Full Year Statutory Accounts

http://www.rns-pdf.londonstockexchange.com/rns/5537V_1-2017-1-31.pdf

eServGlobal Limited

ABN 59 052 947 743

Financial report for the financial year ended 31 October 2016

Annual financial report For the financial year ended31 October 2016 

Contents

Executive Chairman's review

FY2016 was a year of significant achievement in eServGlobal, yet not a year in which we could demonstrate success to our investors. HomeSend's strategic progress was however marked. Our core business, while lossmaking, came back to life on the sales front at the end, and our cost cutting has been very significant.

The HomeSend Joint Venture has moved forward on several strategic fronts and as we look back on the progress made since joint venture formation, I believe it is now possible to 'connect the dots' of the individual milestones which have come together to show a very different picture than a few short years ago.

HomeSend has pivoted to significantly enlarge both its capabilities and the potential target markets it can serve. The hub now provides global payment functionality for person-to-person transfers as well as international SME and banking transactions.

The strategic positioning of HomeSend within the Mastercard suite of solutions has also evolved in the last two years. HomeSend's solution will now facilitate more use cases than originally conceived and there is an evident synergy with Mastercard's global strategy. Supported by the strength of Mastercard, HomeSend now offers an investment case far larger than originally presented to the market.

HomeSend can now tap into the substantial global payments market, namely bank and card transfers. This market is ripe for disruption. McKinsey expects annual global payments revenues to increase at an annual rate of 6 percent during the next five years, exceeding $2 trillion by 2020.

In the Core Business we have provided the first evidence of a turnaround in our sales function by reporting total contracted bookings over 60 percent higher than FY2015. A key strategic goal for FY2016 was to diversify the sales process by working with channel partners. Initial success with this strategy was achieved in October when eServGlobal signed a major channel partnership for mobile financial technology in areas of Africa. This partnership is expected to bring significant growth in regional opportunities over the next five years.

Of the new partnerships and opportunities, some are multi-year, and so we are cognisant that we cannot become complacent and we continue to hunt new opportunities while refining and improving our approach.

Our investors have, not for the first time, provided critical support to the Company through a substantial fundraising. In June we raised A$26.2m (€17.5m) through a placing offer. We used these funds to reduce outstanding loans, to continue addressing our cost base and to accelerate sales and marketing in the core business. I would like to express thanks to our shareholders for their support.

We recently welcomed Andrew Hayward to the Company and the Board as Chief Financial Officer. Andrew brings the right mix of financial and investor relations skills combined with senior strategic advisory experience, I am sure he will be an asset to the Board. I would like to thank my colleagues on the Board for their ongoing dedication and guidance during 2016.

I also want to express, on behalf of the Board, thanks to all the team at eServGlobal. Turning around this business has required perseverance, energy and ingenuity and I have witnessed this again and again across the Company.

Looking ahead, I have confidence that eServGlobal now has not only the foundations, but the first clear evidence of becoming a successful and sustainable business in a growing space. Likewise, the HomeSend Joint Venture is now well-positioned to address a substantially enlarged potential market, and I am excited about 2017.

John Conoley Chairman

Directors' report

Tom Rowe has served as Company Secretary of eServGlobal since 6 April 2011. He is a Corporate and Commercial Lawyer practicing with Capital Corporate Law in Sydney with a specialty in corporate transactions, corporate governance and capital raising. Tom holds a BA LLB (Hons) from the University of Adelaide and Graduate Diplomas in both applied corporate governance and applied finance and investment.

Tom was appointed to the Board in March 2014. He subsequently became a member of the Remuneration and Nomination Committee on 20 July 2015.

Directorships of other listed companies

Directorships of other listed companies held by Directors in the 3 years immediately before the end of the financial year are as follows:

Company Secretary

Tom Rowe has served as Company Secretary of eServGlobal since 6 April 2011.

Details of unissued shares under option as at the date of this report are:

During the financial year and up to the date of this report, there were no options exercised and 3,181,945 options cancelled.

Directors' attendance at Board and Committee meetings held during the financial year

*Held during term of director's appointment to Board, Audit or Remuneration and Nomination Committees.

Non-audit services

The directors are satisfied that the provision of non-audit services, during the financial year, by the auditor (or by another person or firm on the auditor's behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001.

The audit committee, in conjunction with the Chief Financial Officer, assesses the provision of non-audit services by the auditors to ensure that the auditor independence requirements of the Corporations Act 2001 in relation to the audit are met.

Details of amounts paid or payable to the auditor for non-audit services provided during the financial year by the auditor are outlined in Note 7 to the financial statements.

The directors are of the opinion that the services as disclosed in Note 7 to the financial statements do not compromise the external auditor's independence, based on advice received from the Audit Committee, for the following reasons:

· all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor; and

· none of the services undermine the general principles relating to auditor independence as set out in APES 110 'Code of Ethics for Professional Accountants' issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor's own work, acting in a management or decision-making capacity for the Company, acting as advocate for the Company or jointly sharing economic risks and rewards.

Auditor's independence declaration

The auditor's independence declaration is included on page 17 of the financial report.

Remuneration Report

Director and other key management personnel details

The following persons acted as key management personnel of the Company and the Group during or since the end of the financial year:

 John Conoley (Executive Chairman)

 Stephen Baldwin (Non-executive director)

 Tom Rowe (Company Secretary and non-executive director)

 Andrew Hayward (Chief Finance Officer, appointed 10 October 2016, and executive director, appointed 21 December 2016)

 Paolo Gagliardi (Chief Operating Officer)

 James Hume (Chief Technology Officer)

 Peter Green (Vice President Finance)

 Stephen Blundell (non-executive director until resignation on 17 December 2015)

Except as noted, the named persons held their current positions for the whole of the financial year and since the end of the financial year.

Elements of key management personnel remuneration

Non-executive directors are paid directors' fees. The Board reviews the level of fees from time to time, and sets individual non-executive directors fees based on the levels of fees for comparable listed companies in the appropriate parts of the world.

The non-executive directors are appointed by either the Board or shareholder vote and any appointment is subject to re-election on retirement required at Annual General Meetings.

Executive directors and other key management personnel remuneration comprise both Short Term Incentive (STI) and Long Term Incentive (LTI) components. The STI takes the form of a cash bonus and the LTI comprises the issue of share options under the eServGlobal Employee Share Option Plan.

a) The STI component for the executive directors and other key management personnel is as follows.

The Executive Chairman is remunerated on a salary package that includes a base salary. The Executive Chairman does not participate in any variable bonus plan. The Executive Chairman is a permanent employee with no fixed employment term and a notice period of six months required by either party.

The Chief Finance Officer (CFO) is remunerated on a salary package basis that includes a base salary and a portion that is a variable component which is dependent on agreed performance objectives. The variable component is effective from 1 November 2016 and comprises elements relating to achievement of financial plan and specific business objectives. The CFO is a permanent employee with no fixed employment term and a notice period of six months required by either party.

The Chief Operating Officer (COO) is remunerated on a salary package basis that includes a base salary, a portion that is a variable component which is dependent on agreed performance objectives, and various allowances such as housing and education. The variable component comprises elements relating to achievement of financial plan and agreed performance objectives relating to sales. The COO is a permanent employee with no fixed employment term and a notice period of three months required by either party.

The Chief Technology Officer (CTO) is remunerated on a salary package basis that includes a base salary and a portion that is a variable component which is dependent on agreed performance objectives. The variable component comprises elements relating to achievement of financial plan and specific business objectives. The CTO is a permanent employee with no fixed employment term and a notice period of two months required by either party.

The Vice President Finance (VP Finance) is remunerated on a salary package that includes a base salary and a portion that is a variable component which is dependent on agreed performance objectives. The variable component comprises elements relating to achievement of financial plan and specific business objectives. The VP Finance is a permanent employee with no fixed employment term and a notice period of one month required by the Company and six months required by the employee.

b) The LTI (share option) component contains an element of reward to incentivise loyalty and continuity of service to the Company through the vesting of options over a defined period with eligibility being dependent on continued employment.

The tables below set out summary information about the Group's earnings and movements in shareholder wealth for the five years to 31 October 2016.

Directors' report

The group's key management personnel received, or will receive, the following amounts as compensation for their services as directors and key management personnel of the Group during the financial year:

(i) Key management personnel are remunerated on a salary package basis that includes an appropriate portion that is a variable component which is dependent on Group's performance. Variable pay components are confirmed based on achievement of sales performance plan or corporate performance plan (earnings before interest, tax, depreciation and amortisation targets) established during the financial year. The corporate performance plan was not met and accordingly no bonus was payable in respect of this variable pay component. The payment of sales commission to P Gagliardi is based on achievement of sales performance plan target.

(ii) Paid in Euros and subject to foreign exchange fluctuations at Group level.

(iii) Paid in GBP and subject to foreign exchange fluctuations at Group level.

(iv) The fee disclosed relates to payments made to Simpsons Solicitors, where Tom Rowe was employed as special counsel, relating to services provided by Simpsons Solicitors. The amount paid is for services provided by Tom Rowe in his capacity as company secretary and Non-executive Director. All services are invoiced on a time spent basis and on normal commercial terms.

(v) Resigned as a director on 17 December 2015.

(vi) Appointed as Chief Finance Officer on 10 October 2016.

(vii) Salary of $475,727 paid to J Conoley includes $135,938 paid to his private company until January 2016 and $339,789 paid through the company's payroll following the change to the terms of engagement in February 2016.

No key management personnel appointed during the period received a payment in consideration for agreeing to hold the position.

Directors' report

The group's key management personnel received the following amounts as compensation for their services as directors and key management personnel of the Group during the previous financial period:

(i) Key management personnel are remunerated on a salary package basis that includes an appropriate portion that is a variable component which is dependent on Group's performance. Variable pay components are confirmed based on achievement of customers' orders or earnings before interest, tax, depreciation and amortisation targets established during the financial year. 100% of the variable compensation plan bonus was forfeited in the current year for eligible participants in the corporate earnings plan, being S Blundell, P Montessori, P Gagliardi, J Hume and P Green. In addition, a "retention bonus" arrangement was approved by the board of directors for S Blundell and P Montessori which comprised for each, five quarterly payments of $100,000 commencing 1 May 2014, subject to continuing employee status at each payment date. The retention bonus expense for the financial year ended 31 October 2015 has been recognised based on a time proportionate graded basis.

(ii) Paid in Euros and subject to foreign exchange fluctuations at Group level.

(iii) Paid in GBP and subject to foreign exchange fluctuations at Group level.

(iv) Resigned as non-executive director on 29 June 2015.

(v) Appointed Executive Chairman on 20 April 2015.

(vi) Resigned as Chairman on 20 April 2015, and resigned as non-executive director effective on 30 June 2015.

(vii) Resigned as a Director on 2 March 2015. Termination payment was made in accordance with a Deed of Release.

(viii) The fee disclosed relates to payments made to Simpsons Solicitors, where Tom Rowe is employed as special counsel, relating to services provided by Simpsons Solicitors. The amount paid includes services provided by Tom Rowe in his capacity as company secretary and Non-executive Director as well other legal services provided by Simpsons Solicitors. All services are invoiced on a time spent basis and on normal commercial terms.

(ix) Resigned as Chief Operations Officer on 1 September 2015. Resigned as a director on 17 December 2015.

(x) Resigned as Chief Sales Officer on 12 September 2015.

(xi) Appointed as Vice President Finance on 1 October 2015. Remuneration disclosed relates to post appointment period only as key management personnel.

(xii) Appointed as Chief Operations Officer on 10 August 2015. Remuneration disclosed relates to post appointment period only as key management personnel.

(xiii) No key management personnel appointed during the period received a payment in consideration for agreeing to hold the position.

Directors' shareholdings

Directors' report

The following table sets out each director's relevant interest in shares of the Company or a related body corporate as at the end of the financial year.

Share-based payments granted as compensation

During the financial year, the following share-based payment arrangements were in existence.

(i) The options in this series vest 2 years from the date of issue and expire on the 5 year anniversary of the date of issue.

(ii) Options issued in this series vested fully on 21 December 2014 and expire on 21 December 2017.

(iii) Options issued in this series vested as to one half on 10 June 2014 and the balance on 10 June 2015 and expire on 10 June 2018.

(iv) Options issued in this series are executive options which vest on 14 March 2018 and expire on 14 March 2021.

(v) Options issued in this series are executive options which vest on 08 August 2018 and expire on 08 August 2021.

(vi) Options issued in this series are employee options which vest on 08 August 2018 and expire on 08 august 2021.

There has been no alteration of the terms and conditions of the above share based payment arrangements since the grant date. There have been variations to the expiry date following the resignation or termination of employment of some option holders, in accordance with the rules of the scheme.

Directors' report

Options issued to directors and key management personnel

Key management personnel receiving options are entitled to the beneficial interest under the option only if they continue to be employed with the Group at the time the option vests. Any exposure in relation to the risk associated with the movement in the underlying share price rests with the key management personnel.

During the financial year no options were forfeited as a result of a condition required for vesting (other than continuing employment with the Company) not being satisfied.

A total of 981,945 options granted to key management personnel lapsed during the year (2015: nil). No options vested since the end of the year (2015: nil).

(i) Appointed VP Finance on 1 October 2015.

Each executive share plan option converts into one ordinary share of eServGlobal Limited when the option is exercised and the exercise price paid. When options are issued, no amounts are paid or payable by the recipient of the option (Refer Note 6). Options may be exercised at any time from the date of vesting to the date of expiry.

No options were exercised during the year and 981,945 options lapsed during the year.

The following table discloses the number and value of options granted and exercised during the financial year in relation to options granted to key management personnel as part of their remuneration:

Signed in accordance with a resolution of the directors made pursuant to s.298 (2) of the Corporations Act 2001.

On behalf of the Board

John Conoley Chairman

31 January 2017

The Board of Directors eServGlobal Limited

c/- Simpsons Solicitors Level 2, Pier 8/9

23 Hickson Road, Millers Point NSW 2000

31 January 2017

Dear Board Members

eServGlobal Limited

In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of eServGlobal Limited.

As lead audit partner for the audit of the financial statements of eServGlobal Limited for the financial year ended 31 October 2016, I declare that to the best of my knowledge and belief, there have been no contraventions of:

(i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and

(ii) any applicable code of professional conduct in relation to the audit.

Yours faithfully

DELOITTE TOUCHE TOHMATSU

Michael Kaplan Partner

Chartered Accountants

Liability limited by a scheme approved under Professional Standards Legislation.

Independent Auditor's Report

to the Members of eServGlobal Limited

Report on the Financial Report

We have audited the accompanying financial report of eServGlobal Limited, which comprises the statement of financial position as at 31 October 2016, the statement of profit or loss and other comprehensive income, the statement of cash flows and the statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors' declaration of the consolidated entity comprising the company and the entities it controlled at the year's end or from time to time during the financial year as set out on pages 20 to 70.

Directors' Responsibility for the Financial Report

The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001. The directors are also responsible for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements comply with International Financial Reporting Standards.

Auditor's Responsibility

Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. Those standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance that the financial report is free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control, relevant to the entity's preparation of the financial report that gives a true and fair view, in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Auditor's Independence Declaration

In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of eServGlobal Limited, would be in the same terms if given to the directors as at the time of this auditor's report.

Liability limited by a scheme approved under Professional Standards Legislation.

Opinion

In our opinion:

(a) the financial report of eServGlobal Limited is in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the consolidated entity's financial position as at 31 October 2016 and of its performance for the year ended on that date; and

(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001;

(b) the consolidated financial statements also comply with International Financial Reporting Standards as disclosed in Note 1.

Material Uncertainty Regarding Going Concern

Without modifying our opinion, we draw your attention to Note 1(v) Going Concern in the financial report which indicates that the consolidated entity incurred a loss after tax of $24.652 million and had net cash outflows from operations of $12.046 million during the year ended 31 October 2016. These conditions, along with the matters set forth in Note 1(v) Going Concern, indicate the existence of a material uncertainty which may cast significant doubt about the ability of the consolidated entity and the company to continue as going concerns and therefore, they may be unable to realise their assets and extinguish their liabilities in the normal course of business and at the amounts stated in the financial report.

Report on the Remuneration Report

We have audited the Remuneration Report included in pages 9 to 16 of the directors' report for the year ended 31 October 2016. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Opinion

In our opinion the Remuneration Report of eServGlobal Limited for the year ended 31 October 2016, complies with section 300A of the Corporations Act 2001.

DELOITTE TOUCHE TOHMATSU

Michael Kaplan Partner

Chartered Accountants Sydney, 31 January 2017

19

eSer v Gl o b al L i m i t ed 

Directors' declaration

The directors declare that:

(a) based on the matters set out in Note 1(v), in the directors' opinion, there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable;

(b) the attached financial statements are in compliance with International Financial Reporting Standards, as stated in Note 1 to the financial statements;

(c) in the director's opinion, the attached financial statements and notes thereto are in accordance with the Corporations Act 2001, including compliance with accounting standards and giving a true and fair view of the financial position and performance of the consolidated entity; and

(d) the directors have been given the declarations required by section 295A of the Corporations Act 2001.

Signed in accordance with a resolution of the directors made pursuant to section 295(5) of the Corporations Act 2001.

On behalf of the directors

John Conoley

Chairman

31 January 2017

Consolidated statement of profit or loss and other comprehensive loss for the financial year ended 31 October 2016

Notes to the financial statements are included on pages 25 to 70

Consolidated statement of financial position as at 31 October 2016

Notes to the financial statements are included on pages 25 to 70

Consolidated statement of changes in equity for the financial year ended 31 October 2016

Notes to the financial statements are included on pages 25 to 70

Consolidated statement of cash flows for the financial year ended 31 October 2016

Notes to the financial statements are included on pages 25 to 70

Notes to the Financial Statements for the financial year ended 31 October 2016

The following significant accounting policies have been adopted in the preparation and presentation of the financial statements:

Cash and cash equivalents include cash on hand and in banks, deposits held at call with banks and financial institutions, investments in money market instruments with original maturities of three months or less from the date of acquisition, and bank overdrafts. Bank overdrafts are shown within short-term borrowings in current liabilities on the statement of financial position.

Provision is made for benefits accruing to employees in respect of wages and salaries, annual leave, long service leave and retirement benefits when it is probable that settlement will be required and they are capable of being measured reliably.

Provisions made in respect of employee benefits expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement. Provisions made in respect of employee benefits which are not expected to be settled within 12 months are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to the reporting date.

For defined benefit retirement plans, the cost of providing benefits is determined by way of actuarial valuations being carried out at the end of each annual reporting period. Remeasurement is reflected in the statement of financial position with the charge or credit recognised in other comprehensive income.

Notes to the Financial Statements for the financial year ended 31 October 2016

Financial assets are classified into the following specified category: 'loans and receivables'. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Loans and receivables

Trade and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as 'loans and receivables'. Loans and receivables are measured at amortised cost using the effective interest method less impairment. Interest income is recognised by applying the effective interest rate.

The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed on initial recognition. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying value of the allowance account are recognised in profit or loss.

Debt and equity instruments

Debt and equity instruments are classified as either liabilities or as equity in accordance with the substance of the contractual arrangement. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Transaction costs on the issue of equity instruments

Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued.

Other financial liabilities

Other financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs, and are subsequently measured at amortised cost using the effective interest method, recognising interest expense on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period, to the net carrying amount on initial recognition.

Derecognition of financial liabilities

A financial liability is de-recognised when the obligation under the liability is discharged, cancelled, or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss and other comprehensive income.

Notes to the Financial Statements for the financial year ended 31 October 2016

(d) Financial instruments issued by the Group (continued)

Derivative financial liabilities

Equity-settled options denominated in a foreign currency are recognised as derivative financial instruments based on the substance of the contractual arrangement.

Derivatives are initially recognised at fair value at the date the derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship. The Group did not have any hedging relationships in the current or prior year.

Fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

· Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

· Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

· Level 3 inputs are unobservable inputs for the asset or liability.

Trade payables

Trade payables are initially measured at fair value, and are subsequently measured at amortised cost.

(e) Goods and services tax

Revenues, expenses and assets are recognised net of the amount of goods and services tax ("GST"), except:

i. where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or

ii. for receivables and payables which are recognised inclusive of GST.

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables.

Cash flows are included in the statement of cash flows on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the taxation authority is classified as operating cash flows.

Notes to the Financial Statements for the financial year ended 31 October 2016

(f) Foreign currencies

The individual financial statements of each group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each group entity are expressed in Australian dollars, which is the functional currency of the Company and the presentation currency for the consolidated financial statements.

In preparing the financial statements of each individual group entity, transactions in currencies other than the entity's functional currency (foreign currencies) are recognised at the rates of exchange prevailing on the dates of the transactions. At the end of each reporting period, monetary items that are denominated in foreign currencies are retranslated at the rates prevailing at that date. Non- monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences on monetary items are recognised in profit or loss in the period in which they arise except for exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur in the foreseeable future (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income (loss) and reclassified from equity to profit or loss on repayment of the monetary items.

For the purpose of presenting these consolidated financial statements, the assets and liabilities of the Group's foreign operations are translated into Australian dollars using exchange rates prevailing at the end of the reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuated significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income (loss) and accumulated in equity (and attributed to non-controlling interests as appropriate).

Goodwill and fair value adjustments to identifiable assets acquired and liabilities assumed through acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognised in other comprehensive income (loss).

(g) Goodwill

Goodwill, representing the excess of the cost of acquisition over the fair value of the identifiable assets, liabilities and contingent liabilities acquired, is recognised as an asset and not amortised, but tested for impairment annually and whenever there is an indication that the goodwill may be impaired.

Any impairment is recognised immediately in profit or loss and is not subsequently reversed. Refer also to Note 1(h).

Notes to the Financial Statements for the financial year ended 31 October 2016

(h) Impairment of assets

At each reporting date, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.

For the purpose of impairment testing, goodwill is allocated to the cash-generating units expected to benefit from the synergies of the business combination.

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised in profit or loss immediately.

With the exception of goodwill, where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised in profit or loss immediately.

(i) Income tax

Current tax

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the year. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by the reporting date. Current tax for current and prior year is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

Deferred tax

Deferred tax is accounted for in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items.

In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are only recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised.

Notes to the Financial Statements for the financial year ended 31 October 2016

However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from goodwill.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

The carrying amount of deferred tax assets is reviewed at the end of each reporting period and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.

Current and deferred tax for the year

Current and deferred tax is recognised as an expense or income in profit or loss, except when it relates to items credited or debited to other comprehensive income (loss) or directly to equity, in which case the deferred tax is also recognised in other comprehensive income (loss) or directly in equity. Where it arises from the initial accounting for a business combination it is taken into account in the determination of goodwill.

Inventories are valued at the lower of cost and net realisable value. Costs are assigned to inventory on hand by the method most appropriate to each particular class of inventory, with the majority being valued on a first in first out basis. Net realisable value represents the estimated selling price less all estimated costs to be incurred in marketing, selling and distribution.

Operating lease payments, where substantially all of the risks and benefits remain with the lessor, are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals are recognised as an expense in the year in which they are incurred.

Lease incentives

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefits of incentives are recognised as a reduction of rental expense on a straight-line basis.

Notes to the Financial Statements for the financial year ended 31 October 2016

All intangible assets acquired in a business combination are identified and recognised separately from goodwill where they satisfy the definition of an intangible asset and their fair value can be measured reliably.

Internally-generated intangible assets - research and development expenditure

Expenditure on research activities is recognised as an expense in the period in which it is incurred. Where no internally-generated intangible asset can be recognised, development expenditure is recognised as an expense in the period as incurred.

An intangible asset arising from development (or from the development phase of an internal project) is recognised if, and only if, all of the following have been demonstrated:

· the technical feasibility of completing the intangible asset so that it will be available for use or sale;

· the intention to complete the intangible asset and use or sell it;

· the ability to use or sell the intangible asset;

· how the intangible asset will generate probable future economic benefits;

· the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and

· the ability to measure reliably the expenditure attributable to the intangible asset during its development.

The amount initially recognised for internally-generated intangible assets is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above.

The expenditure capitalised includes cost of materials, direct labour and a proportion of directly attributable overheads. Other development expenditure is recognised in profit or loss as an expense as and when incurred.

Subsequent to initial recognition, internally-generated intangible assets are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets acquired separately.

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) (referred to as 'the Group' in these financial statements). Control is achieved when the Company:

 has the power over the investee;

 is exposed, or has rights to variable returns from its involvement with the investee; and

 has the ability to use its power to affect the returns.