ANNUAL REPORT 2012 M2 TELECOMMUNICATIONS GROUP LTD

Transcription

1 ANNUAL REPORT 2012 M2 TELECOMMUNICATIONS GROUP LTD

2 Featured on the cover and in our timeline are some of our newly expanded M2 team. Photographers: Santoso Hendradinata, Ron Phrakhoungheaung, Andrew Barnard and John Warren (Warren Photography, Graphic Design: ADMAD

3 CONTENTS Timeline 2 Chairman s Letter 4 CEO Review 6 Directors Report 14 Remuneration Report 20 Auditor s Independence Declaration 29 Corporate Governance Statement 30 Corporate Social Responsibility 36 Financial Statements 37 Consolidated Statement Of Comprehensive Income 38 Consolidated Statement Of Financial Position 39 Consolidated Statement Of Changes In Equity 40 Consolidated Statement Of Cash Flow 41 Notes to the Consolidated Financial Statements 42 Director s Declaration 87 Independent Audit Report 88 ASX Additional Information 90 Corporate Directory 92 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

4 13 years as an SMB specialist December 1999 M2 established October 2004 M2 listed on ASX December 2009 M2 celebrated its 10th anniversary October 2007 Orion Telecommunications acquired APRIL 2009 People Telecom acquired JUNE 2009 Telecom business assets of Commander acquired EBITDA & NPAT EPS & DPS FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 0 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 EBITDA NPAT EBITDA FY12 NPAT FY12 DPS EPS DPS FY12 EPS FY12 2 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

5 February 2010 April 2012 Renounceable Entitlement Offer completed, raising $83m Dividend Reinvestment Plan introduced June 2012 May 2010 Share Placement completed, raising $20m M2 added to the S&P/ASX200 16th consecutive dividend declared Recorded NPAT of $33m, increase of 20% FEBRuary 2011 M2 acquires the assets of Clear Telecoms June 2012 M2 completes acquisition of Primus Telecom Market Capitalisation Another significant achievement this year was the completion of the Company s largest and most transformational acquisition to date - Primus Telecom Holdings Pty Ltd M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

6 CHAIRMAN S LETTER Craig L Farrow, Chairman DEAR SHAREHOLDER, On behalf of the Board of M2 Telecommunications Group Ltd ( M2, the Company ), I am pleased to present to you our Annual Report for the period 1 July 2011 to 30 June 2012 ( FY12 ). In last year s report I commented that Geoff Horth possessed the exceptional capability to implement the systems, processes and organisational structure necessary to equip M2 to move to the next level whilst maintaining its lean, hungry, challenger culture. I am pleased to report that this capability has been proven, with a more streamlined M2 formed and performing, delivering to shareholders another year of double-digit growth in both earnings before interest, tax, depreciation and amortisation ( EBITDA ) and net profit after tax ( NPAT ). Another significant achievement this year was the completion of the Company s largest and most transformational acquisition to date - Primus Telecom Holdings Pty Ltd ( Primus ), an acquisition led by founding CEO, now Executive Director Vaughan Bowen, indicative of the success of his transition into this role. The addition of Primus to the M2 Group takes the Company to the next level in terms of scale, capability and NBN preparedness. Through the traditional Renounceable Entitlement Offer completed to partially fund the acquisition, it has also contributed to M2 s June entry into the S&P/ASX 200, a notable and pleasing achievement eight years after listing. Whilst much work remains to be done for the Primus business to be fully integrated, our outstanding team has made excellent progress in the short time following completion. Essential to maintaining the dedicated focus of team members as well as the successful cultural integration has been the immediate formation of logical business units with clearly defined strategies for their target segments, as well as the rapid combination of teams and consolidation of premises. More details regarding the integration and business strategy are contained the CEO s review. The following are amongst other key achievements of another busy and productive year at M2, including: > Earnings Before Interest, Tax, Depreciation and Amortisation ( EBITDA ) increased to $60.1 million, up 24% on the previous corresponding period; > EBITDA margin (EBITDA / Revenue) was maintained at 15%, the level achieved in the previous corresponding period and a 95% increase on FY10 results, reflecting the benefits of the businesses focus on efficiency; > Net Profit After Tax ( NPAT ) rose to $33.0 million, an increase of 20%; > An increase of 15% to 25.9 cents Earnings Per Share ( EPS ); Adam Stewart, Account Manager Lee Shan Shiu, Senior Accountant 4 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

7 Dhruman Mehta, Finance Operations Manager Tom Mazerski, Chief Customer Officer > Revenues have been maintained within guidance range, an 8% reduction on the previous corresponding period, following elimination of a high volume of low or no margin revenue associated with the EDirect acquisition; > The transition of the majority of customer support functions to our Hobart Centre of Excellence from our Adelaide operations; > Completion and integration of two smaller, bolt-on acquisitions: the assets of both Time Telecom and Flextalk ; > Refinement of the appointment-setting process, feeding highly qualified sales into our Commander channel; > Phase one deployment of our Companywide Business Support System ( BSS ), nicknamed Ninja by our team; > Successful completion of a Renounceable Entitlement Offer to raise $83.1 million, the Company s second capital raising since listing; > Declaration and payment of the Company s 15th and 16th dividend, maintaining Board policy at 70% of NPAT. As always, these results could not have been achieved without the dedication and hard work of our talented team, now approximately 950 members strong across our sites in Australia and New Zealand, as well as the extended team that is our dealer channel. I would like to thank to each team member for their contributions towards making the M2 business what it is today. We begin this year with greater scale, a product suite that has expanded into next generation products and services, a skilled and customer-oriented team and a vibrant, successful sales force. We are confident that the M2 business is well-positioned for future growth, for continuing to deliver to shareholders and customers, as well as to benefit from industry developments such as the NBN. As exciting as M2 s future may be, we remain inherently conservative in our strategy development and oversight of the expanded business, in order to maintain the Company s historically strong balance sheet and record of delivering from complementary acquisitions. To our valued shareholders, I would like to sincerely thank you for choosing to be a shareholder of our Company and for your continued support throughout another exciting and successful year for M2. Yours faithfully, Craig L Farrow Chairman We begin this year with greater scale, a product suite that has expanded into next generation products and services, a skilled and customer-oriented team and a vibrant, successful sales force. Azme Karim, Account Manager Johnathan Eele, M2NZ Managing Director/CEO M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

8 CEO Review Geoff Horth, CEO The past year has been one of improvement of internal systems and processes, for the benefit of our customers and our business Introduction It gives me great pleasure to present to shareholders a review of the highlights and notable events of the 2011/12 financial year, along with a snapshot of the current business and our strategy for the future. As stated by the Chairman in his opening letter, the past year has been one of improvement of internal systems and processes for the benefit of our customers and our business, whilst ensuring our external dealer channel has greater access to high quality sales opportunities and valuable products to take to our customers. These activities, together with a strong balance sheet, ensured that M2 was very well placed for its largest transaction since acquiring People Telecom and the business assets of Commander in 2009 the completion of the acquisition of Primus Telecom Holdings Pty Ltd on 1 June. We enter the year having met our guidance released in August 2011, including the stated decrease in revenue. As advised, this decrease was due to the decision to eliminate some high volume, low margin revenues following the acquisition of EDirect in April Importantly, the Company delivered on EBITDA, NPAT and EPS guidance, with double-digit percentage increases on all profit measures as a result of our continual focus on internal improvements, supplier arrangements and synergies from acquisitions. The year ahead for M2 is one in which our inherent process of business optimisation and synergy realisation will continue as the Company moves forward as a larger but also better organisation which is well prepared for future developments within the industry. The business has never been better positioned to continue its journey as the preeminent challenger in the SMB market. A year of focus on growth and efficiency The 2011/12 financial year ( FY12 ) was a year in which we made significant investments in building our sales capability at the same time as implementing some important business efficiency initiatives, designed to create a scalable and efficient platform for growth. During this time, some difficult decisions were taken which were critical to ensure the long-term health of the business, specifically in the consolidation The Numbers that Matter Team 956 At 30 June 2012, M2 had 956 team members in sites around Australia and New Zealand. Some members of our team are featured on the cover and scattered throughout this report. Revenue A decrease of 8% on the previous corresponding period, in line with guidance, due to the elimination of some high volume, low margin revenues associated with the Edirect acquisition. EBITDA 60.1 EBITDA rose 24% in comparison with the previous corresponding period, giving an EBITDA margin of 15%. This outstanding result was achieved through continual focus on internal business improvements, favourable supplier arrangements and the realisation of synergies from earlier acquisitions. 6 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

9 Sarah McDonough, Team Leader & Marla Giacon, Brand Manager Throughout these busy and challenging times our team responded with great spirit and dedication. of our contact centres. As an action that affected a number of team members, it was very carefully considered and, pleasingly, several of the Adelaide team members accepted roles in Hobart. Following is a summary of the key FY12 activities: > Our entire dealer channel was consolidated under the Commander brand, our leading brand in our core small to medium business ( SMB ) market. This initiative allowed us to focus our activities on, and arm our sales teams with, our strongest and most trusted brand. These activities have delivered year-on-year growth in the size of our dealer channel and in turn the volume of sales generated; > Successful completion of our appointmentsetting trial with subsequent roll-out of a 25 person dedicated team in the fourth quarter. This team generates highly qualified appointments with SMB customers, providing our dealer channel with greater capacity to see more people and do more deals ; > We further expanded our Inside Sales team growing this team to in excess of 60 people in the period. The Inside Sales team is a directly employed team with a focus on contacting our current customers to ensure that we are meeting all of their telecommunications requirements; in the process increasing product penetration and reducing churn; > Our Wholesale division implemented its Defend and Extend strategy, recontracting existing customers and winning four new customers in its core target market (annual spend of between $1 million and $10 million); > Consolidation of our Adelaide contact centre into our Hobart Centre of Excellence. Bringing these two customer support teams together in Hobart has improved communication between departments as well as delivering real scale benefit and operational efficiency; > Phase one of our next generation Business Support System, Ninja, was deployed in the third quarter of FY12, this phase of the project was delivered on budget and provides billing, provisioning and customer support systems to replace the first of our legacy platforms with a schedule for others to follow; > Completion of the aquisition and successful integration of the assets of Time Telecom and Flextalk, these two earnings accretive bolt on transactions increase our penetration into our core SMB segment and provide valuable cross sell opportunities for our Inside Sales teams. The benefits of these activities can already be seen in our results for the period; in the longer term they will ensure that the business has an efficient and scalable platform for growth. Throughout these busy and challenging times our team responded with great spirit and dedication, giving the business their best and consistently going above and beyond. As a business that has experienced rapid growth both organically and through acquisition, capacity to change has become a feature of our culture and, in fact, part of our core IP. The ability to adapt, to respond to constantly evolving products and market conditions has been a major factor in the success that this business has enjoyed. NPAT 33.0 NPAT increased 20% on the previous corresponding period, an excellent result achieved without contribution from Primus (due to cost of acquisition). EPS 25.9 An increase of 15%, continuing the outstanding track record of continual growth in earnings per share. DIVIDEND 18c Continuing to deliver strong returns to shareholders, the full year dividend for the 2011/2012 financial year was 18c, fully franked, an increase of 13% on the previous corresponding period and the Company s 16th consecutive dividend payment. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

10 Nick Jensen, Server Administrator Yolanda Bryce, HR Coordinator I would like to thank our skilled and loyal team for their work over the last year. To see the way our team responded to the significant change programs of the last year demonstrates that the change and achieve culture is alive and well - the strongest indicator that the M2 success story has only just begun. I would like to thank our skilled and loyal team for their work over the last year. I would also like to once again warmly welcome our newest team members who joined M2 through the acquisition of Primus Telecom Holdings Pty Ltd. The acquisition of Primus Telecom On 1 June 2012, M2 completed the acquisition of 100% of Primus Telecom Holdings Pty Ltd and its subsidiaries for an all cash consideration of $192.4 million ($182 million net of restricted cash). The acquisition was funded through a combination of the proceeds of a Renounceable Entitlement Offer, raising $83.1 million, and a senior lending facility. The Renounceable Entitlement Offer was selected by our Board as the best method to allow all shareholders equal participation in and benefit from the offer. Shareholder support for the offer was high with participation well above average at both institutional and retail levels. The strategic and highly complementary acquisition contributed the following to M2: > Approximately 500 talented and engaged team members; > In excess of 165,000 residential and small business customers; > Approximately $40 million EBITDA based on audited calendar year 2011 results; > Next generation IP and Hosted Voice technologies, ensuring that M2 is well prepared for the opportunities presented by the deployment of the National Broadband Network ( NBN ); > Three data centres, located in Melbourne and Sydney, currently totalling approximately 8,230 raised square metres providing the opportunity to take advantage of the emerging demand for cloud-based services in our core SMB segment; > The well-recognised and trusted iprimus brand. Further to the above, the Primus business has been a strong generator of cash flow and will further contribute to earnings through a program of identified synergies over the course of the next three years. This transaction consolidates M2 s position as the leading challenger in the SMB market. The expanded business is equipped with the capacity to access our core target markets and the capability to meet their changing technology needs over time. Our Primus business integration program was developed adopting a cooperative approach leveraging the knowledge of both the M2 and Primus Executive Management teams. Our program principles specified that the strategy and structure would be clearly defined, the teams quickly and respectfully combined, margins would be maintained, synergies would be realised and that communication would be consistent, regular and open. The below list of milestones support the view that the integration program to date has been a resounding success: > Secured employment of key executive and senior management team members to ensure continuity of operations; > Business unit and functional strategies refined to ensure continued focus on the core earnings-contributing markets of SMB and Consumer; > Corporate reorganisation communicated to all team members within days of acquisition completion; > Premises consolidation completed for Melbourne headquarters within two weeks of completion and Sydney consolidation completed within two months; > Improvements in service levels arising from process redesign and load sharing across the Hobart and Melbourne contact centres; > Key synergy realisation initiatives commenced, with an ongoing monitoring and control process implemented. An extraordinary amount of work is involved in integrating a business of this size; during such a busy time we were mindful that there is a possibility of both businesses losing momentum due to distraction. What was therefore most pleasing about this integration program is that the team remained focused on core activities during this time of intensive change, including achieving record sales results in our core SMB Sales division. 8 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

11 We made significant improvements in our sales organisation. Dimitrios Papadakis, Customer Service Team Manager The New M2 M2 will continue to be structured under Retail and Wholesale divisions, with two leading brands under Retail and one under Wholesale. Our primary objective remains unchanged to be the pre-eminent provider in the SMB market. A summary of our brand strategy and path to market is follows: SMB RETAIL Residential Wholesale Brand Proposition Local Presence, Superior Customer Service, Account Management, Managed voice and data services Value and certainty, Superior Customer Service (three times Roy Morgan award winner) A true partner for business growth with value-added advisory services Path to market 2-20 seats via National Dealer Network, supported by sizeable Inside Sales Team, seats via National direct sales team Targeted local area marketing approach to leverage strength in onnet areas Direct Sales Objective Grow Retain and lead new markets (eg NBN) Grow Customer Characteristics seat businesses up to $500,000 per annum spend Suburban families with a minimum of two telecoms products Reseller service providers with $1-10 million per annum spend Looking forward The business activites in the coming year will be centred on the following strategic pillars: > Focus on our core SMB market, continue to grow the depth and breadth of our dealer channel to grow share of market; leverage our inside sales and customer marketing capability to drive product penetration; > Drive our managed voice and data services capability in the medium business segment ( seats), productising these offerings for sale in the small business segment (1-20 seats) as demand arises; > Retain our profitable residential customer base through targeted marketing and superior customer service, establish a first mover position in new markets (eg NBN); > Be Number 1 in customer satisfaction > Deliver on further synergies and operational efficiencies. The M2 business has never been in a better position to take advantage of industry developments and customer preparedness for managed services. We are future ready and look forward to delivering to our customers and shareholders. Final words I trust that this review provides you with some insight into the business and helps you to understand the reasons for our confidence in the future of M2. Following a year in which we made significant improvements in our sales organisation, executed important efficiency initiatives and acquired critical next generation services capability, the business is very well positioned to continue its remarkable success story. I would like to close by stating that while we are confident in our position and future, we do move forward with appropriate caution, aware of the challenges which may be presented in both the integration of a sizeable business and the impending changes in the industry. We remain conservative in our approach to investing in our assets and intent to maintain the strongest possible financial position. Finally, I would like to thank you, our shareholders, for your continued support of M2. Closing out my first term as CEO, I am pleased to have delivered another year of record earnings and as reflected in the FY13 guidance, I am confident in our ability to deliver on increased profits again in the year ahead. Yours faithfully, Geoff Horth CEO M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

12 SERVICE EXCELLENCE Our objective is to be No 1 in customer satisfaction. All business customers receive account management friendly advice to customers on complementary products and services, improving product penetration and customer tenure. Commander Centres > SMB specialists > Strong physical presence, knocking on the doors of SMBs across Australia > 450+ representatives in Dealers and Dealer support, nationwide > Providing local advice and assistance > Approximately 30 years expertise in servicing and supporting SMBs OUR Hobart Contact Centre > Our Hobart-based consumer and SMB specialists > Includes a dedicated NZ team working to NZ hours > Houses part of our Inside Sales team, meeting changing customer needs and promoting M2 brands, products and services > Uses Ninja, the improved customer management, billing and self-service system being rolled out across all brands Our Melbourne Contact Centre > Our Melbourne-based consumer and Corporate specialists > Skilled and experienced in supporting Managed Services > Inside Sales Team focusses on promoting new and improved products and services to existing iprimus customers > Online ordering is available for customer convenience > High level of specialised support is provided to our M2 Wholesale customers 10 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

13 A partnership for growth M2 Wholesale provides the complete range of reseller solutions, to help you maximise the return on your brand and distribution networks At M2 Wholesale we are dedicated to supporting our partners, sharing our knowledge and experience to assist them to grow and succeed. We provide support and advisory services for our partners, which includes: Complete portfolio of telecommunications services Training and onboarding Customer Lifecycle Management Advice and strategies for growth Credit management tools Broadband & Data Inbound 13/1300/1800 Services IP & Fixed Phone Services Mobile Services & Handsets Call m2wholesale.com.au M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

14 HOME PHONE MOBILE no worries BroAdBAnd Home phone mobile iprimus THE NO WORRIES CHOICE for AustrAliAn families iprimus have been providing residential Broadband, Home phone and mobile services to Australian families for almost 15 years. With our 100% Australian based call centre, 24x7 Technical Support and our own Broadband and Phone network, iprimus delivers great value, reliability and great customer service you can rely on. iprimus is also NBN certified and ready, future-proofing our customers Broadband and Home Phone services for many years to come. Call Visit iprimus.com.au /iprimusau 100% AUSTRALIAN BASED CALL CENTRE 24x7 TECHNICAL SUPPORT NBN CERTIFIED AND READY ROY MORGAN AWARD WINNER 12 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

15 Systems Data Support TAKE COMMAND OF YOUR BUSINESS Commander has been connecting Australian businesses for close to 30 years. We focus solely on business phones, mobile, broadband and data to provide the tools, connectivity, infrastructure and support your business needs to stay connected and competitive now and into the future. At Commander, we connect all forms of communication and work with you to create a simple, integrated solution. We understand how vitally important communication is to your business. That s why, if you ever require assistance, our Commander Centres and Customer Care team are here to help you with personalised service and Australian based support. It s just another way we help you take command of your business. Our customers choose us to improve one of their core functions communications and they stay with us because they can rely on us as they grow. With an integrated solution from Commander, you can take command of your business like never before. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

16 DIRECTORS REPORT In compliance with the provisions of the Corporations Act 2001 ( Corporations Act ), the directors of M2 Telecommunications Group Ltd ( M2 or the Company ) submit the following report for the Company and its controlled entities for the financial year ended 30 June 2012 ( FY12 ). DIRECTORS The names and details of the directors of M2 during FY12 and at the date of this report are as follows: Craig Farrow Chairman B Ec, Dip FS, CPMgr, SA Fin, FCA, FAICD Appointed director 18 February 2000 Appointed Chairman 28 April 2006 Craig is Managing Partner of Brentnalls SA, Chartered Accountants and former National Chairman of the Brentnalls National Affiliation of Accounting Firms. He is also currently President of the Institute of Chartered Accountants in Australia and Chairman of AIRR Holdings Limited and Tonkin Consulting Engineers. In addition, Craig is a director and Board adviser to several private consulting and trading enterprises across the agribusiness, software and manufacturing sectors. Within the last three years, Craig has held no other listed company directorships. Craig is Chair of M2 s Nomination and Remuneration Committee and a member of the Audit & Risk Committee. Vaughan Bowen Executive Director B Com, MAICD Appointed 14 February 2000 Vaughan co-founded M2 in late In his nearly 12 years as Managing Director / CEO, he successfully steered M2 from a start-up technology enterprise to become a fast-growing and profitable national telecommunications company. With a proven ability to successfully execute and integrate acquisitions, Vaughan was appointed Executive Director in October 2011 and maintains a focus on mergers and acquisition opportunities and was instrumental in negotiating the acquisition of Primus Telecom Holdings in early Vaughan is also currently Chairman of the Telco Together Foundation, a charitable foundation he established and seeded in A member of the Australian Institute of Company Directors, Vaughan was named as a finalist in the Entrepreneur of the Year Southern Region in 2004 and 2009 and most recently in July 2012 he received the ACOMMS Communications Ambassador award for outstanding contributions to the Australian telecommunications industry. Within the last three years, Vaughan has held no other listed company directorships. 14 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

17 The directors expect that the financial performance of the business will remain strong in the financial year ending 30 June 2013 ( FY13 ) John Hynd Non-Executive Director LLB, MAICD Appointed 18 February 2000 John is founding partner of Hynd & Co, a commercial law firm in Adelaide. He has over 30 years experience in commercial transactions, corporate advice, corporate governance, insolvency and property development. John is a fellow of the Australian Taxation Institute and a former member of the Council of the Law Society of South Australia. Within the last three years, John has held no other listed company directorships. John is a member of M2 s Audit & Risk Committee and is also a member of the Nomination and Remuneration Committee. Michael Simmons Non-Executive Director BCom FCPA ACIS Appointed 26 November 2009 Michael brings to the Board considerable experience in the telecommunications sector, having previously held the position of Chief Executive Officer of ASX-listed SP Telemedia Limited ( SPT Group, now known as TPG Telecom Limited ( TPG )) from 2001 until May 2008, following its acquisition of TPG. Prior to 2001, Michael served in executive roles for nearly 26 years within the SPT Group, including as Chief Financial Officer and Chief Executive Officer. Following the acquisition of TPG, Michael was the Managing Director of TERRiA, a telecommunications consortium of infrastructure based telecommunications carriers, formed to bid for the contract to build the National Broadband Network (NBN). He currently consults to various companies and government bodies in the area of telecommunications strategy and business opportunities. Within the last three years, Michael has held no other listed company directorships. Michael is Chair of M2 s Audit & Risk Committee. Max Bowen Non-Executive Director Appointed 14 February 2000 Retired 28 October 2011 During his directorship with M2, Max provided the Board with valuable experience gained in a management and business career spanning five decades. Founding Chairman of M2, Max Bowen spent over 20 years developing commercial property throughout Sydney and overseas. Following this, Max acted in a senior advisory capacity to various corporations and public utilities in NSW. Max retired as a director on 28 October Within the last three years, Max has held no other listed company directorships. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

18 COMPANY SECRETARY Kellie Dean BA, LLB, Grad Dip App Corp Gov, FCIS, MAICD Appointed 30 November 2007 Kellie is Company Secretary for the M2 group of companies as well as leading the corporate services division for M2, in which she is responsible for governance, legal and regulatory affairs, human resources, investor relations and corporate communications. Prior to her appointment, Kellie was Company Secretary for Orion Telecommunications Limited, which was acquired by M2 in October A fellow of Chartered Secretaries Australia and a member of the Australian Institute of Company Directors, Kellie has particular expertise in the areas of merger and acquisitions, corporate governance, compliance and risk management. FORMER AUDIT PARTNERS No directors or officers of M2 have been a partner or director of Ernst & Young, the Company s auditor. DIRECTORS SHAREHOLDINGS The following table sets out the details of each director s relevant interest in M2 shares as at the date of this report. There are no options held by any directors of M2. Director Number of ordinary shares Craig Farrow 603,583 Vaughan Bowen 6,042,420 John Hynd 2,553,000 Michael Simmons 11,988 Max Bowen (1) 32,274 TOTAL 9,243, Max Bowen retired as a director on 28 October 2011 PRINCIPAL ACTIVITY The principal activity of the consolidated entity during the financial year was the supply of telecommunications services to residential and business customers within the Australian and New Zealand markets. There was no significant change to the principal activity of the consolidated entity during the year, however, from 1 June 2012, Primus Network (Australia) Pty Ltd became a wholly owned subsidiary of M2 and it holds a carrier licence under the Telecommunications Act REVIEW OF OPERATIONS AND RESULTS Please refer to the Chairman s Letter and CEO s Review for further details relating to M2 s operations and results for FY12. This information is to be read in conjunction with the Directors Report. SIGNIFICANT CHANGES IN STATE OF AFFAIRS On 1 June 2012, M2 acquired all the shares in Primus Telecom Holdings Pty Ltd ( Primus ) for a total cash consideration of $192.4 million, which was funded via a new three year senior bank facility and proceeds received from a onefor-four renounceable rights issue to existing and new shareholders ( Entitlement Offer ). On 21 May 2012, M2 issued 31,255,544 ordinary shares following the successful completion of the fully underwritten Entitlement Offer, at an offer price of $2.66 per share. On 1 March 2012, Southern Cross Telco Pty Ltd, a wholly owned subsidiary of M2, acquired selected business assets of Time Telecom Pty Ltd and its related entities ( Time Group ) for a cash consideration of $19.9 million (including an amount paid for additional customer contracts post completion). Total payment was comprised of an upfront payment and a deferred payment schedule, which is subject to the achievement of certain minimum performance milestones. The assets acquired were the customer contracts of Time Group. SIGNIFICANT EVENTS AFTER BALANCE DATE On 24 August 2012 the directors declared a final dividend on ordinary shares in respect of FY12. The total amount of the dividend is $14,090,961, which represents a fully franked dividend of 9 cents per share (on shares issued as at 30 June 2012). This final dividend is scheduled be paid to shareholders on 26 October LIKELY FUTURE DEVELOPMENTS AND RESULTS The directors expect that the financial performance of the business will remain strong in the financial year ending 30 June 2013 ( FY13 ), particularly through the expected growth in revenue and earnings as a result of organic growth and the recent acquisition of Primus. 16 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

19 Michelle Courtney & Guy Roberts, Customer Order Management Agents Nick Murfet, Billing Analyst ENVIRONMENTAL REGULATION AND PERFORMANCE M2 is not subject to any significant environment regulation under any law of the Commonwealth or of a State or Territory. DIVIDENDS Details of dividends paid during FY12 and the final dividend declared for payment are as follows: Payment Date Cents Per Share Franking Total Dividend Paid / Declared (1) Dividends Paid Final dividend 28 October % $11,142,925 Interim dividend 16 April % $11,208,904 TOTAL $22,351,829 Dividend Declared Final dividend 26 October % $14,090,961 (1) Represents the gross dividend entitlement of all shareholders SHARE OPTIONS Options granted In December 2011, M2 granted 1,500,000 options over unissued shares. Details of options granted to the five most highly remunerated officers of the Company (other than directors), granted as part of remuneration, include: Name Number of options granted Geoff Horth 300,000 Darryl Inns 100,000 Steve Wicks 100,000 Scott Carter 250,000 Alistair Carwardine 250,000 Unissued shares under option As at the date of this report, M2 has 2,650,000 unissued ordinary shares under option, including 1,500,000 options which were granted in December The details of these options are as follows: Number of unissued shares under option Exercise price of option Expiry date of options 125, January , January , January ,998 (1) January ,998 (1) January ,004 (1) January 2017 Total: 2,650,000 (1) Option is only available to exercise subject to the achievement of key performance indicators by the relevant holder in the preceding financial year M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

20 Our primary objective remains unchanged - to be the pre-eminent challenger in the SMB market. Scott Carter, Corporate/Wholesale Director Rights to participate in share issues Under the terms of the M2 Executive Management Team Share Option Plan, option holders have a right to participate in share issues. In the event of a bonus issue of shares, option holders will receive a bonus issue of options, such that the proportion which the number of options held by holder bears to the number of shares on issue is the same both prior to and following the bonus issue of Shares. If there is a pro rata share issue (except a bonus issue) to the holders of shares in the Company before the exercise of options, the exercise price applicable to each then outstanding option will be reduced according to a specified formula, which is consistent with the ASX Listing Rules. Shares issued following exercise of option M2 has issued 674,000 ordinary shares during and since FY12 as a result of the exercise of an option, including 10,000 in July The details of these exercised options are as follows: Number of share issued Amount paid for shares Amount unpaid for shares 299,000 $209,300 Nil 175,000 $297,750 Nil 200,000 $350,750 Nil Total: 674,000 $857,700 Nil INDEMNITIES AND INSURANCE M2 s Constitution provides that except as may be prohibited by the Corporations Act, every officer and auditor of the Company shall be indemnified against any liability incurred by them in their capacity as an officer or auditor of M2 or a related body corporate. Directors of M2 are also party to a deed of access and indemnity. During FY12, M2 paid a premium in respect of a contract insuring the directors and officers of the Company and any related body corporate against any liability that may arise from the carrying out of their duties and responsibilities to the extent permitted by the Corporations Act. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium. DIRECTORS MEETINGS The number of directors meetings, including meetings of each Board committee held during FY12 and the number of meetings attended by each director is as follows: Director Board Meeting Audit & Risk Committee Nomination & Remuneration Committee Eligible to Attend Attended Eligible to Attend Attended Eligible to Attend Attended Craig Farrow Vaughan Bowen John Hynd Michael Simmons Max Bowen (1) (1) Mr M Bowen retired as a director on 28 October M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

21 Sean Devota, Collections Manager Laurice Tongol, Accounts Payable Officer REMUNERATION REPORT Refer to page 20 of this report for the Remuneration Report, which forms part of the directors report. PROCEEDINGS ON BEHALF OF THE COMPANY No proceedings have been brought on behalf of M2, nor has any application been made in respect of the Company under s.237 of the Corporations Act. NON-AUDIT SERVICES Details of amounts paid to M2 s external auditor, Ernst & Young, for non-audit services are set out in note 30 to the financial statements. The services to the Company related to the acquisition of Primus. In accordance with written and signed advice from the Audit & Risk Committee, pursuant to a resolution of this Committee, the directors are satisfied that the provision of non-audit services by Ernst & Young is compatible with the general standards of independence for auditors imposed by the Corporations Act. The reasons being: > The provision of non-audit services by Ernst & Young was considered by the directors prior to the commencement of the engagement and it was determined that it would not impact the independence or integrity of the external auditor; and, > the nature of the services provided do not undermine the general principles relating to external auditor independence, including reviewing and auditing the auditor s own work, acting in a management or decision making capacity for M2 or as an advocate, or jointly sharing in economic risk and rewards. Further, the services provided are consistent with the provisions of M2 s Non-Audit Services Policy. AUDITOR S INDEPENDENCE DECLARATION The auditor s independence declaration is included on page 29 of this report. ROUNDING OFF OF AMOUNTS M2 is a company of the kind referred to in ASIC Class Order 98/0100, dated 10 July 1998 and in accordance with that Class Order, amounts in the Directors Report and the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated. This directors report is signed in accordance with a resolution of the directors made pursuant to s.298(2) of the Corporations Act. On behalf of the directors, Craig Farrow Chairman Melbourne, 24 August 2012 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

22 REMUNERATION REPORT Introduction This remuneration report for FY12, which forms part of the directors report, outlines the remuneration arrangements of the Company in accordance with the requirements of s.300a of the Corporations Act and its regulations. This report has been audited as required by s.308(3c) of the Corporations Act. The key sections of this report include: 1. Key Management Personnel 2. Remuneration Policy 3. Remuneration Governance (a) Nomination and Remuneration Committee (b) Remuneration Consultants (c) Remuneration Report approval at 2011 Annual General Meeting ( AGM ) (d) Hedging of incentive remuneration (e) Employment Agreements 4. Remuneration Arrangements (a) Non executive director remuneration (b) Business Executive remuneration (c) M2 s financial performance 5. Remuneration of Key Management Personnel 1. Key Management Personnel This report sets out the remuneration details of key management personnel. Key management personnel is defined as those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity ( KMP ). M2 has defined its KMP to include directors, Chief Executive Officer, Chief Financial Officer and those people who drive and are responsible for the principal business activities of the Company (`Business Executive ). The KMP for M2 during and since the end of FY12 include: Directors: Craig Farrow Chairman Vaughan Bowen (1) Executive Director John Hynd Non-executive director Michael Simmons Non-executive director Max Bowen (2) Non-executive director (1) Mr V Bowen previously held the position of Managing Director/CEO up until 28 October 2011 (2) Mr M Bowen retired as a director on 28 October 2011 Anthony Daniel, Team Leader & Mark Ceccato, Account Manager Marco Shiro, Technical Support Representative 20 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

23 Larissa Mundy-James, Account Manager Alistair Carwardine, Technology Director Business Executives: Geoff Horth (1) Chief Executive Officer Darryl Inns Chief Financial Officer Steve Wicks Business Director Scott Carter (2) Corporate/Wholesale Director Johnathan Eele (2) Managing Director/CEO M2 NZ Tom Mazerski (3) Chief Customer Officer Except as otherwise noted, the above KMP held their position during and since the end of FY12. (1) Mr G Horth was appointed Chief Executive Officer on 29 October He previously held the position of Chief Operating Officer. (2) Appointed as KMP in the first half of FY12 (3) Appointed as KMP on 1 June Remuneration Policy The performance of the Company depends upon the quality of its KMP. Remuneration levels are set to enable M2 to attract and retain appropriately qualified and experienced people, who will create sustainable value for shareholders and other stakeholders. M2 embodies the following principles in its KMP remuneration framework: > provide competitive rewards to attract and retain skilled people; > link executive rewards to shareholder value; > have a significant portion of executive remuneration at risk, dependent upon meeting pre-determined individual and Company performance benchmarks; > establish appropriate and demanding performance hurdles for variable executive remuneration; and, > establish clear distinction between non-executive director and other KMP remuneration. 3. Remuneration Governance Nomination and Remuneration Committee The Nomination and Remuneration Committee ( Committee ) is responsible for determining and reviewing remuneration arrangements for KMP for recommendation to the Board. They assess the appropriateness of the nature and amount of remuneration on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of high quality directors and other KMP. Specific details relating to the structure and membership of this Committee can be found in the Corporate Governance Statement, immediately following the Directors Report. Remuneration Consultants M2 did not seek the advice or recommendation from a remuneration consultant in relation to any KMP s remuneration during FY12. Remuneration Report approval at 2011 Annual General Meeting ( AGM ) The remuneration report contained within the 2011 annual report received positive shareholder support at the AGM on 28 October 2011, with the resolution passed on a show of hands and on proxies received, only 0.95% voted against (1). No particular comments were made by shareholders in respect of the remuneration report at the AGM or otherwise. (1) Based on proxies voted in favour and against, excluding discretionary votes and those abstaining. Hedging of incentive remuneration In accordance with provisions of the Corporations Act, KMP and their closely related parties are prohibited from hedging any element of remuneration that is unvested (due to time or other conditions) or is vested but subject to restriction on disposal. Callum Mackintosh, Customer Service Representative Carol Thompson, Business Analyst M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

24 The business has never been better positioned to continue its journey as the pre-eminent challenger in the SMB market. Steve Wicks, Business Director Employment Agreements The following key terms are contained in employment agreements for the Executive Director, Chief Executive Officer ( CEO ), Chief Customer Officer ( CCO ) and other Business Executives: Duration of agreement: Executive Director Two years from 1 July In the event the contract is not renewed or extended on or prior to 1 July 2013, it shall continue for rolling terms of three months. Chief Executive Officer Three years from 1 July Chief Customer Officer A minimum term of 12 months from 1 June In the event the agreement is not terminated or renewed on or prior to the expiry of the minimum term, it shall continue for rolling terms of three months. Other Business Executives From 1 July 2011 for no fixed term. Period of notice required to terminate agreement (by the relevant KMP): Executive Director, CCO and Other Business Executives Chief Executive Officer Three months. Six months. Termination payments: Executive Director Upon termination for convenience by the Company, the Executive Director shall be entitled to an amount equal to what he would be entitled to as per relevant legislation. Chief Executive Officer (1) Upon termination for convenience by the Company, the CEO shall be entitled to a sum equal to six months base salary (inclusive of a notice period). (2) Upon termination (for any reason excluding just cause) within 12 months of a corporate event, the CEO shall be entitled to a payment equal to 12 months base salary (inclusive of a notice period). Chief Customer Officer Upon termination for convenience by the Company prior to the expiry of the minimum term, the CCO shall be entitled to a sum the greater of: (1) the amount due up until the expiry of the minimum term; or (2) six months base salary (inclusive of notice period). Other Business Executives Upon termination for convenience by the Company, the Executive shall be entitled to a sum the greater of: (1) six months base salary (inclusive of notice period); or (2) an amount calculated in accordance with the redundancy provisions of the Fair Work Act or its equivalent. 22 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

25 Michael Speglic, Commercial Director Liparo Finocchiaro, Operations Manager (Consumer) 4. Remuneration Arrangements Non-executive director remuneration Non-executive directors are paid fees for their services. The aggregate remuneration of non-executive directors shall be determined from time to time by a general meeting of shareholders. An amount not exceeding the amount determined is then divided between the directors as agreed. The current aggregate remuneration is set at $600,000 per year, which was approved by shareholders at the 2010 AGM. Non-executive directors also receive reimbursement of all reasonable and proper expenses incurred while carrying out their director duties. In addition, the Board provides $2,000 each financial year for each director to utilise for the purpose of attending training or professional development courses and events. These amounts are not incorporated in the aggregate sum. Non-executive directors are not entitled to retirement or termination benefits. The amount of aggregate remuneration and the manner in which it is apportioned amongst directors is reviewed annually. The Board considers individual director contributions and performance and the fees paid to non-executive directors of comparable companies when undertaking the annual review process. Non-executive directors did not receive an increase to their fees during FY12. The fees for FY13 are as follows: Chairman: $210,000 per annum (1) Non-executive director: $70,000 per annum Committee Chair: $10,000 per annum Committee Member: $5,000 per annum Bonus Plan The Chairman is currently entitled to receive a cash bonus following the commencement of each calendar year, which is calculated in reference to the share price of M2 shares (as at a date in January) as compared to the exercise price of options granted by the Company in This Bonus Plan was put in place by the Board to further remunerate the Chairman for his services, based upon the Company s performance. The amount paid is included within the aggregate remuneration sum for non-executive directors. The Board has agreed to continue the Bonus Plan during FY13 for the Chairman. It is not possible to determine the possible maximum or minimum total value of this bonus, as it calculated based on share price, which is unable to be determined. The remuneration of non-executive directors, including the amount of bonus paid to the Chairman in FY12 is detailed in section 5 of this report. Business Executive remuneration M2 rewards other Business Executives with a level and mix of remuneration commensurate with their position and responsibilities within the Company. In addition, it aims to: > reward Business Executives for Company, business unit and individual performance against targets set by reference to appropriate benchmarks; > align the interests of Business Executives with those of shareholders; > link rewards with the strategic goals and performance of the Company; and > ensure total remuneration is competitive by market standards. It is also M2 s policy that employment agreements are entered into with all Business Executives. Business Executive remuneration consists of the following key elements: > Fixed Remuneration > Variable Remuneration - Short-Term Incentive ( STI ) > Options The proportion of fixed remuneration, variable remuneration and any issue of options is established for each Business Executive by the Committee and approved by the Board. The level of fixed and variable remuneration is linked to Company performance, as described below. Fixed Remuneration The level of fixed remuneration is set each year in accordance with the remuneration policy. It is determined in reference to the Business Executive s and Company s performance during the past financial year, the Business Executive s responsibilities and the external compensation environment. Business Executives may also receive nonmonetary benefits such as the provision of motor vehicles and car parking. The amount of fixed remuneration paid to Business Executives during FY12 is detailed in section 5 of this report. (1) Inclusive of all Committee fees M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

26 M2 s performance has remained strong and consistent. Con Papageorgiou, Channels Manager (Corporate) Short term incentives (STI) The objective of STIs is to link the achievement of M2 s operational targets with the remuneration received by the Business Executives responsible for meeting those targets. The total potential STI available for each Business Executive is set at a level so as to provide sufficient incentive to the Business Executive to achieve the operational targets and such that the cost to the Company is reasonable in the circumstances. Actual STI payments granted to a Business Executive depend on the extent to which specific operating targets set at the beginning of the financial year are met, in addition to achievement of overall Company performance metrics, specifically net profit after tax ( NPAT ). The individual operational targets consist of a number of key performance indicators (KPIs) covering both financial and nonfinancial measures of performance. Typical measures include contribution to earnings, sales targets, customer service levels, risk management, product management, completion of specific projects and leadership and team contribution. Such KPIs are chosen as they are representative of the key performance metrics of the business, which drive overall NPAT growth and earnings for shareholders. On an annual basis, after consideration of performance against KPIs, as well an assessment of overall Company performance, a performance rating for the Business Executive is nominated by the Chairman and/ or the Chief Executive Officer. This performance rating determines the amount, if any, of the STI that is paid to a Business Executive. This method of assessing performance against KPIs ensures that the STI granted to a Business Executive is based upon the actual achievement of metrics. Under the terms of each Business Executive s STI arrangements, an STI payment is only made upon the Company achieving its pre-determined NPAT target. Achievement of an NPAT target is linked to growth in shareholder wealth and returns. The amount of annual STI available to each Business Executive is subject to approval of the Board, following consideration by the Committee. Payments made are usually delivered as a cash bonus in the following reporting period. As noted earlier, the Board has put in place a Bonus Plan for the Chairman. This has also been offered to the Executive Director on the same terms. STI outcomes for FY11 The STI paid to Business Executives during FY12 (for FY11 performance) is detailed in section 5 of this report. This table also discloses the percentage of remuneration directly related to performance (in proportion to total remuneration). The table below outlines the percentage of STI that was earned by the Executive Director and Business Executives for FY11 performance (in accordance with the relevant employment agreement), and the percentage that was forfeited. Note, Scott Carter, Johnathan Eele and Tom Mazerski were not classified as Business Executives during FY11. Proportion of maximum STI earned for FY11 Proportion of maximum STI forfeited for FY11 Vaughan Bowen (1) 83.3% 16.7% Geoff Horth 85% 15% Darryl Inns 75% 25% Steve Wicks 75% 25% (1) STI only refers to the STI payable as a percentage of base salary. It does not include the STI paid in respect of the Bonus Plan, which was $186,750, and paid in January The terms of this plan have not altered since this date. Lisa Gerding, Customer Service Representative Sangram Singh, Database Administrator 24 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

27 For each Business Executive, the STI was delivered as a cash bonus, and was granted (paid) in October There have been no alterations to the terms and conditions of the STI since this date. STI outcomes for FY12 The table below outlines the percentage of STI that was earned by Business Executives for FY12 performance (in accordance with the relevant employment agreement) and the percentage that was forfeited. Business Executive Proportion of maximum STI earned for FY12 Proportion of maximum STI forfeited for FY12 Geoff Horth (1) 85% 15% Darryl Inns 92.5% 7.5% Steve Wicks 75% 25% Scott Carter 100% 0% Tom Mazerski (2) NA NA Johnathan Eele 81% 19% (1) Mr Horth is also entitled to receive a payment of $50,000 upon the completion of 12 months service as CEO, which will be 29 October (2) Mr Mazerski joined M2 on 1 June 2012 and no STI was applicable for that period. For each Business Executive listed above the STI will be delivered as a cash bonus and granted (paid) in or before October There have been no alterations to the terms and conditions of the STI since this date. STI arrangements for FY13 STI arrangements that have been put in place for each Business Executive for FY13 performance are as follows: Business Executive Maximum STI Value for FY13 performance Minimum STI Value for FY13 performance Geoff Horth $200,000 $0.00 Darryl Inns $90,000 $0.00 Steve Wicks $125,000 $0.00 Scott Carter $130,000 $0.00 Johnathan Eele $38,895 (1) $0.00 Tom Mazerski $180,000 $0.00 (1) STI is paid to a company related to Johnathan Eele, and value is in New Zealand dollars. This amount represents the Australian dollar value (as at the date of this report). The Board has agreed to extend the Bonus Plan to the Executive Director during FY13. It is not possible to determine the possible maximum or minimum total value of this bonus, as it calculated based on share price, which is unable to be determined. Rose Rimon-Kerr, Customer Service Representative Kelly Tian, Accounts Payable Officer M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

28 Remuneration levels are set to enable M2 to attract and retain appropriately qualified and experienced people. M2 s financial performance The tables below set out M2 s earnings and movements in shareholder returns over the last five years: Earnings per share 25.8 cents cents cents 8.76 cents 7.01 cents Share price at end of financial year $3.36 $3.28 $1.69 $0.715 $0.595 Interim dividend 9 cents 7 cents 5 cents 2.5 cents 2 cents Final dividend 9 cents 9 cents 5 cents 3 cents 3 cents M2 s performance has remained strong and consistent over the last five reporting periods and the remuneration arrangements for Business Executives are reflective of this. Options M2 maintains an Executive Management Team Share Option Plan ( ESOP ). The purpose of the ESOP is to provide a further avenue for the alignment of executive objectives with those of shareholders and to provide an additional element to executive remuneration that was competitive to the external compensation environment. The issue of options under ESOP further allows an opportunity for the Board to reward executives and Business Executives for their performance in a given period. From December 2011, the issue of options to Business Executives was specifically linked to individual performance, whereby the options (once vested) may only be exercised subject to the minimum achievement of a Business Executive s individual KPIs in the preceding financial year prior to the relevant vesting date. The individual KPIs are the same KPIs that are used to assess performance under the STI. 1. The table below outlines the options that were granted to Business Executives during FY12. Executives Number Granted Exercise Price Vesting Date Expiry Date Fair Value at Grant Date $ Geoff Horth 300,000 Darryl Inns 100,000 Steve Wicks 100,000 Scott Carter 250,000 Johnathan Eele 150, ,000 at $ ,000 at $ ,000 at $ ,333 at $ ,333 at $ ,334 at $ ,333 at $ ,333 at $ ,334 at $ ,333 at $ ,333 at $ ,334 at $ ,000 at $ ,000 at $ ,000 at $ January January January January January January January January January January January January January January January January January January January January January January January January January January January January January January per option 0.38 per option 0.41 per option 0.38 per option 0.40 per option 0.41 per option 0.38 per option 0.40 per option 0.41 per option 0.38 per option 0.40 per option 0.41 per option 0.38 per option 0.40 per option 0.41 per option Tom Mazerski (1) (1) Appointed a KMP on 1 June 2012 No options lapsed during FY12 (including as a result of performance). Ohad Morag, Project Manager Kirby Radford, Customer Order Management Agent 26 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

29 Sarah Curtis, Product Marketing Director 2. The table below outlines the options that vested and were exercised by Business Executives during FY12, including the total held as at the date of this Report. Number Vested Exercise Price Expiry Date Number Exercised Amount paid Total amount of Options held as at date of Report Geoff Horth 75,000 $ Jan-14 75,000 $123, ,000 Darryl Inns 75,000 $ Jan-14 75,000 $130, ,000 Steve Wicks 75,000 $ Jan-14 75,000 $130, ,000 Scott Carter ,000 Johnathan Eele ,000 Tom Mazerski (1) (1) Appointed 1 June Remuneration of Key Management Personnel The following tables outline the remuneration received by KMP in FY12. A comparison with the financial year ended 30 June 2011 ( FY11 ) is also included. No payments were made to KMP before they took office as part of the consideration for the person agreeing to hold office. Charlie Brown, Customer Acquisition Marketing Manager Verity White, Paralegal M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

30 Directors remuneration: Salary & Fees (1) Short Term Post employment Total Cash STI Related to performance (2) Non-monetary benefits Superannuation Other postemployment benefits $ $ % $ $ $ $ Craig Farrow , , , ,666 85, ,166 Vaughan Bowen (3) , , ,864 25, , , , ,763 25, ,263 John Hynd , , , ,667 Michael Simmons , , , ,000 Max Bowen (4) , , , ,667 TOTALS , ,000-34,864 25,000-1,180, , ,000-35,763 25,000-1,238,763 (1) Includes all amounts paid and accrued to companies related to the director, for director services (2) The proportion of FY12 salary and fees related to performance, either Company or individual. (3) Mr V Bowen appointed Executive Director from 29 October 2011 (4) Mr M Bowen retired as a director on 28 October 2011 Business Executive remuneration: Short Term Post Employment Share based Payments Total Base Salary Cash STI Related to performance (3) Non-monetary Benefits Superannuation Termination Benefit Value ascribed (1) Value that consists of options $ $ % $ $ $ $ % Geoff Horth ,807 89, ,896 24,999-76, , ,000 90, ,730 25,625-40, ,702 Darryl Inns ,000 33, ,456 24,999-43, , ,000 40, ,057 25,000-40, ,404 Steve Wicks ,076 90, ,353 24,047-43, , , , ,937 25,000-40, ,284 Scott Carter (2) ,999 20, ,775-31, , Tom Mazerski (2) , , , Johnathan Eele (2)(4) ,377 33,403 19, , TOTALS ,586, ,403-75,705 91, ,670-2,234, , ,000-65,724 75, ,041-1,442,390 (1) The remuneration value ascribed to share options has been calculated in accordance with AASB 2 Share-based Payment (2) Business Executive was not KMP during FY11 (3) The proportion of FY12 remuneration directly related to performance (4) Includes amounts paid for services to a New Zealand company associated with Johnathan Eele (in $AU at date of report) 28 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

31 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

32 CORPORATE GOVERNANCE STATEMENT M2 Telecommunications Group Ltd ( M2 or the Company ) is a strong advocate for corporate governance. We believe in transparency, accountability and integrity for the benefit of our shareholders, employees, customers and all other interested stakeholders. M2 continually reviews and refines its corporate governance policies and charters in light of the Corporate Governance Principles and Recommendations, as developed by the ASX Corporate Governance Council ( ASX Guidelines or recommendations ). During FY12, M2 believes it achieved reasonable compliance with the recommendations based on M2 s circumstances, its size and activities. Where recommendations have not been implemented, a full explanation is disclosed, based upon the if not, why not approach adopted by the Council. Over the course of FY11, M2 reviewed its corporate governance program in light of the changes to the ASX Guidelines, which were adopted by the ASX Corporate Governance Council in June As a result, the Board was an early adopter of many of the changes to gender diversity, board selection and analyst briefings, as it recognised the value and importance of maintaining a strong corporate governance framework that would assist the Company in its growth phase. This Statement is dated 24 August Principle 1: Lay solid foundations for management and oversight The Board of Directors is accountable to shareholders for the proper management of the business and affairs of M2. The Board and executives use their diverse skills to work together to consistently operate in the best interests of the Company. The Board has confirmed its role and responsibilities in a written charter. They undertake the following functions and responsibilities: > approve, monitor and modify the strategic direction of M2; > ensure the principles of corporate governance are upheld and consistently reviewed; > monitor the performance of Executives; > ratify the appointment or removal of the Chief Executive Officer and the Company Secretary; > ensure that appropriate risk management systems, internal control and reporting systems are in place and are operating effectively; > approve and monitor financial results; > approve decisions concerning acquisitions and capital, including capital restructures and dividend policies of M2; and, > comply with the reporting and other requirements of the law. The Board has delegated the daily financial and operational management to executives, who are responsible to the Board. They too operate in the interests of the Company and all its stakeholders. 30 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

33 Athina Calagis, Data Networks Coordinator Suzie Wai, Engineer During the reporting period, Executives performance was assessed in accordance with the process disclosed within the Remuneration Report (for performance during the financial year ended 30 June 2011). Executive performance for FY12 was formally assessed in August The Nomination & Remuneration Committee is responsible for ensuring that Board and executive performance is assessed and also that the process is effective in improving deliverable outcomes. Principle 2: Structure the Board to add value M2 s Board comprises four directors: Chairman, Executive Director and two nonexecutive directors. Board Size and Composition M2 is confident its current Board size is adequate, in reference to the size and structure of the Company and it allows the Board to effectively and efficiently discharge its role and responsibilities. The Board has adopted a Diversity Policy, which sets out M2 s commitment to the principles of diversity within its Board and wider team member base. The Board recognises the benefit that it and the Company gain from having a diverse range of individuals and skill sets within its composition. A range of perspectives is imperative to making good balanced decisions that are in the interests of the Company as a whole, including shareholders, team members, customers and other stakeholders. Skills, Experience & Expertise The skills, experience and expertise relevant to the position of director, held by each of M2 s directors at the date of this Statement, are detailed in the Directors Report. Term of Office The term of office for each director during the reporting year is detailed in the Directors Report. Director Independence An independent director is a nonexecutive director who is not a member of management and who is free of any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the independent exercise of their judgment. In considering whether a director is independent, the Board has regard to the series of relationships affecting independence, as outlined in Box 2.1 in Principle 2, and the interests disclosed by them. Based upon this information, the following table outlines the independent status of each M2 director during the reporting period. Chairman The Chairman of M2, Craig Farrow, is classed as an independent director (in accordance with ASX Guidelines). Craig is responsible for the leadership of the Board and for the efficient organisation and conduct of the Board s functioning. Director Title Independent Reason Craig Farrow Chairman Yes Independent from management and free of any material (1) business or other relationship. Vaughan Bowen Executive Director No Employed in an executive capacity and a substantial shareholder of the Company. John Hynd Non-Executive Director Yes Independent from management and free of any material (1) business or other relationship. Michael Simmons Non-Executive Director Yes Independent from management and free of any material (1) business or other relationship. Max Bowen (2) Non-Executive Director No Former substantial shareholder of the Company and father of Vaughan Bowen (1) The Company considers materiality in the context of annual consolidated revenue (2) Mr M Bowen retired from the Board on 28 October 2011 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

34 Bhavesh Desai, Accountant Janos Kecskemeti, Junior Account Manager Separate Role of Chair & CEO In accordance with ASX Guidelines, the role of the Chair and Chief Executive Officer is not exercised by the same individual, with Craig Farrow acting as Chair for the Company, Vaughan Bowen as Managing Director/CEO up until 28 October 2011 and Geoff Horth from 29 October The Chair and CEO have clear lines of responsibility and accountability. Independent Advice & Access to Company Secretary Each member of the Board and the Board Committees has the right to seek independent legal and other professional advice, at M2 s expense, concerning any aspect of the Company s operation or undertakings, if it is considered necessary for the execution of their functions and responsibilities. Executives supply the Board with information and reports on a regular basis as part of Board reporting. The directors are entitled to request additional information and are encouraged to contact an Executive where further information or clarification is required. The Company Secretary is appointed by and reports to the Board on all corporate governance issues. Ms Dean Dean is responsible for the provision of timeframes and information to enable the Board to effectively discharge its duties and responsibilities. All directors, and Board committees, have access to Ms Dean to assist them in carrying out their role. Nomination and Remuneration Committee The selection and appointment process of future directors is deemed to be the responsibility of the whole Board, in accordance with the provisions of the Board Selection Policy. However, M2 has established a Nomination and Remuneration Committee for the purpose of identifying potential candidates for Board selection. In nominating candidates, the Committee shall take into consideration such factors as judgement, skill, diversity and experience and also the extent to which the candidate would be a desirable addition to the Board and any Board Committee. During the financial year, the Nomination and Remuneration Committee consisted of two (independent) non-executive directors: Craig Farrow (Chair) and John Hynd, which is appropriate given the size of the Board. The role and responsibilities of the Nomination and Remuneration Committee are detailed in the Nomination and Remuneration Committee Charter. The meetings and attendance of the Board Committees are detailed in the Directors Report. Evaluating Board Performance The Nomination and Remuneration Committee is responsible for the establishment of process for Board evaluation, with the Chairman providing leadership in the execution of any review. The Board will undertake an evaluation in September All directors will be given an opportunity to provide input on the effectiveness of board processes, meetings, board composition and performance and reporting. This will take the form of a questionnaire, with directors having an opportunity to discuss and comment on such matters individually with the Chairman. The Company has implemented an education policy for its directors, with each director having access to an allowance of $2,000 per year for the purpose of attending and/or participating in professional development activities relevant to their duties as a director. Principle 3: Promote ethical and responsible decision making Code of Conduct All directors, executives and employees of M2 are expected to act with integrity and objectivity, striving at all times to enhance the reputation and performance of the Company. A Code of Conduct has been established, which guides directors, executives and employees in the performance of their duties. Share Trading M2 s policy in the trading of securities regulates dealings by the Company s directors, executives and employees in shares issued by M2. Consistent with legal prohibitions relating to insider trading, all of M2 s directors, executives and employees are prohibited from trading in the Company s shares whilst in possession of unpublished price sensitive information which concerns M2. The policy also prohibits Key Management Personnel from trading in securities during the following black-out periods: > between 1 January each year until such time as the half year financial results of the Company are released to ASX; and, > between 1 July of each year until such time as the full year financial results of the Company are released to ASX. 32 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

35 Moira Henderson, State Sales Manager (Corporate) Gender Diversity As noted above, the Board has adopted a Diversity Policy which sets out the Board and the Company s commitment and objectives in respect of diversity, and more specifically gender diversity. Diversity at M2 is valued and encouraged and the Company recognises the benefit that it gains from having a diverse range of individuals and backgrounds involved in the management of its organisation and its business activities. The Board has set gender objectives in the interests of achieving good corporate governance in a dynamic and evolving industry. They are as follows: Objective Target Date Board: At least one of the next two director appointments desirably should be female, with the appropriate skills and attributes Executive Team and Senior Management Team: To improve or at least maintain current male/female ratio statistics. When it is appropriate to expand the Board or replace an existing director Annually In accordance with the provisions of the ASX Guidelines, the proportion of female directors, executives and senior management, and team members at M2 as at the date of this Statement are as follows: As at August 2011 As at August 2012 (1) Role By Number By Percentage By Number By Percentage Female Directors 0 0% 0 0% Female Executives % % Female Senior Management Female Team Members 4 50% 11 25% % % (1) Includes employees of Primus, acquired in June 2012 M2 is pleased to report the improvement in gender diversity within its Executive Team over the course of FY12. The Company is committed to reviewing its policies and practices to assist with improving diversity across its senior management team and wider group, particularly given the increased number of team members following the Primus acquisition. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

36 M2 is committed to safeguarding the integrity of its financial reporting. PRINCIPLE 4: SAFEGUARD integrity in financial reporting M2 is committed to safeguarding the integrity of its financial reporting. Structures and procedures are in place to ensure the truthful and factual presentation of the Company s financial position. The Board also undertakes to monitor and assess the integrity of the financial reports. Audit & Risk Committee M2 s Audit & Risk Committee is responsible for reviewing the Company s policies and procedures for compliance with international reporting standards, reviewing audit plans, accounting policies and the integrity of the financial reports and ensuring the independence of external auditors. It also works closely with the Company s internal audit function, to review and assess the controls, procedures and risks around business activities and functions. During the reporting year, the Audit & Risk Committee consisted of three nonexecutive directors: Michael Simmons (Chair), Craig Farrow and John Hynd. Their qualifications and experience are outlined in the Directors Report. The Audit & Risk Charter details the Committee s role and responsibilities, composition, structure and membership requirements. Further, it also contains information on the procedures for the selection and appointment of the external auditor and for the rotation of external audit engagement partners. The meetings and attendance of the Audit & Risk Committee are detailed in the Directors Report. Principle 5: Make timely and balanced disclosure In compliance with the continuous disclosure requirements of the Corporations Act and ASX Listing Rules, M2 is committed to the principles of timely and balanced disclosure through the adoption and adherence of a comprehensive Continuous Disclosure and Communications Policy. M2 s Chief Executive Officer and the Company Secretary carry the responsibility and accountability to ensure the principles of continuous disclosure are upheld and maintained. They ensure ASX and media releases are timely, reviewed, do not omit any material information and that they are factual and presented in a clear and balanced way. Principle 6: Respect the rights of shareholders M2 recognises the importance of this principle and will at all times strive to communicate regularly and clearly with shareholders. The investor relations section of M2 s website clearly details and provides links to all of M2 s ASX and company releases, general meeting information, financial reports and investor presentations. This is updated regularly to ensure shareholders have ready access to Company information. M2 s Continuous Disclosure and Communications Policy promotes positive communication with shareholders, outlining the Company s commitment to its obligations relating to the communication of price sensitive information. M2 maintains a strict policy in relation to disclosure of information during analyst briefings (with all investor presentations released to the market) and will consider, where practical and cost effective, webcasting or other forms of communication to allow all shareholders an opportunity to participate in significant group briefings. Shareholders are encouraged to attend and participate at general meetings. They must also vote on the appointment and aggregate remuneration of directors, the granting of options and shares to directors and changes to M2 s Constitution. M2 will arrange for its external auditors to always attend the Annual General Meeting and to be readily available to answer shareholder s questions about the conduct of the audit and the preparations and content of the auditor s report. Jacqui Stennings, Collections Officer Russell Peters, Support & Faults Contact Centre Manager 34 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

37 Cecilia Cheng, Accounts Payable Officer Principle 7: Recognise and manage risk The Board, together with executives, constantly seeks to identify, monitor and mitigate risk. The Board has adopted a Risk Management Policy, which documents the Company s commitment to risk management and sets out the risk management framework that M2 operates. This framework includes the development and maintenance of a risk register with associated delegation and reporting mechanisms. The Audit & Risk Committee has delegated authority to oversee the risk management framework, providing reporting to the Board on a periodic basis. Risk management controls are further embedded in M2 s management and reporting systems, including an annual insurance program, business continuity, internal audit, annual budgeting and forecasting, due diligence and strategic planning. During the reporting period, the Board received relevant reports on the risk register and also reports on particular risks within business divisions. In the interests of continuous improvement and to ensure that the risk management frameworks works within M2 s growing business, further developments and enhancements on the risk register and reporting take place on a periodic basis. Following a reporting period, M2 s Chief Executive Officer and Chief Financial Officer are required to state to the Board, in writing, that: > the integrity of financial statements is founded on a sound system of risk management and internal compliance and control; and, > M2 s risk management and internal compliance and control system is operating efficiently and effectively in all material aspects. During the reporting period, the Board received the assurance from the Chief Executive and Chief Financial Officer, for the year ended 30 June 2012 and the halfyear period ended 31 December Principle 8: Remunerate fairly and responsibly M2 s current remuneration practices are set to enable the Company to attract and retain highly talented and motivated directors, executives and employees. The Remuneration Report details and discloses the annual remuneration for key management personnel of M2. M2 has established a Nomination and Remuneration Committee to assist the Board to adopt and review remuneration policies which will: > enable M2 to attract and retain directors (executive and non-executive) and executives who will create sustainable value for shareholders and other stakeholders; and, > fairly and responsibly reward executives and directors, having regard to the performance of the Group, the performance of the individual and the external compensation environment. The role and responsibilities of the Nomination and Remuneration Committee are detailed in the Nomination and Remuneration Committee Charter. As mentioned previously, this Committee consisted of two non-executive directors, Craig Farrow (Chair) and John Hynd. Details relating to the meetings held during the financial year are contained within the Directors Report. Remunerations arrangements for nonexecutive directors and executives are distinct, as described within the Remuneration Report. In particular, nonexecutive directors receive fees for their director services, they do not receive equity or bonus compensation (excluding the Chairman), nor are they are entitled to retirement or termination benefits. Brendan Wilson, Business Analyst Ella Rogers, Collections Officer M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

38 M2 Corporate Social Responsibility STATEMENT To treat each other, our customers, the community and the environment with respect. To be proactive, innovative and solutions-driven. Our Customers > To care for our customers in a manner which is respectful, professional and solutions oriented. > To be innovative in the services we offer our customers and in the means by which we promote our offerings. Our Team > We are committed to promotion from within, to the encouragement of mutual respect amongst team members and accountable autonomy in decision making. The Community > To remain committed to the support of charitable and community organisations in recognition of our broader place in the community. The Environment > To not only be mindful of our collective effect on the environment but to reduce consumption and waste wherever possible. Our SuppLIERS > To make responsible purchasing decisions, ensuring our impact on the environment is minimal and positive supplier relationships are maintained. 36 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

39 FINANCIAL STATEMENTS Consolidated Statement Of Comprehensive Income 38 Consolidated Statement Of Financial Position 39 Consolidated Statement Of Changes In Equity 40 Consolidated Statement Of Cash Flow 41 Notes To The Consolidated Financial Statements 42 1: Corporate Information 42 2: Summary Of Significant Accounting Policies 42 3: Financial Risk Management Objectives And Policies 55 4: Significant Accounting Judgements, Estimates And Assumptions 59 5: Operating Segments 61 6: Revenue And Expenses 63 7: Income Tax 64 8: Dividends Paid And Proposed 66 9: Earnings Per Share 67 10: Cash And Cash Equivalents 67 11: Trade Receivables 69 12: Inventories 70 13: Other Assets 70 14: Plant And Equipment 70 15: Intangible Assets And Goodwill 71 16: Trade And Other Payables 73 17: Provisions 73 18: Interest Bearing Loans And Borrowings 74 19: Deferred Consideration 74 20: Other Non-Current Liabilities 75 21: Contributed Equity 75 22: Related Party Disclosure 76 23: Key Management Personnel 77 24: Share-Based Payment Plans 80 25: Business Combinations 83 26: Commitments 85 27: Contingencies 86 28: Events After Balance Date 86 29: Information Relating To M2 Telecommunications Group Ltd ( The Parent Entity ) 86 30: Auditor s Remuneration 86 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

40 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2012 Note Revenue 6(a) 393, ,912 Cost of Sales (265,159) (322,335) Gross profit 128, ,577 Other income 6(b) 5,047 (79) Employee benefits expenses 6(c) (45,395) (37,854) Depreciation and amortisation 6(d) (10,187) (6,024) Share based payments 24 (425) (282) Other expenses 6(e) (27,547) (19,078) Financing costs 6(f) (2,792) (1,852) Profit before income tax 47,010 40,408 Income tax expense 7 (14,047) (12,776) Profit after tax 32,963 27,632 Net profit and total comprehensive income for the period 32,963 27,632 Net profit and total comprehensive income for the period is attributable to: - Non-controlling interest (66) (52) - Owners of the parent 33,029 27,684 32,963 27,632 Earnings per share for profit attributable to the ordinary equity of the holders of the parent: - Basic earnings per share (cents) Diluted earnings per share (cents) The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes. 38 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

41 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2012 Note ASSETS Current Assets Cash and cash equivalents 10 24,957 12,542 Trade receivables 11 66,325 51,135 Inventories Other current assets 13 14,906 9,312 Total Current Assets 107,074 73,351 Non-Current Assets Other receivables 4 36 Plant and equipment 14 51,108 3,421 Intangible assets and goodwill , ,615 Deferred income tax asset 7 9,151 6,397 Other non-current assets 13 4,545 1,563 Total Non-Current Assets 364, ,032 TOTAL ASSETS 471, ,383 LIABILITIES Current Liabilities Trade and other payables 16 86,120 53,469 Interest-bearing loans and borrowings 18 22,330 12,488 Deferred consideration 19 5,400 6,193 Income tax payable 7 13,112 5,389 Provisions 17 7,975 3,682 Total Current Liabilities 134,937 81,221 Non-Current Liabilities Interest-bearing loans and borrowings ,923 17,252 Deferred tax liability 7 15,511 4,627 Provisions Other non-current liabilities 20 3,352 4,008 Total Non-Current Liabilities 147,637 26,389 TOTAL LIABILITIES 282, ,610 NET ASSETS 188,738 93,773 EQUITY Contributed equity ,911 66,761 Reserves Retained earnings 37,403 26,725 Parent interests 188,849 93,818 Non-controlling interests (111) (45) TOTAL EQUITY 188,738 93,773 The above Statement of Financial Position should be read in conjunction with the accompanying notes. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

42 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 JUNE 2012 Note Ordinary shares Retained earnings Employee equity benefits reserve Foreign currency translation reserve Owners of the parent Noncontrolling interest At 1 July ,761 26, (78) 93,818 (45) 93,773 Profit for the period - 33, ,029 (66) 32,963 66,761 59, (78) 126,847 (111) 126,736 Options exercised 1,036 - (198) Share option reserves Net translation during the year (24) (24) - (24) Shares issued 83, ,140-83,140 Transactions cost on shares (3,229) (3,229) - (3,229) Dividends paid - (19,148) - - (19,148) - (19,148) Dividend reinvestment plan 3,203 (3,203) At 30 June ,911 37, (102) 188,849 (111) 188,738 Total At 1 July ,936 13, (54) 77,002-77,002 Profit for the period - 27, ,684 (52) 27,632 62,936 41, (54) 104,686 (52) 104,634 Options exercised 1,242 - (214) - 1,028-1,028 Share option reserves Net translation during the year (24) (24) - (24) Shares issued Dividends paid - (12,114) - - (12,114) - (12,114) Dividend reinvestment plan 2,623 (2,623) Deferred tax adjustment (40) (40) - (40) At 30 June ,761 26, (78) 93,818 (45) 93,773 The above statement of changes in equity should be read in conjunction with the accompanying notes. 40 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

43 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2012 Note CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers 400, ,598 Payments to suppliers and employees (346,999) (380,974) Interest received 809 1,065 Interest paid (2,792) (1,851) Income tax paid (9,745) (4,097) Net cash flows from operating activities 10 41,560 39,741 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of plant and equipment (1,604) (1,188) Purchase of intangibles (4,523) (37,245) Acquisition payments, net cash acquired (195,212) - Proceeds from disposal of plant and equipment 119 (5,910) Net cash flows used in investing activities (201,220) (44,343) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of borrowings (9,067) (6,923) Proceeds from borrowings 119,541 20,089 Proceeds from issue of shares 83,978 1,028 Transaction costs of issue of shares (3,229) - Dividends paid (19,148) (12,114) Net cash flows from financing activities 172,075 2,080 Net increase/(decrease) in cash and cash equivalents 12,415 (2,522) Cash and cash equivalents at beginning of period 12,542 15,064 Cash and cash equivalents at end of period 10 24,957 12,542 The above statement of cash flow should be read in conjunction with the accompanying notes. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE : CORPORATE INFORMATION The consolidated financial report of M2 Telecommunications Group Ltd (the Company, M2, the Group ) for the year ended 30 June 2012 was authorised for issue in accordance with a resolution of the directors on 24 August M2 is a for profit company limited by shares incorporated and domiciled in Australia whose shares are publicly traded on the Australian Securities Exchange (ASX). 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of preparation The financial report is a general purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards and other authoritative pronouncements of the Australian Accounting Standards Board. The financial report has also been prepared on a historical cost basis. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($ 000) unless otherwise stated. (b) Statement of compliance The financial report complies with Australian Accounting Standards as issued by the Australian Accounting Standards Board and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The Group has adopted the following new and amended Australian Accounting Standards and AASB Interpretations as of 1 July 2011: > AASB 124 (Revised) Related Party Disclosures > AASB 1054 Australian Additional Disclosures > AASB Amendments to Australian Accounting Standards [AASBs 5, 8, 108, 110, 112, 119, 133, 137, 139, 1023, 1031 and Interpretations 2, 4, 16, 1039 & 1052] > AASB Further Amendments to Australian Accounting Standards arising from Annual Improvements Project [AASB 1, 7, 101,134 and Interpretation 13] > AASB Amendments to Australian Accounting Standards [AASB 1, 3, 4, 5, 101, 107, 112, 118, 119, 121, 132, 133, 134, 137, 139, 140, 1023 & 1038 and Interpretations 112, 115, 27, 132, & 1042] > AASB Amendments to Australian Accounting Standards Disclosures on Transfers of Financial Assets [AASB 1 & 7] > AASB Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence Project [AASB 1, 5, 101, 107, 108, 121, 128, 132, 134 and Interpretation 2, 112 & 113] None of the above standards resulted in a change in accounting policies. The accounting policies adopted are consistent with those of the previous financial year. 42 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

45 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Accounting Standards and Interpretations issued but not yet effective Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective and have not been adopted by the Group for the annual period ended 30 June 2012 are outlined below: Reference Title Summary AASB Amendments to Australian Accounting Standards Presentation of Other Comprehensive Income [AASB 101] This Standard requires entities to group items presented in other comprehensive income on the basis of whether they might be reclassified subsequently to profit or loss and those that will not. Application date of standard Impact on Group financial report 1 July 2012 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal. Application date for Group 1 July 2012 AASB 9 Financial Instruments AASB 9 includes requirements for the classification and measurement of financial assets. It was further amended by AASB to reflect amendments to the accounting for financial liabilities. These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The main changes are described below. (a) Financial assets that are debt instruments will be classified based on (1) the objective of the entity s business model for managing the financial assets; (2) the characteristics of the contractual cash flows. (b) Allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument. (c) Financial assets can be designated and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases. (d) Where the fair value option is used for financial liabilities the change in fair value is to be accounted for as follows: > The change attributable to changes in credit risk are presented in other comprehensive income (OCI) > The remaining change is presented in profit or loss If this approach creates or enlarges an accounting mismatch in the profit or loss, the effect of the changes in credit risk are also presented in profit or loss. Consequential amendments were also made to other standards as a result of AASB 9, introduced by AASB and superseded by AASB and January 2015 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal. 1 July 2015 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Reference Title Summary AASB 10 AASB 12 AASB 13 Consolidated Financial Statements Disclosure of Interests in Other Entities Fair Value Measurement AASB 10 establishes a new control model that applies to all entities. It replaces parts of AASB 127 Consolidated and Separate Financial Statements dealing with the accounting for consolidated financial statements and UIG-112 Consolidation Special Purpose Entities. The new control model broadens the situations when an entity is considered to be controlled by another entity and includes new guidance for applying the model to specific situations, including when acting as a manager may give control, the impact of potential voting rights and when holding less than a majority voting rights may give control. Consequential amendments were also made to other standards via AASB AASB 12 includes all disclosures relating to an entity s interests in subsidiaries, joint arrangements, associates and structures entities. New disclosures have been introduced about the judgements made by management to determine whether control exists, and to require summarised information about joint arrangements, associates and structured entities and subsidiaries with non-controlling interests AASB 13 establishes a single source of guidance for determining the fair value of assets and liabilities. AASB 13 does not change when an entity is required to use fair value, but rather, provides guidance on how to determine fair value when fair value is required or permitted. Application of this definition may result in different fair values being determined for the relevant assets. AASB 13 also expands the disclosure requirements for all assets or liabilities carried at fair value. This includes information about the assumptions made and the qualitative impact of those assumptions on the fair value determined. Consequential amendments were also made to other standards via AASB AASB 119 Employee Benefits The main change introduced by this standard is to revise the accounting for defined benefit plans. The amendment removes the options for accounting for the liability, and requires that the liabilities arising from such plans is recognised in full with actuarial gains and losses being recognised in other comprehensive income. It also revised the method of calculating the return on plan assets. The revised standard changes the definition of short-term employee benefits. The distinction between short-term and other long-term employee benefits is now based on whether the benefits are expected to be settled wholly within 12 months after the reporting date. Consequential amendments were also made to other standards via AASB AASB Amendments to Australian Accounting Standards to Remove Individual Key Management Personnel Disclosure Requirements This Amendment deletes from AASB 124 individual key management personnel disclosure requirements for disclosing entities that are not companies. Application date of standard Impact on Group financial report 1 January 2013 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal. 1 January 2013 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal. 1 January 2013 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal. 1 July 2013 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal. 1 July 2013 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal. Application date for Group 1 July July July July July M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

47 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Reference Title Summary AASB 1053 AASB AASB AASB Application of Tiers of Australian Accounting Standards This Standard establishes a differential financial reporting framework consisting of two Tiers of reporting requirements for preparing general purpose financial statements: (a) Tier 1: Australian Accounting Standards (b) Tier 2: Australian Accounting Standards Reduced Disclosure Requirements Tier 2 comprises the recognition, measurement and presentation requirements of Tier 1 and substantially reduced disclosures corresponding to those requirements. The following entities apply Tier 1 requirements in preparing general purpose financial statements: (a) For-profit entities in the private sector that have public accountability (as defined in this Standard) (b) The Australian Government and State, Territory and Local Governments The following entities apply either Tier 2 or Tier 1 requirements in preparing general purpose financial statements: (a) For-profit private sector entities that do not have public accountability (b) All not-for-profit private sector entities (c) Public sector entities other than the Australian Government and State, Territory and Local Governments. Consequential amendments to other standards to implement the regime were introduced by AASB Amendments AASB principally amends AASB 7 Financial to Australian Instruments: Disclosures to require disclosure of Accounting Standards information that will enable users of an entity s financial Disclosures statements to evaluate the effect or potential effect Offsetting Financial of netting arrangements, including rights of set-off Assets and Financial associated with the entity s recognised financial assets Liabilities and recognised financial liabilities, on the entity s financial position. Amendments to Australian Accounting Standards arising from Annual Improvements Cycle AASB makes amendments resulting from the Annual Improvements Cycle. The Standard addresses a range of improvements, including the following: repeat application of AASB 1 is permitted (AASB 1); and clarification of the comparative information requirements when an entity provides a third balance sheet (AASB 101 Presentation of Financial Statements). Amendments to AASB adds application guidance to AASB Australian Accounting 132 Financial Instruments: Presentation to address Standards inconsistencies identified in applying some of the Offsetting Financial offsetting criteria of AASB 132, including clarifying the Assets and Financial meaning of currently has a legally enforceable right of Liabilities set-off and that some gross settlement systems may be considered equivalent to net settlement. Application date of standard Impact on Group financial report 1 July 2013 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal. 1 January 2013 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal. 1 January 2013 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal. 1 January 2014 The Group has not yet fully assessed the impact of the changes but expects the impact on the financial statements to be minimal. Application date for Group 1 July July July July 2015 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (c) Basis of consolidation The consolidated financial statements comprise the financial statements of M2 Telecommunications Group Ltd and its subsidiaries as at and for the period ended 30 June each year ( the Group ). Subsidiaries are all those entities over which the Group has the power to govern the financial and operating policies so as to obtain benefits from their activities. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether a group controls another entity. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies. In preparing the consolidated financial statements, all intercompany balances, transactions, unrealised gains and losses resulting from intra-group transactions and dividends have been eliminated in full. Subsidiaries are fully consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Investments in subsidiaries held by M2 Telecommunications Group Ltd are accounted for at cost in the separate financial statements of the parent entity less any impairment charges. Dividends received from subsidiaries are recorded as a component of other revenues in the separate income statement of the parent entity, and do not impact the recorded cost of the investment. Upon receipt of dividend payments from subsidiaries, the parent will assess whether any indicators of impairment of the carrying value of the investment in the subsidiary exist. Where such indicators exist, to the extent that the carrying value of the investment exceeds its recoverable amount, an impairment loss is recognised. The acquisition of subsidiaries is accounted for using the acquisition method of accounting. The acquisition method of accounting involves recognising at acquisition date, separately from goodwill, the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. The identifiable assets acquired and the liabilities assumed are measured at their acquisition date fair values (see note 2(d)). The difference between the above items and the fair value of the consideration (including the fair value of any pre-existing investment in the acquiree) is goodwill or a discount on acquisition. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units. Non-controlling interests are allocated their share of net profit after tax in the statement of comprehensive income and are presented within equity in the consolidated statement of financial position, separately from the equity of the owners of the parent. Losses are attributed to the non-controlling interest even if that results in a deficit balance. A change in the ownership interest of a subsidiary that does not result in a loss of control is accounted for as an equity transaction. (d) Business combinations Business combinations are accounted for using the acquisition method. The consideration transferred in a business combination shall be measured at fair value, which shall be calculated as the sum of the acquisition-date fair values of the assets transferred by the acquirer, the liabilities incurred by the acquirer to former owners of the acquiree and the equity issued by the acquirer, and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition-related costs are expensed as incurred, and included in administrative expenses. When the Group acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with contractual terms, economic conditions, the Group s operating or accounting policies and other pertinent conditions as at the acquisition date. This includes the separation of embedded derivatives in host contracts by the acquiree. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or liability will be recognised in accordance with AASB 139 either in profit or loss or in other comprehensive income. If the contingent consideration is classified as equity, it should not be remeasured until it is finally settled within equity. 46 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

49 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (e) Operating segments An operating segment is a component of an entity that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity), whose operating results are regularly reviewed by the entity s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance and for which discrete financial information is available. This includes start up operations which are yet to earn revenues. Management will also consider other factors in determining operating segments such as the level of segment information presented to the board of directors. Operating segments have been identified based on the information provided to the chief operating decision makers being the executive management team. Operating segments that meet the quantitative criteria as prescribed by AASB 8 are reported separately. (f) Foreign currency translation Functional and presentation currency Both the functional and presentation currency of M2 Telecommunications Group Ltd and its Australian subsidiaries are Australian dollars ($). The New Zealand subsidiary s functional currency is New Zealand dollars which is translated to the presentation currency (see below for consolidated reporting). Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange at the reporting date. Translation of Group Companies functional currency to presentation currency The results of the New Zealand subsidiary are translated into Australian dollars (presentation currency) as at the date of each transaction. Assets and liabilities are translated at exchange rates prevailing at reporting date. Exchange variations resulting from the translation are recognised in the foreign currency translation reserve in equity. On consolidation, exchange differences arising from the translation of the net investment in the New Zealand subsidiary are taken to the foreign currency translation reserve. If the New Zealand subsidiary were sold, the proportionate share of exchange differences would be transferred out of equity and recognised in the statement of comprehensive income. (g) Cash and cash equivalents Cash and cash equivalents in the statement of financial position comprise cash at bank and in hand and short-term deposits with an original maturity 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. For the purposes of the statement of cash flow, cash and cash equivalents consist of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Bank overdrafts are included within interest bearing loans and borrowings in current liabilities on the statement of financial position. (h) Trade receivables Trade receivables, which generally have day terms, are recognised initially at fair value and subsequently measured at amortised cost which is the original invoice amount less an allowance for impairment. Collectability of trade receivables is reviewed on an ongoing basis at an operating unit level. Individual debts that are known to be uncollectible are written off when identified. An impairment provision is recognised when there is objective evidence that the Group will not be able to collect the receivable. All debts are reviewed by management for impairment. Financial difficulties of the debtor, default payments and information provided by collection agents are considered objective evidence of impairment. The amount of the impairment loss is the receivable carrying amount compared to the present value of estimated future cash flows, discounted at the original effective interest rate. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (i) Inventories Inventories are valued at the lower of cost and net realisable value. Costs are accounted for on a first-in, first-out basis. Cost of finished goods comprise of cost of direct materials assigned on the basis of weighted average costs. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. (j) Investments and other financial assets Investments and financial assets in the scope of AASB 139 Financial instruments: Recognition and Measurement are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired or originated. Designation is re-evaluated at each financial year end, but there are restrictions on reclassifying to other categories. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transactions costs. Recognition and derecognition All regular way purchases and sales of financial assets are recognised on the trade date i.e., the date that the Group commits to purchase the asset. Regular way purchases or sales are purchases or sales of financial assets under contracts that require delivery of the assets within the period established generally by regulation or convention in the market place. Financial assets are derecognised when the right to receive cash flows from the financial assets has expired or when the entity transfers substantially all the risks and rewards of the financial assets. If the entity neither retains nor transfers substantially all of the risks and rewards, it derecognises the asset if it has transferred control of the assets. Subsequent measurement - Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process. These are included in current assets, except for those with maturities greater than 12 months after reporting date, which are classified as non-current. (k) Plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of replacing parts that are eligible for capitalisation when the cost of replacing the parts is incurred. Similarly, when each major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement only if it is eligible for capitalisation. All other repairs and maintenance are recognised in profit or loss as incurred. Depreciation is calculated on a straight-line basis over the estimated useful life of the specific assets as follows: Plant and equipment over 2 to 10 years Motor vehicles over 4 to 8 years, determined by the life of the lease Leased equipment over 2 to 5 years, determined by the life of the lease Switch cables over 15 years The assets residual values, useful lives and amortisation methods are reviewed, and adjusted if appropriate, at each financial year end. Derecognition An item of plant and equipment is derecognised upon disposal or when no further future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in statement of comprehensive income in the year the asset is derecognised. 48 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

51 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (l) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset, even if that right is not explicitly specified in an arrangement. Group as a lessee Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognised as an expense in profit or loss. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term. Operating lease payments are recognised as an expense in the Statement of Comprehensive Income on a straight-line basis over the lease term. Operating lease incentives are recognised as a liability when received and subsequently reduced by allocating lease payments between rental expense and reduction of the liability. (m) Impairment of non-financial assets other than goodwill and indefinite intangibles Non-financial assets other than goodwill and indefinite life intangibles are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Group conducts an annual internal review of asset values, which is used as a source of information to assess for any indicators of impairment. External factors, such as changes in expected future processes, technology and economic conditions, are also monitored to assess for indicators of impairment. If any indication of impairment exists, an estimate of the asset s recoverable amount is calculated. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. (n) Goodwill and intangibles Goodwill Goodwill acquired in a business combination is initially measured at cost of the business combination being the excess of the consideration transferred over the fair value of the Group s net identifiable assets acquired and liabilities assumed. If this consideration transferred is lower than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised in profit or loss. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated represents the lowest level within the Group at which the goodwill is monitored for internal management purposes, and is not larger than an operating segment determined in accordance with AASB 8. Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash-generating units), to which the goodwill relates. The Group performs its impairment testing annually, or more frequently if events or changes in circumstances indicate that the carrying value may be impaired, using discounted cash flows under the value in use methodology. Further details on the methodology and assumptions used are outline in note 15. When the recoverable amount of the cash-generating unit (group of cash-generating units) is less than the carrying amount, an impairment loss is recognised. Impairment losses recognised for goodwill are not subsequently reversed. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Intangibles Intangible assets acquired separately or in a business combination are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. The useful lives of these intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over their useful life and tested for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite useful lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset. Indefeasible Rights to Use (IRUs) of capacity are intangible assets amortised on a straight line basis over the remaining life of the contracts. Trademarks, licenses and customer contracts are amortised over the period of expected future sales from the related asset. Software purchased is amortised over a period of between 2 years and 10 years, being the estimated useful life of the asset. Brands have indefinite useful lives. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at cash-generating unit level consistent with the methodology outlined for goodwill above. Such intangibles are not amortised. The useful life of an indefinite life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis. Software includes capitalised development costs. Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefit from the related project. The carrying value of an intangible asset arising from development expenditure is tested for impairment annually when the asset is not yet available for use or more frequently when an indication of impairment arises during the reporting period. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised. Expenditures on advertising and promotional expenses are recognised as a component of marketing expense in the statement of comprehensive income when the Group has either the right to access the goods or has received the services. (o) Trade and other payables Trade and other payables are carried at amortised cost and due to their short-term nature they are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. (p) Interest-bearing loans and borrowings All loans and borrowings are initially recognised at the fair value of the consideration received less directly attributable transaction costs. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date. 50 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

53 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Borrowing costs Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset (i.e. an asset that necessarily takes a substantial period of time to get ready for its intended use or sale) are capitalised as part of the cost of that asset. All other borrowing costs are expensed in the period they occur. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. The Group does not currently hold qualifying assets but, if it did, the borrowing costs directly attributable with this asset would be capitalised (including any other associated costs directly attributable to the borrowing and temporary investment income earned on the borrowing). (q) Provisions and employee leave benefits Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. When the Group expects some or all of a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the statement of comprehensive income net of any reimbursement. Provisions are measured at the present value of management s best estimate of the expenditure required to settle the present obligation at the reporting date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision resulting from the passage of time is recognised in finance costs. Employee leave benefits (i) Wages, salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for sick leave are recognised when the leave is taken and are measured at the rates paid or payable. (ii) Long service leave The liability for long service leave 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 employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows. (r) Share-based payment transactions Equity settled transactions The Group has provided benefits to its employees in the form of share-based payments, whereby employees rendered services in exchange for shares or rights over shares (equity-settled transactions). There are currently two plans in place to provide these benefits: > the Executive Management Team Share Option Plan (ESOP), which provides benefits to directors, executives and selected employees > the Employee Share Loan Plan (ESP), which provides benefits to selected employees The cost of these equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined by an external valuer using a binomial model; further details are given in note 24. The cost of equity-settled transactions is recognised, together with a corresponding increase in the equity, over the period in which the performance and/or service conditions are fulfilled (the vesting period), ending on the date on which the relevant employees become fully entitled to the award (the vesting date). M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) At each subsequent reporting date until vesting, the cumulative charge to the statement of comprehensive income is the product of: (i) The grant date fair value of the award (ii) The current best estimate of the number of awards that will vest, taking into account such factors as the likelihood of employee turnover during the vesting period and the likelihood of non-market performance conditions being met (iii) The expired portion of the vesting period. The charge to the Statement of Comprehensive Income for the period is the cumulative amount as calculated above less the amounts already charged in previous periods. There is a corresponding entry to equity. Until an award has vested, any amounts recorded are contingent and will be adjusted if more or fewer awards vest than were originally anticipated to do so. Any award subject to a market condition is considered to vest irrespective of whether or not that market condition is fulfilled, provided that all other conditions are satisfied. If the terms of an equity-settled award are modified, as a minimum an expense is recognised as if the terms had not been modified. An additional expense is recognised for any modification that increases the total fair value of the share-based payment arrangement, or is otherwise beneficial to the employee, as measured at the date of modification. If an equity-settled award is cancelled, it is treated as if it had vested on the date of cancellation, and any expense not yet recognised for the award is recognised immediately. However, if a new award is substituted for the cancelled award and designated as a replacement award on the date that it is granted, the cancelled and new award are treated as if they were a modification of the original award, as described in the previous paragraph. The dilutive effect, if any, of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share (see note 9). Shares in the Group reacquired on-market and held by the ESLP are classified and disclosed as reserved shares and deducted from equity. (s) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. (t) Revenue recognition Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Rendering of services The Group principally obtains revenue from providing the following telecommunication services: fixed wire, mobile, data services and equipment sales. Products and services may be sold separately or in bundled packages. Revenue for fixed wire, mobile and data services are recognised as revenue, as services are performed. Revenue from services provided, but unbilled, are accrued at end of each period and unearned revenue (revenue billed in advance) for services to be provided in future periods is deferred. Revenue for equipment sales is recognised when the device is delivered to the end customer and the sale is considered complete. Commission income Commissions are received as incentives from upstream suppliers for connecting new customers. Revenue from such commissions is deferred and recognised over a period of life in line with the average period related to the customers contracts. Licence fees Licence fees are brought to account as revenue in accordance with the terms of the licence agreement when substantially all obligations arising from the licence arrangement have been fulfilled. 52 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

55 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Interest Revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. (u) Income tax and other taxes Current tax assets and liabilities for the current period are measured at the amount expected to be recovered from or paid to the taxation authorities based on the current period s taxable income. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date. 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 on all temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary difference except: > When the deferred liabilities arise from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. > When the taxable temporary difference is associated with investments in subsidiaries, associates or interest in joint ventures, and the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred income tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry-forward of unused tax credits and unused tax losses can be utilised, except: > When the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss. > When the deductible temporary differences is associated with investments in subsidiaries, associates and interests in joint ventures, in which case a deferred tax asset is only recognised to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each reporting date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. Tax consolidation legislation M2 Telecommunications Group Ltd and its wholly-owned Australian controlled entities implemented the tax consolidation legislation as of 1 July The head entity, M2 Telecommunications Group Ltd, and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the stand-alone taxpayer approach in determining the appropriate amount of current taxes arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In addition to its own current and deferred tax amounts, M2 Telecommunications Group Ltd also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the Group via an intercompany account. Details of the tax funding agreement are detailed in note 7. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. Other taxes Revenues, expenses and assets are recognised net of the amount of GST except: > When the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable. > Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (v) Earnings per share Basic earnings per share is calculated as net profit attributable to members of the parent, adjusted to exclude any costs of servicing equity (other than dividends) and preference share dividends, divided by the weighted average number of ordinary shares, adjusted for any bonus element. Diluted earnings per share is calculated as net profit attributable to members of the parent, adjusted for: > Costs of servicing equity (other than dividends) and preference share dividends. > The after tax effect of dividends and interest associated with dilutive potential ordinary shares that have been recognised as expenses. > Other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential ordinary shares divided by the weighted average number of ordinary shares and dilutive potential ordinary shares, adjusted for any bonus element. (w) Customer loyalty programme In certain circumstances, for every dollar spent on certain types of phone calls or plans by the customer, up to 15% of the eligible calls or plans can be redeemed for travel booked through M2 Travel. The customer has up to 60 days to redeem their travel dollars upon termination or expiration of their contract, after which the travel dollars are forfeited. For dollars earned by the customers, the Group defers a portion of the revenue and recognises a liability at fair value to fulfil its obligation to supply the redemption. When the obligation to supply the travel dollars is fulfilled the deferred revenue is recognised in the profit or loss in the period in which the obligation was fulfilled and the liability is extinguished. (x) Deferred acquisition cost Deferred acquisition cost pertains to upfront commissions paid to internal and external sales personnel upon acquiring new service contracts. Upfront commissions paid to internal and external sales personnel are initially recognised at cost in the statement of financial position as Other Assets (note 13) and subsequently amortized over the average term of the customer s contract which is from 22 to 24 months. The amortization is included in cost of sales. 54 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

57 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) (y) Derivative financial instruments and hedging The Group uses derivative financial instruments to hedge its risks associated with interest rate fluctuations. Such derivate financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured to fair value. Derivates are carried as assets when their fair value is positive and as liabilities when their fair value is negative. The fair values of interest rate swaps are determined using a valuation technique based on cash flows discounted to present value using current market interest rates. Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss for the year. 3: FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES The Group s principal financial instruments comprise receivables, payables, bank loans and overdrafts, finance leases, and cash and short-term deposits. Risk Exposures and Responses The Group manages its exposure to key financial risks in accordance with the Group s financial risk management policy. The objective of the policy is to support the delivery of the Group s financial targets whilst protecting future financial security. The main risks arising from the Group s financial instruments are interest rate risk, liquidity risk and credit risk. The Group uses different methods to measure and manage different types of risks to which it is exposed. Such methods include monitoring levels of exposure to interest rate risk and assessments of market forecasts for interest rate. Aging analyses and monitoring of specific credit allowances are undertaken to manage credit risk. Liquidity risk is monitored through the development of future rolling cash flow forecasts. The Board reviews and agrees policies for managing each of these risks as summarised below. Primary responsibility for identification and control of financial risks rests with the Audit and Risk Committee under the authority of the Board. The Board reviews and agrees policies for managing each of the risks identified below, including setting of limits for credit allowances and future cash flow forecast projections. (a) Interest rate risk The Group s exposure to market interest rates relates primarily to the Group s long-term debt obligations. The level of debt is disclosed in note 18. At the reporting date, the Group has the following mix of financial assets and liabilities exposed to Australian variable interest rate risk: Financial assets Cash and cash equivalents 24,957 12,542 Financial liabilities Interest-bearing loans and borrowings (77,193) (29,740) Net exposure (52,236) (17,198) The Group constantly analyses its interest rate exposure. Within this analysis, consideration is given to potential renewals of existing positions and alternative financing. In addition, the Group has sound and prudent interest rate risk management policies which include an interest rate risk philosophy governing the extent to which the Group is willing to assume interest rate risk and explicit and prudent limits on the Group s rate risk exposure. Derivative financial instruments are used by the Group in the normal course of business in order to hedge exposure to fluctuations in interest rates. These are economic hedges and do not satisy the requirements for hedge accounting. At the balance sheet date, the Group held interest rate swaps to hedge their variable interest rate borrowings for a notional amount $73.06 million (2011: NIL). M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) The following sensitivity analysis is based on the interest rate risk exposures in existence at the reporting date. At 30 June 2012, if interest rates had moved, as illustrated in the table below, with all other variables held constant, post tax profit would have been affected as follows: Post tax profit and equity Judgements of reasonable possible movements: higher/(lower) Consolidated +1% (100 basis points) (522) (172) -.5% (50 basis points) The movements in profit are due to higher interest costs from variable rate debt and cash balances. The sensitivity is higher in 2012 than in 2011 due to the increase in borrowings in order to fund the Primus acquisition. Significant assumptions used in the interest rate sensitivity analysis include: > Reasonably possible movements in interest rates were determined based on the Group s current credit rating and mix of debt in Australia, relationships with financial institutions, the level of debt that is expected to be renewed as well as a review of the last two year s historical movements and economic forecaster s expectations. > The net exposure at reporting date is representative of what the Group is expecting to be exposed to in the next 12 months from balance sheet date (b) Credit risk Credit risk arises from the financial assets of the Group, which comprise cash and cash equivalents and trade and other receivables. The Group s exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of these financial assets (as outlined in each applicable note). The Group does not hold any credit derivatives to offset its credit exposure. The Group trades only with recognised, credit-worthy third parties, and as such collateral is not requested nor is it the Group s policy to securitise its trade and other receivables. It is the Group s policy that all customers who wish to trade on credit terms are subject to credit verification procedures including an assessment of their independent credit rating, financial position, past experience and industry reputation. Risk limits are set for each individual customer in accordance with parameters set by the board. These risk limits are regularly monitored. In addition, receivable balances are monitored on an ongoing basis with the result that the Group s exposure to bad debts is not significant. There are no significant concentrations of credit risk within the Group. 56 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

59 3: FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) (c) Liquidity risk Liquidity risk arises from the financial liabilities of the Group and the Group s subsequent ability to meet their obligations to repay their financial liabilities as and when they fall due. The Group s objective is to maintain a balance between continuity of funding and flexibility through the use of credit facilities, bank loans, finance leases and committed available credit lines. The Group minimises liquidity risk by maintaining a significant level of cash and cash equivalents as well as ensuring the Group has access to the use of credit facilities as required. The Group monitors total cash inflows and outflows expected on a monthly basis. Non-derivative financial liabilities The following liquidity risk disclosures reflect all contractually fixed pay-offs, repayments and interest resulting from recognised financial liabilities as of 30 June For the other obligations, the respective undiscounted cash flows for the respective upcoming fiscal years are presented. The timing of cash flows for liabilities is based on the contractual terms of the underlying contract. However, where the counter party has a choice of when the amount is paid, the liability is allocated to the earliest period in which the Group can be required to pay. When the Group is committed to make amounts available in instalments, each instalment is allocated to the earliest period in which the Group is required to pay. The risks implied from the values shown in the table below, reflect a balanced view of cash inflows and outflows. Leasing obligations, trade payables and other financial liabilities mainly originate from the financing of assets used in ongoing operations such as plant and equipment and investments in working capital (e.g., inventories and trade receivables). Liquid non-derivative assets such as cash and receivables are considered in the Group s overall liquidity risk. The Group ensures that sufficient liquid assets are available to meet all the required short-term cash payments. < 6 months 6-12 months 1-5 years > 5 years TOTAL Year ended 30 June 2012 Liquid financial assets Cash and cash equivalents 24, ,957 Trade and other receivables 66, ,325 91, ,282 Financial Liabilities Trade and other payables (74,290) - (636) - (74,926) Interest bearing loans and borrowings (10,569) (11,761) (127,923) - (150,253) (84,859) (11,761) (128,559) - (225,179) Net inflow/(outflow) 6,423 (11,761) (128,559) - (133,897) Year ended 30 June 2011 Liquid financial assets Cash and cash equivalents 12, ,542 Trade and other receivables 51, ,135 63, ,677 Financial Liabilities Trade and other payables (41,611) (41,611) Interest bearing loans and borrowings (5,500) (6,000) (18,240) - (29,740) (47,111) (6,000) (18,240) - (71,351) Net inflow/(outflow) 16,566 (6,000) (18,240) - (7,674) M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES (CONTINUED) (d) Foreign currency risk The Group has a subsidiary operating in New Zealand. The operation is small and does not materially impact the Group financial statements. For this reason, the management believes the exposure to New Zealand Dollar currency fluctuations is not material. The Group has transactional currency exposures resulting from the purchase of intangible assets. This transaction is denominated in United States Dollars (USD). The Group is considering several options to mitigate the effect of this foreign currency exposure. One option is to enter into forward contracts to hedge fluctuations in foreign currency rates. Another option is to re-negotiate the USD denominated contracts to change the denomination to AUD. At the balance sheet date, the Group had the following exposure to USD foreign currency that is not designated in cash flow hedges: Financial liabilities Other financial liabilities 9,831 - Net exposure 9, The following sensitivity is based on the foreign currency risk exposures in existence at the reporting date: At 30 June 2012, had the Australian Dollar (AUD) moved, as illustrated in the table below, with all other variables held constant, post tax profit would have been affected as follows: Post tax profit and equity Judgements of reasonable possible movements: higher/(lower) Consolidated AUD to USD +15% (2011: NIL) 1,282 - AUD to USD -15% (2011: NIL) (1,735) - The sensitivities of post-tax profit in 2012 are greater than in 2011 due to the acquisition of Primus. Included in the net identifiable assets acquired are financial liabilities payable in USD. Significant assumptions used in the foreign currency sensitivity analysis include: > The reasonably possible movement was calculated by taking the USD spot rate as at balance sheet date, moving this spot rate by the reasonably possible movements and then re-converting the USD into AUD with the new spot rate. This methodology reflects the translation methodology undertaken by the Group. > The net exposure at balance sheet date is representative of what the Group was and is expecting to be exposed to in the next 12 months from balance sheet date M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

61 4: SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements and estimates on historical experience and on other various factors it believes to be reasonable under the circumstances, the result of which form the basis of the carrying values of assets and liabilities that are not readily apparent from other sources. Management has identified the following critical accounting policies for which significant judgements, estimates and assumptions are made. Actual results may differ from these estimates under different assumptions and conditions and may materially affect financial results or the financial position reported in future periods. Further details of the nature of these assumptions and conditions may be found in the relevant notes to the financial statements. (a) Significant accounting judgements Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences as management considers that it is probable that future taxable profits will be available to utilise those temporary differences. Significant management judgement is required to determine the amount of deferred tax assets that can be recognised, based upon the likely timing and the level of future taxable profits over the next four years. Impairment of non-financial assets other than goodwill and indefinite life intangibles The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. These include product performance, technology, economic and political environments and future product expectations. If an impairment trigger exists, the recoverable amount of the asset is determined. Taxation The Group s accounting policy for taxation requires management s judgement as to the types of arrangements considered to be a tax on income in contrast to an operating cost. Judgement is also required in assessing whether deferred tax assets and certain deferred tax liabilities are recognised on the statement of financial position. Deferred tax assets, including those arising from unrecouped tax losses, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered, which is dependent on the generation of sufficient future taxable profits. Assumptions about the generation of future taxable profits depend on management s estimates of future cash flows. These depend on estimates of future carrier costs, commissions and sales volumes, operating costs, restoration costs, capital expenditure, dividends and other capital management transactions. Judgements are also required about the application of income tax legislation. These judgements and assumptions are subject to risk and uncertainty, hence there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets and deferred tax liabilities recognised on the statement of financial position and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, some or all of the carrying amounts of recognised deferred tax asset and liabilities may require adjustment, resulting in a corresponding credit or charge to the statement of comprehensive income. (b) Significant accounting estimates and assumptions Impairment of trade and other receivables Management reviews its trade and other receivables for objective evidence of impairment regularly. Significant financial difficulties of the debtor, the probability that the debtor will enter bankruptcy, and default or significant delay in payments are considered objective evidence that a receivable is impaired. In determining this, management makes judgement as to whether there is observable data indicating that there has been a significant change in the payment ability of the debtor, or whether there have been significant changes with adverse effect in the technological, market, economic or legal environment in which the debtor operates in. Where there is objective evidence of impairment, management makes judgements as to whether an impairment loss should be recorded as an expense. In determining this, management uses estimates based on historical loss experience for assets with similar credit risk characteristics. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between the estimated loss and actual loss experience. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (continued) Impairment of goodwill and intangibles with indefinite useful lives The Group determines whether goodwill and intangibles with indefinite useful lives are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash-generating units, using a value in use discounted cash flow methodology, to which the goodwill and intangibles with indefinite useful lives are allocated. Share-based payment transactions The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. The fair value is determined with the assistance of an external valuer using a binomial model. The accounting estimates and assumptions relating to equity-settled share-based payments would have no impact on the carrying amounts of assets and liabilities within the next annual reporting period but may impact expenses and equity. Estimation of useful lives of plant and equipment The charge in respect of periodic depreciation is derived after determining an estimate of an asset s expected useful life and the expected residual value at the end of its life. Increasing an asset s expected life or its residual value would result in a reduced depreciation charge in the consolidated income statement. The useful lives and residual values of Group assets are determined by management at the time the asset is acquired and reviewed annually for appropriateness. The lives are based on historical experience with similar assets as well as anticipation of future events which may impact their life such as changes in technology. Historically, changes in useful lives and residual values have not resulted in material changes to the Group s depreciation charge. Estimation of useful lives of intangible assets The useful life used to amortise intangible assets relates to the future performance of the assets acquired and management s judgement of the period over which economic benefit will be derived from the asset. The basis for determining the useful life for the most significant categories of intangible assets is as follows: > Customer contracts. The estimated useful life principally reflects management s view of the average economic life of the customer base and is assessed by reference to customer churn rates. An increase in churn rates may lead to a reduction in the estimated useful life and an increase in the amortisation charge. Historically, changes to the estimated useful lives have not had a significant impact on the Group s results and financial position. > Software. The useful life is determined by management at the time the software is acquired and brought into use and is regularly reviewed for appropriateness. For computer software licences, the useful life represents management s view of expected benefits over which the Group will receive benefits from the software, but not exceeding the licence term. For unique software products controlled by the Group, the life is based on historical experience with similar products as well as anticipation of future events which may impact their life such as changes in technology. Historically, changes in useful lives have not resulted in material changes to the Group s amortisation charge. > Indefeasible Rights to Use (IRUs). The useful life is determined by the remaining life of the contracts. The assets will be fully amortised once the contracts expire. 60 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

63 5: OPERATING SEGMENTS Identification of reportable segments The Group has identified its operating segments based on the internal reports that are reviewed and used by the executive management team (chief operating decision makers) in assessing performance and in determining the allocation of resources. The operating segments are identified by management based on the manner in which the product is sold, whether Retail or Wholesale. Discrete financial information about each of these operating businesses is reported to the executive management team on at least a monthly basis. The reportable segments are based on aggregated operating segments determined by the similarity of the products produced and sold and/or the services provided, as these are the sources of the Group s major risks and have the most effect on the rates of return. Primus Telecom Holdings Pty Ltd was acquired on 1 June As at 30 June 2012, management was in the process of updating M2 s management reporting to incorporate the Primus operations. As a result, the contribution of Primus has been included within the retail and wholesale segments based on the nature of the Primus customers and underlying risks of the Primus operations. Detail regarding Primus contributed assets and liabilities, and financial contribution to the group can be found separately in Note 25 Business Combinations. Types of products and services The Group has two operating segments, Retail and Wholesale. The Group s risks and rates of return are affected predominantly by differences in the markets served by these business units. The Retail business segment offers unique packaged telecommunications services, targeted particularly to small and medium sized enterprises, offering fixed line voice services, including line rental services, mobile voice and data services, terrestrial dial-up and high speed broadband internet services as well as mobile telephone hardware. The Wholesale business segment offers the full suite of fixed line voice services, including line rental services, mobile voice and data services, terrestrial dial-up and high speed broadband internet services and mobile telephone hardware to the telecommunications reseller market at wholesale rates. Accounting policies and inter-segment transactions The accounting policies used by the Group in reporting segments internally are the same as those contained in note 2 to the accounts and in the prior periods except as detailed below: Corporate charges Corporate charges comprise non-segmental expenses incurred by the various business functions that support both Retail and Wholesale operations. Some of these business functions include IT, finance, facilities and equipment, commercial, and head office. Except for head office charges, all other corporate charges are allocated to each business segment on proportionate basis linked to segment revenue so as to determine a segment result. Head office charges remain unallocated due to the difficulty in obtaining a reliable measurement of amounts that can be reasonably allocated between Retail and Wholesale. Income tax expenses Income tax expense is calculated based on the segment operating net profit using a notional charge of 30% (2011: 30%). No effect is given for taxable or deductible temporary differences. Unallocated items It is the Group s policy that if items of revenue and expenses are not allocated to operating segments, then any associated assets and liabilities are also not allocated to segments. This is to avoid asymmetrical allocations within segments which management believe would be inconsistent. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : OPERATING SEGMENTS (continued) Major customers The Group has no significant clients that individually account for more than 10% of external revenue. The following tables present revenue and profit information for the years ended 30 June 2012 and 30 June Retail Wholesale Total Revenue Sales to external customers 320, ,948 73, , , ,912 Total revenue per the statement of comprehensive income 393, ,912 Result Segment net operating profit after tax 34,437 23,024 8,153 6,368 42,590 29,392 Reconciliation of segment net profit after tax to net profit before tax Income tax expense - current and deferred 14,047 12,776 Head office charges - employee benefits (4,148) (2,327) Head office charges - miscellaneous (5,479) 567 Net profit before tax per the statement of comprehensive income 47,010 40,408 Retail Wholesale Unallocated Total Depreciation 1,947 1, ,170 1,443 Amortisation 7,998 4, ,017 4,581 Income tax expense - current 12,080 10,969 3,150 3,066 (1,116) (4,395) 14,114 9,640 Segment assets and liabilities as of 30 June 2012 and 30 June 2011 are as follows: Retail Wholesale Total Segment assets Segment operating assets 399, ,268 47,138 31, , ,283 Working capital - Head office 15, Other 9, Total assets per the statement of financial position 471, ,383 Segment liabilities Segment operating liabilities 255,910 71,257 8,285 6, ,195 77,590 Borrowings - Head office 10,226 29,567 Other 8, Total liabilities per the statement of financial position 282, , M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

65 6: REVENUE AND EXPENSES (a) Revenue Rendering of services 392, ,085 Interest income 809 1,065 License fees , ,912 (b) Other income Gain on disposal of plant and equipment 34 (79) Other 5,013-5,047 (79) (c) Employee benefits expense Wages and salaries 39,308 32,507 Defined contribution superannuation expense 3,080 2,704 Annual leave provision 2,689 2,433 Long service leave provision ,395 37,854 (d) Depreciation and amortisation Depreciation 2,170 1,443 Amortisation of software 2, Amortisation of customer contracts 5,114 3,744 Amortisation of IRUs ,187 6,024 (e) Other expenses Selling and marketing 934 1,134 Business development 2,370 1,981 Facilities and equipment 3,808 2,528 Corporate 1,497 1,486 Professional fees 5,215 2,591 Bank fees 1, Bad debts 7,914 4,726 Operating lease 4,210 3,504 Other ,547 19,078 (f) Finance costs Finance charges payable under finance leases and hire purchase contracts Finance charges payable on bank loan 2,663 1,741 2,792 1,852 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : INCOME TAX (a) Income tax expense The major components of income tax expense are: Statement of comprehensive income: Current income tax Current income tax charge 14,114 9,640 Adjustments in respect of current income tax of previous years (70) - Deferred income tax Relating to origination and reversal of temporary differences 3 3,136 Income tax expense reported in the statement of comprehensive income 14,047 12,776 (b) Numerical reconciliation between aggregate tax expense recognised in the statement of comprehensive income and tax expense calculated per the statutory income tax rate A reconciliation between tax expense and the product of accounting profit before income tax multiplied by the Group s applicable tax rate is as follows: Accounting profit before income tax 47,010 40,408 At the Group s statutory income tax rate of 30% (2011: 30%) 14,103 12,122 Non-temporary differences (35) 973 Share based payments Losses carried forward (367) (652) Adjustments in respect of current income tax of previous years (21) - Other Aggregate income tax expense at effective tax rate of 30% (2011: 32%) 14,047 12, M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

67 7: INCOME TAX (CONTINUED) (c) Recognised deferred tax assets and liabilities Current Income Tax Deferred Income Tax Current Income Tax Deferred Income Tax Opening balance (5,389) 1,770 (413) 5,473 Charged to income (14,044) (3) (9,640) (3,136) Payments 9,745-4,664 - Acquisitions (3,424) (8,127) - (567) Closing balance (13,112) (6,360) (5,389) 1,770 Tax expense in statement of comprehensive income 14,047 12,776 Amounts recognised in the statement of financial position: Deferred tax asset 9,151 6,397 Deferred tax liability (15,511) (4,627) (6,360) 1,770 Deferred income tax at 30 June relates to the following: Deferred tax assets Trade receivables 2,682 1,353 Plant and equipment Intangibles Trade and other payables 1,881 1,048 Unearned income Other provisions 2,647 1,522 Transaction cost on issue of shares Tax losses and temporary differences 1,038 1,869 Gross deferred tax assets 9,151 6,397 Deferred tax liabilities Trade receivables 9 - Plant and equipment Other assets - deferred acquisition cost 4,226 2,620 Intangibles 11,134 1,986 Leases Gross deferred tax liabilities 15,511 4,627 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : INCOME TAX (CONTINUED) (d) Tax consolidation Members of the tax consolidated group and the tax-sharing agreement M2 Telecommunications Group Ltd and its 100% owned Australian subsidiaries formed a tax consolidated group with effect from 1 July M2 Telecommunications Group Ltd is the head entity of the tax consolidated group. Members of the Group have entered into a tax sharing agreement that provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement on the basis that the possibility of default is remote. Tax effect accounting by members of the tax consolidated group Measurement method adopted under AASB Interpretation 1052 Tax Consolidated Accounting The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the stand-alone taxpayer approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. The current and deferred tax amounts are measured in a systematic manner that is consistent with the broad principles in AASB 112 Income Taxes. The nature of the tax funding agreement is discussed further below. In addition to its current and deferred tax amounts, the head entity also recognises current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Nature of the tax funding agreement Members of the tax consolidated group have entered into a tax funding agreement. The tax funding agreement requires payments to/ from the head entity to be recognised via an inter-entity receivable/(payable) which is at call. To the extent that there is a difference between the amount charged under the tax funding agreement and the allocation under AASB Interpretation 1052, the head entity accounts for these as equity transactions with the subsidiaries. 8: DIVIDENDS PAID AND PROPOSED Recognised amounts Declared and paid during the year Dividends on ordinary shares: Final franked dividend for 2011: 9.0 cents (2010: 5.0 cents) 11,143 6,112 Interim franked dividend for 2012: 9.0 cents (2011: 7.0 cents) 11,208 8,625 22,351 14,737 (b) Unrecognised amounts Dividends on ordinary shares: Final franked dividend for 2012: 9.0 cents (2011: 9.0 cents) 14,091 11,125 After the reporting date, the above dividend was declared. This amount has not been recognised as a liability as at 30 June 2012 but will be brought to account during the 2013 financial year. The tax rate at which paid dividends have been franked is 30% (2011: 30%). Dividends proposed will be franked at the rate of 30% (2011: 30%). 66 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

69 9: EARNINGS PER SHARE The following reflects the information used in the basic and diluted earnings per share computations: (a) Earnings used in calculating earnings per share For basic and diluted earnings per share: Net profit attributable to ordinary equity holders of the parent 33,029 27,684 (b) Weighted average number of shares Weighted average number of ordinary shares for basic earnings per share 127, ,694 Effect of dilution: Share options 2,660 1,849 Weighted average number of ordinary shares adjusted for the effect of dilution 130, ,543 There have been no transactions (e.g., share options) excluded from the calculation of diluted earnings per share that could potentially dilute basic earnings per share in the future because they are antidilutive for either of the periods presented. There have been no transactions involving ordinary shares or potential ordinary shares that would significantly change the number of ordinary shares or potential ordinary shares outstanding between the reporting date and the date of completion of these financial statements. (c) Information on the classification of securities Options granted to employees (including KMP) as described in note 24 are considered to be potential ordinary shares and have been included in the determination of diluted earnings per share to the extent they are dilutive. These options have not been included in the determination of basic earnings per share. 10: CASH AND CASH EQUIVALENTS Cash at bank and in hand 23,922 11,009 Short-term deposits 1,035 1,533 24,957 12,542 (a) Reconciliation to statement of cash flows For the purposes of the statement of cash flows, cash and cash equivalents comprise the following at 30 June: Cash at bank and in hand 23,922 11,009 Short-term deposits 1,035 1,533 24,957 12,542 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : CASH AND CASH EQUIVALENTS (continued) Cash at bank includes restricted cash of $2.6 million (2011: NIL). Cash at bank earns interest at floating rates based on daily bank deposit rates. Included within short-term deposits is an amount of $1.0 million (2011: $1.5 million) which is held in trust for the Phone & Fly travel dollars loyalty program. Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the Group, and earn interest at the respective short-term deposit rates. (b) Reconciliation of net profit after tax to net cash flows from operations Net profit 32,963 27,632 Adjustments for : Depreciation and amortisation 10,187 6,024 Share based payments Gain on disposal of plant and equipment (34) 79 Foreign currency translation (420) - Other revenue (5,013) (372) Non cash acquisition items - (7,021) Changes in assets and liabilities (Increase)/decrease in trade receivables 7,596 4,617 (Increase)/decrease in inventories (20) (24) (Increase)/decrease in other assets (2,761) (3,563) (Increase)/decrease in other receivables Increase/(decrease) in trade and other payables (5,307) 3,252 Increase/(decrease) in provisions (395) 130 Increase/(decrease) in current income tax payable 4,299 4,976 (Increase)/decrease in deferred tax asset Increase/(decrease) in deferred tax liability (812) 3,353 Net cash flow from operating activities 41,560 39,741 (c) Non-cash financing and investing activities Issue of shares under ESOP (note 24) Dividend reinvestment plan (note 21) 3,203 2,623 Purchase of plant and equipment under finance lease (note 14) M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

71 11: TRADE RECEIVABLES Trade receivables 75,265 55,646 Allowance for impairment loss (a) (8,940) (4,511) 66,325 51,135 (a) Allowance for impairment loss Trade receivables are non-interest bearing and are generally on day terms. A provision for impairment loss is made when there is objective evidence that a trade receivable is impaired. An impairment loss of $7.9 million (2011: $4.7 million) has been recognised by the Group in the current year. This amount has been included in the distribution expense item. No individual amount within the impairment allowance is material. Movements in the provision for impairment loss were as follows: At 1 July 4,511 2,667 Charge for the year 7,914 4,726 Amounts written off (3,485) (2,882) At 30 June 8,940 4,511 At 30 June, the aging analysis of trade receivables is as follows: Gross Allowance Gross Allowance Consolidated Current 52, , days 5, , days 2, , days and over 14,762 7,853 7,894 4,167 Closing balance 75,265 8,940 55,646 4,511 Trade receivables that are past due but not considered impaired amounted to $9 million (2011: $9.7 million). Each operating unit has been in direct contact with the relevant debtor and is satisfied that the payment will be received in full. Other balances within trade and other receivables do not contain impaired assets and are not past due. It is expected that these other balances will be received when due. (b) Fair value and credit risk Due to the short-term nature of these receivables, their carrying value is assumed to approximate their fair value. The maximum exposure to credit risk is the fair value of receivables. Collateral is not held as security, nor is it the Group s policy to transfer (on-sell) receivables to special purpose entities. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : INVENTORIES Finished goods (at cost) Total inventories at the lower of cost and net realisable value Inventory recognised as expense for the year ended 30 June 2012 totalled $3.5 million (2011: $5.3 million) for the Group. This expense has been included in cost of sales in the Statement of Comprehensive Income : OTHER ASSETS Bartercard trade balance Prepayments 3,153 1,331 Security deposit Deferred acquisition cost 10,872 7,171 Other Total current other assets 14,906 9,312 Deferred acquisition cost 4,236 1,563 Other Total non-current other assets 4,545 1,563 Total other assets 19,451 10,875 Bartercard is a program which allows customers to pay a percentage of their bills with barter dollars. Bartercard trade balance refers to those receivables from such customers : PLANT AND EQUIPMENT The reconciliation of carrying amounts at beginning and end of the period are as follows: COST At 1 July 9,984 8,912 Additions 1,604 1,188 Acquisition 48,338 - Disposals and write-offs (342) (116) Other - - At 30 June 59,584 9,984 ACCUMULATED DEPRECIATION At 1 July 6,563 5,192 Depreciation charge for the year 2,170 1,443 Disposals and write-offs (257) (72) Other - - At 30 June 8,476 6,563 NET BOOK VALUE 51,108 3,421 Plant and equipment with carrying amount of $13.7 million (2011: $0.2 million) for the Group are pledged as securities for non-current liabilities as disclosed in note M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

73 15: INTANGIBLE ASSETS AND GOODWILL (a) Reconciliation of carrying amounts at the beginning and end of the period Software Customer Contracts IRUs Brands Goodwill Total Year ended 30 June 2012 At 1 July 2011, Net of accumulated amortisation and impairment 8,343 6,557-1, , ,615 Additions Software 4, ,523 Acquisitions (provisional) 3,724 35,668 32,500 19,838 94, ,309 Total additions 8,247 35,668 32,500 19,838 94, ,832 Amortisation charge for the year (2,285) (5,114) (618) - - (8,017) At 30 June 2012, Net of accumulated amortisation and impairment 14,305 37,111 31,882 21, , ,430 At 30 June 2012 Cost (gross carrying amount) 18,563 42,762 32,500 21, , ,957 Accumulated amortisation and impairment (4,258) (5,651) (618) - - (10,527) Net carrying amount 14,305 37,111 31,882 21, , ,430 Year ended 30 June 2011 At 1 July 2010, Net of accumulated amortisation and impairment 1,335 4,311-1,503 63,308 70,457 Additions Software 8, ,200 Acquisitions (provisional) - 5, ,590 42,580 Total additions 8,200 5, ,590 50,780 Adjustments to fair value from provisional accounts Write-offs (355) (355) Amortisation charge for the year (837) (3,744) (4,581) At 30 June 2012, Net of accumulated amortisation and impairment 8,343 6,557-1, , ,615 At 30 June 2012 Cost (gross carrying amount) 11,182 13,852-1, , ,749 Accumulated amortisation and impairment (2,839) (7,295) (10,134) Net carrying amount 8,343 6,557-1, , ,615 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : INTANGIBLE ASSETS AND GOODWILL (CONTINUED) (b) Description of the Group s intangible assets and goodwill Software Software purchased in the normal course of business is amortised over a 2 to 10 year period. Customer contracts Customer contracts are acquired through the acquisition of businesses and are amortised over a 2 to 4 year period. Indefeasible Rights to Use (IRUs) IRUs are acquired through the acquisition of a business and are amortised over the remaining life of the contracts which range from 3 to 13 years. Brands Brands are acquired through the acquisition of businesses and have indefinite useful lives. Brands are not amortised but are subject to impairment testing on an annual basis or whenever there is an indication of impairment. Goodwill After initial recognition, goodwill acquired in a business combination is measured at cost less any accumulated impairment losses. Goodwill is not amortised but is subject to impairment testing on an annual basis or whenever there is an indication of impairment. (c) Impairment tests for goodwill and intangibles with indefinite useful lives Description of cash generating units and other relevant information Goodwill acquired through business combinations has been allocated to and are tested at the level of their respective cash generating units for impairment testing as follows: > Retail cash generating unit > Wholesale cash generating unit > Primus The recoverable amount of the cash generating units has been determined based on a value in use calculation using cash flow projections based on financial budgets approved by senior management covering a five year period. The pre-tax, risk-adjusted discount rate applied to cash flow projections is 12% (2011: 13%). The same discount rates are applied to both retail and wholesale segments. The long-term growth rate used to extrapolate the cash flows of the retail and wholesale sales units beyond the five-year period is 2.5%. The senior management of both units believes the growth rate is justified based on the acquisitions during the financial year, which resulted in increased customer base. Carrying amount of goodwill allocated to each of the cash generating units Cash generating units Retail cash generating units 103,870 85,202 Wholesale cash generating units 15,010 15,010 Primus 75,911 - Total Goodwill 194, ,212 Brands are wholly allocated to the retail cash generating units. 72 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

75 15: INTANGIBLE ASSETS AND GOODWILL (CONTINUED) Key assumptions used in value in use calculations for the cash generating units for 30 June 2012 and 30 June The following describes each key assumption on which management has based its cash flow projections when determining the value in use of the above mentioned cash generating units: > Budgeted gross margins the basis used to determine the value assigned to the budgeted gross margin is the average gross margin achieved in the year immediately before the budgeted year adjusted for the budgeted growth. > Budgeted overheads the basis used to determine the value assigned to the budgeted overheads is the average overheads achieved in the year immediately before the budgeted year adjusted for budgeted increase. > Discount rates discount rates reflect management s estimate of the time value of money and the risks specific to each unit. This is the benchmark used by management to assess operating performance and to evaluate future investment proposals. In determining appropriate discount rates for each unit, regard has been given to the yield on a ten-year government bond at the beginning of the budgeted year and a risk premium. > Growth rate estimates the basis used for growth rates reflect management s estimate, determined by future investment in sales generation methods and by growth rates achieved within the previous period. 16: TRADE AND OTHER PAYABLES Trade payables 43,668 23,375 Accrued expenses 21,486 3,436 Withholding tax payable Goods and services tax payable 1, Unearned income 8,224 6,270 Deferred commission revenue 9,006 11,781 Other payables 1,947 7,416 86,120 53,469 Trade and other payables are non-interest bearing and are normally settled on 30-day terms. Due to the short-term nature of these payables, their carrying value is assumed to approximate their fair value. Information regarding interest rate and liquidity risk exposure is set out in note 3. 17: PROVISIONS Current Annual leave 4,243 2,067 Long-service leave 3,732 1,615 7,975 3,682 Non-Current Annual leave - - Long-service leave ,826 4,184 Refer to note 2(q) for the relevant accounting policy and a discussion of significant estimations and assumptions applied in the measurement of these provisions. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : INTEREST BEARING LOANS AND BORROWINGS Current Obligations under finance leases and hire purchase contracts (note 26) Bank loans 19,483 11,500 Other financial liabilities 2,497-22,330 12,488 Non-Current Obligations under finance leases and hire purchase contracts (note 26) Bank loans 120,379 17,150 Other financial liabilities 7, ,923 17,252 (a) Fair values The carrying amounts of the Group s current and non-current borrowings approximate their fair values. (b) Interest rate and liquidity risk Details regarding interest rate and liquidity risk are disclosed in note 3. (c) Defaults and breaches During the current and prior years, there were no defaults or breaches on any of the loans. (d) Assets pledged as security Bank borrowings are secured by fixed and floating charges over the business assets of the entities within the Group. Business assets include debtors (less than 90 days), inventory and plant and equipment. 19: DEFERRED CONSIDERATION Current 5,400 6,193 The deferred consideration for the acquisition of the Clear assets has been adjusted downward by $6.2 million based on actual performance milestones. 74 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

77 20: OTHER NON-CURRENT LIABILITIES Deferred commission revenue 2,716 4,008 Other payables ,352 4,008 21: CONTRIBUTED EQUITY Ordinary shares - issued and fully paid 150,911 66,761 Fully paid ordinary shares carry one vote per share and carry the right to dividends. No. ( 000) Movements in ordinary shares on issue At 30 June ,522 62,936 Share issue due to exercise of share options 1,198 1,242 Share issue due to dividend reinvestment plan 897 2,623 Adjustments - (40) At 30 June ,617 66,761 Share issue due to exercise of share options 664 1,036 Share issue due to dividend reinvestment plan 1,036 3,203 Share issue 31,255 83,140 Transaction costs - (3,229) At 30 June , ,911 Capital management When managing capital, management s objective is to ensure the entity continues as a going concern as well as to maintain optimal returns to shareholders and benefits for other stakeholders. Management also aims to maintain a capital structure that ensures the lowest cost of capital available to the entity. Management are constantly adjusting the capital structure to take advantage of favorable costs of capital or high returns on assets. As the market is constantly changing, management may change the amount of dividends to be paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. During 2012, management paid dividends of $22.4 million (2011: $14.7 million). The Group is not subject to externally imposed capital requirements. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : RELATED PARTY DISCLOSURE (a) Subsidiaries The consolidated financial statements include the financial statements of M2 Telecommunications Group Ltd and the subsidiaries listed in the following table. Name Country of incorporation % Equity interest Investment M2 Telecommunications Pty Ltd Australia ,955 2,955 People Telecom Pty Ltd Australia People Telecommunications Pty Ltd Australia People Mobile Pty Ltd Australia M2 Mobile Services Pty Ltd Australia M2 NZ Limited New Zealand Southern Cross Telco Pty Ltd Australia Orion Telecommunications Ltd Australia M2 Clear Pty Ltd Australia M2 Viptel Pty Ltd Australia M2 Loyalty Programs Pty Ltd Australia M2 Wholesale Pty Ltd Australia Wholesale Communications Group Pty Ltd Australia M2 Wholesale Services Pty Ltd Australia M2 Commander Pty Ltd Australia Primus Telecom Holdings Pty Ltd Australia Primus Telecom Pty Ltd Australia Hotkey Internet Services Pty Ltd Australia Primus Telecommunications Pty Ltd Australia Pty Ltd Australia Primus Online Pty Ltd Australia Primus Telecommunications (Australia) Pty Ltd Australia Primus Network (Australia) Pty Ltd Australia ,955 2, M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

79 22: RELATED PARTY DISCLOSURE (CONTINUED) (b) Ultimate parent M2 Telecommunications Group Ltd is the ultimate parent entity. (c) Key management personnel (KMP) Details relating to KMP, including remuneration paid, are included in note 23. (d) Transactions with related parties Refer to note 23(d) for the total amount of transactions that were entered into with related parties for the relevant financial year. Terms and conditions of transactions with related parties Outstanding balances at year-end are unsecured, interest free and settlement occurs in cash. Allowance for impairment loss on trade receivables For the year ended 30 June 2012, the Group has not made any allowance for doubtful debts relating to amounts owed by related parties as there were no indicators to trigger such action (2011:$nil). An impairment assessment is undertaken each financial year by examining the financial position of the related party and the market in which the related party operates to determine whether there is objective evidence that a related party receivable is impaired. When such objective evidence exists, the Group recognises an allowance for the impairment loss. 23: KEY MANAGEMENT PERSONNEL (a) Compensation for key management personnel Short-term employee benefits 3,084 2,459 Post employment benefits Share-based payment Total compensation 3,415 2,681 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : KEY MANAGEMENT PERSONNEL (CONTINUED) (b) Option holdings of key management personnel 30 June 2012 Balance at 1 July 2011 Granted as remuneration Options exercised Net change Balance at 30 June 2012 Directors Craig Farrow Vaughan Bowen Max Bowen (2) John Hynd Michael Simmons Executives Geoff Horth 250, ,000 (75,000) 225, ,000 Darryl Inns 175, ,000 (75,000) 25, ,000 Steve Wicks 175, ,000 (75,000) 25, ,000 Scott Carter - 250, , ,000 Johnathan Eele - 150, , ,000 Tom Mazerski (3) Total 600, ,000 (225,000) 675,000 1,275, June 2011 Balance at 1 July 2010 Granted as remuneration Options exercised Net change Balance at 30 June 2011 Directors Craig Farrow Vaughan Bowen Max Bowen (2) John Hynd Michael Simmons Dennis Basheer (1) Executives Geoff Horth 250, ,000 Darryl Inns 250,000 - (75,000) (75,000) 175,000 Steve Wicks 250,000 - (75,000) (75,000) 175,000 Total 750,000 - (150,000) (150,000) 600,000 (1) Mr. Basheer retired as director on 29 October (2) Mr. Max Bowen retired as director on 28 October (3) Mr. Mazerski was appointed on June M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

81 23: KEY MANAGEMENT PERSONNEL (CONTINUED) (c) Shareholdings of key management personnel 30 June 2012 Balance at 1 July 2011 Granted as remuneration On exercise of options Net change Balance at 30 June 2012 Directors Craig Farrow 582, , ,583 Vaughan Bowen 8,376, (2,334,221) 6,042,420 Max Bowen (2) 32, ,274 John Hynd 2,332, ,476 2,553,000 Michael Simmons 9, ,397 11,988 Executives Geoff Horth 44,500-75,000 86, ,625 Darryl Inns 282,678-75,000 (48,664) 234,014 Steve Wicks 1,842,083-75,000 (53,209) 1,788,874 Scott Carter Johnathan Eele 13, ,312 16,562 Tom Mazerski (3) Total 13,516, ,000 (2,102,981) 11,413, June 2011 Balance at 1 July 2010 Granted as remuneration On exercise of options Net change Balance at 30 June 2011 Directors Craig Farrow 958, (375,742) 582,780 Vaughan Bowen 10,935, (2,559,000) 8,376,641 Max Bowen (2) 32, ,274 John Hynd 2,832, (500,000) 2,332,524 Michael Simmons 3, ,000 9,591 Dennis Basheer (1) 5,044, (250,000) 4,794,906 Executives Geoff Horth 44, ,500 Darryl Inns 589,333-75,000 (306,655) 282,678 Steve Wicks 2,780,996-75,000 (938,913) 1,842,083 Total 23,222, ,000 (4,924,310) 18,297,977 All KMP balances include spouse shareholdings. (1) Mr. Basheer retired as director on 29 October (2) Mr. Max Bowen retired as director on 28 October (3) Mr. Mazerski was appointed on June M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : KEY MANAGEMENT PERSONNEL (continued) (d) Other transactions and balances with key management personnel and their related parties The following table provides the total amount of transactions that were entered into with related parties for the relevant financial year. Sales to related parties Purchases from related parties Directors Craig Farrow (1) Max Bowen (2) Dennis Basheer (3) John Hynd (4) Michael Simmons (5) (1) Telecommunications services were provided to Brentnalls SA and Petcraky Pty Ltd on commercial terms. Mr Farrow is a director of both companies. (2) Telecommunications services were provided to MGB Holdings Pty Ltd on commercial terms. Mr Bowen is a director of MGB Holdings Pty Ltd. Mr Bowen retired as director on 28 October (3) Sales commissions were paid and telecommunications services were provided to Dennis N Basheer Nominees on commercial terms. Telecommunications services were provided to M2SA Pty Ltd on commercial terms. Mr Basheer is a director of both companies. Mr. Basheer retired as director of M2 on 29 October (4) Telecommunications services were provided to Hynd & Co Pty Ltd on commercial terms. Mr Hynd is a director of the firm Hynd & Co Pty Ltd. (5) Telecommunications services were provided to Luab Pty Ltd (Mr Simmons is a director) on commercial terms. 24: SHARE-BASED PAYMENT PLANS (a) Recognised share-based payment expenses The expense recognised for employee services received during the year is shown in the table below: Expense arising from equity-settled share-based payment transactions - M2 Executive Management Team Share Option Plan (ESOP) Total expense arising from share-based payment transactions The share-based payment plans are described below. There have been no cancellations or modifications to any of the plans during (b) Types of share-based payment plans M2 Executive Management Team Share Option Plan In February 2007, M2 introduced the M2 Executive Management Team Share Option Plan, and later in May 2009 this was extended to selected employees. The purpose of the ESOP was to provide an avenue for the alignment of Executive and employee objectives with those of shareholders, and to provide an additional element to Executive and employee remuneration that was competitive to the external compensation environment. The issue of options under ESOP further allows an opportunity for the Board to reward Executives and employees for their performance in a given period. All Executives and selected employees of M2 were eligible to participate in the ESOP. However, the issue of options under the ESOP to executive directors is subject to approval by M2 shareholders M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

83 24: SHARE-BASED PAYMENT PLANS (continued) Under the ESOP, Executives and selected employees may be offered options to acquire M2 Shares. Any shares issued under the ESOP consequent upon exercise of the options will rank equally with all other M2 Shares and application will be made for them to be quoted on ASX. No application will be made for the options to be quoted on ASX. Options issued under the ESOP vest (and may only then be exercised) one, two and three years (as determined by the M2 Board) after they are offered to the eligible Executive or employee. Unless the M2 Board determines otherwise, no fee will be payable on the issue of any option under the ESOP. The exercise price for each option (payable on exercise of the option) will be determined by the Board at the time of issue of the option. Options issued under the ESOP may be exercised, once they are vested, at any time within two years from the date on which they vest. Other than continuous service conditions with the Company, there are no performance conditions which must be met prior to the vesting or exercise of options. Options are not generally transferable (and only with board approval) and cease to be exercisable at the end of the exercise period or within a specified time after the cessation of the Executive s or employee s employment (which time depends on the circumstances of the cessation). An option holder may not attend and vote at annual general meetings and other shareholder meetings and is not entitled to participate in any rights issues unless the options have been exercised. Any bonus issue will proportionately increase the number of options held by any Executive or employee who has been granted options. Employee share plan (ESP) In April 2007 M2 introduced the ESP to reward the loyalty of employees. All employees of M2, both full-time and permanent part-time, were eligible to participate in the ESP, in which M2 shares were offered at the discretion of M2 Management and the M2 Board. The issue of M2 shares under the ESP is further subject to the approval of the M2 shareholders. A summary of the ESP is as follows: (i) Under the ESP, eligible employees were offered M2 shares. The shares issued under the ESP ranked equally with all other M2 shares and application was made for them to be quoted on the ASX. (ii) The shares were offered to eligible employees at the average weighted closing market price of M2 share s sold on the ASX during the five business days immediately before invitations to eligible employees were announced or issued. (iii) The maximum number of shares that were offered to an eligible employee in any twelve month period is 20,000 M2 shares. (iv) Eligible employees have paid for the shares offered out of their own funds or M2 has provided them with an interest-free, limited recourse loan to finance up to the full cost of the shares. (v) Eligible employees who have paid for the shares offered out of their own funds may deal with them as they wish. (vi) Eligible employees who took up the offer of the loan did so on the following terms: a. The loan is required to be repaid within twenty years after the date of allotment of the shares, or upon the employee ceasing employment with M2; b. The loan may be repaid in full or part at any time prior to the repayment date; c. All cash dividends will be put towards repayment of the loan; d. The employee cannot sell the shares until the loan has been repaid; e. If the loan becomes repayable M2 may sell the employee s shares to repay the loan but if the sale proceeds are insufficient to repay the loan then the employee is released from further liability. (vii) The employee may attend and vote at annual general meetings and other shareholder meetings and is entitled to participate in any bonus or rights issues. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : SHARE-BASED PAYMENT PLANS (continued) (c) Summaries of options granted under ESOP The following table illustrates the number (No.) and weighted average exercise prices (WAEP) of, and movements in, share options issued during the year: No. WAEP No. WAEP Outstanding at the beginning of the year 1,849,000 $ ,020,000 $1.363 Granted during the year 1,500,000 $ $ - Expired during the year (25,000) $ $ - Exercised during the year (664,000) $1.262 (1,171,000) $0.858 Outstanding at the end of the year 2,660,000 $ ,849,000 $1.386 The outstanding balance as at 30 June 2012 is represented by 2,660,000 executive options with exercise price ranging from $1.64 to $3.29, exercisable until dates ranging from 1 January 2011 to 1 January (d) Weighted average remaining contractual life The weighted average remaining contractual life for the share options outstanding as at 30 June 2012 is 3 years (2011: 2 years). (e) Range of exercise price The range of exercise prices for all options outstanding at the end of the financial year was $1.64 to $3.29 (2011: $0.70 to $1.95). (f) Weighted average fair value The weighted average fair value of options granted during the year is $3.03. (g) Option pricing model: ESOP The fair value of the equity-settled share options granted under the ESOP is estimated as at the grant date using a Binomial Model taking into account the terms and conditions upon which the options were granted. The following table lists the inputs to the Binomial Model used for the year ended 30 June: ESOP 2012 ESOP 2011 Dividend yield (%) 5.56% 3.93% Expected volatility (%) 30.32% 46.62% Risk-free interest rate (%) 2.62% 5.05% Expected life of option (years) 4 years 3 years Option exercise price ($) $2.99, $3.14, $3.29 $1.75, $1.85, $1.95 Weighted average share price at measurement date ($) $3.14 $1.40 Model used Binomial Binomial 82 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

85 25: BUSINESS COMBINATIONS Flex Group On 1 January 2012, M2 Commander Pty Ltd acquired certain assets (customer contracts and associated records) of Flex Group Pty Ltd ( Flex Group ). The assets were acquired for $3.45 million in cash. The fair values of the identifiable assets and liabilities of Flex Group as of the date of acquisition were: CONSOLIDATED FINAL Intangible assets 1,058 Deferred tax liability (317) Fair value of identifiable net assets 741 Goodwill arising from acquisition 2,709 3,450 Cost of the combination: Cash paid 3,450 Total cost of the combination 3,450 From the date of acquisition, Flex Group has contributed $2 million to the revenue the Group. If the acquisition happened at the beginning of the financial year, Flex Group would have contributed approximately $4 million to the Group revenue. Determining the net profit contribution of Flex Group from the date of acquisition or the beginning of the financial year is not practicable, due to it being fully integrated into the Group. Key factors contributing to the $2.7 million goodwill are synergies existing within the acquired business, and synergies expected to be achieved as a result of combining Flex Group with the rest of the M2 Group. Time Group On 1 March 2012, Southern Cross Telco Pty Ltd acquired certain assets (customer contracts and associated records) of Time Telecom Pty Ltd and related entities ( Time Group ). The assets were acquired for $19.97 million, comprised of an upfront and deferred payment, less certain adjustments including performance related conditions for the deferred payment. The transaction is funded by cash and a debt facility set in place for the purpose of this asset acquisition. The fair values of the identifiable assets and liabilities of Time Group as of the date of acquisition were: CONSOLIDATED FINAL Intangible assets 5,736 Deferred tax liability (1,721) Fair value of identifiable net assets 4,015 Goodwill arising from acquisition 15,959 19,974 Cost of the combination: Cash paid - upfront payment 14,574 Cash paid - deferred payment 5,400 Total cost of the combination 19,974 The deferred payment is payable based on specific performance milestones achieved, the milestone being churn rates. Based on analysis of churn rates, management expects to pay the full deferred consideration on payment date (September 2012). From the date of acquisition, Time Group has contributed approximately $6 million to the revenue of the Group. If the acquisition happened at the beginning of the financial year, Time Group would have contributed approximately $18 million to the Group revenue. Determining the net profit contribution of Time Group from the date of acquisition or the beginning of the financial year is not practicable, due to it being fully integrated into the Group. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : BUSINESS COMBINATIONS (continued) Key factors contributing to the $16 million goodwill are synergies existing within the acquired business, and synergies expected to be achieved as a result of combining Time Group with the rest of the M2 Group. If the acquisition happened at the beginning of the financial year, Time Group would have contributed $18 million to the Group revenue. Primus On 1 June 2012, M2 Telecommunications Group Ltd acquired 100% of Primus Telecom Holdings Pty Ltd ( Primus ) and its subsidiaries, for a total consideration of $192.4 million (including $10.6 million of restricted cash). The acquisition was funded through a combination of the proceeds of a Renounceable Entitlement Offer ( Entitlement Offer ), which raised $83.1 million and a senior lending facility. The fair values of the identifiable assets and liabilities of Primus as of the date of acquisition were: CONSOLIDATED PROVISIONAL Cash and cash equivalents 15,212 Trade and other receivables* 25,535 Inventories 504 Other assets 5,792 Plant and equipment 48,338 Intangible assets 84,936 Deferred tax asset 3,574 Trade and other payables (38,825) Interest-bearing loans and borrowings (10,458) Income tax payable (3,424) Deferred tax liability (9,658) Provisions (5,037) Fair value of identifiable net assets 116,489 Goodwill arising from acquisition 75, ,400 Cost of the combination: Cash paid 192,400 Total cost of the combination 192,400 * Gross contractual amount is $27.7 million. Due to the timing of the acquisition, the fair values currently established are provisional and are subject to further review during the next financial year. From the date of acquisition, Primus has contributed $21.9 million revenue and $1.3 million net loss (which includes transaction costs incurred during the acquisition) to the Group. If the acquisition happened at the beginning of the financial year, Primus would have contributed approximately $260 million and $11.7 million to the Group revenue and net profit respectively. Key factors contributing to the $76 million goodwill are synergies existing within the acquired business, and synergies expected to be achieved as a result of combining Primus Group with the rest of the M2 Group. 84 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

87 25: BUSINESS COMBINATIONS (continued) Prior period acquisitions There were no adjustments relating to the acquisitions in the prior period except for the deferred consideration resulting from the acquisition of selected assets of Clear Telecoms (Aust) Pty Ltd. The deferred consideration has been adjusted during this financial year as explained in note : COMMITMENTS (a) Leasing commitments Operating lease commitments Group as lessee The Group has entered into commercial leases on offices and certain plant and equipment. Future minimum lease payments under noncancellable operating leases as at 30 June are as follows: Within one year 8,682 1,505 After one year but not more than five years 21,031 2,589 After more than five years 10,470 - Total minimum lease payments 40,183 4,094 Finance lease and hire purchase commitments Group as lessee These lease contracts expire within one to four years. Future minimum lease payments under finance lease and hire purchase contracts as at 30 June are as follows: Within one year 358 1,052 After one year but not more than five years Total minimum lease payments 586 1,161 Less amounts representing finance charges (26) (71) Present value of minimum lease payments 560 1,090 (c) Other financial liabilities Within one year 2,497 - After one year but not more than five years 7,334 - Total other financial liabilities 9,831 - These financial liabilities relate to the Indefeasible Rights to Use of capacity (IRUs) arising from Primus acquisition. (c) Capital commitments The Group had contractual obligations to purchase plant and equipment, software and other value added services for $3.8 million dollars at balance sheet date (2011: NIL) principally relating to soft switches and gateways. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FOR THE YEAR ENDED 30 JUNE : CONTINGENCIES There are no contingent assets or liabilities as at Statement of Financial Position date. 28: EVENTS AFTER BALANCE DATE On 24 August 2012, the directors declared a final dividend on ordinary shares in respect of the 2012 financial year. The total amount of the dividend is $14,090,961, which represents a fully franked dividend of 9 cents per share (on shares issued as at 30 June 2012). This final dividend will be paid to shareholders on 26 October : INFORMATION RELATING TO M2 TELECOMMUNICATIONS GRoUP LTD ( the parent entity ) Current assets 11,751 1,891 Total assets 319, ,841 Current liabilities 32,186 18,424 Total liabilities 162,218 35,586 Issued capital 150,911 66,761 Retained earnings 5,940 5,084 Equity Reserves Total shareholders equity 157,488 72,255 Profit or loss and total comprehensive income of the parent entity 23,207 17,798 The parent entity has no commitments or contingencies as of reporting date. 30: AUDITOR S REMUNERATION The auditor of M2 Telecommunications Group Ltd is Ernst & Young $ 2011 $ Amounts received or due and receivable by Ernst & Young (Australia) for: - An audit or review of the financial report of the entity and any other entity within the consolidated group - Other services in relation to the entity and any other entity in the consolidated group 455, , , , , M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

89 DIRECTORS DECLARATION In accordance with a resolution of the directors of M2 Telecommunications Group Ltd: 1. In the opinion of the directors: (a) The financial statements, notes and the additional disclosures included in the directors report designated as audited, of the Company and of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) Giving a true and fair view of the Company s and consolidated entity s financial position as at 30 June 2012 and of their performance for the year ended on that date (ii) Complying with Accounting Standards (including the Australian Accounting Interpretations) and Corporations Regulations 2001 (b) The financial statements and notes comply with International Financial Reporting Standards as disclosed in note 2(b) (c) There are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. This declaration has been made after receiving the declarations required to be made to the directors in accordance with section 295A of the Corporations Act 2001 for the financial year ended 30 June On behalf of the directors Craig Farrow Chairman Melbourne, 24 August 2012 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

90 Independent auditor's report to the members of M2 Telecommunications Group Limited Report on the financial report We have audited the accompanying financial report of M2 Telecommunications Group Limited, which comprises the consolidated statement of financial position as at 30 June 2012, the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, 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. Directors' responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to enable the preparation of the financial report that is free from material misstatement, whether due to fraud or error. In Note 2(b), 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 about whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor's judgment, 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 controls relevant to the entity's preparation and fair presentation of the financial report 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 controls. 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. Independence In conducting our audit we have complied with the independence requirements of the Corporations Act We have given to the directors of the company a written Auditor s Independence Declaration, a copy of which is included in the directors report. In addition to our audit of the financial report, we were engaged to undertake the services disclosed in the notes to the financial statements. The provision of these services has not impaired our independence. Liability limited by a scheme approved under Professional Standards Legislation 88 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

91 2 Opinion In our opinion: a. the financial report of M2 Telecommunications Group 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 30 June 2012 and of its performance for the year ended on that date; and ii complying with Australian Accounting Standards and the Corporations Regulations 2001; and b. the financial report also complies with International Financial Reporting Standards as disclosed in Note 2(b). Report on the remuneration report We have audited the Remuneration Report included in pages 22 to 30 of the directors' report for the year ended 30 June 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 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 M2 Telecommunications Group Limited for the year ended 30 June 2012, complies with section 300A of the Corporations Act Ernst & Young David Shewring Partner Melbourne 24 August 2012 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

92 ASX ADDITIONAL INFORMATION Additional information required by the ASX Listing Rules and not shown elsewhere in this report is as follows. This information is current as at 23 August (a) Distribution of equity holders of securities (i) Ordinary share capital 156,581,954 fully paid ordinary shares are held by 6,888 shareholders (ii) Options 2,650,000 options are held by 11 individual option holders The numbers of shareholders, by size of holding, in each class are: Range Securities No of Holders 100,001 and Over 109,088, ,001 to 100,000 29,903,151 1,204 5,001 to 10,000 8,759,878 1,174 1,001 to 5,000 8,106,472 2,981 1 to 1, ,251 1,424 Total 156,581,954 6,888 Unmarketable Parcels 4, (b) Substantial holders Names of the Company s substantial shareholders and the number of ordinary securities they hold a relevant interest in, as disclosed in the latest substantial holdings notices provided to the Company: Name of substantial shareholder Name of registered holder(s) Number of ordinary shares % issued capital Hunter Hall Investment Management Limited JP Morgan Nominees Australia Limited 11,190, National Australia Bank Limited MLC Investments Limited 8,137, NABInvest Managed Investments Limited MLC Wealth Management Ltd National Australia Bank Limited 90 M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012

93 (c) Twenty Largest Shareholders Names of M2 s 20 largest shareholders of ordinary shares and the percentage of capital each holds: Rank Name A/C Designation 22 Aug 12 %IC 1 J P Morgan Nominees Australia Limited 27,893, % 2 HSBC Custody Nominees (Australia) Limited 11,441, % 3 National Nominees Limited 10,889, % 4 BNP Paribas Noms Pty Ltd <MASTER CUST DRP> 8,352, % 5 UBS Wealth Management Australia Nominees Pty Ltd 5,087, % 6 Mr Vaughan Bowen V G BOWEN FAMILY 4,773, % 7 Dennis N Basheer Superannuation Pty Ltd <DENNIS N BASHEER S/F A/C> 4,318, % 8 Thirty Fourth Zulu Pty Ltd <HAMILTON SUPERFUND A/C> 2,527, % 9 Citicorp Nominees Pty Limited 2,047, % 10 Citicorp Nominees Pty Limited <COLONIAL FIRST STATE INV A/C> 1,760, % 11 AMP Life Limited 1,664, % 12 Wicks Group Pty Ltd <WICKS FAMILY A/C> 1,365, % 13 Mr Vaughan Garfield Bowen & Mrs Carolina Nunn <BOWEN FAMILY SUPER FUND A/C> 1,185, % 14 Emtel Pty Ltd 1,100, % 15 Wyatt Pty Ltd 1,000, % 16 Hyland Securities Pty Ltd <THE HYLAND A/C> 920, % 17 Reven Pty Limited <FAYE HAMILTON-HAMILTON FAMILYA/C> 890, % 18 Mr Edmond Wing Kin Cheung & Mrs Eliza Siu Ling Cheung <EDMOND & ELIZA S/F A/C> 871, % 19 Mr Marcello Barbaro 835, % 20 Suncorp Custodian Services Pty Limited <SGAEAT> 801, % Total 89,727, % Balance Of Register 66,665, % Grand Total 156,393, % Voting Rights Ordinary Shares By virtue of the Company s Constitution, outlined in clause 10, voting rights for ordinary shares are: (1) on a show of hands, every Member present, in person or by proxy, attorney or representative, has one vote; and (2) on a poll every Member has: (i) one vote for each fully paid share; and (ii) for each partly paid share held by the Member, a fraction of a vote equivalent to the proportion which the amount paid (not credited) is of the total amounts paid and payable (excluding amounts credited) on the share. Restricted Securities There are no restricted securities on issue. On-Market Buy-Back There is no on-market share buy-back in operation. M2 TELECOMMUNICATIONS LTD ANNUAL REPORT

94 Corporate Directory M2 Telecommunications Group Ltd ACN ABN M2 is a publicly listed company, limited by shares. It is incorporated and domiciled in Australia. Registered Office Level 10, 452 Flinders Street Melbourne VIC 3000 Telephone: Facsimile: Web: Stock Exchange Australian Securities Exchange Ltd (ASX) Issuer code: MTU Directors Craig Farrow Vaughan Bowen John Hynd Michael Simmons Chairman Executive Director Non-Executive Director Non-Executive Director CHIEF EXECUTIVE OFFICER Geoff Horth CHIEF FINANCIAL OFFICER Darryl Inns Company Secretary Kellie Dean Auditor Ernst & Young 8 Exhibition Strett Melbourne, VIC 3000 Share Registry Link Market Services Limited Level 4, 333 Collins Street Melbourne, VIC 3000 Telephone: or M2 TELECOMMUNICATIONS LTD ANNUAL REPORT 2012