FINANCIAL STATEMENTS CONTENTS Page Statement of Financial Position 2 Income Statement 3 Statement of Changes in Member Benefits 4-5 Statement of Changes in Equity 6 Statement of Cash Flows 7 Notes to the Financial Statements 8-32 Statement by Trustee 33 Independent Auditor s Report 34-35 Issued by Mercy Super Pty Ltd ABN 98 056 047 324, AFS Licence No.418976 as Trustee for Mercy Super ABN 11 789 425 178
STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2017 Notes ASSETS Cash and cash equivalents 17(b) 5,179 6,179 Receivables 14 13,322 10,582 Investments 8 1,154,938 1,000,430 Derivative assets 1,814 - Prepayments 221 158 TOTAL ASSETS 1,175,474 1,017,349 LIABILITIES Creditors and accruals 15 2,819 1,353 Derivative liabilities 161 - Current tax liabilities 13(d) 2,191 3,870 Deferred tax liabilities 13(e) 13,138 7,439 TOTAL LIABILITIES EXCLUDING MEMBER BENEFITS 18,309 12,662 NET ASSETS AVAILABLE FOR MEMBER BENEFITS 1,157,165 1,004,687 MEMBERS BENEFITS Defined contribution member liabilities 4(a) 1,062,660 906,050 Defined benefit member liabilities 4(b) 65,665 72,407 TOTAL MEMBERS BENEFITS 1,128,325 978,457 NET ASSETS 28,840 26,230 EQUITY Trustee operating account 6,449 5,740 Operational risk reserve 3,390 2,997 Defined benefit plans that are over/(under) funded 12,699 10,158 Unallocated balance 6,302 7,335 TOTAL EQUITY 28,840 26,230 This Statement should be read in conjunction with the accompanying notes. Page 2
INCOME STATEMENT Notes REVENUE FROM SUPERANNUATION ACTIVITIES Interest 65 133 Dividends and distributions 60,798 64,632 Net remeasurement of assets measured at fair value 10 67,021 (28,670) Fee rebates 827 671 Other income (4) 2 TOTAL SUPERANNUATION ACTIVITIES REVENUE 128,707 36,768 EXPENSES Direct investment expense 11 1,741 1,419 General administration expenses 12 5,453 5,314 TOTAL EXPENSES 7,194 6,733 NET INCOME FROM SUPERANNUATION ACTIVITIES 121,513 30,035 ALLOCATION TO MEMBERS BENEFITS Net benefits allocated to defined contribution (DC) member accounts (110,736) (30,579) Net benefits allocated to defined benefit (DB) member liabilities (7,110) (2,448) TOTAL ALLOCATION TO MEMBER BENEFITS (117,846) (33,027) OPERATING RESULT BEFORE INCOME TAX 3,667 (2,992) INCOME TAX EXPENSE/(BENEFIT) 13(a)(b) 4,659 (1,760) OPERATING RESULT AFTER INCOME TAX (992) (1,232) This Statement should be read in conjunction with the accompanying notes. Page 3
STATEMENT OF CHANGES IN MEMBER BENEFITS Notes DC Members DB Members Total Benefits Benefits 2017 Year ended 30 June 2017 Liability for accrued benefits beginning of period 906,050 72,407 978,457 CONTRIBUTION REVENUE Employer contributions 80,858-80,858 Member contributions 16,795-16,795 Government co-contributions 115-115 Transfers in 34,390-34,390 Transfers from DB to DC 10,709 (10,709) - Income tax on contributions 13(c) (12,009) - (12,009) Net after tax contributions 130,858 (10,709) 120,149 BENEFITS PAID Benefits paid (65,232) (3,143) (68,375) Pensions paid (7,984) - (7,984) Anti-detriment deduction 13(c) 152-152 Net benefits paid (73,064) (3,143) (76,207) INSURANCE Insurance premiums charged to members accounts (12,035) - (12,035) Claims credited to members accounts 3,717-3,717 Net Insurance (cost)/benefit (8,318) - (8,318) INCOME AND EXPENSES Investment earnings/(losses) applied to members 110,736-110,736 Net change in defined benefit member accrued benefits - 7,110 7,110 Administration fees paid by members (848) - (848) Asset fees paid by members (2,754) - (2,754) Financial planning and other fees - - - Net income/(expenses) 107,134 7,110 114,244 Liability for accrued benefits end of period 1,062,660 65,665 1,128,325 This Statement should be read in conjunction with the accompanying notes. Page 4
STATEMENT OF CHANGES IN MEMBER BENEFITS Notes DC Members DB Members Total Benefits Benefits 2016 Year ended 30 June 2016 Liability for accrued benefits beginning of period 840,696 78,588 919,284 CONTRIBUTIONS RECEIVED Employer contributions 70,108-70,108 Member contributions 11,894-11,894 Government co-contributions 132-132 Transfers in 31,849-31,849 Transfers from DB to DC 8,388 (8,388) - Income tax on contributions 13(c) (10,558) - (10,558) Net after tax contributions 111,813 (8,388) 103,425 BENEFITS PAID Benefits paid (63,412) (241) (63,653) Pensions paid (6,458) - (6,458) Anti-detriment deduction 13(c) 147-147 Net benefits paid (69,723) (241) (69,964) INSURANCE Insurance premiums charged to members accounts (6,336) - (6,336) Claims credited to members accounts 2,381-2,381 Net Insurance (cost)/benefit (3,955) - (3,955) INCOME AND EXPENSES Investment earnings/(losses) applied to members 30,579-30,579 Net change in defined benefit member accrued benefits - 2,448 2,448 Administration fees paid by members (815) - (815) Asset fees paid by members (2,547) - (2,547) Financial planning and other fees 2-2 Net income/(expenses) 27,219 2,448 29,667 Liability for accrued benefits end of period 906,050 72,407 978,457 This Statement should be read in conjunction with the accompanying notes. Page 5
STATEMENT OF CHANGES IN EQUITY Trustee Operating Defined Benefit Unallocated Total Reserve ORFR plans that are Balance Reserves over/(under) funded Year Ended 30 June 2017 Opening Balance 5,740 2,997 10,158 7,335 26,230 Net income/(loss) applied (2,893) 393 2,541 (1,033) (992) Fees paid by members 3,602 - - - 3,602 Closing Balance 6,449 3,390 12,699 6,302 28,840 Year Ended 30 June 2016 Opening Balance 5,793 2,190 9,632 6,487 24,102 Tax surplus distributed - 700 - (700) - Net income/(loss) applied (3,413) 107 526 1,548 (1,232) Fees paid by members 3,360 - - - 3,360 Closing Balance 5,740 2,997 10,158 7,335 26,230 (a) Trustee Operating Reserve The trustee operating reserve is established in accordance with the trust deed and is used to fund the operating expenses of the Fund. (b) Operational Risk Financial Reserve (ORFR) Under APRA Prudential Standard SPS 114: Operational Risk Financial Requirement ( ORFR ), a fund is required to maintain an ORFR reserve of at least 0.25% of a fund s assets. The Trustee intends that the actual dollar amount of the ORFR will increase in line with increasing Fund assets to achieve and maintain a target level at 0.30% of Fund assets. The ORFR is invested within the Fund s default Balanced Growth Investment Option. (c) Defined benefit plans that are over/(under) funded These relate to the difference between the DB assets held and the accrued benefits. (d) Unallocated balance This balance relates to the difference between the amounts allocated to defined contribution members and the balance of the Fund s assets after identified reserves. This Statement should be read in conjunction with the accompanying notes. Page 6
STATEMENT OF CASH FLOWS Notes CASH FLOWS FROM OPERATING ACTIVITIES Interest received 65 133 Dividend and distributions received - 19,023 Other investment income 823 672 Insurance proceeds (inwards) 3,717 2,381 General administration expenses (5,305) (5,349) Insurance premiums (outwards) (11,601) (6,336) Investment expenses (1,741) (1,419) Income tax benefits 138 2,864 NET CASH FLOWS FROM OPERATING ACTIVITIES 17(a) (13,904) 11,969 CASH FLOWS FROM INVESTING ACTIVITIES Net Proceeds from (purchase)/sale of Investments (30,265) (48,641) NET CASH FLOWS USED IN INVESTING ACTIVITIES (30,265) (48,641) CASH FLOWS FROM FINANCING ACTIVITIES Employer contributions 80,861 70,108 Member contributions 16,795 11,894 Government co-contribution 115 132 Transfers in 34,390 31,849 Benefits paid (76,358) (70,111) Income tax on contributions received (12,634) (10,939) NET CASH FLOWS FROM FINANCING ACTIVITIES 43,169 32,933 NET (DECREASE)/INCREASE IN CASH HELD (1,000) (3,739) CASH AT THE BEGINNING OF PERIOD 6,179 9,918 CASH AT THE END OF PERIOD 17(b) 5,179 6,179 This Statement should be read in conjunction with the accompanying notes. Page 7
1. REPORTING ENTITY Mercy Super ( the Fund ) is a hybrid between defined benefits and defined contributions superannuation fund domiciled in Australia. The address of the Fund s registered office is The Kelly Building, Mater Misericordiae Limited (MML), Raymond Terrace, South Brisbane, QLD 4101. The Fund is operated for the purpose of providing for members (and their dependants or beneficiaries), lump sum benefits upon retirement, termination of service, death and disablement. The Fund is constituted by a Trust Deed dated 31 July 1962. The Trustee of the Fund is Mercy Super Pty Ltd (ABN 98 056 047 324). 2. BASIS OF PREPARATION (a) Statement of Compliance The financial statements are general purpose statements which have been drawn up in accordance with Australian Accounting Standards, including AASB 1056 Superannuation Entities, other applicable Accounting Standards and the requirements of the Superannuation Industry (Supervision) Act 1993 and Regulations ( SIS ) and the provisions of the Trust Deed. The financial statements were approved by the Board of the Trustee, Mercy Super Pty Ltd on 25 September 2017. (b) Basis of Measurement The financial statements have been measured on a fair value basis. (c) Functional and Presentation Currency The financial statements are presented in Australian dollars, which is the functional currency of the Fund. Amounts have been rounded to the nearest thousand dollars except where otherwise noted. (d) Use of Estimates and Judgements The preparation of financial statements requires the use of certain critical accounting assumptions and estimates. It also requires the Trustee and management to exercise judgement in the process of applying the entity s accounting policies and reporting amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. There are no critical accounting estimates and judgements contained in these financial statements other than those used to determine the liability for accrued benefits (Note 4(b)), valuation of investments (Note 3(a)) and deferred tax asset recognition (Note 3(i)), the latter of which are not brought to account but disclosed by way of note. Page 8
2. BASIS OF PREPARATION (CONTINUED) (e) New and amended standards adopted during the year The following new and revised Standards and Interpretations have been adopted in the financial statements. Apart from AASB 1056, their adoption has not had significant financial or disclosure impact on these financial statements but may affect the accounting for future transactions or arrangements. AASB Amendment / Standard AASB 1056 AASB 2015-1 AASB 2015-2 AASB 2015-5 Title Superannuation Entities Amendments to Australian Accounting Standards Annual Improvements to Australian Accounting Standards 2012-2014 Cycle Amendments to Australian Accounting Standards Disclosure Initiative: Amendments to AASB 101 Amendments to Australian Accounting Standards Investment Entities: Applying the Consolidation Exception (f) Adoption of AASB 1056 Superannuation Entities ( AASB 1056 ) The Australian Accounting Standards Board issued AASB 1056 in June 2014. The new standard replaces AAS 25 Financial Reporting by Superannuation Plans ( AAS 25 ) and is applicable retrospectively from financial period beginning on or after 1 July 2016. The purpose of this new standard is to address deficiencies in AAS 25 and align accounting and financial reporting requirements for superannuation entities with current requirements of Australian Accounting Standards. The Fund has applied the requirements of AASB 1056 for the first time in the current year. In accordance with the transitional provisions of AASB 1056, the Fund has not presented a statement of financial position as at the beginning of comparative period (1 July 2015). The impact of adopting AASB 1056 has been summarised as follows: All funds to present 5 primary financial statements (ie. Statement of Financial Position, Income Statement, Statement of Cash Flows, Statement of Changes in Equity/Reserves and Statement of Changes in Members Benefits); All assets and liabilities (with the exception of members liabilities, tax balances, goodwill, reinsurance assets and liabilities and employer sponsor receivables) are to be measured at fair value; Members benefits are required to be presented as liabilities in the Statement of Financial Position; and The Fund is required to consider the nature of insurance arrangements in place and consider valuation of its reinsurance assets and liabilities where appropriate. The adoption of AASB 1056 had the following impact on the financial statements of the Fund for the period ended 30 June 2016: Impact on the Statement of Financial Position Liabilities Member benefits recognised as liabilities rather than equity: Original reported 30 June 2016 Transitional restatement Restated 30 June 2016 Defined contribution member liabilities - 906,050 906,050 Defined benefit member liabilities - 72,407 72,407 Equity Member benefits recognised as liabilities rather than equity: Member benefits 988,613 (988,613) - Other equity movements DB Surplus - 10,158 10,158 Unallocated balance 7,335-7,335 Trustee operating account 5,740-5,740 Operational risk reserve 2,997-2,997 Page 9
2. BASIS OF PREPARATION (CONTINUED) Impact on the Income Statement Original reported 30 June 2016 Transitional restatement Restated 30 June 2016 Profit before income tax previously reported 69,953-69,953 Contributions, rollovers and other inward transfers and benefits paid to members are transferred to the statement of changes in member benefits: Employer contributions - (70,108) (70,108) Member contributions - (11,894) (11,894) Government co-contributions - (132) (132) Transfers in - (31,849) (31,849) Claims credited to members accounts - (2,381) (2,381) Insurance premiums charged to members accounts - 6,336 6,336 Benefits paid - 70,111 70,111 Profit from operating activities 69,953 (39,917) 30,036 Benefits allocated to members accounts - (33,027) (33,027) Profit before income tax 69,953 (72,944) (2,991) Income tax (expense)/benefit (8,651) - (8,651) Income tax on contributions transferred to the statement of changes in member benefits - 10,410 10,410 Profit after income tax 61,302 (62,534) (1,232) Statement of Changes in Members Benefits Original reported 30 June 2016 Transitional restatement Restated 30 June 2016 Opening balances - 919,284 919,284 Contributions, transfers from other superannuation entities (transferred from income statement) - 113,983 113,983 Tax on contributions - (10,558) (10,558) Benefits paid to members (transferred from income statement) - (70,111) (70,111) Claims credited to members accounts - 2,381 2,381 Insurance premiums charged to members accounts - (6,336) (6,336) Anti-detriment - 147 147 Net benefits allocation (defined contribution) - 30,579 30,579 Net change in defined benefit member benefits - 2,448 2,448 Fees deducted from members - (3,360) (3,360) Statement of Changes in Equity Original reported 30 June 2016 Transitional restatement Restated 30 June 2016 Opening balances - 24,102 24,102 Fees deducted from members - 3,360 3,360 Operating results - (1,232) (1,232) Closing balance - 26,230 26,230 Page 10
2. BASIS OF PREPARATION (CONTINUED) Statement of Cash Flows Original reported 30 June 2016 Transitional restatement Restated 30 June 2016 Net cash inflows from operating activities - 11,969 11,969 Net cash outflows from investing activities - (48,641) (48,641) Net cash inflows from financing activities - 32,933 32,933 Net increase in cash - (3,739) (3,739) Cash at beginning of year - 9,918 9,918 Cash at end of year - 6,179 6,179 Apart from the above, AASB 1056 also introduces the following changes, where no financial impact has been identified for the financial period presented: Requirement to re-measure defined benefit liabilities at each period end; Additional disclosure requirements in relation to defined benefit liabilities valuations; Consideration to recognise employer sponsor receivable where appropriate; and Requirement to disaggregate financial information presentation where members from different categories are exposed to different risks and benefits. (g) New Standards and Interpretations not yet Adopted A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after 30 June 2017, and have not been applied in preparing these financial statements. Those which may be relevant to the Fund are set out below. The Fund does not plan to adopt these standards early. AASB 9 Financial Instruments AASB 9 replaces the existing guidance in AASB 139 Financial Instruments: Recognition and Measurement. AASB 9 includes revised requirements on the classification and measurement of financial instruments, a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the requirements on recognition and derecognition of financial instruments from AASB 139. AASB 9 is effective for annual reporting periods beginning on or after 1 January 2018. The adoption of AASB 9 is not expected to have a material impact on the Fund s financial assets or financial liabilities. AASB 15 Revenue from Contracts with Customers AASB 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including AASB 118 Revenue, AASB 111 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. AASB 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. AASB 15 is based on the principle that revenue is recognised when control of a good or service transfers to a customer so the notion of control replaces the existing notion of risks and rewards. The Fund's main sources of income are interest, dividends, distributions and gains on financial instruments held at fair value. All of these are outside the scope of the new revenue standard. As a consequence, the directors do not expect the adoption of the new revenue recognition rules to have a significant impact on the Fund's accounting policies or the amounts recognised in the financial statements. Page 11
2. BASIS OF PREPARATION (CONTINUED) (h) Comparatives Where necessary, comparative information has been reclassified to achieve consistency in disclosure with current financial year information and other disclosures. 3. SIGNIFICANT ACCOUNTING POLICIES The accounting policies set out below have been applied consistently to all periods presented in these financial statements. (a) Investments Investments of the Fund are initially recognised using trade date accounting. From this date any gains and losses arising from net remeasurement changes in assets are recorded. Fair values have been determined as follows: Market quoted investments The fair value of an investment for which there is a readily available market quotation is determined as the last quoted sale price at the close of business on reporting date. Non-market quoted investments Investments for which market quotations are not readily available are valued at the fair value determined by the Trustee as follows: Unlisted securities recorded with reference to recent arm s length transactions, current market value of another instrument substantially the same or discounted cash flows. Where discounted cash flow techniques are used, estimated future cash flows are based on Trustee s best estimates and the discount rate used is a market rate at the balance sheet date applicable for an instrument with similar terms, condition and risk. Where other pricing models are used, inputs are based on market data at the reporting date. Private equity investments are valued according to the most recent valuation obtained from the underlying manager at fair value adjusted for subsequent investments, redemptions and significant changes in underlying market conditions through to balance date. Units in pooled superannuation trusts, unlisted unit trusts and property trusts These are valued at the redemption price at reporting date quoted by the investment managers which are based on the fair value of the underlying investments. Unit values denominated in foreign currency are translated to Australian dollars at the current exchange rates. Short term deposits These are valued at their fair value at close of business on the last business day of the reporting period. (b) Cash and Cash Equivalents Cash comprises cash on hand and demand deposits. Cash equivalents are short term, highly liquid investments that are readily converted to known amounts of cash and which are subject to an insignificant risk of changes in value. (c) Foreign Currency Transactions in foreign currencies are translated at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at balance sheet date are translated to Australian dollars at the foreign exchange rate ruling at that date. Foreign exchange differences are recognised in the Income Statement. Page 12
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (d) Receivables Interest receivable represents accrued interest revenue from government securities, other fixed interest securities, money market securities and derivatives. Receivables are carried at nominal amounts accrued or due at reporting date, which approximate fair value. (e) Financial Liabilities The Fund recognises financial liabilities on the date it becomes a party to the contractual provisions of the instrument. Other payables are payable on demand or over short time frames of less than 60 days. The Fund recognises financial liabilities at fair value as at reporting date with any net remeasurement changes in assets since the beginning of the reporting period included in the Income Statement. (f) Revenue Recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised. Net remeasurement changes in value of investments Net remeasurement changes in value of investments are recognised as income in the Income Statement in the periods in which they occur. Net remeasurement changes in value are determined as the difference between the fair value at balance date or consideration received (if sold during the year) and the fair value at the previous balance date or the cost (if the investment was acquired during the year). Interest revenue Interest revenue is recognised in the Income Statement as it accrues, using the original effective interest rate of the instrument calculated at the acquisition or origination date. Interest income includes the amortisation of any discount or premium, transaction costs or other differences between the initial carrying amount of an interestbearing instrument and its amount at maturity calculated on an effective interest rate basis. Dividend revenue Revenue from dividends is recognised on the date the shares are quoted ex-dividend and if not received at reporting date, is reflected in the Statement of Financial Position as a receivable at fair value. Trust distribution revenue Distributions from managed investment schemes are recognised on the date as at the date the unit value is quoted ex-distribution and the Fund is entitled to receive the distribution. If not received at reporting date, the distribution receivable is reflected in the Statement of Financial Position as a receivable at fair value. (g) Contributions revenue and transfers in Contributions revenue and transfers in are recognised when the control and the benefits from the revenue have transferred to the Fund and is recognised gross of any taxes in the period to which they relate. Where contributions have not been allocated to members accounts at period end they are included as a liability on the Statement of Financial Position. (h) Benefits Benefits paid recognise all benefits due and payable from the Fund. Benefits payable are settled in accordance with the Fund s trust deed. Page 13
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (i) Income Tax The Fund is a complying superannuation fund within the provisions of the Income Tax Assessment Act and accordingly the concessional tax rate of 15% has been applied. Current tax Current tax is calculated by reference to the amount of income tax payable or recoverable in respect of the taxable income accrued for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). Deferred tax Deferred tax is accounted for using the comprehensive balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax base of those items. In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities, which affect neither taxable income nor accounting profit. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflect the tax consequences that would follow from the manner in which the Fund expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Fund intends to settle its current tax assets and liabilities on a net basis. (j) Goods and Services Tax Revenue, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the taxation authority. In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included in the value. The net amount of GST recoverable from, or payable to, the Australian Taxation Office (ATO) is included as a current asset or liability in the Statement of Financial Position. (k) Excess Contributions Tax The Australian Taxation Office ( ATO ) may issue release authorities to members of the Fund relating to the relevant member s excess contributions tax that is payable in respect of the member s concessional and/or nonconcessional contributions for a particular year. The liability for excess contributions tax will be recognised when the relevant release authorities are received from members, as the Trustee considers this is when it can be reliably measured. The excess contributions tax liability recognised by the Fund will be charged to the relevant members accounts. (l) No-TFN Contributions Tax Where a member does not provide their tax file number to a fund, the fund may be required to pay no-tfn contributions tax at a rate of 34% which is in addition to the concessional tax rate of 15% which applies to the Fund s assessable income. The no-tfn contributions tax liability recognised by the Fund will be charged to the relevant members accounts. Where a tax offset is obtained by the Fund in relation to members no-tfn contributions tax, the tax will be included in the relevant members accounts. Page 14
3. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (m) Financial Instruments Recognition The Fund recognises financial assets and financial liabilities on the date it becomes a party to the contractual provisions of the instrument. Financial assets are initially recognised using trade date accounting. From this date, any gains and losses arising from changes in fair value of the financial assets or liabilities are recorded. Financial liabilities are not recognised unless one of the parties has performed or the contract is a derivative contract not exempt from the scope of AASB139. Measurement Financial instruments are initially measured at cost, being the fair value of the consideration given. Subsequent to initial recognition all financial instruments are valued at fair value. Derecognition of Financial Assets and Liabilities A financial asset is derecognised when the rights to receive cash flows from the asset have expired or the Fund transfers substantially all the risks and rewards of ownership of the asset. A financial liability is derecognised when the obligation under the liability is discharged, cancelled or expires. (n) Structured Entities A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity. This could be the case where voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. The Fund invests in other funds for the purpose of capital appreciation. The investee funds objectives range from achieving medium to long term capital growth. The investee funds invest in a number of different financial instruments, including equities and debt instruments. The size of a related investee fund is indicated by the net asset value of the fund per the investee funds balance sheet. For unrelated funds, size is indicated by the carrying value of the Fund s investment as recognised on the Fund s balance sheet as at reporting date as there is no other exposure to the Fund other than the carrying value of its investment. The exposure to investments in investee funds at fair value, by individual fund is disclosed in Note 8 to the financial statements. 4. MEMBER LIABILITIES The entitlements of members to benefit payments are recognised as liabilities. They are measured at the amount of the accrued benefits as at the reporting date, being the benefits that the Fund is presently obliged to transfer to members or their beneficiaries in the future as a result of the membership up to the end of the reporting period. The Fund has two sections, comprising the Defined Benefit liabilities and the Accumulation liabilities. The Defined Benefit section is closed to new members with new members joining the Accumulation section. Note that a defined benefit member will have both a defined benefit and an accumulation benefit. (a) Defined contribution member liabilities Obligations relating to member entitlements are recognised as member liabilities. Defined contribution member liabilities are measured as the amount of member account balances as at reporting date. Vested benefits are benefits that are not conditional upon continued membership of the Fund (or any factor other than resignation from the Fund) and include benefits which members were entitled to receive had they terminated their Fund membership as at the reporting date. At the end of the period the defined contribution member liabilities which represent the vested benefits for those members are as follows: Vested Benefits 1,062,660 906,050 Defined contribution members bear the investment risk relating to the underlying assets of the Fund. Employer contributions for defined contribution members (including the members who have a frozen defined benefit) were paid at the rate or rates agreed. Page 15
4. MEMBER LIABILITIES (CONTINUED) (b) Defined benefit member liabilities The Actuarial Value of Accrued Benefits represents the total value in current dollars of the defined benefit members accrued benefits in respect of their membership up to the investigation date allowing for future salary increases, investment earnings and expected incidence and type of payment. The actuarial value of the accrued benefits at 30 June is as follows: Actuarial Value of Accrued Benefits 65,665 72,407 Assets related to defined benefits 78,364 82,565 The assumptions used in calculating the Actuarial Value of Accrued Benefits are as follows: Investment earnings 6.00% per annum (previously 7.00%) Salary inflation increase 3.0% per annum for the next two financial years Longer term salary increase rate assumption is 5.0% per annum Defined benefit accounts are credited with the actual investment return (net of investment fees and tax) from the underlying assets Expenses incurred in the administration of the Defined Benefit section are assumed to be 0.3% of assets per annum (previously 0.4%) The eventual costs of the benefits will depend on the Fund experience rather than on the assumptions. The actuary considers that the material risks to the funding of the Fund are as follows: Investment returns being lower than expected; Salary increases being higher than expected; The employer being unable to make the recommended contributions; Any large downsizing of the membership, when the VBI is less than 100%; The occurrence of a catastrophic event leading to a significant number of deaths or disablements of members. The Trustee monitors the financial position on a regular basis and as such would identify if the funding position is deteriorating as a result of adverse experience, including adverse investment returns, salary increases and exits. The impact of the reasonably possible changes in these key assumptions are shown below: The future rate of investment return ±1% (2016: ±1%). Reasonable possible change in key assumptions Increase in future rate of investment return and no change in other assumptions 2,575 2,839 Decrease in future rate of investment return and no change in other assumptions (2,003) (2,208) The Actuary has provided the Trustee with a Funding and Solvency Certificate dated 1 April 2015 for the period 1 April 2015 to 31 March 2020. The Actuary recommended that employer contributions in respect of defined benefit entitlements be frozen, however should the Fund experience be worse that assumed, they may need to review the employer contribution program before the next actuarial investigation is due on 30 June 2019. 5. GUARANTEED BENEFITS No guarantees have been made in respect of any part of the liability for accrued benefits. Page 16
6. INSURANCE ARRANGEMENTS The Fund provides death and disability benefits to its members. The Trustee has a group policy in place with a third party insurance company to insure these death and disability benefits for the members of the Fund. The Fund collects premiums from members on behalf of the insurance company. Insurance claim amounts are recognised where the insurer has agreed to pay the claim. Therefore insurance premiums are not revenues or expenses of the superannuation entity and do not give rise to insurance contract liabilities or reinsurance assets. Insurance premiums charged to members accounts and reinsurance recoveries allocated are recognised in the statement of changes in members benefits. The Trustee determined that the Fund is not exposed to material insurance risk because: members (or their beneficiaries) will only receive insurance benefits if the external insurer pays the claim insurance premiums are only paid through the Fund for administrative reasons, and insurance premiums are effectively set directly by reference to premiums set by an external insurer. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair Value of Financial Instruments The table below analyses financial instruments carried at fair value, which the trustee has determined is a reasonable estimation of the fair value of investments, by valuation method. The different levels have been defined as follows: Level 1: quoted prices (unadjusted) in active markets for identical assets and liabilities Level 2: valuation technique for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable Level 3: valuation technique for which the lowest level input that is significant to the fair value measurement is not observable. The Fund invests in two different classes of investments: mandates where the securities are held directly by the Fund s custodian and those held through collective investment vehicles. The investments held by the custodian generally include securities listed and traded on a recognised exchange, and liquid securities which trade in recognised primary and secondary markets. For both of these transparent and observable pricing exists. Collective investment vehicles are managed by an investment manager within a regulated structure (unit trust, corporate structure or partnership). The investments can include listed or liquid securities as above and unlisted investments. Transparent and observable pricing exists for the listed and liquid investments. Each unlisted investment will have its own discrete valuation process. Principles for unlisted investment valuation The Fund recognises that the best types of valuations for unlisted investments are those that are independently performed by skilful external valuers that are not affiliated with the investment manager of the collective investment vehicle. These valuers should be using an approved process/ methodology, with a clear frequency and consistency of method. The method of setting interim valuations should also be clear, as should the risk from using any models in the valuation process. Assumptions and parameters should also be clear in each valuation. The Fund recognises that some products may not have independent external valuations. Where internal valuations are performed the Fund will assess the extent of independent oversight of the setting of valuation parameters, the extent of model risk, and the clarity of assumptions in the valuations. The valuation of private equity investments also poses significant challenges since general partners rely on internally set net asset values. In assessing private equity valuations the Fund will look for general partner endorsement of generally accepted accounting principles. Page 17
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 30 June 2017 Level 1 Level 2 Level 3 Total Financial assets at fair value through profit or loss - Directly Held Australian Shares 16,851 - - 16,851 - Directly Held International Shares 52,313 - - 52,313 - Pooled Superannuation Trusts - 93,668-93,668 - Units in Unit Trusts 336,475 653,955-990,430 405,639 747,623-1,153,262 The following table shows a reconciliation of the movement in the fair value of financial instruments categorised within Level 3 between the beginning and the end of the reporting period. Unlisted Unlisted PST Asset Total Equity and managed backed securities investment securities schemes Opening balance - - - - Total realised and unrealised gains/(losses) - - - - Purchases - - - - Sales - - - - Reclassification to Level 2 - - - - Closing balance - - - - 30 June 2016 Level 1 Level 2 Level 3 Total Financial assets at fair value through profit or loss - Directly Held Australian Shares 15,300 - - 15,300 - Directly Held International Shares 41,952 - - 41,952 - Pooled Superannuation Trusts - 76,344-76,344 - Units in Unit Trusts 330,730 535,441-866,171 387,982 611,785-999,767 The following table shows a reconciliation of the movement in the fair value of financial instruments categorised within Level 3 between the beginning and the end of the reporting period. Page 18
7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) Unlisted Unlisted PST Asset Total Equity and managed backed securities investment securities schemes Opening balance - - - - Total realised and unrealised gains/(losses) - - - - Purchases - - - - Sales - - - - Reclassification to Level 2 - - - - Closing balance - - - - 8. INVESTMENTS Holding% Holding% Managed Portfolios Tribeca Investment Partners Australia Equities Portfolio 25.28% 17,910 28.69% 17,307 Sanders Capital 74.72% 52,930 71.31% 43,007 Total Managed Portfolios 100% 70,840 100% 60,314 Pooled Superannuation Trusts IFM Australian Infrastructure Unit Class 25.19% 23,599 27.62% 21,084 IFM International Infrastructure 74.81% 70,069 72.38% 55,260 Total Pooled Superannuation Trusts 100% 93,668 100% 76,344 Page 19
8. INVESTMENTS (CONTINUED) Holding% Holding% Unit Trusts AMP Responsible Investment Leaders Balanced Fund 0.54% 5,377 0.50% 4,294 Barings Global Fund Trust (prev BCA) 3.72% 36,817 3.90% 33,703 BlackRock Global Bond Index Fund 3.82% 37,875 2.37% 20,435 BlackRock Whsle Indexed Aust Bond Fund 3.93% 38,971 4.01% 34,659 Fiduciary International Real Estate 3 0.19% 1,883 0.24% 2,044 Fortius Active Property Trust No 1 0.02% 213 0.03% 225 Gardior Funds 3.65% 36,143 3.94% 34,018 IFM Australian Equity Index Fund 3.71% 36,765 4.83% 41,699 IFM Australian Infrastructure Whlsle Fund 0.94% 9,272 0.17% 1,509 Industry Super Holdings 0.05% 456 0.04% 380 Invesco Wholesale Global Target Fund 2.12% 21,041 - - Investa Commercial Property Fund 3.55% 35,143 3.58% 30,949 ISPT No 1 2.92% 28,893 2.83% 24,473 ISPT No 2 1.16% 11,471 1.20% 10,377 ISPT Retail Australia Property Trust 1.94% 19,255 2.10% 18,173 Lazard Emerging Market Equity Fund 2.15% 21,324 2.10% 18,122 Macquarie IFP Global Franchise Fund 5.42% 53,635 5.26% 45,462 Maple-Brown Abbott Australian Equity Trust 8.31% 82,342 8.69% 75,092 Members Equity Bank Pty Ltd 0.04% 427 0.05% 428 MFS Global Equity Trust 5.56% 55,055 5.64% 48,701 Newbury Equity Partners II (Cayman) LP 0.23% 2,295 0.41% 3,577 Oaktree Mezzanine Fund Ill, L.P. Class A 0.00% 5 0.00% 1 Oaktree Mezzanine Fund Ill, L.P. Class B 0.40% 3,945 0.67% 5,775 P.A Private Capital Fund 1 0.00% 22 0.02% 151 P.A Private Capital Fund 2 0.00% 17 0.01% 115 P.A Private Capital Fund 4 0.09% 901 0.22% 1,931 Paradice Mid Cap Fund 3.70% 36,618 3.58% 30,909 PIMCO Target Return Fund 1.54% 15,278 1.70% 14,662 Pinebridge Global Dynamic Absolute Return 1.82% 17,990 1.96% 16,933 QIC Cash Fund 12.46% 123,442 14.20% 122,558 QIC Property Fund 4.27% 42,297 4.47% 38,603 ROC Alternative Investment Trust III 0.04% 417 0.09% 805 ROC Alternative Investment Trust IV 0.10% 944 0.13% 1,160 ROC Alternative Investment Trust V 0.25% 2,519 0.34% 2,914 ROC Alternative Investment Trust VI 1.41% 13,967 1.40% 12,131 Sands Capital Emerging Market Growth Feeder Fund 2.48% 24,521 1.86% 16,035 Schroder Australian Equity Fund 10.99% 108,825 10.45% 90,170 Siguler Guff Distressed Opp Fund Ill (F) LP 0.17% 1,656 0.26% 2,283 SSgA -Global Index Plus Unhedged Trust 4.44% 43,938 5.80% 50,117 Super Loans Trust 0.01% 76 0.02% 191 Westbourne Yield Fund No.1 0.00% 12 0.36% 3,106 Westbourne Infrastructure Debt 2 1.51% 14,920 - - Wilshire Australian Private Markets No.2 Fund 0.35% 3,458 0.57% 4,902 Unsettled transactions 0.00% 9 0.00% - Total Unit Trusts 100% 990,430 100% 863,772 TOTAL INVESTMENTS - 1,154,938-1,000,430 Page 20
9. FINANCIAL RISK MANAGEMENT The Trustee recognises that it is important for the members of the Fund, and their beneficiaries, to be assured that the prudential management of the Fund is being undertaken with continuous and appropriate risk identification and management strategies are being put in place and utilised. Risk Management is recognised as critical to the effective operation of the Fund. The Trustee undertakes a formal risk assessment process at least annually when assessing the risks associated with operating the Fund, both internally and externally. This formal risk assessment process is included in the Board s annual strategic and/or business planning activities. State Street Australia Limited acts as custodian for the Fund. The investments of the Fund (other than cash held for liquidity purposes) consist of direct equity mandates, units in collective investment vehicles such as life office investment policies, managed investment funds and pooled superannuation trusts. The Trustee has determined that these types of investments are appropriate for the Fund and are in accordance with the Fund's published investment strategy. The investment manager(s) of the collective investment vehicle(s) will have invested in a variety of financial instruments, including derivatives which expose the Fund's investments to a variety of investment risks, including market risk, credit risk, interest rate risk and currency risk. The investment manager(s) provide regular reports on the Fund's investment to the Trustee. The Trustee seeks information from the trustee and/or manager of each proposed collective investment (and may also seek independent advice from other qualified persons) so as to determine the nature and extent of any risks, and the expected returns, associated with each investment prior to determining its suitability as an investment for the Fund. Each investment manager is required to invest the assets managed by it in accordance with the terms of a written investment mandate. The Trustee has determined that the appointment of these managers is appropriate for the Fund and is in accordance with the Fund s investment strategy. The allocation of assets between the various types of financial instruments is determined by the Trustee who manages the Fund s portfolio of assets to achieve the Fund s investment objectives. Divergence from target asset allocations and the composition of the portfolio is monitored by the Fund on at least a quarterly basis. The Fund s investing activities expose it to the following risks from its use of financial instruments: market risk credit risk liquidity risk The nature and extent of the financial instruments employed by the Fund are discussed below. This note presents information about the Fund s exposure to each of the above risks, the Fund s objectives, policies and processes for measuring and managing risk. The Trustee of the Fund has overall responsibility for the establishment and oversight of the Fund s risk management framework. Categories of financial instruments The assets and liabilities of the Fund are recognised at fair value as at reporting date. are recognised through the Income Statement. Changes in fair value Page 21
9. FINANCIAL RISK MANAGEMENT (CONTINUED) Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Fund s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return on risk. Currency Risk Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Fund is exposed to currency risk on financial instruments, receivables and liabilities that are denominated in a currency other than the respective functional currency (Australian Dollars) of the Fund. The Fund also invests in Australian domiciled unit trusts where the underlying investments are in overseas equities. The financial instruments presenting direct exposure to currency risk are the investments in Siguler Guff Distressed Opportunities Fund, Fiduciary International Real Estate 3, Newbury Equities Partners II (Cayman) LP, Oaktree Mezzanine Fund III, Sands Capital Emerging Market Growth Feeder and Sanders Capital share portfolio. The Fund s strategy on the management of currency risk is driven by the Fund s investment objectives. The Fund may invest in financial instruments and enter into transactions denominated in currencies other than its functional currency. Consequently, the Fund is exposed to risks that the exchange rate of its currency relative to other foreign currencies may change in a manner that has an adverse affect on the value of that portion of the Fund s assets or liabilities denominated in currencies other than the Australian Dollar. The Fund's currency risk is monitored on a monthly basis by the Asset Consultant in accordance with the asset allocations as outlined in the Fund's product disclosure statement and investment strategy. This includes monitoring the investment's performance against identified benchmarks. The Fund's investment managers may use derivative financial instruments to reduce risks in the currency markets and to increase or decrease the Fund's exposure to particular investment classes or markets The Fund s major exposure to fluctuations in foreign currency exchange rates through its monetary assets at the balance date was as follows: Fair Value Fair Value Assets USD 73,406 62,484 EUR 3,681 3,775 GBP 4,147 3,976 CHF 3,362 1,853 JPY 2,389 1,540 Other 1,989 1,141 Sensitivity analysis The Trustee has determined that for the coming year the reasonably possible change for all currencies is 15% (2016: 15%). A rate increase would decrease the Fund s net assets available for member benefits by $13,346,072 (2016: $9,372,614) and a rate decrease would increase the assets of the Fund by $13,346,072 (2016: $9,372,614). This analysis assumes that all other variables, in particular interest rates, remain constant. The comparative analysis was performed on the same basis as 2016. Page 22
9. FINANCIAL RISK MANAGEMENT (CONTINUED) Interest rate risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The majority of the Fund s financial assets comprise non-interest-bearing and interest bearing financial instruments. Interest-bearing financial assets and interest-bearing financial liabilities mature or re-price due to market changes. As a result, the Fund is subject to exposure to fair value interest rate risk due to fluctuations in the prevailing levels of market interest rates. The Fund also invests in Australian domiciled unit trusts where the underlying investments are in fixed interest securities. The Fund s major exposure to fluctuations in interest rates at balance date was as follows: 2017 Investment Floating Interest Rate Fixed Interest Rate Noninterest Bearing Total Cash 6,854 - - 6,854 Shares in listed companies - - 68,020 68,020 Pooled superannuation trusts - - 93,668 93,668 Units in Unit Trusts - 252,468 739,106 991,574 Total 6,854 252,468 900,794 1,160,116 Weighted average interest rate: 1.75% 2016 Investment Floating Interest Rate Fixed Interest Rate Noninterest Bearing Total Cash 7,279 - - 7,279 Shares in listed companies - - 57,252 57,252 Pooled superannuation trusts - - 76,344 76,344 Units in Unit Trusts - 226,209 639,524 865,733 Total 7,279 226,209 773,120 1,006,608 Weighted average interest rate: 1.75% Sensitivity analysis The Trustee has determined that a reasonable possible change in interest rates for the coming year is 175 basis points (2016: 175 basis points). An increase or decrease of 175 basis points in interest rates would have decreased or increased the net assets available for members and the net income from superannuation activities after tax by $101,959 (2016: $108,273). As the interest rate on the Fund s bank account is a floating rate and varies with market interest rates, any change in interest rates will have no impact on the valuation of the account. The amount of interest the Fund receives after interest rate changes is dependent on the Fund s bank balance in the future. Other market price risk Other market price risk is the risk that the value of the instrument will fluctuate as a result of changes in market prices, whether caused by factors specific to an individual investment, its issuer or all factors affecting all instruments traded in the market. As the Fund s financial instruments are valued at fair value with changes in fair value recognised in the Income Statement, all changes in market conditions will directly affect investment revenue. Page 23