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9 Financial information
9
Section 9 Financial information
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9.1 OVERVIEW
The Fund is a managed investment scheme structured as a comprised of two stapled unit trusts, which were registered with ASIC on 7 February 2020.
As at the date of this PDS, the Fund has 874,993 Stapled Units on issue to the Existing Unitholders and has $1.75 million in issued equity outstanding.
This Financial Information set out in this Section 9 has been prepared by the Directors of the Responsible Entity for the Fund, which comprises: • The unaudited historical consolidated statement of financial position (Historical Financial Information) and pro forma consolidated statement of financial position (Pro Forma Historical Financial Information) as at 31 December 2019 (see
Section 9.2); • Directors’ material assumptions used in the preparation of the Pro Forma Historical Financial Information (see Section 9.3); • Capital structure of the Fund on completion of the Offer (see Section 9.4); • Pro forma cash of the Fund (see Section 9.5); and • Significant accounting policies of the Fund (see Section 9.6).
The Historical Financial Information and Pro Forma Historical Financial Information as defined above has been reviewed by PricewaterhouseCoopers Securities Ltd, which provided an Independent Limited Assurance Report on the Historical and Pro Forma Historical Financial Information in Section 12.
The information in this Section 9 should also be read in conjunction with the Risks set out in Section 8 and other information contained in this PDS.
The table below sets out the Historical Financial Information, the pro forma adjustments that have been made to it (further described in Section 9.3) and the Pro Forma Historical Financial Information as at 31 December 2019.
The Pro Forma Historical Financial Information is intended to be illustrative only and will not reflect the actual position and balances of the Fund as at the date of this PDS or at the completion of the Offer. The Historical and Pro Forma Historical Financial Information has been prepared in accordance with the principles and significant accounting policies set out in Section 9.6.
31 December 2019
Assets Cash and cash equivalents Total Current Assets
Financial assets at fair value through profit or loss Total Non-Current Assets
Total Assets
Total Liabilities
Equity Issued Equity Total Equity Net Assets attributable to Unitholders
Directors’ material assumption note (see Section 9.3) Pro Forma Historical Historical Financial Financial Information Pro Forma Information ($’000) ($’000) ($’000)
9.3.1
- 98,250 98,250 - 98,250 98,250 1,750(1) - 1.750
1,750
- 1,750 1,750 98,250 100,000
9.3.1; 9.3.2 1,750(1)
98,250 100,000 1,750 98,250 100,000 1,750 98,250 100,000
Section 9 Financial information
Notes: (1) Cash acquisition of minority interest in Cardioscan for $1.62 million; plus additional acquisition of Cardioscan shares from Dennison
Hambling in exchange for issued equity in the Fund for $0.13 million. This investment will be accounted for at fair value through profit or loss. Equity in the Fund was issued at $2.00 per Stapled Unit, while shares in Cardioscan were valued at $0.206 per share at the date of acquisition and exchange, respectively. Refer to section 5.2 for details on the initial asset.
The Pro Forma Historical Financial Information has been prepared by the Directors of the Responsible Entity as if the following transactions and events, which are to take place on or before completion of the Offer, had occurred as at 31 December 2019:
9.3.1 As no minimum or maximum subscription is mandated, it is assumed that after the Offer $100.0 million of Stapled Units will have been issued. This amounts to the issue of 49,125,007 fully paid Stapled Units by Applicants under this PDS at an issue price of $2.00 per Stapled Unit; and 9.3.2 The initial costs and expenses to establish the Offer are to be paid by the 360 Capital Group.
9.4 PRO FORMA CAPITAL STRUCTURE
Set out below is a reconciliation of the anticipated capital structure of the Fund as is the transactions and events, contemplated in Section 9.3, had occurred as at 31 December 2019.
Opening balance Offer
Pro forma issued equity
Directors’ material assumption note
No. of Stapled Units Pro Forma
Issued Equity ($’000) NAV per Stapled Unit1
874,993 1,750 $2.00 9.3.1 49,125,007 98,250 $2.00 50,000,000 100,000 $2.00
9.5 PRO FORMA CASH
Set out below is the anticipated capital structure of the Fund as is the transactions and events, contemplated in Section 9.3, had occurred as at 31 December 2019.
Opening balance Offer
Pro forma cash
Directors’ material assumption note Pro Forma ($’000)
9.3.1 98,250 98,250
The proceeds of the Offer will be used to execute the investment strategy, as outlined in Section 5.1.
9.6 SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies that have been adopted in the preparation of the Financial Information set out in Section 9.2, and which will be applied prospectively in the preparation of the financial statements of the Fund for the financial year ending 30 June each year, is set out as follows:
9.6.1 Basis of preparation
The Historical and Pro Forma Historical Financial Information has been prepared in accordance with the recognition and measurement principles contained in Australian Accounting Standards (AAS) and interpretations and other authoritative pronouncements of the Australian Accounting Standards Board (“AASB”) and the Corporations Act.
AAS sets out an accounting framework that the AASB has concluded would result in a financial report containing relevant and reliable information about transactions, events and conditions to which they apply. Compliance with AAS ensures that the Historical and Pro Forma Historical Financial Information and notes also comply with the recognition and measurement requirements of International Financial Reporting Standards (“IFRS”).
The Historical Financial Information has been derived from its unaudited trial balance as at 31 December 2019, on which no audit opinion or limited assurance conclusion has been issued. This date has been chosen as it is the date on which the latest financial information was available.
The financial information presented in this PDS is presented in an abbreviated form and does not contain all of the presentation and disclosures that are usually provided in an annual report prepared in accordance with AAS. The Pro Forma Historical Financial Information has been prepared on the basis of the assumptions outlined in Section 9.3.
9.6.2 Functional and presentation currency
The Historical and Pro Forma Historical Financial Information is presented in Australian dollars, which is the Fund’s functional currency.
9.6.3 Use of estimates and judgements
The preparation of the Historical and Pro Forma Historical Financial Information requires management to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The Fund will make judgements, estimates and assumptions associated with the measurement of its financial assets, including estimating the loss allowance for assets measured at amortised cost and in measuring fair value. These estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgements about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
The 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 if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
9.6.4 Consolidation (i) Stapling
On 26 November 2019, 360 Capital Active Value Equity Fund was formed by stapling together units of the 360 CEIT and 360 CEAT. The Fund determined that 360 CEIT is the parent entity in the stapling arrangement.
For statutory reporting purposes, the Fund reflects the consolidated entity being 360 CEIT (the parent) and its controlled entities. On the basis that 360 CEIT does not hold any interest in 360 CEAT, the net assets, profit or loss and other comprehensive income of 360 CEAT are considered non-controlling interests and are therefore disclosed separately.
The Constitutions of 360 CEIT and 360 CEAT ensure that, for so long as these entities remain jointly stapled, the number of units in 360 CEIT and the number of units in 360 CEAT shall be equal and that securityholder in both Trusts be identical. Both the Responsible Entity of 360 CEIT and 360 CEAT must at all times act in the best interest of consolidated entity.
The stapling arrangement will cease upon the earlier of the winding up of any of the stapled entities, or any of the entities terminating the stapling arrangement.
Section 9 Financial information
(ii) Controlled entities The consolidated financial statements will comprise the financial statements of the Fund and its subsidiaries. Subsidiaries are entities (including structured entities) over which the Fund has control. Subsidiaries will be consolidated under AASB10 and IFRS10 on the basis that the Fund has control and the Fund will prepare consolidated financial statements.
Control is achieved when the Fund:
(i) has the power over each respective investee; (ii) is exposed, or has rights, to variable returns from its involvement with the investee; and (iii) has the ability to use its power to affect its returns.
The Fund will reassess whether or not it controls each respective investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Fund has less than a majority of voting rights of in a investee, it considers that it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Fund considers all relevant facts and circumstances in assessing whether or not the Fund’s voting rights in each respective investee are sufficient to give it power, including:
(i) the size of the Fund’s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; (ii) potential voting rights held by the Fund, other vote holders or other parties; (iii) rights arising from other contractual arrangements; and (iv) any additional facts and circumstances that indicate that the Fund has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders’ meetings. Consolidation of a subsidiary begins when the Fund obtains control over the subsidiary and ceases when the Fund loses control of the subsidiary.
Profit or loss and each component of other comprehensive income are attributed to the owners of the Fund and to the non-controlling interests. Total comprehensive income of the subsidiaries is attributed to the owners of the Fund and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with the Fund’s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between the members are eliminated on consolidation.
(iii) Investments in associates and joint ventures Investments in associates and joint ventures are accounted for using the equity method. Under the equity method, the investment in an associate or a joint venture is initially recognised at cost. The carrying amount of the investment is adjusted to recognise changes in the Fund’s share of net assets of the associate or joint venture since the acquisition date.
The Fund’s share of net profit or loss is recognised in the statement of profit or loss from the date joint control commences until the date joint control ceases. Other movements in reserves are recognised directly in the consolidated reserves.
The Fund classifies its financial assets as subsequently measured at amortised cost, measured at fair value through other comprehensive income or measured at fair value through profit or loss on the basis of both the entity’s business model for managing the financial assets and the contractual cash flow characteristics of the financial asset.
a) Financial assets measured at fair value through profit or loss A financial asset is measured at fair value through profit or loss if:
(i) its contractual terms do not give rise to cash flows on specified dates that are solely payments of principal and interest on the principal amount outstanding; or (ii) it is not held within a business model whose objective is either to collect contractual cash flows, or to both collect contractual cash flows and sell; or (iii) at initial recognition, it is irrevocably designated as measured at fair value through profit or loss when doing so eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognising the gains and losses on them on different bases.
b) Financial assets measured at fair value through other comprehensive income A financial asset is measured at fair value through other comprehensive income if it is held within a business model whose objective is achieved by collecting the contractual cash flows as well as selling financial assets, and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
c) Financial assets measured at amortised cost A financial asset is measured at amortised cost if it is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and its contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Financial liabilities a) Financial liabilities measured at amortised cost This category includes all financial liabilities that will subsequently be measured at amortised cost. The Fund includes short-term payables in this category.
(ii) Recognition and derecognition The Fund recognises a financial asset or a financial liability when, and only when, it becomes a party to the contractual provisions of the instrument. Purchases or sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the marketplace are recognised on the trade date, i.e. the date that the Fund commits to purchase or sell the asset.
Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or the Fund has transferred substantially all the risks and rewards of ownership. Financial liabilities are derecognised when the obligations under the liabilities are discharged.
(iii) Initial measurement Financial assets and financial liabilities held at fair value through profit or loss are recorded in the statement of financial position at fair value. All transaction costs for such instruments are recognised directly in profit or loss.
Financial assets and liabilities (other than those classified as at fair value through profit or loss) are measured initially at their fair value plus/minus any directly attributable incremental costs of acquisition or issue.
(iv) Subsequent measurement After initial measurement, the Fund measures financial instruments which are classified as at fair value through profit or loss at fair value. Subsequent changes in the fair value of those financial instruments are recorded in the statement of comprehensive income.
Financial assets and liabilities, other than those classified as at fair value through profit or loss, are subsequently measured using the effective interest method and financial assets are subject to impairment. Gains and losses are recognised in profit or loss when the asset or liability is derecognised, modified or impaired.
Section 9 Financial information
(v) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market for the asset or liability. The principal or the most advantageous market must be accessible to the Fund.
The fair value for financial instruments traded in active markets at the reporting date is based on their quoted price without any deduction for transaction costs.
For all other financial instruments not traded in an active market, the fair value is determined using valuation techniques deemed to be appropriate in the circumstances. Valuation techniques include the market approach (i.e. using recent arm’s length market transactions, adjusted as necessary, and reference to the current market value of another instrument that is substantially the same) and the income approach (i.e. discounted cash flow analysis and option pricing models making as much use of available and supportable market data as possible).
(vi) Fair value hierarchy All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:
(i) Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities. (ii) Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. (iii) Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
Assessing the significance of a particular input requires judgement, considering factors specific to the asset or liability.
(vii) Impairment At each reporting date, the Fund shall measure the loss allowance on financial assets at amortised cost at an amount equal to the lifetime expected credit losses if the credit risk has increased significantly since initial recognition. If, at the reporting date, the credit risk has not increased significantly since initial recognition, the Fund shall measure the loss allowance at an amount equal to 12-month expected credit losses. Significant financial difficulties of the counter party, probability that the counter party will enter bankruptcy or financial reorganisation, and default in payments are all considered indicators that credit loss has increased significantly. If the credit risk increases to the point that it is considered to be credit impaired, interest income will be calculated based on the gross carrying amount adjusted for the loss allowance.
The Responsible Entity does not currently intend for the Stapled Units in the Fund to be listed on the ASX. The Stapled Units issued by the Fund have been classified as equity.
9.6.7 Investment income
Interest income is recognised in the statement of comprehensive income for all interest-bearing financial instruments using the effective interest method.
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 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 instrument. 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.
9.6.8 Expenses
All expenses are recognised in the statement of comprehensive income on an accruals basis.
Interest expense, if any, is recognised in the statement of comprehensive income as it accrues, using the effective interest method.
9.6.9 Distributions
The Fund will distribute its income, in accordance with the Fund’s Constitution, to Unitholders in cash at the discretion of the Responsible Entity. Distributions to Unitholders are recognised directly in equity and presented in the statement of changes in equity. A distribution payable is recognised in the statement of financial position where the amount remains unpaid at the reporting date.
9.6.10 Australian Income Tax
The Responsible Entity of 360 CEIT intends to make an election to be an Attribution Managed Investment Trust (AMIT) where the Trust is eligible to do so. Investors will be advised if this election is made.
Under current income tax legislation, 360 CEIT should not be subject to income tax provided that in relation to each financial year either Stapled Unitholders are made presently entitled to all of the net income/taxable income of the Trust (if the Trust is not an AMIT) or all of the taxable income and tax offsets of the Trust are fully attributed to Stapled Unitholders (if the Trust is an AMIT).
360 CEAT will be considered to be a separate taxable entity from Stapled Unitholders and will be liable to Australian income tax at the top corporate rate (currently 30%, or at the rate of 27.5% where it qualifies as a ‘base rate entity’) on its net income (for non-base rate companies). This reduces the amount available for distribution to Stapled Unitholders.
Deferred income tax is provided in full, using the balance sheet method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. However, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance date and are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Deferred tax assets are reduced to the extent that is no longer probable that the related tax benefit will be realised.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances relate to the same taxation authority. Current tax assets and tax liabilities are offset where the Fund has a legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity.
9.6.11 Australian Goods and Services Tax (GST)
The Fund will be registered for GST. The issue or redemption of Stapled Units in the Fund will not be subject to GST. The Fund may be required to pay GST on management and other fees, charges, costs and expenses incurred by the Fund. However, the Fund may be entitled to input tax credits and reduced input tax credits in respect of the GST incurred.
Revenues, expenses and assets are recognised net of the amount of GST, unless GST incurred is not recoverable from the ATO. In this case it is recognised as part of the cost of acquisition of the asset or as part of the expense.
Receivables and payables are stated inclusive of the amount of GST receivable or payable. The net amount of GST recoverable from, or payable to, the tax authority is included in other receivables or other payables in the statement of financial position.
Section 9 Financial information
9.6.12 Cash and cash equivalents
Cash and cash equivalents includes cash at bank, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.
9.6.13 Foreign currency translation
Foreign currency transactions are translated into Australian dollars using the exchange rates prevailing at the date of the transaction. 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 as net foreign exchange gains/(losses) in the statement of comprehensive income.
Non-monetary items that are measured at fair value in a foreign currency are translated using the exchange rates at the date when fair value was determined. Translation differences on assets and liabilities carried at fair value are reported in the statement of comprehensive income within net gains/(losses) on financial instruments held at fair value.
9.6.14 Derivatives
In the normal course of business, the Fund may enter into transactions in various derivative financial instruments with certain risks. A derivative is a financial instrument or other contract which is settled at a future date and whose value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index or other variable. Derivative financial instruments require no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors. Derivative transactions include many different instruments, such as forwards, futures, options and swaps. Derivatives are considered to be part of the investment process and the use of derivatives may form part of the Fund’s portfolio management. If derivatives are entered into by the Fund, a decision on whether to apply hedge accounting will made at that time.
The Fund may hold derivative instruments, namely foreign currency contracts and interest rate futures. Refer to Section 14.2.1 for more information regarding the use of derivatives by the Fund.
9.6.15 Earnings per Stapled Unit
Earnings per Stapled Unit are calculated by dividing the profit or loss of the Fund by the weighted average number of Stapled Units outstanding during the financial period.
