Annual report - 30 June 2009

Transcription

1 1" ; MQ Equity Enhanced Income Fund ARSN Annual report -

2 MQ Portfolio Management Limited ACN (Responsible Entity of the Entity ("he Entity") ARSN ) is a wholly owned subsidiary of Macquarie Bank Limited ACN who in turn is a wholly owned subsidiary of Macquarie Group Limited ACN Other than Macquarie Bank Limited ABN ("MBL"), any Macquarie Group entity noted on this page is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Commonwealth of Australia). That entity's obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that entity, unless noted otherwise. This report is not an offer or invitation for subscription or purchase, or a recommendation of securities. It does not take into account the investment objectives, financial situation and particular needs of the investor. Before making an investment in the Entity, the investor or prospective investor should consider whether such an investment is appropriate to their particular investment needs, objectives and financial circumstances and consult an investment adviser if necessary. MQ Portfolio Management Limited, as Responsible Entity of the Entity, is entitled to fees for so acting. Macquarie Bank Limited and its related corporations, together with their offcers and Directors, may hold units in the Entity from time to time.

3 ARSN Annual report - Contents Directors' report Auditor's independence declaration Income statements Balance sheets Statements of changes in equity Cash flow statements Directors' declaration Independent auditor's report to the unitholders of MQ Equity Enhanced Income Fund Page This financial report covers MQ Equity Enhanced Income Fund as an individual entity and the consolidated entity consisting of MQ Equity Enhanced Income Fund and its subsidiaries. The Responsible Entity of MQ Equity Enhanced Income Fund is MQ Portfolio Management Limited (ACN ). The Responsible Entity's registered offce is Mezzanine Level, NO.1 Martin Place, Sydney, NSW

4 Directors' report Directors' report In respect of the year ended, the Directors of MQ Portolio Management Limited ("Responsible Entity") submit the following report together with the consolidated financial report of MQ Equity Enhanced Income Fund ("Fund") and its controlled entities (" Entity") made out in accordance with a resolution of the Directors. Principal activities The consolidated entity invests in equities and derivatives, unlisted unit trusts, money market securities and fixed interest securities in accordance with the provisions of the Trust Constitution. The consolidated entity did not have any employees during the year. There were no significant changes in the nature of the consolidated entity's activities during the year. Directors The following persons held offce as directors of MQ Portfolio Management Limited during the year or since the end of the year and up to the date of this report: Ottmar Weiss (resigned 23/06/09) Gregory John Mackay (resigned 19/09/2008) Bruce Neil Terry Gervaise Robert John Heddle Scot Thompson (appointed 03/02/2009) Review and results of operations During the year, the Trust continued to invest in accordance with target asset allocations as set out in the governing documents of the Trust and in accordance with the provisions of the Trust Constitution. Results Year ended Year ended Operating profit/(ioss) before finance costs attributable to unitholders ($'000) Distributions Distribution paid and payable ($'000) Distribution (cents per unit) (8,477) (7,235) (1,629) (7,088) 3, , , Significant changes in state of affairs In the opinion of the directors, there were no significant changes in the state of affairs of the Entity that occurred during the financial year which are not otherwise disclose in this report. Events subsequent to balance sheet date As at the date of this report the Directors are not aware of any matters or circumstances which have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Entity, the results of those operations or the state of affairs of the Entity in future financial years subsequent to which are not otherwise disclosed in this report. -2-

5 Directors' report Directors' report Likely developments and expected results of operations The Entity wil continue to be managed in accordance with the investment objectives and guidelines as set out in the governing documents of the Fund and in accordance with the provisions of the Fund Constitution. The results of the Entity will be affected by a number of factors, including the performance of investment markets in which the Entity invests. Investment performance is not guaranteed and future returns may differ from past returns. As investment conditions change over time, past returns should not be used to predict future returns. Disclosures of information relating to the likely developments in the operations, and the expected results of those operations in future financial years of the Entity have not been included in this report as the Responsible Entity believes it may result in unreasonable prejudice to the Entity. Indemnification and insurance of officers and auditors No insurance premiums are paid for out of the assets of the Entity in regard to insurance cover provided to either the Responsible Entity or the auditors of the Entity. So long as the offcers of the Responsible Entity act in accordance with the Fund's Constitution and the Corporations Act 2001, the offcers remain indemnified out of the assets of the Entity against any losses incurred while acting on behalf of the Entity. The auditors of the Entity are in no way indemnified out of the assets of the Entity. Fees paid to and interests held in the Trust by the Responsible Entity or its associates Fees paid to the Responsible Entity out of Entity property during the year are disclosed in note 11 on page 28 of the financial report. No fees were paid out of Entity property to the directors of the Responsible Entity during the year. Interests in the Entity held by the Responsible Entity or its associates as at the end of the financial year are disclosed in note 11 on page 28 of the financial report. Interests in the Entity The movement in units on issue in the Entity during the year is disclosed in note 6 of the financial report. The value of the Entity's assets and liabilities is disclosed on the balance sheets and derived using the basis set out in note 2 of the financial report. Environmental regulation The Entity's operation are not regulated by any significant environmental regulations under a Commonwealth, State or Territory law. Rounding of amounts to the nearest thousand dollars The Trust is an entity of the kind referred to in Class Order 98/0100 (as amended) issued by the Australian Securities and Investments Commission relating to the "rounding off' of amounts in the directors' report. Amounts in the directors' report have been rounded to the nearest thousand dollars in accordance with that Class Order, unless otherwise indicated. -3-

6 Directors' report Directors' report Auditor's independence declaration A copy of the Auditor's independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 5. This report is made in accordance with a resolution of the directors..4 / ( / f l'... Gervaise Robert John Heddle Director Sydney 29 September

7 ljcew1erhouse(oopers ri PricewaterhouseCoopers ABN Auditor's Independence Declaration As lead auditor for the audit of MQ Equity Enhanced Income Fund for the year ended, I declare that to the best of my knowledge and belief, there have been: Darling Park Tower Sussex Street GPO BOX 2650 SYDNEY NSW 1171 DX 77 Sydney Australia Telephone Facsimile ww.pwc.com/au a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of MQ Equity Enhanced Income Fund and the entities it controlled during the year. ~E A Barron Partner PricewaterhouseCoopers Sydney 29 September 2009 Liability limited by a scheme approved under Professional Standards Legislation

8 Income statements For the year ended Income statements Notes Investment income Interest income from financial assets not held at fair value through profit or loss 534 1, Dividend income 2,094 5,156 Distribution income 1,157 2,795 4,628 Net gains/(iosses) on financial instruments held at fair value through profit or loss 5 (10,471) (10,145) (3,341 ) (10,528) Other operating income Total net investment income/(ioss) (6,678) (3,458) (462) (5,487) Expenses Responsible Entity's fees 11 1,291 2, ,019 Other operating expenses 508 1, Total operating expenses 1,799 3,777 1,167 1,601 Operating profit/(ioss) (8,477) (7,235) (1,629) (7,088) Finance costs attributable to unitholders Distributions to unitholders of the parent entity (3,955) (4,525) (3,955) (4,525) Distributions to minority interests (159) (462) (Increase)/decrease in net assets attributable to unitholders of the parent entity 6 5,584 11,613 5,584 11,613 (Increase)/decrease in net assets attributable to minority interests 7, Profit/(Ioss) for the year The above income statements should be read in conjunction with the accompanying notes. -6-

9 Balance sheets As at Balance sheets Notes Assets Cash and cash equivalents 7 3,279 1,622 Due from brokers - receivable for securities sold 4,657 18,013 Receivables Financial assets held at fair value through profi or loss 8 54,062 57,569 Total assets 62,019 77,813 Liabilities Distributions payable 3,957 4,987 Responsible Entity fees payable Other payables 515 4,577 Financial liabilities held at fair value through profi or loss Net assets attributable to minority interests (redemption price of units) 16 2,619 Total liabilities (excluding net assets attributable to unitholders of the parent entity) 4,604 12,793 Net assets attributable to unitholders of the parent entity - liability 6 57,415 65, ,830 60,870 64,975 61,468 69,920 3,955 4, ,053 4,900 57,415 65,020 The above balance sheets should be read in conjunction with the accompanying notes. -7-

10 Statements of changes in equity For the year ended Statements of changes in equity Total equity at the beginning of the financial year Profit/(Ioss) for the year Net income/(expense) recognised directly in equity Total recognised income and expense for the financial year Transactions with equity holders in their capacity as equity holders Total equity at the end of the financial year Under AIFRS, net assets attributable to unitholders are classified as a liability rather than equity. As a result there was no equity at the start or end of the year. The above statements of changes in equity should be read in conjunction with the accompanying notes. -8-

11 Cash flow statements For the year ended Cash flow statements Notes Cash flows from operating activities Proceeds from sale of financial 98, ,343 50,672 23,982 instruments held at fair value through profi or loss Purchase of financial instruments held (90,311 ) (268,914) (42,315) (10,989) at fair value through profi or loss Dividends received 2,441 5,668 Interest received 552 1, Trust distributions received 3,294 Redemption received (170) (170) Other income received Interest paid (80) (681) Responsible Entity's fees paid (2,325) (3,140) (1,515) (1,586) Other expenses paid (179) (76) (156) Due to/from brokers 12,167 13,368 Decrease in consolidated cash balance (8,898) on loss of control of subsidiary Net cash inflow/(outfow) from 12(a) 12,081 15,824 7,009 14,832 operating activities Cash flows from financing activities Proceeds from applications by unitholders 12,799 1,834 Payments for redemptions by unitholders (22,697) (9,693) (6,493) (8,157) Distributions paid (479) (6,686) (6,662) Expenses paid on behalf of unitholders (53) (53) Net cash inflow/(outflow) from financing activities (10,430) (14,545) (6,546) (14,819) Net increase/(decrease) in cash and cash equivalents 1,651 1, Cash and cash equivalents at the beginning of the year 1, Effects of foreign currency exchange rate changes on cash and cash equivalents 6 (18) Cash and cash equivalents at the end of the year 7 3,279 1, Non-cash financing activities 12(b) 3,752 4,472 3,752 4,472 The above cash flow statements should be read in conjunction with the accompanying notes. -9-

12 1 General information The financial report covers separate financial statements for Macquarie Equity Enhanced Income Fund ("Fund") as an individual entity and the Entity which consists of Macquarie Equity Enhanced Income Fund and its subsidiaries. The Fund was registered on 12 April 2006 as a managed investment scheme and will terminate 80 years (less one day) after the date of establishment, unless terminated earlier by an extraordinary resolution as determined by the Fund's members; the date specified by the Fund's Responsible Entity in a notice given to the Fund's members or on another date as specified by and in accordance with the Fund's constitution or by law. The Responsible Entity of the Fund is MQ Portfolio Management Limited, a wholly owned subsidiary of Macquarie Bank Limited ("MBL") which in turn is a wholly owned subsidiary of Macquarie Group Limited. The registered offce of the Responsible Entity is Mezzanine Level, NO.1 Martin Place, Sydney, NSW The financial report is presented in the Australian currency. The principal activity of the Fund continues to be to provide exposure to the Macquarie Income Timing Fund and the Macquarie Australian Equity Income Fund as per the objectives stated in the Product Disclosure Statement (PDS). As allowed by the threshold management provisions in the PDS, the Fund is now also investing in a zerocoupon bond due to the decline in the value of the underlying funds. During the year, the Trust continued to invest funds in accordance with target asset allocations as set out in the current offer document and in accordance with the provisions of the Trust Constitution. On 27th April 2009, the Trust ceased to control Macquarie Australian Equity Income Fund as the unit holding reduced below 50% as at that date. For the year ended, the consolidated profit and loss include a net operating loss of $6,234,604 attributable to Macquarie Australian Equity Income Fund for the period from 1 July 2008 until the date of cessation of control. The financial statements were authorised for issue by the directors on 29 September The directors of the Responsible Entity have the power to amend and reissue the financial report. 2 Summary of significant accounting policies The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all the years presented, unless otherwise stated. (a) Basis of preparation This general purpose financial report has been prepared in accordance with Australian Accounting Standards, other authoritative pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001 in Australia. The financial report is prepared on the basis of fair value measurement of assets and liabilities except where otherwise stated. Compliance with International Financial Reporting Standards (IFRS) Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the financial report of the Entity, comprising the financial statements and notes thereto, complies with International Financial Reporting Standards. (b) Principles of consolidation (i) Subsidiaries The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Macquarie Equity Enhanced Income Fund ("the parent entity") as at and the results of all subsidiaries for the year then ended. MQ Equity Enhanced Income Fund and its subsidiaries together are referred to in this financial report as the Entity. Subsidiaries are all those entities (including special purpose entities) over which the Entity has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Entity controls another entity. -10-

13 2 Summary of significant accounting policies (b) Principles of consolidation Subsidiaries are fully consolidated from the date on which control is transferred to the Entity. They are de-consolidated from the date that control ceases. The purchase method of accounting is used to account for the acquisition of subsidiaries by the Entity. All transactions (including gains and losses) and balances between entities in the consolidated group are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Entity. Minority interests in the results and net assets of subsidiaries are shown separately in the consolidated income statements and balance sheets respectively. Investments in subsidiaries are accounted for at fair value in the individual financial statements of MQ Equity Enhanced Income Fund. (c) Financial instruments (i) Classification The Entity's investments are classified as at fair value through profi or loss. They comprise:. Financial instruments held for trading These include derivative financial instruments including futures, forward contracts, options and interest rate swaps. The Entity does not designate any derivatives as hedges in a hedging relationship.. Financial instruments designated at fair value through profit or loss upon initial recognition These include financial assets that are not held for trading purposes and which may be sold. These are investments in exchange traded debt and equity instruments, unlisted trusts and commercial paper. Financial assets and financial liabilities designated at fair value through profi or loss at inception are those that are managed and their performance evaluated on a fair value basis in accordance with the Entity's documented investment strategy. The Entity's policy is for the Responsible Entity to evaluate the information about these financial assets on a fair value basis together with other related financial information. The Entity makes short sales in which a borrowed security is sold in anticipation of a decline in the market value of that security, or it may use short sales for various arbitrage transactions. Short sales are classified as financial liabilities at fair value through profit or loss. (ii) Recognition/derecognition The Entity recognises financial assets and financial liabilities on the date it becomes party to the contractual agreement (trade date) and recognises changes in fair value of the financial assets or financial liabilities from this date. Investments are derecognised when the right to receive cashflows from the investments has expired or the Entity has transferred substantially all risks and rewards of ownership. (iii) Measurement (a) Financial assets and liabilities held at fair value through profit or loss Financial assets and liabilities held at fair value through profit or loss are measured initially at fair value excluding any transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Transaction costs on financial assets and financial liabilities at fair value through profit or loss are expensed immediately. Subsequent to initial recognition, all instruments held at fair value through profit or loss are measured at fair value with changes in their fair value recognised in the income statements. -11-

14 2 Summary of significant accounting policies (c) Financial instruments. Fair value in an active market The fair value of financial assets and liabilities traded in active markets is based on their quoted market prices at the balance sheets date without any deduction for estimated future selling costs. Financial assets are priced at current bid prices, while financial liabilities are priced at current asking prices.. Fair value in an inactive or unquoted market The fair value of financial assets and liabilities that are not traded in an active market is determined using valuation techniques. These include the use of recent arm's length market transactions, reference to the current fair value of a substantially similar other instrument, discounted cash flow techniques, option pricing models or any other valuation technique that provides a reliable estimate of prices obtained in actual market transactions. For other pricing models, inputs are based on market data at the balance sheets date. Fair values for unquoted equity investments are estimated, if possible, using applicable pricing/earnings ratios for similar listed companies adjusted to reflect the specific circumstances of the issuer. Investments in other unlisted unit trusts are recorded at the redemption value per unit as reported by the managers of such trusts provided such value could be affected at the balance date. (iv) Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in the balance sheets when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (d) Investments in subsidiaries Investments in subsidiaries are measured in accordance with note 2(c). (e) Net assets attributable to unitholders Units are redeemable at the unitholders' option and are therefore classified as financial liabilities. The units can be put back to the Fund at any time for cash based on the redemption price. The fair value of redeemable units is measured at the redemption amount that is payable (based on the redemption unit price) at the balance sheets date if unitholders exercised their right to put the units back to the Fund. (f) Cash and cash equivalents For cash flow statements presentation purposes, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions and bank overdrafts. Bank overdrafts are shown separately on the balance sheets. Payments and receipts relating to the purchase and sale of investment securities are classified as cash flows from operating activities, as movements in the fair value of these securities represent the Entity's main income generating activity. (g) Investment income Investment income represents dividend income, interest income, changes in fair value of, and realised gains on investments and interest bearing financial instruments. Interest income and expenses are recognised in the income statement for all financial instruments that are not held at fair value through profi or loss. Interest on bank and broker balances is recognised on an accruals basis while interest on zero coupon bonds is recognised using the effective interest method. Interest income on assets held at fair value through the profit or loss is included in the net gains/(iosses) on financial instruments. Other changes in fair value for such instruments are recorded in accordance with the policies described in note 2(c). -12-

15 2 Summary of significant accounting policies (g) Investment income The effective interest method is a method of calculating the amortised cost of a financial asset or financial liability and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts throughout the expected life of the financial instrument, or a shorter period where appropriate, to the net carrying amount of the financial asset or liability. When calculating the effective interest rate, the Fund estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees paid or received between the parties to the contract that are an integral part of the effective interest rate, including transaction costs and all other premiums or discounts. Dividend income is recognised on the ex-dividend date with any related foreign withholding tax recorded as an expense. Dividends declared on securities sold short are recorded as a dividend expense on the ex-dividend date. Trust distributions are recognised on an entitlements basis. (h) Expenses All expenses, including Responsible Entity's fees, are recognised in the income statements on an accruals basis. (i) Income tax Under current legislation, the Fund is not subject to income tax provided the taxable income of the Fund is fully distributed either by way of cash or reinvestment (ie unitholders are presently entitled to the income of the Fund). Financial instruments held at fair value may include unrealised gains. Should such a gain be realised, that portion of the gain that is subject to tax will be distributed so that the Fund is not subject to tax on the realised gains. Realised losses are not distributed to unitholders but are retained in the Fund to be offset against any realised gains. If realised gains exceed realised losses, the excess is distributed to unitholders. The benefis of imputation credits and foreign tax paid are passed on to unitholders. The Fund may incur withholding tax imposed by certain countries on investment income. Such income is recorded net of withholding tax in the income statement. U) Distributions In accordance with the Fund Constitution, the Fund fully distributes its distributable (taxable) income, and any other amounts determined by the Responsible Entity, to unitholders by cash or reinvestment. The distributions are recognised in the income statement as finance costs attributable to unitholders. (k) Increase/decrease in net assets attributable to unitholders Income not distributed is included in net assets attributable to unitholders. Movements in net assets attributable to unitholders are recognised in the income statements as finance costs. (I) Foreign currency translation i) Functional and presentation currency Items included in the Entity's financial report are measured using the currency of the primary economic environment in which it operates (the "functional currency"). This is the Australian dollar, which reflects the currency of the economy in which the Entity competes for funds and is regulated. The Australian dollar is also the Entity's presentation currency. -13-

16 2 Summary of significant accounting policies (I) Foreign currency translation ii) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translations at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statements. The Entity does not isolate that portion of gains or losses on securities and derivative financial instruments that are measured at fair value through profi or loss and which is due to changes in foreign exchange rates from that which is due to changes in the market price of securities. Such fluctuations are included with the net gains or losses on financial instruments at fair value through profit or loss. (m) Due from/to brokers Amounts due from/to brokers represent payables for securities purchased and receivables for securities sold that have been contracted for but not yet delivered by the end of the year. A provision for impairment of amounts due from brokers is established when there is objective evidence that the Entity will not be able to collect all amounts due from the relevant broker. Significant financial diffculties of the broker, probability that the broker will enter bankruptcy or financial reorganisation, and default in payments are considered indicators that the amount due from brokers is impaired. (n) Receivables Receivables may include amounts for dividends, interest and trust distributions. Dividends and trust distributions are accrued when the right to receive payment is established. Interest is accrued at the reporting date from the time of last payment in accordance with the policy set out in note 2(g) above. Amounts are generally received within 30 days of being recorded as receivables. (0) Payables Payables includes liabilities and accrued expenses owing by the Entity which are unpaid as at balance date. The distribution amount payable to unitholders as at the reporting date is recognised separately on the balance sheets when unitholders are presently entitled to the distributable income under the Fund's Constitution. (p) Applications and redemptions Applications received for units in the Fund are recorded net of any entry fees payable prior to the issue of units in the Fund. Redemptions from the Fund are recorded gross of any exit fees payable after the cancellation of units redeemed. (q) Goods and Services Tax (GST) The amount of GST incurred by the Entity that is not recoverable from the Australian Taxation Offce ("A TO") is recognised as an expense or as part of the cost of acquisition of an asset. The Entity qualifies for Reduced Input Tax Credits at the rate of 75% on various services such as Manager's fees and Trustee's fees. These expenses have been recognised in the Income Statement net of the amount of GST recoverable from the ATO. The net amount of GST recoverable/payable from/to the ATO is included in the balance sheet. Cash flows relating to GST are included in the cash flow statement on a gross basis. -14-

17 2 Summary of significant accounting policies (r) Use of estimates The Entity makes estimates and assumptions that effect the reported amounts of assets and liabilities within the next financial year. Estimates are continually evaluated and are based on historical experience and other factors, including reasonable expectations of future events. The Directors believe the estimates used in preparing the financial report are reasonable. Actual results in the future may differ from those reported. For the majority of the Entity's financial instruments, quoted market prices are readily available. However certain financial instruments, for example, over the counter derivatives or unquoted securities are fair valued using valuation techniques. Where valuation techniques (for example pricing models) are used to determine fair values, they are validated and periodically reviewed by experienced personnel of the Responsible Entity, independent of the area that created them. Models are calibrated by back-testing to actual transactions to ensure that outputs are reliable. Models use observable data, to the extent practicable. However, areas such as credit risk (both own and counterparty), volatilities and correlations require management to make estimates. Changes in assumptions about these factors could affect the reported fair value of financial instruments. For certain other financial instruments, including amounts due from/to brokers, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the immediate short-term nature of these financial instruments. (s) New accounting standards and interpretations Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2009 reporting periods. The directors' assessment of the impact of these new standards (to the extent relevant to the Trust) and interpretations is set out below: (i) Revised AASB 101 Presentation of Financial Statements and AASB Amendments to Australian Accounting Standards arising from AASB 101 (effective from 1 January 2009) The revised AASB 101 requires the presentation of a statement of comprehensive income and makes changes to the statement of changes in equity, but will not affect any of the amounts recognised in the financial statements. If an Trust has made a prior period adjustment or has reclassified items in the financial statements, it will need to disclose a third balance sheet (statement of financial position), this one being as at the beginning of the comparative period. The Trust will apply the revised standard from 1 July (ii) AASB 132 Financial Standards - Puttable Financial from 1 January 2009) Instruments: Presentation and AASB Amendments to Australian Accounting Instruments and Obligations Arising on Liquidation (Revised AASB 132) (effective Revised AASB 132 is applicable for reporting periods beginning on or after 1 January The Trust has not adopted this standard early. Application of this standard will not affect any of the amounts recognised in the financial statements as the Trust is obligated to distribute all of its taxable income in accordance with the Trust's Constitution. Accordingly, there will be no change to classification of' funds as a liability and therefore no impact on profi or loss and equity. (iii) AASB Amendments to Australian Accounting Standards - Improving Disclosures about Financial Instruments (effective from 1 January 2009) In April 2009, the AASB published amendments to AASB 7 Financial Instruments: Disclosures to improve the information that entities report about their liquidity risk and the fair value of their financial instruments. The amendments require fair value measurement disclosures to be classified into a new three-level hierarchy and additional disclosures for items whose fair value is determined by valuation techniques rather than observable market values. The AASB also clarified and enhanced the existing requirements for the disclosure of liquidity risk of derivatives. The Trust will apply the amendments from 1 July They wil not affect any of the amounts recognised in the financial statements but may affect certain disclosures. -15-

18 2 Summary of significant accounting policies (t) Early adoption of standards The Trust has early adopted AASB 8 Operating Segments in the year ended. The application of AASB 8 will not impact the Trust as the Trust is outside the scope of AASB 8 because it does not have debt or equity instruments traded in a public market, or file its financial statements with a securities commission or other regulatory organisation for the purpose of issuing any class of instruments in a public market. Following the early adoption of AASB 8, the Trust has omitted the segment disclosure previously required under AASB 114 Segment Reporting. (u) Rounding of amounts The Trust is an entity of the kind referred to in Class Order 98/0100 (as amended), issued by the Australian Securities and Investments Commission, relating to the "rounding off' of amounts in the financial report. Amounts in the financial report have been rounded off to the nearest thousand dollars in accordance with that Class Order, unless otherwise indicated. -16-

19 3 Financial risk management The Entity and the Trust's activities expose it to a variety of financial risks: market risk (including price risk, foreign exchange risk and interest rate risk), credit risk and liquidity risk. The Entity and the Trust's overall risk management programme focuses on ensuring compliance with the Entity's Product Disclosure Statement and seeks to maximise the returns derived for the level of risk to which the Entity is exposed. The Trust uses derivative financial instruments to alter certain risk exposures. Financial risk management is carried out by the risk management department under policies approved by senior managers of MQ Portfolio Management Limited or the board of directors of the Responsible Entity (the Board). The Entity's financial risk is managed by the Investment Manager of the individual unit trusts within the Entity. No other risk management occurs for the consolidated entity. The Investment Manager (MQ Portolio Management Ltd) adopted the following investment objectives, policies and processes for managing the Trust's capital: Investment objectives The Trust's investment objective is to achieve long term returns, while protecting investors against a loss of their application amount. The Trust also has exposure to a number of other strategies. This is in accordance with the provisions of the Trust's Constitution. The Trust trades in regulated financial markets. The laws and regulations that govern these markets may change in a way that adversely affects the ability of the Trust to meet its investment objective. Investment policies The primary objective of the Trust is to enhance capital appreciation, so preservation of capital is very important. As share price volatilities increase with changing global market conditions, the Trust's positions are monitored for both long and short positions as a primary measure. These limits are identified and calculated by the divisional risk management team in conjunction with the Risk Management Division. Further, these limits are monitored on a daily basis and their adequacy is reviewed on an ongoing basis. There are self imposed parameters such as country, section and stock exposure limits currently applying to the Trust as a secondary measure, and these are subject to ongoing review. Derivatives are generally used for hedging purposes but may be used to gain market exposure. Exchange traded and over the counter derivatives, including (but not limited to) futures, forwards, swaps, contracts for differences (CFD) and options may be used by the Trust. The relatively small margin required to establish a position in these financial instruments permits a high degree of leverage. As a result, these financial instruments can be highly volatile. Basis risk (ie the risk that the derivative position will not move in line with the underlying position) is taken into account by the Investment Managers as part of the investment process. Daily monitoring of the use of derivatives is undertaken by the divisional risk team of the Investment Manager. Any breaches are reported to the Compliance Committee and the Responsible Entity. Investment processes The Trust aims to achieve its objective by providing exposure to various investment strategies employed by the Investment Manager. The Trust will apply one of the investment strategies directly to a component of the fund. Alternatively, The Trust may invest directly in the single strategy funds managed by the Investment Manager. The Investment Manager will usually leverage the Trust's exposure to the underlying investment strategies. The level of leverage utilised by the Investment Manager may be significant. Whilst the use of leverage may increase the potential return on the investment in the Trust, it also increases the level of risk and may also result in substantial losses. The Trust may also trade futures contracts for hedging the overall risk and return profile of the fund. The Trust wil provide exposure to the investment strategies described below. In addition to the investment strategies discussed below, other investment strategies may be used from time to time as determined by the Directors.. Macquarie Australian Equity Income Fund (formerly MQ Buy Write Fund). Macquarie Income Timing Fund (formerly MQ Income Timing Fund) -17-

20 3 Financial risk management The risks and the respective risk management policies employed by the Entity to manage these risks are discussed below. (a) Market risk (i) Price Risk Other price risk is the risk that the value of the Trust's and Entity's investments will fluctuate as a result of changes in market prices. The Trust's and Entity's other price risk is monitored by the Investment Manager on an ongoing basis and is managed through diversification of the investment portolio, hedging of various positions through the use of futures contracts, swaps, forward contracts and other appropriate instruments. Short sales made by the Trust and Entity involve certain risks and special considerations. Possible losses from short sales differ from losses that could be incurred from a purchase of a security, because losses from short sales may be unlimited, whereas losses from purchases cannot exceed the total amount invested. The Entity's equity securities held long and short, whether cash positions or through derivative instruments, are substantially all publicly traded. Refer to note 3(e) for analysis of the Trust's and Entity's sensitivity to price risk. The Entity is exposed to other price risk on its investment in its subsidiary. Other price risk for the subsidiary is monitored by the Investment Manager on an ongoing basis and is managed through diversification of the investment portfolio, hedging of various positions through the use of futures contracts, swaps, forward contracts and other appropriate instruments. (ii) Foreign exchange risk The Entity does not hold any monetary and non-monetary assets denominated in currencies other than the Australian dollar. The Entity's investment in the underlying Funds trade Australian securities and are held in Australian Dollars. Therefore as at and 30 June 2008 the Entity has no material exposure to foreign exchange risk. (iii) Interest rate risk The Compliance Committee of the Responsible Entity reviews any identified exceptions to internal risk policies and procedures on a quarterly basis. The Entity is exposed to interest rate risk on its bank and broker balances and its investments in zero coupon bonds. Interest income and expense may fluctuate in amount, in particular due to changes in interest rates. The table summarising the Trust's exposure to interest rate risk is detailed in note 3(d) below. Refer to note 3(e) for an analysis of the Trust's sensitivity to interest rate movements. (b) Credit risk Credit risk is the risk that one party to a financial instrument will fail to discharge its obligation and cause the other party to incur a financial loss. The Trust takes on exposure to credit risk with both Macquarie Bank Limited ("MBL") and with underlying unit trusts. The Trust is also exposed to credit risk on its cash and cash equivalents. The Trust is exposed to the risk that MBL will default on its contractual obligations to deliver the capital protected amount on the capital protection date. The obligations of MBL are not deposit liabilities of MBL and they are not guaranteed by any party. The obligations are unsecured, and will rank behind claims of secured creditors and mandatory creditors. -18-

21 3 Financial risk management (b) Credit risk The Entity is exposed to credit risk on its cash and cash equivalents held and on the derivative contracts held through approved brokers. This risk is monitored on an ongoing basis. Further, the risk of default is considered minimal, as delivery of securities sold is only made once the broker has received payment. Payment is made on a purchase once the securities have been received by the broker. The trade will fail if either party fails to meet its obligation. Financial assets which potentially subject to concentrations of credit risk consist principally of bank deposits and balances, assets held with Goldman Sachs International (the "Prime Broket'), and derivatives where the Prime Broker is the counterparty. The Prime Broker also provides the clearing and depository operations for the Entity's security transactions. The Prime Broker provides loans and finance to the Entity and, as continuing security for the payment and discharge of all liabilities of the Entity, assets held by the Prime Broker will be charged in favour of the Prime Broker. As at the net investment of the Fund in its subsidiary, which amounted to $8,986,140 (2008:$56,140,068), are held with the Prime Broker. The Entity limits its exposure to credit risk by transacting the majority of its securities and contractual commitment activities with broker-dealers, banks and regulated exchanges with high credit ratings and that the Entity considers to be well established. The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets. As at the credit ratings issued by the Moody's at the year end were: Goldman Sachs Macquarie Bank Limited A1 Aa3 A2 A A1 A Aa3 A1 In accordance with the Entity's policy, the Investment Manager's risk management department monitors the Entity's credit position on a daily basis. (c) Liquidity risk Liquidity risk is the risk that the Trust and Entity will encounter diffculty in selling a financial asset quickly at close to its fair value. The Entity and the Trust are exposed to monthly cash redemptions of redeemable units and as a result it primarily holds investments that are traded in an active market and can be readily disposed. The Entity's listed securities are considered readily realisable. The Entity may invest in derivative contracts traded over the counter, which are not traded in an organised market and may be illiquid. As a result, the Entity may not be able to quickly liquidate its investments in these instruments at an amount close to their fair value to meet its liquidity requirements or to respond to specific events such as deterioration in the creditworthiness of any particular issuer or counterparty. As of, the Investment Manager believes that the majority of the Entity's positions are in liquid instruments that can be liquidated without any significant market impact. The table below analyses the Trust's and the Entity's financial liabilities, including gross settled derivatives financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying amounts, as the impact of discounting is not significant. -19-

22 3 Financial risk management (c) Liquidity risk At Financial liabilities at fair value through Less than 1 month profit or loss 6 Distribution payable Responsible Entity fees payable 110 Other payables 515 Net assets attributable to minority interests Total financial liabilities (excluding net assets attributable to unitholders of the parent entity) 631 At 30 June 2008 Responsible Entity fees payable Distribution payable Other payables 4,434 profit or loss 4 Financial liabilities at fair value through Net assets attributable to minority interests Total financial liabilities (excluding net assets attributable to unitholders of the parent entity) 4, months Less than 1 month 1-6 months 3,957 3, , ,736 $'000 At Distribution payable 3,955 Responsible Entity fees 66 Other payables 32 Total financial liabilities (excluding net assets attributable to unitholders) 98 3, No stated maturity $'000 No stated maturity ,619 2,619 Total $'000 Total $' , , ,987 4, ,619 12,793 3, ,053 At 30 June 2008 Distribution payable Responsible Entity fees payable Other payables Total financial liabilities (excluding net assets attributable to unitholders) 4, ,900 4, ,900 In accordance with the Entity's policy, the Investment Manager monitors the Entity's liquidity position on a continual basis to enable them to close out of positions at any point in time. Further, prior to any derivative position being entered into, the relationship between the likely liquidity and the size of the position taken is considered. -20-

23 3 Financial risk management (d) Interest rate risk The Trust's interest-bearing financial assets and liabilities expose it to risks associated with the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. The table below summarises the Trust's exposure to interest rate risks. It includes the Trust's assets and trading liabilities at fair values, categorised by the earlier of contractual re-pricing or maturity dates. Fixed Weighted Floating interest rate average interest Non. interest rate interest rate 1 to 5 years bearing (%pa) $'000 Assets Cash and cash equivalents ,279 Due from brokers - receivable for securities sold 4,657 Receivables 21 Financial assets held at fair value through profi or loss ,103 11,959 Total assets 3,279 42,103 16,637 Liabilities Distributions payable 3,957 Other payables 515 Responsible Entity fees payable 110 Financial liabilities held at fair value through profi or loss 6 Net assets attributable to minority interests 16 Total liabilties (excluding net assets attributable to unitholders of the parent entity) 4,604 Net assets attributable to unitholders - liabilty 3,279 42,103 12,033 Fixed Weighted Floating interest rate average interest Non- interest rate interest rate 1 to 5 years bearing (%pa) $'000 Cash and cash equivalents Receivables 20 Financial assets held at fair value through profi or loss ,103 18,767 Total assets ,103 18,787 Liabilties Distributions payable 3,955 Other payables 32 Responsible Entity fees payable 66 Total liabilities (excluding net assets attributable to unitholders) 4,053 Net assets attributable to unitholders. liability ,103 14,

24 3 Financial risk management (d) Interest rate risk 30 June 2008 Assets Cash and cash equivalents Due from brokers - receivable for securities sold Receivables Financial assets held at fair value through profit or loss Total assets Liabilties Distributions payable Other payables Financial liabilities held at fair value through profit or loss Net assets attributable to minority interests Total liabilities (excluding net assets attributable to unitholders of the parent entity) Net assets attributable to unitholders - liabilty Weighted Floating average interest Noninterest rate interest rate bearing ("!pa) ,622 18, ,569 1,622 76,191 4,987 5, ,619 12,794 1,622 63, June 2008 Weighted Floating average interest Noninterest rate interest rate bearing ("!pa) Cash and cash equivalents Receivables Financial assets held at fair value through profit or loss Total assets Distributions payable Other payables Total liabilities (excluding net assets attributable to unitholders) ,830 64,975 69,805 4, ,900 Net assets attributable to unitholders - liabilty ,905 (e) Summarised sensitivity analysis The following table summarises the sensitivity of the Trust's operating profit and net assets attributable to unitholders to interest rate risk and other price risk. The reasonably possible movements in the risk variables have been determined based on management's best estimate, having regard to a number of factors, including historical levels of changes in interest rates and historical correlation of the Fund's investments with the relevant benchmark and market volatility. However, actual movements in the risk variables may be greater or less than anticipated due to a number of factors, including unusually large market shocks resulting from changes in the performance of the economies, markets and securities in which the fund invests. As a result, historic variations in risk variables are not a definitive indicator of future variations in the risk variables. -22-