi-annually at 1.5% per annum subject to a minimum fee. No losses are anticipated in respect of the above guarantees.
(iii) Operating lease commitments
Operating leases relate to branch offices and ATMs with lease terms of between one to twelve years, with an option to extend for up to fifteen years. All operating lease contracts contain contingent rentals based on consumer price index and 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 any leased asset at the expiry of the lease period.
Where the consolidated entity is the lessee the future minimum lease payments under non-cancellable operating leases are summarised in the table in section (a) above. In addition to the operating lease commitments disclosed in section (a) above, the consolidated entity continues to occupy 6 rental premises on a month to month basis while lease negotiations are finalised. The monthly lease cost for these properties is $44,878.
5.4 Market risk - interest rate risk
Interest rate risk is the potential change in the consolidated entity's net interest income and capital position arising from the impact of movements in interest rates.
The Board has approved an Interest Rate Risk Policy that sets out the approach to managing interest rate risk including effective governance structures, responsibilities, systems, controls, measurement methodologies and limits. The objective of this policy is to maintain stable interest income and capital in the long term to preserve member value.
The consolidated entity measures and manages interest rate risk exposure using simulation modelling to project the potential short and longer-term impacts of severe, but plausible, movements in market interest rates on the consolidated entity's balance sheet. Short-term interest rate risk exposure is measured by modelling the sensitivity of the projected NII at Risk over a twelve month time horizon following a range of severe, but plausible, instantaneous shocks to market interest rates. Longer term impacts are measured by modelling the sensitivity of the net present value of the balance sheet (Economic Value Sensitivity (EVS)) over the estimated life of the balance sheet to a range of severe, but plausible, interest rate shock scenarios. The shock can be instantaneous and dynamic through the particular scenario.
The Board have approved limits for the maximum tolerable NII at Risk and EVS measures under each of these scenarios that define the interest rate risk appetite. The results of each simulation are calculated and compared against these limits on a daily basis by the Risk Management function to ensure that the consolidated entity operates within the defined risk appetite. Results relative to appetite are reported to management daily, and to ALCO and the Board monthly.
ALCO is charged with the responsibility for oversight of the development and implementation of the strategies used to manage interest rate risk. The strategies used to manage interest rate risk by ALCO include:
- reducing the repricing mismatch between assets and liabilities by altering the mix, structure and repricing profile of existing assets and liabilities and the composition and mix of balance sheet growth; and
- the use of derivative financial instruments to hedge identified sources of interest rate risk. To support ALCO in evaluating and deriving appropriate hedging strategies in a timely manner, ALCO, under delegation from the Board, authorised the Treasury department to evaluate the need for, and transact, derivative instruments for interest rate risk management purposes, upon approval from the Chief Financial Officer.
29 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.4 Market risk - interest rate risk (continued)
(a) Repricing analysis
Non-interest Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Bearing Total Consolidated Entity - 2018 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Assets Cash and cash equivalents 408,905 204,318 - - - 23,250 636,473 Other receivables - - - - - 5,618 5,618 Derivatives - 214 - - - - 214 Held-to-maturity investments 219,521 419,417 248,647 27,438 - - 915,023 Loans to members 5,961,834 211,309 748,415 2,140,150 4,415 - 9,066,123 Available-for-sale investments - - - - - 23,080 23,080 Other financial assets - - - - - 294 294 6,590,260 835,258 997,062 2,167,588 4,415 52,242 10,646,825 Liabilities Payables - - - - - 17,417 17,417 Derivatives 447 1,099 - - - - 1,546 Deposits 5,407,320 1,028,530 1,436,308 370,144 - - 8,242,302 Life investment & insurance 16,457 - - - - - 16,457 Borrowings 405,672 923,629 139,900 - - - 1,469,201 5,829,896 1,953,258 1,576,208 370,144 - 17,417 9,746,923 Interest repricing gap 760,364 (1,118,000) (579,146) 1,797,444 4,415
Consolidated Entity - 2017 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Assets Cash and cash equivalents 496,933 334,523 - - - 25,207 856,663 Other receivables - - - - - 6,898 6,898 Derivatives - 20 48,582 - - - 48,602 Held-to-maturity investments 235,775 326,550 606,240 35,181 - - 1,203,746 Loans to members 5,891,008 126,976 828,110 1,852,406 5,412 - 8,703,912 Other financial assets - - - - - 294 294 6,623,716 788,069 1,482,932 1,887,587 5,412 32,399 10,820,115 Liabilities Payables - - - - - 12,737 12,737 Derivatives - 31 194 3,141 - - 3,366 Deposits 5,266,190 1,251,905 1,266,683 379,426 - - 8,164,204 Life investment & insurance 18,583 - - - - - 18,583 Borrowings 389,233 979,617 391,876 - - - 1,760,725 5,674,006 2,231,553 1,658,753 382,567 - 12,737 9,959,615 Interest repricing gap 949,710 (1,443,484) (175,821) 1,505,020 5,412
Parent Entity - 2018 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Assets Cash and cash equivalents 304,785 204,318 - - - 23,250 532,353 Other receivables - - - - - 24,490 24,490 Derivatives - 214 - - - - 214 Held-to-maturity investments 1,565,922 419,417 248,647 27,438 - - 2,261,424 Loans to members 5,961,834 211,309 748,415 2,140,150 4,415 - 9,066,123 Other financial assets - - - - - 294 294 7,832,541 835,258 997,062 2,167,588 4,415 48,034 11,884,898 Liabilities Payables - - - - - 21,129 21,129 Derivatives 447 1,099 - - - - 1,546 Deposits 5,413,114 1,028,530 1,436,308 370,144 - - 8,248,096 Borrowings 1,912,886 690,949 139,462 - - - 2,743,297 7,326,447 1,720,578 1,575,770 370,144 - 21,129 11,014,068 Interest repricing gap 506,094 (885,320) (578,708) 1,797,444 4,415
30 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.4 Market risk - interest rate risk (continued)
(a) Repricing analysis (continued)
Non-interest Up to 1 month 1-3 months 3-12 months 1-5 years Over 5 years Bearing Total Parent Entity - 2017 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Assets Cash and cash equivalents 373,066 333,377 - - - 25,207 731,650 Other receivables - - - - - 27,470 27,470 Derivatives - 20 48,582 - - - 48,602 Held-to-maturity investments 1,419,678 324,083 606,240 35,181 - - 2,385,182 Loans to members 5,891,008 126,976 828,110 1,852,406 5,412 - 8,703,912 Other financial assets - - - - - 294 294 7,683,752 784,456 1,482,932 1,887,587 5,412 52,971 11,897,110 Liabilities Payables - - - - - 18,333 18,333 Derivatives - 31 194 3,141 - - 3,366 Deposits 5,279,656 1,253,723 1,266,683 379,426 - - 8,179,488 Borrowings 1,835,974 637,640 391,876 - - - 2,865,489 7,115,630 1,891,394 1,658,753 382,567 - 18,333 11,066,676 Interest repricing gap 568,122 (1,106,938) (175,821) 1,505,020 5,412
(b) Sensitivity analysis - interest rate risk
As at the balance sheet date, NII sensitivity to an instantaneous, downward parallel shift in market interest rates of 1%, is a reduction of $6.2m (2017: $5.5m) with a corresponding decrease in profit before tax and retained profits.
An instantaneous upward parallel shift in market interest rates of 2% would reduce the net present value of net assets (EVS) as at the balance sheet date by $35.3m (2017: $26.6m).
5.5 Market risk - foreign exchange risk
Foreign currency risk is the potential loss in earnings arising from changes in foreign exchange rates. Foreign currency risk arises for the consolidated entity where it secures funding in overseas markets denominated in currencies other than Australian dollars.
The Board has approved a Foreign Exchange Risk Policy which sets out the approach to managing foreign currency risk including effective governance structures, responsibilities, systems, controls, measurement methodologies and limits. The objective of this policy is to ensure all significant foreign currency risks are fully hedged and that the consolidated entity does not have any material residual exposure to foreign currency risk.
The following table summarises the consolidated entity's exposure to foreign exchange risk. Included in the table are the consolidated entity's financial instruments denominated in foreign currency, categorised by the denominated currency and presented in Australian dollars. Other currencies presented in the following table include a range of immaterial exposures in CAD, EUR, NOK and GBP. These balances do not result in a material foreign currency exposure to the consolidated entity.
As at 30 June 2017 the consolidated entity held US dollar denominated funding of US$227,000,000. The funding had matured by 30 June 2018 and was not replaced. The funding program was previously fully hedged with cross currency interest rate swaps.
As at 30 June 2018 As at 30 June 2017 USD Other Total USD Other Total Parent and Consolidated Entity $'000 $'000 $'000 $'000 $'000 $'000
Assets Cash and cash equivalents 12 4 16 12 4 16 Derivatives - - - 304,377 - 304,377 Total financial assets 12 4 16 304,389 4 304,393
Liabilities Borrowings - - - 296,884 - 296,884 Total financial liabilities - - - 296,884 - 296,884
Net balance sheet financial position 12 4 16 7,505 4 7,509
31 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.6 Capital management
The consolidated entity is regulated by APRA. As a result, the consolidated entity must, for capital adequacy purposes, hold the minimum levels of capital as required by Australian Prudential Standard (APS) 110 Capital Adequacy . As part of these requirements, the consolidated entity must hold Tier 1 Capital and may also include Tier 2 Capital as part of its required capital holdings up to certain prescribed limits.
Tier 1 Capital comprises the highest quality components of capital that fully satisfy all of the following essential characteristics: - provide a permanent and unrestricted commitment of funds; - are freely available to absorb losses; - do not impose any unavoidable servicing charge against earnings; and - rank behind the claims of depositors and other creditors in the event of winding up.
For the purpose of calculating the consolidated entity’s capital base, Tier 1 Capital consists of retained earnings, general reserves (excluding the general reserve for credit losses) and current year earnings. Tier 2 Capital includes other components of capital that, to varying degrees, fall short of the quality of Tier one capital but nonetheless contribute to the overall strength of an institution and its ability to absorb losses. Tier 2 Capital for the consolidated entity consists of the general reserve for credit losses.
The consolidated entity is subject to a Prudential Capital Ratio (PCR) as determined by APRA. The consolidated entity, must at all times, maintain a risk based capital ratio in excess of its PCR. The consolidated entity has complied with both external and internal capital requirements during the current and previous financial years.
The consolidated entity has in place a Capital Adequacy Risk Policy and an Internal Capital Adequacy Assessment Process (ICAAP), which are both subject to review on an at least an annual basis. The ICAAP includes: - policies, procedures, systems and controls to identify, measure, monitor and manage the risks arising from the consolidated entity’s activities on a continuous basis to ensure that capital is held at a level consistent with the consolidated entity’s risk profile; - Board approved limits for the quality, source and level of capital it considers necessary to absorb unanticipated losses and support its strategic objectives; - a capital management plan which includes: (i) the consolidated entity's strategy for maintaining capital over time, including outlining its capital target for providing a buffer against the risks involved in the ADI's activities, how the target level of capital is to be met and the means available for sourcing additional capital where required; and (ii) actions and procedures for monitoring the consolidated entity’s capital adequacy requirements, including the setting of trigger ratios to alert management to, and avert potential breaches of these requirements. - stress testing and scenario analysis relating to potential risk exposures and available capital resources; - processes for reporting on the ICAAP and its outcomes to the Board and senior management of the consolidated entity, and for ensuring that the ICAAP is taken into account in making business decisions; and - policies to address the capital impact of material risks not covered by explicitly regulatory capital requirements.
5.7 Life insurance risk
(a) Risks related to life insurance and investment contracts
The consolidated entity is exposed to risks related to life insurance and investment contracts through Newcastle Friendly Society Limited (NFS), a controlled entity. The financial condition and operating results of the life insurance and life investment contracts are affected by a number of key financial and non-financial risks, the results of which have been incorporated into the consolidated entity reporting in Notes 5.2 to 5.5 above.
The nature of the terms of the life insurance and life investment contracts written is such that certain external variables can be identified on which related cash flows for claim payments depend. The following table provides an overview of the key variables upon which the amount of related cash flows are dependent:
Key Variables Insurance Bond Savings Bond Pre-arranged Funeral Bond Details of contract workings Provides a benefit of the current account Provides a benefit of the current Pre-arranged funeral fund policies allow individuals to balance on member withdrawal or death. account balance on member contract with a funeral director to provide pre-arranged An additional death benefit is also withdrawal or death. funeral services upon death at a fixed price. The individual payable, being 30% of contributions for makes a contribution to the Funeral Fund to which members aged under 60 and 5% bonuses are added over the course of the policy. The otherwise. proceeds of the policy are then used to pay the funeral director for the pre-arranged funeral. NFS does not guarantee that the proceeds will be sufficient to pay the cost of the contracted funeral services. Nature of compensation for Benefits arising from the discretionary Members' account balances increase Members' account balances increase over time with bonus claims participation feature are based on the over time with bonus declarations. declarations. On a six monthly basis, the Board, in realised investment returns on a specified These bonuses are calculated in accordance with the Funeral Funds Act 1979 distribute as pool of assets. accordance with the rules for this bonuses any increase in the value of the fund (after benefit fund that are contained in payment of fees) between the members' accounts in NFS's constitution. There is little proportion to the amount in each members' account and discretion in this formula, and the period for which the amount has been invested since therefore this benefit fund is not the last distribution. considered to have a significant discretionary participating feature.
Key variables that affect the Mortality Mortality Mortality timing and uncertainty of cash Morbidity Morbidity Morbidity Interest rates Interest rates Interest rates flows Discontinuance Discontinuance Discontinuance 32 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.7 Life insurance risk (continued)
(b) Life insurance capital management
The consolidated entity's life insurance operations are subject to regulatory capital requirements which prescribe the amount of capital to be held, depending on the risks applicable to the life insurance company. These regulatory capital requirements are established and monitored by APRA.
The life insurance entity is required to maintain a Prudential Capital Amount (PCA), which is applicable to both an individual fund and for the life insurance entity as a whole. The PCA allocates capital to a range of risk charges and is intended to ensure that if a fund was to start the year with a capital base equal to the PCA, and losses occurred within the 99.5 per cent confidence level, then the assets remaining would be at least sufficient to provide for the fund liabilities at the end of the year. The consolidated entity applies the Standard Method in calculating its PCA.
The required level of capital for regulatory purposes is the Prudential Capital Requirement (PCR), which is intended to take account of the full range of risks to which a fund or life company is exposed. The PCR equals the PCA plus any supervisory adjustments determined by APRA. At all times, the consolidated entity must ensure that each fund, and the company as a whole, maintains a capital base in excess of its PCR.
The consolidated entity has implemented an ICAAP specific to its life insurance operations in order to ensure that it maintains the required levels of capital within each benefit fund and the management fund. The ICAAP establishes the level of surplus capital that the consolidated entity seeks to hold over and above the PCR in respect of each benefit fund and the management fund, consistent with the risk appetite of the consolidated entity and reflecting the key risks to which the consolidated entity is exposed. The ICAAP also documents appropriate capital management actions under various scenarios to ensure that, at all times, the consolidated entity maintains capital adequacy at a level commensurate with its risk appetite and risk tolerance level.
5.8 Fair value measurements
The fair value of financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The consolidated entity complies with the requirements of AASB 7 Financial Instruments: Disclosures which requires disclosure of the fair value measurements by level of the following fair value measurement hierarchy:
- Level 1 : Valued by reference to quoted prices in active markets for identical assets or liabilities. These quoted prices represent actual and regularly occurring market transactions on an arm's length basis. - Level 2 : Valued by using inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices). - Level 3 : Valued in whole or in part using valuation techniques or models that use inputs that are not based on observable market data (unobservable inputs).
A description of the valuation technique(s) and the inputs used in the fair value measurement for each item categorised as a Level 2 or Level 3 valuation is outlined below:
(i) Available-for-sale financial assets The portfolio is comprised of units held in a range of managed funds. Investments are valued using current prices obtained from independent external pricing sources. The portfolio is managed under an outsourced arrangement with a professional investment advisory firm. Asset prices are reviewed and verified in line with valuation policies in place by specialised investment teams.
(ii) Derivative financial instruments Derivatives consist of interest rate swaps and cross currency swaps. The fair value of these financial assets is calculated as the present value of estimated future cash flows. Cash flows are calculated and discounted using observable market yield curves and exchange rates at the end of the reporting period. The fair value of derivatives also incorporates the credit risk associated with default by the swap counterparty (where the derivative is a financial asset) or associated with the consolidated entity's own credit risk (where the derivative is a financial liability).
(iii) Property, plant and equipment A description of the valuation technique(s) and the inputs used in the fair value measurement is outlined at Note 6.2(b).
(iv) Life investment and insurance contracts A description of the valuation technique(s) and the inputs used in the fair value measurement is outlined at Note 6.6.
(v) Held-to-maturity investments The disclosed fair value of held-to-maturity financial assets that are short-term (i.e. holdings with an original maturity less than three months) is calculated with reference to current Bank Bill Swap Rate (BBSW) curves and the remaining term to maturity of the investment. The disclosed fair value of held-to-maturity financial assets that are long-term is calculated by multiplying the current capital price (sourced from market data) of the security by the face value.
(vi) Loans and advances to members The disclosed fair value of loans and advances to members is calculated by discounting future cash flows on fixed rate loans at market interest rates. Variable rate loans are measured at amortised cost and the carrying value reflects the fair value of the loans at balance date.
(vii) Investment properties A description of the valuation technique(s) and the inputs used in the fair value measurement is outlined at Note 6.3.
(viii) Borrowings The disclosed fair value of borrowings is calculated by discounting future cash flows on fixed rate liabilities at market interest rates. Variable rate liabilities and short-term liabilities are measured at amortised cost and the carrying value reflects the fair value of the borrowings at balance date. 33 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.8 Fair Value Measurements (continued)
The following table provides the fair value measurement hierarchy of the consolidated entity's assets and liabilities:
Parent and Consolidated Entity Level 1 Level 2 Level 3 Total As at 30 June 2018 Note $'000 $'000 $'000 $'000
Items that are measured at fair value
Assets Available-for sale financial assets 4.2 - 23,080 - 23,080 Derivative financial instruments Interest rate swap contracts - cash flow hedges 4.3 - 214 - 214 Property, plant and equipment Land and buildings 6.2 - - 31,250 31,250
Liabilities Derivative financial instruments Interest rate swap contracts - cash flow hedges 4.3 - 1,546 - 1,546 Life investment contract liabilities 6.6 - - 672 672 Life insurance contract liabilities 6.6 - - 15,785 15,785
Items not measured at fair value, for which fair value is disclosed Held-to-maturity investments 4.2 - 916,070 - 916,070 Loans and advances to members 3.1 - - 9,163,238 9,163,238 Investment properties 6.3 - - 2,914 2,914
Aa at 30 June 2017 Note $'000 $'000 $'000 $'000
Items that are measured at fair value
Assets Derivative financial instruments Interest rate swap contracts - cross currency 4.3 - 48,602 - 48,602 Property, plant and equipment Land and buildings 6.2 - - 27,487 27,487
Liabilities Derivative financial instruments Interest rate swap contracts - cash flow hedges 4.3 - 3,366 - 3,366 Life investment contract liabilities 6.6 - - 652 652 Life insurance contract liabilities 6.6 - - 17,931 17,931
Items not measured at fair value, for which fair value is disclosed Held-to-maturity investments 4.2 - 1,204,484 - 1,204,484 Loans and advances to members 3.1 - - 8,810,659 8,810,659 Investment properties* 6.3 - - 2,790 2,790 Borrowings 4.5 - 1,775,077 - 1,775,077
* The comparative statement has been restated.
There have been no transfers of any financial assets or financial liabilities between the fair value measurement hierarchy levels during the year.
34 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
5.9 Maturity analysis
The maturity analysis based on the contractual maturity of financial assets and liabilities is set out in the following tables:
Not longer than one No maturity Consolidated entity month 1-3 months 3-12 months 1-5 years Over 5 years specified Total As at 30 June 2018 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Financial assets Cash and cash equivalents 274,087 204,318 - - - 158,068 636,473 Other receivables 1,323 - - - - - 1,323 Derivative financial instruments - - - 214 - - 214 Held-to-maturity investments - 96,897 328,215 486,596 3,315 - 915,023 Loans and advances to members 22,522 1,543 6,099 122,232 8,755,030 158,697 9,066,123 Available-for-sale financial assets - - - - - 23,080 23,080 Other financial assets - - - - - 294 294 Total 297,932 302,758 334,314 609,042 8,758,345 340,139 10,642,530
Financial liabilities Payables 17,282 8 35 92 - - 17,417 Derivative financial instruments 28 186 222 1,110 - - 1,546 Deposits from other financial institutions - - - - - 380 380 Deposits due to members 5,406,569 1,012,222 1,387,361 333,866 - - 8,140,018 Other deposits 2,846 11,578 46,999 40,481 - - 101,904 Life investment contract liabilities - - - - - 672 672 Life insurance contract liabilities - - - - - 15,785 15,785 Borrowings 45,464 224,936 611,410 587,391 - - 1,469,201 Total 5,472,189 1,248,930 2,046,027 962,940 - 16,837 9,746,923
Net financial assets/(liabilities) (5,174,257) (946,172) (1,711,713) (353,898) 8,758,345 323,302 895,607
As at 30 June 2017 $'000 $'000 $'000 $'000 $'000 $'000 $'000
Financial assets Cash and cash equivalents 245,447 334,523 - - - 276,693 856,663 Other receivables 2,663 - - - - - 2,663 Derivative financial instruments - 2 48,600 - - - 48,602 Held-to-maturity investments 62,353 65,440 724,475 347,653 3,825 - 1,203,746 Loans and advances to members 23,740 1,254 5,434 100,533 8,390,788 182,163 8,703,912 Other financial assets - - - - - 294 294 Total 334,203 401,219 778,509 448,186 8,394,613 459,150 10,815,880
Financial liabilities Payables* 12,557 8 35 138 - - 12,737 Derivative financial instruments - 31 194 3,141 - - 3,366 Deposits from other financial institutions 35,957 - - - - 380 36,337 Deposits due to members 5,186,693 1,165,845 1,175,337 322,849 - 39 7,850,763 Other deposits 46,793 85,690 89,368 55,253 - - 277,104 Life investment contract liabilities - - - - - 652 652 Life insurance contract liabilities - - - - - 17,931 17,931 Borrowings 286,728 195,754 616,558 661,685 - - 1,760,725 Total 5,568,727 1,447,328 1,881,492 1,043,066 - 19,002 9,959,615
Net financial assets/(liabilities) (5,234,524) (1,046,109) (1,102,983) (594,880) 8,394,613 440,148 856,265
* The comparative statement has been restated for maturity buckets only.
35 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
6 Other notes
6.1 Intangible assets
Internally generated Computer Capital Works software Software in progress Total Parent and Consolidated Entity Note $'000 $'000 $'000 $'000
Year ended 30 June 2018 Opening net book amount - 5,054 4,205 9,259 Additions - 1,671 4,868 6,539 Disposals - (100) - (100) Transfers to/(from) capital work in progress 5,554 439 (5,993) - Amortisation charge 2.2(a) (715) (1,957) - (2,672) Closing net book amount 4,839 5,107 3,080 13,026
At 30 June 2018 Cost 5,554 23,450 3,080 32,084 Accumulated amortisation and impairment (715) (18,343) - (19,058) Net book amount 4,839 5,107 3,080 13,026
Year ended 30 June 2017 Opening net book amount - 6,054 1,336 7,390 Additions - 450 3,327 3,777 Disposals - (1) - (1) Transfers to/(from) capital work in progress - 458 (458) - Amortisation charge 2.2(a) - (1,907) - (1,907) Closing net book amount - 5,054 4,205 9,259
At 30 June 2017 Cost - 21,448 4,205 25,653 Accumulated amortisation and impairment - (16,394) - (16,394) Net book amount - 5,054 4,205 9,259
(a) Maturity analysis
All amounts are expected to be recovered or settled more than twelve months after the reporting period.
(b) Internally generated software
During the 2018 financial year, additional functionalities relating to the internet banking platform were finalised and launched. Amounts previously carried in capital work in progress have been transferred to intangible assets and amortised in accordance with the accounting policy below. At 30 June 2018, the carrying amount of the internet banking software was $2,673,000 with a remaining amortisation period of 4.34 years.
(c) Recognition and measurement
Costs incurred in developing products or systems and costs incurred in acquiring software and licences that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised to software and systems. Costs capitalised include external direct costs of materials and services. IT development costs include only those costs directly attributable to the development phase and are only recognised following completion of technical feasibility and where the group has an intention and ability to use the asset.
Amortisation is calculated on a straight-line basis over periods generally ranging from 2 to 8 years.
6.2 Property, plant and equipment
Freehold Land and Leasehold Plant and Capital Works Buildings Improvements Equipment in Progress Total Parent and Consolidated Entity Note $'000 $'000 $'000 $'000 $'000
Year ended 30 June 2018 Opening net book amount 27,487 2,818 13,463 1,327 45,095 Revaluation increment 5,043 - - - 5,043 Additions - 415 1,553 2,348 4,316 Disposals (696) - (282) - (978) Transfers to/(from) capital work in progress - 17 2,663 (2,680) - Depreciation charge 2.2(a) (585) (797) (4,140) - (5,522) Closing net book amount 31,249 2,454 13,257 995 47,954
At 30 June 2018 Fair value/cost 31,299 16,675 46,099 995 95,068 Accumulated depreciation (49) (14,222) (32,842) - (47,113) Net book amount 31,250 2,453 13,257 995 47,955 36 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
6.2 Property, plant and equipment (continued)
Freehold Land and Leasehold Plant and Capital Works Buildings Improvements Equipment in Progress Total Parent and Consolidated Entity Note $'000 $'000 $'000 $'000 $'000
Year ended 30 June 2017 Opening net book amount 28,517 3,025 14,000 487 46,029 Additions - 556 1,910 3,246 5,712 Disposals (467) (120) (376) - (963) Transfers to/(from) capital work in progress 27 442 1,937 (2,406) - Depreciation charge 2.2(a) (590) (1,085) (4,008) - (5,683) Closing net book amount 27,487 2,818 13,463 1,327 45,095
At 30 June 2017 Fair value/cost 28,750 16,422 44,173 1,327 90,672 Accumulated depreciation (1,263) (13,604) (30,710) - (45,577) Net book amount 27,487 2,818 13,463 1,327 45,095
(a) Fair value of land and buildings
The fair value of land and buildings was determined by a registered valuer and Fellow of the Australian Property Institute. The date of the last valuation was 31 May 2018. The Directors have updated their assessment of the fair value of each property at the balance sheet date, taking into account the valuations performed.
The fair value of land and buildings was based on the capitalisation of fair market rental returns. This method adopts capitalised income projections based on a property's estimated net market income, and a capitalisation rate derived from an analysis of market evidence. In all valuations, a net rent has been applied to owner occupied properties. The key inputs under this approach are the rental rates per square metre and the capitalisation rate.
(b) Significant unobservable valuation inputs
The following table summarises the quantitative information about the significant unobservable inputs used in determining the recurring "Level 3" fair value measurements of land and buildings.
Fair value at 30 Relationship of June 2018 unobservable inputs to fair Description $'000 Unobservable inputs Range of inputs value
Land and buildings 31,250 Net rental per square metre $92/m2 to $650/m2 The higher the net rental per square metre, the higher the fair value. Capitalisation rate 1.84% to 8.00% The higher the capitalisation rate, the lower the fair value.
Parent and Consolidated Entity 2018 2017 $'000 $'000
(c) Carrying amounts that would have been recognised if land and buildings were stated at cost
Cost 26,470 26,999 Accumulated depreciation (12,615) (12,191) Net book amount 13,855 14,808
(d) Maturity analysis
All amounts are expected to be recovered or settled more than twelve months after the reporting period.
(e) Recognition and measurement
Land and buildings are shown at fair value, based on periodic, but at least triennial, valuations by external independent valuers, less subsequent depreciation for buildings. Any accumulated depreciation at the date of revaluation is eliminated against the gross carrying amount of the asset and the net amount is restated to the revalued amount of the asset.
Increases in the carrying amounts arising on revaluation of land and buildings are credited, net of tax, to other comprehensive income and accumulated in reserves in equity. To the extent that the increase reverses a decrease previously recognised in profit or loss, the increase is first recognised in profit and loss. Decreases that reverse previous increases of the same asset are first recognised in other comprehensive income to the extent of the remaining surplus attributable to the asset. All other decreases are charged to profit or loss during the period in which they are incurred.
Plant and equipment is stated at historical cost less depreciation. Historical cost includes expenditure that is directly attributable to the acquisition of the items.
Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the consolidated entity and the cost of the item can be measured reliably. Repairs and maintenance costs are charged to profit or loss during the reporting period in which they are incurred.
37 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
6.2 Property, plant and equipment (continued)
(e) Recognition and measurement (continued)
Land is not depreciated. Depreciation on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual values, over their estimated useful lives, or, in the case of leasehold improvements, the shorter lease term as follows:
Buildings 40 years Motor vehicles 5 - 7 years Plant and equipment 2 - 25 years Leasehold improvements 2 - 10 years
Depreciation of an asset begins when it is available for use, that is, when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. Capital expenditure incurred by the consolidated entity which is not yet available for use is recognised as capital works in progress. Amounts recognised in capital works in progress are subsequently transferred to the appropriate class of property, plant and equipment and depreciated when they are first deemed to be available for use.
The asset's residual values and useful lives are reviewed and adjusted, if appropriate, at each reporting date. An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount.
Gains and losses on disposals are determined by comparing proceeds with the carrying amount and are included in profit or loss. When revalued assets are sold, it is the policy of the consolidated entity to transfer the amounts included in the property revaluation surplus in respect of those assets to retained earnings.
Parent and Consolidated Entity 2018 2017 Note $'000 $'000
6.3 Investment properties
Opening balance at 1 July 2,061 4,488 Disposals (278) (2,368) Depreciation 2.2 (34) (59) Closing balance at 30 June 1,749 2,061
Cost 2,170 2,472 Accumulated depreciation (421) (411) Net book value 1,749 2,061
(a) Amounts recognised in profit and loss for investment properties
Rental income 2.1 174 302 Direct operating expenses from property that generated rental income (207) (247) Depreciation charge 2.2 (34) (59) Net gain on disposal of investment property* - (1,059) (67) (1,063) * The comparative statement has been expanded to include additional detail.
(b) Fair value of investment properties
The consolidated entity measures investment properties at cost. Accounting standard AASB 140 Investment Property requires the consolidated entity to disclose the fair value of investment property where it is measured at cost. At the balance date, the fair value of investment properties was $2,914,000 (2017: $2,790,000).
(c) Description of valuation techniques and inputs used in fair value measurement
The fair value of investment properties was determined by a registered valuer and Fellow of the Australian Property Institute. The date of the last valuation was 31 May 2018. The Directors have updated their assessment of the fair value of each property at the balance sheet date, taking into account the valuations performed.
The fair value of investment property was based on the capitalisation of fair market rental returns. This method adopts capitalised income projections based on a property's estimated net market income, and a capitalisation rate derived from an analysis of market evidence. In all valuations, a net rent has been applied to owner occupied properties. The key inputs under this approach are the rental rates per square metre and the capitalisation rate.
(d) Leasing arrangements
Some of the investment properties are leased to tenants under fixed term operating leases with rentals payable monthly. Operating leases relate to the investment properties owned by Newcastle Permanent at branch offices with lease terms of between one to five years, with an option to extend for up to five years. All operating lease contracts contain market review clauses in the event that the consolidated entity exercises its option to renew. The lessee does not have an option to purchase the properties at the expiry of the lease period.
Minimum lease payments receivable under non-cancellable operating leases of investment properties not recognised in the financial statements are as follows:
Within one year 99 61 Later than one year but not later than 5 years* 141 107 Later than 5 years* 14 23 254 191 * The comparative statement has been expanded to include additional detail. 38 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
6.3 Investment properties (continued)
(e) Maturity analysis
All amounts are expected to be recovered or settled more than twelve months after the reporting period.
(f) Recognition and measurement
Investment properties are properties held for long-term rental yields which are not occupied by the consolidated entity and are depreciated on a straight- line basis over 40 years. The consolidated entity does not actively trade in the investment property market.
Investment properties are measured initially at cost, including transaction costs. Subsequent to initial recognition, the consolidated entity has elected to measure its investment properties at cost less depreciation. Depreciation is calculated on a straight line basis over a period of 40 years. Investment property is written down immediately to its recoverable amount if the asset's carrying value is greater than its estimated recoverable amount.
The consolidated entity is required to disclose the fair value of its investment properties. The fair value of investment properties is determined on an annual basis and is generally based on current market prices in an active market for similar properties in the same location and condition.
Parent Entity Consolidated Entity 2018 2017 2018 2017 Note $'000 $'000 $'000 $'000
6.4 Prepayments and other receivables
Prepayments* 4,283 4,223 4,295 4,235 Other receivables 1,094 2,460 1,323 2,663 Amounts due from related parties 6.14(d) 19,113 20,787 - - 24,490 27,470 5,618 6,898 * The comparative statement has been restated. Refer to Note 7.1(i) for further details.
(a) Maturity analysis
Amounts expected to be settled within: Less than 12 months 23,624 26,322 4,752 5,750 Greater than 12 months 866 1,148 866 1,148 24,490 27,470 5,618 6,898
(b) Past due or impaired other receivables
As at 30 June 2018, there were no past due or impaired current other receivables of the parent and consolidated entity (2017: nil).
(c) Fair value and credit risk
Due to the short-term nature of these receivables, their carrying amount is assumed to be the same as their fair value. Information about the consolidated entity's exposure to credit risk is outlined in Note 5.2.
(d) Recognition and measurement
Other receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest rate method, less provision for impairment. Other receivables are generally due for settlement within 30 days.
Collectability of other receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. An allowance account (provision for impairment for other receivables) is established when there is objective evidence that the consolidated entity will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the receivable is impaired. The amount of the impairment allowance is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial.
The amount of the impairment loss is recognised in profit or loss within other expenses. When a receivable for which an impairment allowance had been recognised becomes uncollectable in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are recorded in Other Income.
6.5 Payables
Other payables 16,841 12,774 17,078 12,552 Deferred income 339 185 339 185 Amounts due to related parties* 6.14(d) 3,949 5,374 - - 21,129 18,333 17,417 12,737 * The comparative statement has been restated. Refer to Note 7.1(i) for further details.
(a) Recognition and measurement
These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. 39 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Consolidated Entity Life investment Life insurance contract liabilities contract liabilities 2018 2017 2018 2017 $'000 $'000 $'000 $'000
6.6 Life insurance and life investment contract liabilities
(a) Reconciliation of movements
Gross contract liabilities at 1 July 652 728 17,931 19,951 Movement in death benefit provision - - (5) (4) Contributions recognised in policy liabilities 37 40 25 67 Bonus credited to policyholders 2 4 11 102 Withdrawals recognised in policy liabilities (19) (120) (2,177) (2,185) Gross contract liabilities at 30 June 672 652 15,785 17,931
Included within life insurance contract liabilities are amounts in respect of contracts with discretionary participating features. The amount of policy liabilities that relate to the guaranteed element of these contracts is $12,182,000 (2017: $13,530,000). Life insurance contract liabilities are attributable to future policy benefits.
(b) Fair value measurement
The carrying value of life insurance contract and life investment liabilities are a reasonable approximation of fair value.
(c) Disclosures on asset restrictions
Restrictions over cash and cash equivalents refer to Note 4.1.
Consolidated Entity 2018 2017 $'000 $'000
(d) Operating expenses of life insurance and life investment operations
(i) Bonuses paid to policy holders
Policy holder bonus expense 12 105
(ii) Other expenses 316 227
(e) Accounting policies
(i) Principles for life insurance business
The life insurance operations of the consolidated entity are conducted by a controlled entity within separate funds as required by the Life Insurance Act 1995 (the Life Act) and are reported in aggregate in the income statement and statement of comprehensive income, balance sheet and cash flow statement of the consolidated entity. The life insurance operations of the consolidated entity comprise the selling and administration of life insurance and life investment contracts.
Life insurance contracts involve the acceptance of significant insurance risk and are contracts with a discretionary participating feature. Insurance risk is defined as significant if and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance (i.e. have no discernible effect on the economics of the transaction). Insurance contracts include those where the insured benefit is payable on the occurrence of a specified event such as death, injury or disability caused by accident or illness. The insured benefit is either not linked or only partly linked to the market value of the investments held by the consolidated entity and the financial risks are substantially borne by the consolidated entity.
Life insurance and life investment contract liabilities are valued at fair value, subject to a minimum of the current surrender value. Details of the actuarial methods used to calculate fair value are disclosed below.
(ii) Contributions and claims
Contributions and withdrawal components of life insurance contracts are not revenues and expenses respectively, and are treated as movements in life insurance contract liabilities.
There are no contributions revenue or claims expenses in respect of life investment contracts. Contributions to, and surrenders and withdrawals which relate to life investment contracts are treated as a movement in life investment contract liabilities. Surrenders are recognised when the policyholder formally notifies of their intention to end the policy previously contracted to.
(iii) Expenses
Expenses of the consolidated entity in relation to life insurance and life investment operations are considered to be maintenance costs incurred to administer existing life insurance and life investment contracts. There are no expenses incurred by the consolidated entity in relation to the acquisition of life insurance and life investment contracts.
(iv) Product classification
The accounting treatment of certain transactions varies depending on the nature of the contract underlying the transaction. The major contract classifications are insurance contracts and investment contracts.
40 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
6.6 Life insurance and life investment contract liabilities (continued)
(e) Accounting policies (continued)
(v) Assets backing policy liabilities
The consolidated entity has determined that all assets held by its controlled entity in relation to life insurance and life investment contracts are assets backing policy liabilities. As all assets of the controlled entity are managed on a fair value basis and reported to the Board on this basis, all assets have been valued at fair value through profit or loss where available. Fair value is determined as follows:
- cash assets are carried at face value of the amounts deposited. The carrying amounts of cash assets approximate their fair value; and - receivables are carried at book value, which is the best estimate of fair value, as they are settled within a short period.
(f) Critical accounting estimates and assumptions
(i) Actuarial assumptions for life insurance and life investment operations
The effective date of the actuarial report on life insurance liabilities and life investment contract liabilities and solvency reserves is 20 August 2018. The actuarial report was prepared by Mr J Nicholls FIAA. The actuarial report indicates that Mr Nicholls is satisfied as to the accuracy of the data upon which policy liabilities have been determined. Both life insurance contract liabilities and life investment contract liabilities of the consolidated entity have been calculated in accordance with relevant actuarial guidance.
Insurance Bond Fund The calculation of the policy liability was performed in two parts:
- Base liability: The base liability was taken as the account balance at the valuation date. Section 26 of Life Insurance Prudential Standard (LPS) 340 allows for alternative approaches, such as the accumulation method, to be used for determining the liability where the results comply with the principles of the standard. For this fund, the account balance is equivalent to the discounted value of future surrender benefit payments, where the discount rate is the expected earning rate net of tax and on-going fees (payable to the Management Fund). As a result, basing the liability on the account balance gives a result that is equivalent to the best estimate liability determined using a projection approach with an allowance for the emergence of future fees (and the payment of those fees to the Management Fund) over time. Accordingly, the account balance has been adopted as the base liability.
- Additional death benefit: The liability for this component was taken as the discounted value of future additional death benefits less the discounted value of future mortality charges. This involved a projection of the future death claims and mortality charges on a policy by policy basis. This projection allows for current bonuses plus provision for expected future bonuses (although this has no impact on the result). As no mortality charges are currently being deducted for this benefit, the best estimate liability is equal to the discounted value of future additional death benefits.
The calculation of the life insurance contract liability in respect of the Insurance Bond product is consistent with the methodology used in the previous valuation for policy liability calculations. Assumptions were only required for the calculation of the best estimate liability for the additional death benefit, as the accumulation approach used for the investment component requires no assumptions.
Mortality was assumed to be 100% of Australian Life Table ALT 95-97 (2017: 100%), with no allowance for future improvement. This table reflects the mortality of the general population, which is appropriate for this product as there is no underwriting or other initial selection.
The future bonus rate, which has no impact on the additional death benefit policy liability calculation, has been calculated using the rules specified in the Constitution of the controlled entity and the projected results of the fund. No future special distributions of surplus have been assumed.
The surrender rate assumed was 10% per annum (by both funds under management and number of policies) unchanged from the prior year. This rate has been derived from experience investigations into the policy and fund surrender rates in recent years.
Pre-Arranged Funeral Fund The life insurance contract liability was taken as the account balance at the valuation date. Section 26 of LPS 340 allows for alternative approaches, such as the accumulation method, to be used for determining the liability where the results comply with the principles of the standard. For this fund, the account balance is equivalent to the discounted value of future death benefit payments, where the discount rate is the expected earning rate net of tax and on-going fees (payable to the Management Fund). As a result, basing the liability on the account balance gives a result that is equivalent to the best estimate liability determined using a projection approach with an allowance for the emergence of future fees (and the payment of these fees to the Management Fund) over time. Accordingly, the account balance has been adopted as the base liability.
Mortality was assumed to be 100% of Australian Life Table ALT 95-97 (2017: 100%), with no allowance for future improvement. This table reflects the mortality of the general population, which is appropriate for this product as there is no underwriting or other initial selection.
The future bonus rate has been calculated using the rules specified in the Constitution of the controlled entity.
The surrender rate assumed was 0.25% per annum (by number of policies, unchanged from the prior year). This rate has been derived from experience investigations into the policy and fund surrender rates in recent years. This assumption has remained unchanged from the prior valuation.
Savings Bond Fund The life investment contract liability was taken as the account balance at the valuation date. No management services element has been recognised for the Savings Bond Fund and surrender penalties are now trivial for this fund. The calculation of the life investment contract liability using the accumulation method is consistent with the methodology used in the previous valuation for policy liability purposes.
Mortality was assumed to be 100% of Australian Life Table ALT 95-97 (2017: 100%), with no allowance for future improvement. This table reflects the mortality of the general population, which is appropriate for this product as there is no underwriting or other initial selection.
The future bonus rate has been calculated using the rules specified in the Constitution of the controlled entity.
The surrender rate assumed was 15% per annum (by funds under management and number of policies). This rate has been derived from experience investigations into the policy and fund surrender rates in recent years. There was no change in the surrender rate from the previous valuation. 41 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017 2018 2017 $'000 $'000 $'000 $'000
6.7 Provisions
Employee benefits 12,881 12,531 12,881 12,531 Directors' retirement provision 380 791 384 806 13,261 13,322 13,265 13,337
(a) Maturity analysis
Amounts expected to be settled within: Less than 12 months 6,517 6,470 6,517 6,482 Greater than 12 months 6,744 6,852 6,748 6,855 13,261 13,322 13,265 13,337
Parent Entity Consolidated Entity Directors' Directors' Employee Retirement Employee Retirement Benefits provision Benefits provision $'000 $'000 $'000 $'000
(b) Movements in provisions
Carrying amount at beginning of the year 380 791 384 806
Additional provisions made in the period 6,784 - 6,784 - Amounts used during the period (6,408) (415) (6,408) (415) Movements during the period due to changes in the discount rate applied (26) 4 (26) (7)
Carrying amount at end of the year 730 380 734 384
(c) Accounting policies
(i) Short-term obligations
Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months after the end of the period in which the employees render the related service are recognised in respect of employees' services up to the end of the reporting period and are measured at the amounts expected to be paid when the liabilities are settled. The liability for annual leave is recognised in the provision for employee benefits. All other short-term employee benefit obligations are presented as payables.
(ii) Other long-term employee benefit obligations
The liability for long service leave, annual leave and other employee benefits which are not expected to be settled within 12 months after the end of the period in which the employees render the related service is recognised in the provision for employee benefits and measured at the present value of expected future payments to be made in respect of services provided by employees up to the end of the reporting period. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted to present value using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.
(iii) Retirement benefit obligations
The liability for director retirement benefits is recognised in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by the directors up to the reporting date. Consideration is given to expected future benefit levels and anticipated timing of retirement of directors. Expected future payments are discounted using market yields at the reporting date on high quality corporate bonds with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows.
(iv) Termination benefits
Termination benefits are recognised as a liability at the earlier of: when the entity can no longer withdraw the offer of those benefits; and when the entity recognises costs for a restructuring and involves a payment of termination benefits.
(v) Restructuring provisions
Restructuring provisions are recognised only when the recognition criteria for provisions are fulfilled. The consolidated entity has a constructive obligation when a detailed formal plan identifies the business or part of the business concerned, the location and number of employees affected, a detailed estimate of the associated costs and an appropriate timeline. Furthermore, the employees affected have been notified of the plan's main features.
If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, when appropriate, the risks specific to the liability. When discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.
42 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017 2018 2017 Note $'000 $'000 $'000 $'000
6.8 Reserves
General reserve for credit losses 6.8(b)(i) 22,058 21,886 22,058 21,886 Cash flow hedges 6.8(b)(ii) (1,010) 654 (1,010) 654 Revaluation surplus - property, plant and equipment 6.8(b)(iii) 11,265 8,044 11,265 8,044 32,313 30,584 32,313 30,584
(a) Nature and purpose of reserves
(i) General reserve for credit losses
For prudential purposes, APRA requires that Newcastle Permanent maintains a General Reserve for Credit Losses (GRCL) in accordance with Prudential Standard APS 220 Credit Quality to safeguard against potential future losses that may occur across the credit portfolios, together with any exposure to overdrawn retail savings. The GRCL is in addition to the collective and specific allowances for impairment.
The GRCL is reviewed on a regular basis and includes an assessment of credit risk policies and procedures, the requirements of APRA Prudential Standards in relation to provisioning for credit risk, the current and past level of arrears and losses and expected future losses based on current and expected market trends and fluctuations.
(ii) Cash flow hedges
The hedging reserve is used to record gains or losses on a hedging instrument in a cash flow hedge that are recognised directly in other comprehensive income, as described by Note 4.3. Amounts are reclassified to profit or loss when the associated hedged transaction affects profit or loss.
(iii) Revaluation surplus - property, plant and equipment
The property revaluation surplus is used to record increments and decrements on the revaluation of property as described in Note 6.2.
Parent Entity Consolidated Entity 2018 2017 2018 2017 $'000 $'000 $'000 $'000
(b) Movements
(i) General reserve for credit losses
Balance at 1 July 21,886 20,807 21,886 20,807 Transfer from retained profits 172 1,079 172 1,079 Balance at 30 June 22,058 21,886 22,058 21,886
(ii) Hedging reserve - cash flow hedges
Balance at 1 July 654 8,120 654 8,120 Revaluation - gross (2,958) (10,423) (2,958) (10,423) Deferred tax on cash flow hedges 1,223 3,649 1,223 3,649 Losses on swaps unwound during the year (1,123) (1,740) (1,123) (1,740) Unwound swap losses released to the income statement 1,705 1,497 1,705 1,497 Deferred tax on unwound swaps (511) (449) (511) (449) Balance at 30 June (1,010) 654 (1,010) 654
(iii) Revaluation surplus - property, plant and equipment
Balance at 1 July 8,044 8,356 8,044 8,356 Revaluation - gross 5,043 - 5,043 - Deferred tax (1,512) - (1,512) - Transfer to retained earnings on disposal of assets (310) (312) (310) (312) Balance at 30 June 11,265 8,044 11,265 8,044
6.9 Retained profits attributable to members of Newcastle Permanent
Balance at 1 July 848,548 809,906 848,548 809,906 Transfer to the general reserve for credit losses (172) (1,079) (172) (1,079) Transfer from revaluation surplus - property, plant and equipment 310 312 310 312 Deferred tax adjustment on disposal of assets - 461 - 461 Net profit for the year 43,768 38,948 43,768 38,948 Balance at 30 June 892,454 848,548 892,454 848,548
43 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Consolidated Entity Note 2018 2017 $'000 $'000
6.10 Non-controlling interests
Interests in: Reserves 6.10(b)(i) 343 - Retained profits 29,183 29,939 29,526 29,939 (a) Nature and purpose of reserves
(i) Available-for-sale financial assets
Changes in the fair value and exchange differences arising on translation of investments, such as equities classified as available-for-sale financial assets, are recognised in other comprehensive income, as described in Note 4.2 and accumulated in a separate reserve within equity. Amounts are reclassified to profit or loss when the associated assets are sold or impaired.
(b) Movements
(i) Available-for-sale financial assets
Balance at 1 July - - Revaluation - gross 343 - Reclassification to profit or loss on disposal - gross - - Balance at 30 June 343 -
Parent Entity Consolidated Entity 2018 2017* 2018 2017* $'000 $'000 $'000 $'000
6.11 Key management personnel disclosures
(a) Key management personnel compensation
Short-term employee benefits 5,256 5,090 5,389 5,176 Post-employment benefits 265 329 283 334 Termination benefits - 407 - 407 Long-term benefits 478 529 491 540 5,999 6,355 6,163 6,457
* The comparative statement has been restated. Refer to Note 7.1(i) for further details.
(b) Transactions with key management personnel
Loans to key management personnel of Newcastle Permanent, including their personally related parties, are secured unless the loan product does not require security (e.g credit cards). Loans are on normal terms and conditions applicable to members generally, unless the individual is eligible for a discounted interest rate in accordance with Newcastle Permanent staff benefit policies. These benefits have been grandfathered and are no longer offered. No provision for impairment has been recognised in respect of these loans, and there are no arrears existing on these loans. Deposits from key management personnel including their personally related parties are on the same terms and conditions as applicable to members generally.
(c) Loans to key management personnel
Details of loans made to directors and other key management personnel of the consolidated entity, including their personally related parties, are set out in aggregate below:
Loans and advances receivable at end of financial year 2,513 3,332 2,513 3,832 Loans advanced during the year 149 897 149 897 Interest received on loans and advances 174 125 174 132
(d) Deposits from key management personnel
Details of deposits held by directors and other key management personnel of the consolidated entity, including their personally related parties, are set out in aggregate below:
Deposits held at end of financial year 1,489 1,162 1,502 1,384 Interest expense on deposits to key management personnel 23 32 23 32
44 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
Parent Entity Consolidated Entity 2018 2017 2018 2017 $ $ $ $
6.12 Remuneration of auditors
During the year the following fees were incurred for services provided by the auditor of the parent entity, its related practices and non-related audit firms:
(a) Assurance Services
(i) Audit services Audit of financial statements 247,833 254,001 301,021 304,723
(ii) Other assurance services Audit of regulatory returns 57,337 49,797 57,337 49,797
Total remuneration for assurance services 305,170 303,798 358,358 354,520
(b) Other Services
Tax compliance 33,351 21,713 43,579 30,127 Advisory services 53,098 103,278 53,098 103,278
Total remuneration for other services 86,449 124,991 96,677 133,405
6.13 Interests in other entities
(a) Material subsidiaries
The consolidated financial statements incorporate the assets, liabilities and results of the following controlled entities in accordance with the accounting policy described in Note 7.1(a).
Country of Ownership interest held by Ownership interest held by Name of Entity Principal Activities incorporation the group non-controlling interests 2018 2017 2018 2017
Newcastle Friendly Society The provision of financial products Australia - - 100% 100% Limited and services approved under the Life Insurance Act 1995.
Newcastle Permanent Incorporated in New South Wales, Australia 100% 100% - - Community Foundation Australia. Trustee of Newcastle Company Limited Permanent Charitable Foundation.
Newcastle Permanent Charitable Community support fund Australia - - 100% 100% Foundation established for the purpose of raising funds to be provided to other deductible gift recipients. Newcastle Permanent contributed $100 in settlement capital to establish the fund.
Newcastle Permanent Funding Securitisation Trust program Australia 91% 91% 9% 9% Trust No.1 established under a Master Trust Deed dated 21 December 2011. Newcastle Permanent is the holder of the participation unit and nine residual units for which a total issue price of $100 was paid on the establishment of the Trust. Solution Capital Pty Limited is the holder of the remaining residual unit of $10.
(b) Voting rights of the group
The proportion of voting rights held by non-controlling interests, if different from the proportion of ownership interests held, is disclosed in the table below:
Voting rights held by the group 2018 2017
Newcastle Permanent Funding Trust No.1 100% 100%
45 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
6.13 Interests in other entities (continued)
(b) Voting rights of the group (continued)
The consolidated entity has made the judgement that it controls the non-controlling interests through consideration of the following factors:
(i) the consolidated entity exercises power over the investee through existing rights that give it the ability to direct the relevant activities that significantly affect the entity's returns;
(ii) the consolidated entity is exposed, or has rights, to variable returns from its involvement with the investee and that the returns from its involvement have the potential to vary as a result of the investee's performance; and
(iii) the consolidated entity has the ability to use its power over the investee to affect its returns from its involvement with the investee.
(c) Non-controlling interests
Newcastle Friendly Society Newcastle Permanent Limited Charitable Foundation 2018 2017 2018 2017 Note $'000 $'000 $'000 $'000
(i) Summarised balance sheet
Total assets 17,920 20,414 28,180 28,475 Total liabilities (16,571) (18,950) (3) - Net assets 1,349 1,464 28,177 28,475
Accumulated non-controlling interest 1,349 1,464 28,177 28,475
Total material non-controlling interests 29,526 29,939 Other non-controlling interests - - Total non-controlling interests 6.10 29,526 29,939
(ii) Summarised statement of comprehensive income
Total income 281 758 850 809 Profit/(loss) for the period (114) 378 (642) (651)
Other comprehensive income - - 343 - Total comprehensive income (114) 378 (299) (651)
Profit/(loss) allocated to non-controlling interests (114) 378 (299) (651)
Total loss allocated to material non-controlling interests (413) (273) Other non-controlling interests - - Total loss allocated to non-controlling interests (413) (273)
(iii) Summarised cash flows
Cash flows from operating activities (2,056) (2,386) (617) (610) Cash flows from investing activities - - (1,888) 6,874 Cash flows from financing activities - - - - Net decrease in cash and cash equivalents (2,056) (2,386) (2,505) 6,264
6.14 Related party transactions
(a) Parent entity
The ultimate parent entity and ultimate controlling entity is Newcastle Permanent Building Society Limited (Newcastle Permanent).
(b) Controlled entities
Interest in controlled entities are set out in Note 6.13.
(c) Key management personnel
Disclosures relating to key management personnel are set out in Note 6.11.
46 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
6.14 Related party transactions (continued)
(d) Transactions with other related parties
The following transactions and year end balances occurred with related parties. Unless otherwise stated, all transactions occurred on an arm's length basis.
2018 2017 $ $
(i) Newcastle Permanent Charitable Foundation (the Foundation)
Transactions Interest paid to the Foundation on funds on deposit with Newcastle Permanent 41,658 166,411
Newcastle Permanent does not charge a fee to provide administrative, accounting and marketing services to the Foundation, nor does it seek to recover the direct expenditure incurred. Direct expenditure incurred by Newcastle Permanent in providing these services includes:
Salaries, wages and administrative costs 334,320 322,508 Marketing costs 253,877 260,000
Year end balances Foundation funds on deposit with Newcastle Permanent 17,458 6,415,996
(ii) Newcastle Friendly Society Limited (Newcastle Friendly Society)
Transactions Management fee paid to Newcastle Permanent for the provision of administrative support 121,000 50,000 Interest paid to Newcastle Friendly Society on funds on deposit with Newcastle Permanent 94,878 111,090
Newcastle Permanent provides accounting and secretarial services to Newcastle Friendly Society for which a management fee is paid. The management fee charged by Newcastle Permanent is set out in the Investment and Other Services Agreement between the parties at the estimated market value of services provided.
Year end balances Newcastle Friendly Society funds on deposit with Newcastle Permanent 5,777,303 6,832,908
(iii) Newcastle Permanent Funding Trust No.1 (the Funding Trust)
A controlled entity, Newcastle Permanent Funding Trust No.1 purchased equitably assigned residential mortgage loans originated by Newcastle Permanent. However, equitably assigned loans relating to the same securitisation program continue to be recognised in the balance sheet of Newcastle Permanent with a corresponding increase in Newcastle Permanent’s payable to the Trust.
Transactions Interest expense on imputed loan payable to the Funding Trust 66,103,788 60,335,245 Service fees paid by the Funding Trust to Newcastle Permanent in its capacity as Manager, Servicer and Trust Administrator 3,055,462 2,864,425 Distribution paid by the Funding Trust to Newcastle Permanent as the participation unit-holder and residual income unit-holder 14,100,085 13,392,486 Net movement in loans and receivables (imputed loan) to the Funding Trust 61,153,728 134,510,937 Interest received by Newcastle Permanent on trust notes held with the Funding Trust 41,129,994 37,387,507
Year end balances Amount payable by Newcastle Permanent to the Funding Trust for imputed loans 1,507,213,558 1,445,733,324 Other receivables due from Newcastle Permanent 3,949,018 5,374,337 Amount payable to Newcastle Permanent by the Funding Trust at the balance sheet date 19,082,720 20,706,717 Newcastle Permanent holds trust notes at the balance sheet date issued by the Funding Trust 1,346,400,862 1,199,231,835
(e) Other arrangements with related parties
Newcastle Permanent Funding Trust No.1
During the year, Newcastle Permanent paid a sub-trust manager fee to Perpetual Limited which remunerates them for performing services outlined in the sub-manager agreement. The fee was paid on behalf of Newcastle Permanent Funding Trust No.1. The duties are administrative functions of the Trust and are performed at the direction of Newcastle Permanent as the trust manager of the Trust. The expenditure paid by Newcastle Permanent has been disclosed. 295,766 289,331
47 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
6.14 Related party transactions (continued)
(f) Related party settlement matter
During the prior year, Newcastle Permanent communicated an offer to reimburse Newcastle Friendly Society for costs incurred during 2015 and 2016. Under the Investment and Other Services agreement between the parties, Newcastle Permanent is responsible for providing administrative and compliance services to Newcastle Friendly Society. As a result of an oversight in the provision of these services, Newcastle Friendly Society has incurred a loss for which Newcastle Permanent has made an offer of restitution.
The terms of settlement were agreed between the parties, which saw Newcastle Permanent contribute $435,000 as restitution for costs incurred by Newcastle Friendly Society. As the settlement is an intercompany transaction, it has no material impact on the consolidated entity results.
6.15 Matters subsequent to the end of financial year
No matters of circumstances have arisen since the end of the financial period, other than that referenced in Note 4.5, which significantly affected, or may significantly affect, the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in future financial years.
6.16 Member guarantee
In the event of winding up Newcastle Permanent, the liability of the members of Newcastle Permanent is limited to $1.00. Upon winding up if there are undistributed funds, members will receive these monies in proportion to the amounts invested by members in Newcastle Permanent.
7. Accounting policies and new accounting standards
7.1 Accounting policies
(a) Basis of consolidation
The consolidated financial statements comprise the financial statements of Newcastle Permanent and its subsidiaries and structured entities (as outlined in Note 6.13 as at and for the period ended 30 June each year. Control is achieved when the consolidated entity is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
When the consolidated entity has less than a majority of the voting or similar rights of an investee, the consolidated entity considers all relevant facts and circumstances in assessing whether it has power over an investee, including:
- the contractual arrangement with the other vote holders of the investee; - rights arising from other contractual arrangements; and - the consolidated entity's voting rights and potential voting rights.
Structured entities are those entities over which the consolidated entity has no ownership interest but in effect the substance of the relationship is such that the consolidated entity controls the entity so as to obtain variable returns from its involvement with the entity.
Controlled entities are fully consolidated from the date on which control is transferred to the consolidated entity. They are de-consolidated from the date that control ceases.
Profit or loss and each component of other comprehensive income are attributed to the equity holders of the parent of the consolidated entity and to the non-controlling interests, even if this results in the non-controlling interests having a deficit balance.
Intercompany transactions, balances and unrealised gains on transactions between entities within the consolidated entity are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of the impairment of the asset transferred. Accounting policies of controlled entities have been changed where necessary to ensure consistency with the policies adopted by the consolidated entity.
Non-controlling interests in the results and equity of controlled entities are shown separately in the consolidated income statements, statements of comprehensive income, statements of changes in equity and balance sheets respectively.
Investments in subsidiaries are accounted for at cost, less any impairment loss in the separate financial statements of Newcastle Permanent.
(b) Foreign currency translation
(i) Functional and presentation currency
Items included in the financial statements of each entity within the consolidated entity are measured using the currency of the primary economic environment in which the entity operates ("the functional currency"). The consolidated financial statements are presented in Australian dollars, which is the consolidated entity's functional and presentation currency.
(ii) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss, except when they are deferred in equity as qualifying cash flow hedges.
Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. Translation differences on assets and liabilities carried at fair value are reported as part of the fair value gain or loss. For example, translation differences on non-monetary financial assets such as equities classified as available-for-sale financial assets are included in the available-for- sale investments reserve in equity. 48 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
7.1 Accounting policies (continued)
(c) Goods and Services Tax (GST)
Newcastle Permanent is treated as an input-taxed entity for GST purposes. This means that in most circumstances, GST is not chargeable on services provided and GST incurred by Newcastle Permanent is not recoverable from the Australian Taxation Office. Accordingly in respect of Newcastle Permanent, the amount of GST incurred that is not recoverable is recognised as part of the cost of acquisition of an asset or as part of an item of expense.
Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the taxation authority is included within other receivables or payables in the balance sheet.
(d) Financial liabilities
Financial liabilities include payables, deposits from members and other financial institutions, certificates of deposit, interest bearing trust notes and life insurance and life investment contracts.
Financial liabilities may be held at fair value through profit or loss or at amortised cost. When a financial liability is recognised, initially it is measured at its fair value net of transaction costs, unless the financial instrument is designated as fair value through profit or loss.
(e) Repurchase and reverse repurchase agreements
Securities sold under agreements to repurchase at a specified future date are not derecognised from the balance sheet as the consolidated entity retains substantially all the risks and rewards of ownership. The corresponding cash received is recognised in the consolidated balance sheet as an asset with a corresponding obligation to return it, including accrued interest as a liability within payables, reflecting the transaction's economic substance as a loan to the consolidated entity. The difference between the sale and repurchase prices is treated as interest expense and is accrued over the life of the agreement using the effective interest rate. When the counterparty has the right to sell or repledge the securities, the consolidated entity reclassifies those securities in its balance sheet to "Financial assets held-for-trading pledged as collateral" or to "Financial investments available- for-sale pledged as collateral", as appropriate.
Conversely, securities purchased under agreements to resell at a specified future date are not recognised in the balance sheet. The consideration paid, including accrued interest, is recorded in the balance sheet within "Cash collateral on securities borrowed and reverse repurchase agreements", reflecting the transaction's economic substance as a loan by the consolidated entity. The difference between the purchase and resale prices is recorded in "Net interest income" and is accrued over the life of the agreement using the effective interest rate.
If securities purchased under agreement to resell are subsequently sold to third parties, the obligation to return the securities is recorded as a short sale within "Financial liabilities held-for-trading" and measured at fair value with any gains or losses including in "Net trading income".
(f) Financial institution guarantees
The consolidated entity extends credit commitments, guarantees, commercial and standby letters of credit to ensure funds are available to a customer as required. These are instruments that are written undertakings by the consolidated entity on behalf of a customer authorising a third party to draw drafts on the consolidated entity up to a stipulated amount under specific terms and conditions.
(g) Fair value measurement
The consolidated entity measures financial instruments such as derivatives, and non-financial assets such as land and buildings, at fair value at each balance sheet date. Also, certain assets and liabilities measured at cost or amortised cost are required to have their fair value disclosed in the financial statements. Where disclosures of fair value are made for items measured at cost or amortised cost, the principles outlined below are applied.
Fair value is 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. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
- in the principal market for the asset or liability; or - in the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the consolidated entity.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.
The consolidated entity uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
- Level 1 - Quoted (unadjusted) market prices in active markets for identical assets or liabilities; - Level 2 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable; - Level 3 - Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
49 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
7.1 Accounting policies (continued)
(g) Fair value measurement (continued)
For assets and liabilities that are recognised in the financial statements on a recurring basis, the consolidated entity determines whether transfers have occurred between Levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
External valuers are involved for the valuation of significant assets, such as land and buildings. Involvement of external valuers is decided upon annually by management after discussion with and approval by the Audit Committee. Selection criteria include market knowledge, reputation, independence and whether professional standards are maintained.
(h) Rounding of amounts
The consolidated entity is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors' Reports) Instrument 2016/191, relating to the "rounding off" of amounts in the financial report. Amounts in the financial report have been rounded off in accordance with the instrument to the nearest thousand dollars, or in certain cases, the nearest dollar.
(i) Reclassifications
During the current period, the consolidated entity has reclassified comparative data to ensure a consistent presentation with the current year results. All comparative changes made have been footnoted throughout the Financial Statements. Other than changes presented below, the restatements are not considered to have a material impact on the Financial Statements. A description of each material reclassification is outlined below for both the parent and consolidated entity unless otherwise stated: - Comparative data for treasury dealer fees previously reported in operating expenses was reclassified into interest expense on borrowings to more accurately reflect the nature of this expense. The effect of this was to increase interest expense on borrowings by $243,000 and reduce operating expenses by $243,000. The associated cash flow movements has also been reflected. - Comparative data for the balance of treasury dealer fees previously reported in prepayments was reclassified into borrowings to more accurately reflect the nature of this expense. The effect of this was to reduce prepayments by $1,096,000 and reduce unsecured borrowings by an equivalent amount. The associated cash flow movements has also been reflected. - Comparative data for ATM, Visa and BPAY Fees, and fee for service income previously reported in commission revenue, was reclassified into fee revenue, to more accurately reflect the description of the revenue source. The effect of this was to increase fee income by $8,542,000 and reduce commission income by $8,542,000. - Comparative data for other income was reclassified into partnership income to disaggregate a material component of revenue. The effect of this was to separately identify partnership Income of $1,062,000, reducing other income by an equivalent amount. - Comparative data for intercompany payables previously shown in borrowings was reclassified into payables to align reporting across the consolidated entity. The effect was to decrease borrowings by $5,374,337 and increase payables by an equivalent amount (parent only). The associated cash flow movements has also been reflected. - Comparative data for key management personnel was reclassified from short-term benefits into long-term benefits to more accurately reflect the nature of the payments made. The effect of this was to decrease short-term benefits and increase long-term benefits by $269,000 (for the parent entity) and $278,000 (for the consolidated entity).
7.2 New accounting standards and interpretations
(a) Changes in accounting policies and disclosures
The consolidated entity has not adopted any new and amended Australian Accounting Standards and Interpretations as of 1 July 2017 that would have a material impact on the financial statements.
(b) Accounting standards and interpretations issued but not yet effective
Certain new Australian Accounting Standards and Interpretations have been published that are not mandatory for 30 June 2018 reporting periods. The consolidated entity's assessment of the impact of these new standards and interpretations is set out below:
Title of Standard AASB 9 Financial Instruments
Nature of Change AASB 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities, introduces new rules for hedge accounting and a new impairment model for financial assets.
Impact The consolidated entity has reviewed its financial assets and liabilities and is expecting the following impact from the adoption of the new standard on 1 July 2018:
Classification and The classification and measurement of financial liabilities remains substantially unchanged from AASB 139, except Measurement where under that standard (or going forward) the entity has chosen to measure a financial liability at fair value through profit and loss (FVTPL). Newcastle Permanent has no such liabilities and has recognised all financial liabilities at amortised cost under AASB 139. Therefore there is no impact to financial liabilities for NPBS on transition to AASB 9.
The classification and measurement methodology for financial assets focuses on the business model for managing the financial asset and their contractual cash flow characteristics. This is designed to be a simpler approach than that under AASB 139 that better aligns the presentation of the balance sheet with the business objectives of the entity.
The majority of the consolidated entity's financial assets that are currently classified as held-to-maturity or loans and receivables will continue to be measured at amortised cost under AASB 9. However, there are some exceptions to this, which are outlined below: 50 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
7.2 New accounting standards and interpretations (continued)
(b) Accounting standards and interpretations issued but not yet effective (continued)
Title of Standard AASB 9 Financial Instruments
(a) Investment portfolio held by At 30 June 2018, the consolidated entity (through a Charitable Foundation) holds available-for-sale financial assets, Charitable Foundation which are comprised of units in managed fund unit trusts. The nature of these units are such that, units are redeemable, and there is an obligation for the trust manager to distribute income to the unitholders, giving them the features of a liability. The Trust will therefore classify the investments as "debt instruments" and consider the business model and contractual cashflow characteristics when determining the appropriate measurement basis.
The consolidated entity has determined that although it has an intention to hold the investments for long term income and capital appreciation, the payments it receives as a unitholder do not have the characteristic of being "solely payments of principal and interest". Therefore, the consolidated entity will continue to measure the investments at fair value, however gains and losses will be recognised directly in the income statement. This differs from the current treatment as an available-for-sale financial asset, whereby the gains and losses are recognised in a reserve within equity.
The transition to AASB 9 will therefore see the available-for-sale investments reserve of $343,000 transferred to retained earnings at 1 July 2018. There will be no overall increase in equity at the transition date. Future gains and losses arising from the measurement of the investments at fair value will be recorded in the income statement for the 2019 financial year.
(b) Mortgage backed At 30 June 2018, the consolidated entity holds mortgage backed securities of $3,314,000. Although the consolidated investments entity holds the investment to collect principal and interest cash flows, it does not pass the "sole payments of principal and interest" test, due to the subordinated nature of the investment (i.e. the investment holds higher credit risk than the underlying pool of assets which back it). Therefore, under AASB 9, the investment will be required to be measured at fair value through profit and loss (FVTPL).
The transition to AASB 9 will result in the investment being recognised at its fair value of $2,367,000. The difference of $943,000 will be recorded as a reduction in retained earnings at 1 July 2018. Future gains and losses arising form the measurement of the investment at fair value will be recorded in the income statement for the 2019 financial year.
(c) Subordinated notes in At 30 June 2018, the parent entity holds interest bearing notes in its securitisation vehicles (held for both funding and securitisation vehicles contingent liquidity purposes). This includes holdings of subordinated notes within the securitisation structures. As for (b) above, the subordinated nature of these notes require them to be measured at FVTPL.
However, the parent entity has determined that the fair value of the notes at 30 June 2018 approximates their current carrying value at amortised cost, and therefore there will be no quantitative impact on transition to AASB 9. It is also important to note that the notes held in securitisation vehicles are fully eliminated within the consolidated entity's financial statements.
Impairment The new impairment model under AASB 9 requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under AASB 139.
The consolidated entity has developed an ECL provision model that complies with the requirements of AASB 9. An ECL provision will be recognised for all financial assets measured at amortised cost. On 1 July 2018, the consolidated entity will increase its provision for impairment by $421,000 for cash and liquid assets, and $444,000 for loans and advances. The total increase of $865,000 will result in a reduction in retained earnings, and an increase in the provision for impairment.
Disclosure The new standard also introduces expanded disclosure requirements and changes presentation. These are expected to change the nature and extent of the consolidated entity's disclosures about its financial instruments particularly in the year of adoption of the new standard.
Date of Adoption The consolidated entity will apply the standard from 1 July 2018 and apply the new rules retrospectively from 1 July 2018, with the practical expedients permitted under the Standard. Comparatives for 2018 will not be restated, with transitional adjustments recognised through retained earnings on 1 July 2018.
Title of Standard AASB 15 Revenue from Contracts with Customers
Nature of Change AASB 15 is a new standard for the recognition of revenue. This will replace AASB 118 which covers revenue arising from the sale of goods and the rendering of services, and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer.
Impact The consolidated entity has reviewed its financial assets and liabilities and is expecting the following impact from the adoption of the new standard on 1 July 2018:
51 NEWCASTLE PERMANENT BUILDING SOCIETY LIMITED NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2018
7.2 New accounting standards and interpretations (continued)
(b) Accounting standards and interpretations issued but not yet effective (continued)
Title of Standard AASB 15 Revenue from Contracts with Customers
(a) Items outside the scope of Certain contracts that fall within the scope of other accounting standards are not impacted by AASB 15. This includes the Standard financial instruments and other contractual rights or obligations within the scope of AASB 9: Financial Instruments . The majority of the consolidated entity's revenue is derived from loans and advances, investments and fees that are integral part of the effective interest rate of financial instruments. Therefore, these items are not impacted by the transition to AASB 9. NPBS have elected to apply this Standard retrospectively only to contracts that are not completed contracts at the date of initial application.
(b) Insurance commissions The consolidated entity receives insurance commissions from partner organisations for distributing and placing general and consumer credit insurance products. When a customer takes out an insurance policy distributed by Newcastle Permanent, it is required to recognise revenue once it satisfies the required performance obligations to transfer the service to a customer. Based on expected retention rates, it is expected that the consolidated entity will record a contract asset relating to expected revenue over the life of the contract with the partner organisation. The contract asset will be regularly assessed against actual policy retention data.
As a result, the transition to AASB 15 will see a contract asset of $1,352,000 recognised on 1 July 2018, with a corresponding increase in retained earnings. The contract asset represents the full lifetime revenue expected for contracts on hand at 30 June 2018, for which the consolidated entity has satisfied the required performance obligations for the recognition of the revenue. This transitional adjustment will also have an impact on deferred tax balances.
(c) Card incentives The consolidated entity receives insurance commissions from partner organisations for distributing and placing general and consumer credit insurance products. When a customer takes out an insurance policy distributed by Newcastle Permanent, it is required to recognise revenue once it satisfies the required performance obligations to transfer the service to a customer. Based on expected retention rates, it is expected that the consolidated entity will record a contract asset relating to expected revenue over the life of the contract with the partner organisation. The contract asset will be regularly assessed against actual policy retention data.
The transition to AASB 15 will see a contract asset of $87,000 recognised on 1 July 2018, with a corresponding increase in retained earnings. The contract asset represents NPBS’ progress (as at 30 June 2018) towards meeting the calendar year transaction volume targets. This transitional adjustment will also have an impact on deferred tax balances.
Date of Adoption The consolidated entity will apply the standard from 1 July 2018 and apply the new rules retrospectively from 1 July 2018, with the practical expedients permitted under the standard. The consolidated entity intends to adopt the standard using the modified retrospective approach which means that the cumulative impact of the adoption will be recognised in retained earnings as of 1 July 2018, and that comparatives will not be restated.
Title of Standard AASB 16 Leases
Nature of Change AASB 16 was issued in February 2016. It will result in almost all leases being recognised on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognised. The only exceptions are short-term and low- value leases. The accounting for lessors will not significantly change.
Impact The consolidated entity has not yet completed its assessment of the impact of applying AASB 16. However, the consolidated entity does have a range of operating lease contracts that will require recognition as a "right of use" asset, with a corresponding liability to be recognised. At 30 June 2018, the consolidated entity has reported total operating lease commitments of $34,180,000 (refer to Note 5.3).
However, the consolidated entity has not yet assessed what other adjustments, if any, are necessary for example because of the change in the definition of the lease term and the different treatment of variable lease payments and of extension and termination options. It is therefore not yet possible to estimate the amount of "right of use" assets and lease liabilities that will have to be recognised on adoption of the new standard and how this may affect the consolidated entity's profit or loss and classification of cash flows going forward.
Date of Adoption The consolidated entity will apply the standard from 1 July 2019 and does not intend to adopt the standard before its effective date. The consolidated entity intends to apply the simplified transition approach and will not restate comparative amounts for the year prior to first adoption.
No other new accounting standards or interpretations are applicable.
52
Independent auditor’s report To the members of Newcastle Permanent Building Society Limited
Our opinion In our opinion the accompanying financial report of Newcastle Permanent Building Society Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the Company's and Group's financial positions as at 30 June 2018 and of their financial performance for the year then ended (b) complying with Australian Accounting Standards and the Corporations Regulations 2001.
What we have audited The Company and Group financial report comprises: the Consolidated and Company balance sheets as at 30 June 2018 the Consolidated and Company income statements for the year then ended the Consolidated and Company statements of comprehensive income for the year then ended the Consolidated and Company statements of changes in equity for the year then ended the Consolidated and Company statements of cash flows for the year then ended the notes to the financial statements, which include a summary of significant accounting policies the directors’ declaration.
Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Independence We are independent of the Company and the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.
Other information The directors are responsible for the other information. The other information comprises the information included in the financial report for the year ended 30 June 2018, including the Directors' Report, but does not include the financial report and our auditor’s report thereon.
PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo, GPO BOX 2650, SYDNEY NSW 2001 T: +61 2 8266 0000, F: +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T: +61 2 9659 2476, F: +61 2 8266 9999, www.pwc.com.au
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