NOTES TO THE FINANCIAL STATEMENTS 30 JUNE 2016 NOTE 1. BASIS OF PREPARATION These general purpose financial statements have been prepared in accordance with Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board (‘AASB’) and the Corporations Act 2001, as appropriate for for-profit oriented entities. These financial statements also comply with International Financial Reporting Standards as issued by the International Accounting Standards Board (‘IASB’). Historical cost convention The financial statements have been prepared under the historical cost convention, except for the revaluation of derivative financial instruments at fair value. Net current asset deficiency As at 30 June 2016, Vocus’ current liabilities exceeded its current assets by $66,880,000. Vocus is satisfied that it will be able to meet all its obligations as they fall due given its strong profitability and operating cash flows, existing cash reserves and available finance facilities. Critical accounting estimates The preparation of the financial statements requires the use of certain critical accounting estimates. It also requires management to exercise its judgement in the process of applying Vocus’ accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements, are disclosed in note 2. Parent entity information In accordance with the Corporations Act 2001, these financial statements present the results of Vocus (as a Consolidated entity) only. Supplementary information about the parent entity is disclosed in note 39. NOTE 2. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS The preparation of the financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts in the financial statements. Management continually evaluates its judgements and estimates in relation to assets, liabilities, contingent liabilities, revenue and expenses. Management bases its judgements, estimates and assumptions on historical experience and on other various factors, including expectations of future events, management believes to be reasonable under the circumstances. The resulting accounting judgements and estimates will seldom equal the related actual results. The judgements, estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities (refer to the respective notes) within the next financial year are discussed below. Estimation of useful lives of assets The estimated useful lives and related depreciation and amortisation charges for its property, plant and equipment and finite life intangible assets is determined by the Company. The useful lives could change significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where the useful lives are less than previously estimated lives, or technically obsolete or non-strategic assets that have been abandoned or sold will be written off or written down. Goodwill and other indefinite life intangible assets The recoverable amount of the Australia and New Zealand CGU’s have been determined based on a fair value less costs of disposal calculation. In assessing fair value less costs of disposal, Vocus estimates post tax future cash flows including expected synergistic benefits from recent mergers, further capital expenditure and a long term growth rate assumption, and discounts these cash flows using a post-tax rate. These assumptions require managements’ judgement and are based on market expectations. 50 | VOCUS.COM.AU NOTE 2. CRITICAL ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS (continued) Impairment of non-financial assets other than goodwill and other indefinite life intangible assets Assessments of impairment of non-financial assets other than goodwill and other indefinite life intangible assets are made at each reporting date by evaluating conditions specific to Vocus and to the particular asset that may lead to impairment. If an impairment trigger exists, the recoverable amount of the asset is determined. This involves fair value less costs of disposal or value-in-use calculations, which incorporate a number of key estimates and assumptions. Derivative financial instruments Forward foreign exchange contracts, designated as cash flow hedges, are measured at fair value. Reliance is placed on future cash flows and judgement is made on a regular basis, through prospective and retrospective testing, including at the reporting date, that the hedges are still highly effective. Business combinations As discussed in note 40, business combinations are initially accounted for on a provisional basis. The fair value of assets acquired, liabilities and contingent liabilities assumed are initially estimated taking into consideration all available information at the reporting date. Fair value adjustments on the finalisation of the business combination accounting is retrospective, where applicable, to the period the combination occurred and may have an impact on the assets and liabilities, depreciation and amortisation reported. Unbilled revenue Unbilled revenue for gas and electricity is estimated at the end of the reporting period. Customers are billed on a periodic and regular basis. Management estimates customer consumption between the last invoice date and the end of the reporting period. This is based on preliminary usage obtained from external regulators at an estimated bill rate. Various assumptions and financial models are used to determine the estimated unbilled rate. NOTE 3. OPERATING SEGMENTS Reporting segments Segment information is based on the information that management uses to make decisions about operating matters and allows users to review operations through the eyes of management. Operating segments represent the information reported to the chief operating decision makers (CODM), being the executive management team, for the purposes of resource allocation and assessment of segment performance focuses on the jurisdiction in which the services are delivered or provided. Consistent with information presented for internal management reporting purposes, the result of each segment is measured based on its EBITDA contribution. Corporate costs are allocated to segments (and included within segment EBITDA) with reference to the resources allocated to provide those services to each segment. The directors of Vocus have chosen to organise the Group around the two main jurisdictions in which the Group operates. Specifically, the Group’s reportable segments under AASB 8 are as follows: ➜➜ Australia ➜➜ New Zealand The reportable segments also represent the group’s cash-generating units for impairment testing purposes. In the prior year, Vocus operated and disclosed as a single operating segment. The prior year reporting segment information has been restated below in line with current year segments. 51 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 3. OPERATING SEGMENTS (continued) In addition to reportable segments, a summary of sales revenue by product has been provided below. Sales revenue by product set Consolidated 2016 2015 $’000 $’000 172,876 64,539 Internet 88,885 43,853 Data Centre 53,599 26,621 Voice 149,807 12,251 Consumer Telecommunications 287,355 - Fibre and Ethernet Consumer Energy 59,481 - Other 17,935 1,740 829,938 149,004 Total sales revenue Major customers During the year ended 30 June 2016 there were no customers of Vocus which contributed 10% or more of external revenue (2015: nil). Segment revenues and results Australia New Zealand Intersegment adjustments Total $’000 $’000 $’000 $’000 696,236 144,609 (10,907) 829,938 1,707 40 (868) 879 7 1 - 8 Total revenue 697,950 144,650 (11,775) 830,825 EBITDA 170,641 25,183 (868) 194,956 Depreciation and amortisation (68,103) (10,384) - (78,487) Finance costs (16,815) (8,517) 868 (24,464) 161 - - 161 85,884 6,282 - Consolidated - 2016 Revenue Sales to external customers Interest revenue Other revenue Non-controlling interest Profit before income tax expense Income tax expense 92,166 (27,914) Profit after income tax expense 64,252 Assets Segment assets 3,785,830 908,189 - Total assets 4,694,019 4,694,019 Liabilities Segment liabilities Total liabilities 52 | VOCUS.COM.AU 1,272,797 246,937 - 1,519,734 1,519,734 NOTE 3. OPERATING SEGMENTS (continued) Australia New Zealand Intersegment adjustments Total $’000 Consolidated - 2015 $’000 $’000 $’000 101,725 50,508 (3,229) 149,004 3,857 85 (3,147) 795 105,582 50,593 (6,376) 149,799 Revenue Sales to external customers Interest revenue Total revenue EBITDA 50,045 9,379 (6,382) 53,042 (12,549) (6,135) - (18,684) Finance costs (2,201) (7,019) 3,147 (6,073) Profit/(loss) before income tax expense 35,295 (3,775) (3,235) 28,285 Depreciation and amortisation Income tax expense (8,435) Profit after income tax expense 19,850 Assets Segment assets 229,251 154,093 - Total assets 383,344 383,344 Liabilities Segment liabilities 72,530 114,575 - Total liabilities 187,105 187,105 Revenue by geographical area Consolidated 2016 2015 $’000 $’000 Australia 669,257 81,937 New Zealand 148,890 58,721 Rest of World 11,791 8,346 829,938 149,004 Revenues from Rest of World customers are predominantly earned by the Australia operating segment. Accounting policy for operating segments Operating segments are presented using the ‘management approach’, where the information presented is on the same basis as the internal reports provided to the Chief Operating Decision Makers (‘CODM’). The CODM are responsible for the allocation of resources to operating segments and assessing their performance. 53 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 4. REVENUE Consolidated 2016 2015 $’000 $’000 829,938 149,004 8 - Sales revenue Rendering of services Other revenue Dividends Interest Revenue 879 795 887 795 830,825 149,799 Accounting policy for revenue recognition Revenue is recognised when it is probable that the economic benefit will flow to Vocus and the revenue can be reliably measured. Revenue is measured at the fair value of the consideration received or receivable. Rendering of services Corporate revenue is derived from the provision of internet, data centre, fibre and Ethernet and voice services to corporate and wholesale customers. Revenues are recognised on a straight-line basis over the period that services are provided. Consumer revenue is principally derived from providing telecommunication and gas and electricity services. Telecommunication services include fixed wire, mobile, data services and equipment sales. Products and services may be sold separately or in bundled packages. Revenue for fixed wire, mobile and data services are recognised as revenue when services are performed. Revenue from services provided, but unbilled, are accrued at end of each period and unearned revenue (revenue billed in advance) for services to be provided in future periods is deferred. Revenue from bundled offers is recognised when two or more activities or deliverables are sold under one single arrangement. The total fixed or determinable amount of the arrangement is allocated to the separate units of accounting based on its relative fair value. A delivered item is considered a separate unit of accounting where it has value to the customer on a stand-alone basis and the fair value of any undelivered items cannot be terminated by the customer without incurring penalties. Revenue from gas and electricity services supplied is recognised once the gas and electricity has been delivered to the customer and is measured through a regular review of usage meters. At the end of each reporting period, gas and electricity revenue includes an accrual for energy delivered to the customer but not yet billed (unbilled revenue) Revenue for equipment sales is recognised when the device is delivered to the end customer and the sale is considered complete. Commission income Commissions are received as incentives from upstream suppliers for connecting new customers. Revenue from such commissions is deferred and recognised over a period of life in line with the average period related to the customers’ contracts. Interest Interest revenue is recognised as interest accrues using the effective interest method. This is a method of calculating the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Other revenue Other revenue is recognised when it is received or when the right to receive payment is established. 54 | VOCUS.COM.AU NOTE 5. OTHER GAINS AND LOSSES Consolidated 2016 2015 $’000 Gain on early repayment of borrowings * Gain on total return swaps ** Acquisition and integration costs *** Gains/(losses) associated with foreign exchange Other gains/(losses) Other gains and losses $’000 - 5,477 19,520 7,486 (40,660) (10,400) 1,445 (629) (956) (1,257) (20,651) 677 * The gain on early repayment of borrowings arose following the Company’s payment of its outstanding IRU liabilities in the 2015 financial year. ** The gains on total return swaps for the year ended 30 June 2016 comprises of mark-to-market movements in relation to Vocus’ 16% relevant interest in Macquarie Telecom Group Limited, net of dividends received, brokerage and interest costs relating to these total return swap arrangements. The Macquarie Telecom swap is presently scheduled to settle on 30 December 2016. The gains on total return swaps for the previous year comprised realised gains in relation to Vocus’ 10% interest in Amcom settled in May 2015 and unrealised gains in relation to its relevant interest in Macquarie Telecom for that period. *** Acquisition and integration costs in the year ended 30 June 2016 primarily comprise legal, professional services and other costs in relation to the acquisition and integration of Amcom and M2 which completed on 8 July 2015 and 22 February 2016, respectively. Acquisition and integration costs for the previous year primarily relate to transaction costs in respect of the Bentley, FX Networks and EDC acquisitions and integration costs incurred during the period. NOTE 6. EXPENSES Consolidated 2016 2015 $’000 $’000 Depreciation (note 25) 36,864 12,338 Amortisation (note 26) 41,623 6,346 Total depreciation and amortisation 78,487 18,684 24,464 6,073 12,152 4,747 Salaries and wages expense 67,942 16,137 Employee on-costs expense 14,601 2,440 4,330 1,547 Profit before income tax includes the following specific expenses: Depreciation and amortisation Finance costs Interest and finance charges paid/payable Rental expense relating to operating leases Minimum lease payments Employee benefits expense Employee leave expense Outsourcing expense Share-based payment expense Other employee benefits expense Total employee benefits expense 16,978 - 2,077 917 14,844 4,878 120,772 25,919 55 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 7. EARNINGS PER SHARE Consolidated 2016 Profit after income tax Non-controlling interest Profit after income tax attributable to the owners of Vocus Communications Limited 2015 $’000 $’000 64,252 19,850 (161) - 64,091 19,850 Number Number 339,875,432 104,009,415 Options 194,094 388,179 Performance rights 493,780 - 340,563,306 104,397,594 Weighted average number of ordinary shares used in calculating basic earnings per share Adjustments for calculation of diluted earnings per share: Weighted average number of ordinary shares used in calculating diluted earnings per share Cents Cents Basic earnings per share 18.86 19.08 Diluted earnings per share 18.82 19.01 The weighted average number of ordinary shares for 2015 and 2016 has been restated for the effect of the 1 for 8.9 rights issue completed in July 2016, in accordance with AASB 133 ‘Earnings per share’. Accounting policy for earnings per share Basic earnings per share Basic earnings per share is calculated by dividing the profit attributable to the owners of Vocus Communications Limited, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the financial year. Diluted earnings per share Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account dilutive potential ordinary shares and the weighted average number of shares assumed to have been issued for no consideration in relation to dilutive potential ordinary shares. NOTE 8. EQUITY - DIVIDENDS Dividends Dividends paid/payable during the financial year were as follows: Consolidated 2016 2015 $’000 $’000 4,606 946 Interim dividend for the year ended 30 June 2016 of 7.60 cents per ordinary share (2015: 1.20 cents per ordinary share) paid on 6 April 2016 40,443 1,266 Special dividend for the year ended 30 June 2016 of 1.90 cents per ordinary share (2015: 5.10 cents) paid on 6 April 2016 (2015: 8 July 2016) 10,110 5,381 55,159 7,593 Final dividend for the year ended 30 June 2015 of 2.00 cents per ordinary share (2015: 1.00 cent per ordinary share) paid on 24 September 2015 56 | VOCUS.COM.AU NOTE 8. EQUITY - DIVIDENDS (continued) On 23 August 2016, the Directors declared a final fully franked dividend of 8.0 cents per share on ordinary shares in respect of its financial year ended 30 June 2016. This dividend is to be paid on 4 October 2016, for shareholders registered on 20 September 2016. The dividend is eligible for the Vocus Dividend Reinvestment Plan. The directors have adopted a dividend policy to deliver growing dividends, reflective of profitability, cash position and investment opportunities. The Vocus Dividend Reinvestment Plan (DRP) allows shareholders to elect to receive their dividends in the form of Vocus shares, offered at a discount of 1.5% to the volume weighted average price, in aggregate, over the five trading days commencing on and including the next trading day after the dividend record date. In relation to the final dividend for the year ended 30 June 2016, the issue price will be the volume weighted average price for the period 21 September 2016 to 27 September 2016, less the discount of 1.5%. The last date for receipt of election notices for participation in the DRP in relation to this dividend is 21 September 2016. 1,203,192 shares were issued in respect of the DRP in the financial year ended 30 June 2016. Franking credits Consolidated 2016 Franking credits available at the reporting date based on a tax rate of 30% 2015 $’000 $’000 38,927 10,369 Franking credits that will arise from the payment of the amount of the June income tax payment made in July at the reporting date based on a tax rate of 30% 4,405 3,973 Franking credits available for subsequent financial years based on a tax rate of 30% 43,332 14,342 Franking debits that will arise from the payment of dividends declared subsequent to the reporting date based on a tax rate of 30% Net franking credits available based on a tax rate of 30% (21,172) (2,306) 22,160 12,036 Consolidated 2016 Franking credits available for subsequent financial years based on a tax rate of 30% 2015 $’000 $’000 22,160 12,036 The above amounts represent the balance of the franking account as at the end of the financial year, adjusted for: ➜➜ franking credits that will arise from the payment of the amount of the provision for income tax at the reporting date ➜➜ franking debits that will arise from the payment of dividends recognised as a liability at the reporting date ➜➜ franking credits that will arise from the receipt of dividends recognised as receivables at the reporting date Accounting policy for dividends Dividends are recognised when declared during the financial year and no longer at the discretion of the Company. Provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the Company, on or before the end of the financial year but not distributed at the reporting date. 57 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 9. FINANCIAL INSTRUMENTS Financial risk management objectives Vocus’ activities expose it to a variety of financial risks including market risks such as foreign currency, price and interest rate, and credit and liquidity risks. The Audit Committee has general oversight of those financial risks identified here. In addition, the Risk Committee oversees a formal risk management policy and risks identified are monitored by executive management on a regular basis to minimise the potential adverse effects these risks may have on financial performance. Overall risk management focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on financial performance where material. Derivative financial instruments such as forward foreign exchange contracts are used to hedge certain risk exposures or cash flow hedges where appropriate. Derivatives are exclusively used for hedging purposes, i.e. not as trading or other speculative instruments, with the exception of the total return swap in relation to Vocus’ 16% relevant interest in Macquarie Telecom Group Limited which is held as a strategic investment. Different methods are used to measure different types of risk to which Vocus is exposed. These methods include sensitivity analysis in the case of interest rate, foreign exchange and other price risks and ageing analysis for credit risk. As part of the acquisition of M2 Group Limited, Vocus now has an electricity and gas retailing business for which it needs to manage commodity risk. The Wholesale Energy Risk Management Committee, which is a sub-committee of the Risk Committee provides direct oversight over the risks relating to this business and appropriate hedging strategies are undertaken to mitigate these risks. Financial assets and liabilities comprise cash and cash equivalents, receivables, payables, bank loans and finance leases. Market risk Foreign currency risk Certain transactions are denominated in foreign currency and is exposed to foreign currency risk through foreign exchange rate fluctuations. Foreign exchange risk arises from future commercial transactions and recognised financial assets and financial liabilities denominated in a currency that is not the entity’s functional currency. The risk is measured using sensitivity analysis and cash flow forecasting. The maturity, settlement amounts and the average contractual exchange rates of outstanding forward foreign exchange contracts at the reporting date was as follows: Sell Australian dollars Average exchange rates 2016 2015 2016 2015 $’000 $’000 $’000 $’000 20,042 20,566 0.7579 0.7712 - 16,689 - 0.7604 58,423 - 34.1473 - 9,167 - 34.9091 - Buy US dollars Maturity: 0 - 12 months 12 - 24 months Buy Philippine Pesos Maturity: 0 - 12 months 12 - 24 months These figures represent the Australian dollars to be sold under foreign exchange contracts to purchase US dollars and Philippine Pesos. 58 | VOCUS.COM.AU NOTE 9. FINANCIAL INSTRUMENTS (continued) The carrying amount of foreign currency denominated financial assets and financial liabilities at the reporting date was as follows: Assets Consolidated 2016 2015 Liabilities 2016 2015 $’000 $’000 $’000 $’000 US dollars 3,275 2,038 4,962 1,699 New Zealand dollars 5,687 6,447 38 - - - 4,959 - 8,962 8,485 9,959 1,699 Philippine Pesos Vocus is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to, the United States dollar (USD), New Zealand dollar (NZD) and Philippine peso (PHP). Vocus manages its foreign exchange rate risk by hedging its firm commitments and highly probable forecast transactions over varying time horizons. These hedges are undertaken centrally by Group Treasury. As at 30 June 2016, future movements in USD/AUD currency of 5%(2015: 5%) will have an approximate $80,000 (2015:20,000) increase or decrease to profit or loss and $1,076,000 increase and $974,000 decrease (2015: $1,933,000 increase and $1,749,000 decrease) in equity in the financial year ending 30 June 2016. As at 30 June 2016, future movements in NZD/AUD currency of 5%(2015: 5%) will have an approximate $30,000 (2015:$272,000) increase or decrease to profit or loss. As at 30 June 2016, future movements in PHP/AUD currency of 5%(2015: 5%) will have an approximate $236,000 (2015:nil) increase or decrease to profit or loss and $3,486,000 increase and $3,154,000 decrease(2015: nil ) in equity in the financial year ending 30 June 2016. Commodity risk Vocus is exposed to commodity price risk associated with the purchase and/ or sale of electricity and to a lesser extent gas. To manage the price risks associated with electricity, Vocus enters into derivative instruments such as options and swaps. To manage gas price risk, Vocus has a supply agreement which has the commercial effect of limiting the price paid from the national pool on a certain amount of gas. Based on a quarterly forecast of the required electricity supply, Vocus hedges the purchase price using future commodity purchase contracts. The forecast is deemed to be a highly probable transaction. Details of electricity hedges entered at 30 June 2016 can be found in Note 11. As at 30 June 2016, future movements in electricity price of 1% will have an approximate $47,000 increase or decrease to profit or loss and $419,000 increase or decrease in equity. Interest rate risk Interest rate risk arises from term deposits, cash on deposit, bank loans and long-term borrowings. Term deposits, cash on deposit and borrowings at variable rates creates exposure to interest rate risk. To manage interest rate risk, the group enters into interest rate swaps. The interest rate swaps have the economic effect of converting borrowings from floating rates to fixed rates. Obligations under the IRU loan and finance leases are fixed as part of the defined repayment schedules. This mitigates interest rate risk in respect of these obligations. 59 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 9. FINANCIAL INSTRUMENTS (continued) As at the reporting date, Vocus had the following variable rate borrowings and interest rate swap contracts outstanding: 2016 Consolidated Weighted average interest rate Balance 2015 Weighted average interest rate Balance % $’000 $’000 $’000 Bank overdraft and bank loans 3.88% 828,555 5.79% 106,235 Interest rate swaps (notional principal amount) 2.70% (379,222) - Net exposure to cash flow interest rate risk - 449,333 106,235 As at 30 June 2016, future movements in interest rate of 50 basis points (2015: 50 basis points) will have an approximate $2,232,000 (2015:$531,000) increase or decrease to profit or loss and $1,896,000 (2015: nil) increase or decrease in equity in the financial year ending 30 June 2016. Credit risk Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss. Vocus does not hold any credit derivatives to offset its credit exposure. It is Vocus’ policy that customers who wish to trade on credit terms are subject to credit verification procedures including an assessment of their independent credit worthiness, financial position, past experience and industry reputation. Where appropriate, guarantees and security deposits are used as collateral to mitigate perceived risk. The maximum exposure to credit risk at the reporting date to recognised financial assets, is the carrying amount, net of any provisions for impairment of those assets, as disclosed in the statement of financial position and notes to the financial statements. In addition, receivable balances are monitored on an ongoing basis with the result that Vocus’ exposure to bad debts is not significant. There are no significant concentrations of credit risk within Vocus. Liquidity risk Vigilant liquidity risk management requires the maintenance of sufficient liquid assets (mainly cash and cash equivalents) and available borrowing facilities to be able to pay debts as and when they become due and payable. Liquidity risk is managed by maintaining adequate cash reserves and available borrowing facilities by continuously monitoring actual and forecast cash flows and matching the maturity profiles of financial assets and liabilities. Financing arrangements Unused borrowing facilities at the reporting date: Consolidated 2016 Bank loans 2015 $’000 $’000 Multi-option facility 358,462 - 20,707 - - 21,668 379,169 Bank guarantee / letter of credit facility 21,668 The bank guarantee / letter of credit facility was used to issue bank guarantees for property leases and other performance contracts and replaces the multi-option facility present in the prior year (refer note 33 for details of the total facility). 60 | VOCUS.COM.AU NOTE 9. FINANCIAL INSTRUMENTS (continued) Remaining contractual maturities The following tables detail Vocus’ remaining contractual maturity for its financial instrument liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the financial liabilities are required to be paid. The tables include both interest and principal cash flows disclosed as remaining contractual maturities and therefore these totals may differ from their carrying amount in the statement of financial position. Between 1 and 2 years Between 2 and 5 years Over 5 years Remaining contractual maturities $’000 Consolidated - 2016 1 year or less $’000 $’000 $’000 $’000 Non-derivatives Non-interest bearing Trade payables and accruals Other payables Deposits held 218,064 - - - 218,064 62,518 - - - 62,518 326 - - - 326 - - 828,555 - 828,555 Interest-bearing - variable Bank loans Interest-bearing - fixed rate Lease liability 9,032 7,584 9,139 13,117 38,872 IRU liability 7,542 7,842 20,513 - 35,897 297,482 15,426 858,207 13,117 1,184,232 Interest rate swaps net settled 2,207 2,591 2,767 - 7,565 Forward foreign exchange contracts net settled 1,326 32 - - 1,358 Total non-derivatives Derivatives 439 - - - 439 Total derivatives Total return swap net settled 3,972 2,623 2,767 - 9,362 Consolidated - 2015 1 year or less Between 1 and 2 years Between 2 and 5 years Over 5 years Remaining contractual maturities $’000 $’000 $’000 $’000 $’000 Non-derivatives Non-interest bearing Trade payables and accruals Other payables Deposits held 20,898 - - - 20,898 3,279 - - - 3,279 120 - - - 120 5,843 5,843 112,078 - 123,764 Interest-bearing - variable Bank loans Interest-bearing - fixed rate Lease liability Total non-derivatives 2,666 2,525 3,913 12,559 21,663 32,806 8,368 115,991 12,559 169,724 61 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 10. FAIR VALUE MEASUREMENT Fair value hierarchy The following tables detail assets and liabilities, measured or disclosed at fair value, using a three level hierarchy, based on the lowest level of input that is significant to the entire fair value measurement, being: Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly Level 3: Unobservable inputs for the asset or liability Level 1 Level 2 Level 3 Total $’000 Consolidated - 2016 $’000 $’000 $’000 1,998 - - 1,998 Assets Available-for sale financial assets Forward foreign exchange contracts - 495 - 495 Electricity derivatives - 9,483 - 9,483 1,998 9,978 - 11,976 Total assets Liabilities Total return swaps - (439) - (439) Forward foreign exchange contracts - (1,358) - (1,358) Interest rate swaps - (7,565) - (7,565) Total liabilities - (9,362) - (9,362) Level 1 Level 2 Level 3 Total $’000 $’000 $’000 $’000 Forward foreign exchange contracts - 523 - 523 Total return swaps - 504 - 504 Total assets - 1,027 - 1,027 Consolidated - 2015 Assets There were no transfers between levels during the financial year. The carrying amounts of trade and other receivables and trade and other payables are assumed to approximate their fair values due to their short-term nature. The fair value of financial liabilities is estimated by discounting the remaining contractual maturities at the current market interest rate that is available for similar financial liabilities. Total return swaps Vocus holds a 16% relevant interest in Macquarie Telecommunications Group Limited by way of a total return swap with the Commonwealth Bank of Australia. Under the total return swap, Vocus is exposed to mark-to-market movements on the value of Macquarie Telecom shares, for which it receives or pays cash to CBA depending on the movement in each period. The swap is currently scheduled to settle on 30 December 2016, but can be extended by mutual consent. 62 | VOCUS.COM.AU NOTE 10. FAIR VALUE MEASUREMENT (continued) Valuation techniques for fair value measurements Available for sale financial assets uses observable values such as publically available equity prices at the end of the reporting period in the valuation and is classified as in the hierarchy as level 1. The fair value of derivative financial instruments that are not traded on an active market is determined by using valuation methodologies and assumptions that are based on market conditions existing at the valuation date. These include: ➜➜ The use of forward electricity price curve derived from various inputs such as electricity futures market is used in calculating electricity derivatives. ➜➜ The interest rate yield curve and applying the net present value to future cash flows are techniques used in valuing interest rate swaps. ➜➜ The fair value of forward exchange contracts are determined by using forward exchange market rates in valuing forward exchange contracts. ➜➜ The fair value of total return swap contracts are derived from the market value of the underlying security, being the shares of Macquarie Telecommunications Group Limited, adjusted for receipts/payments made under the swap to balance date. Accounting policy for fair value measurement When an asset or liability, financial or non-financial, is measured at fair value for recognition or disclosure purposes, the fair value is based on 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; and assumes that the transaction will take place either: in the principal market; or in the absence of a principal market, in the most advantageous market. Fair value is measured using the assumptions that market participants would use when pricing the asset or liability, assuming they act in their economic best interests. For non-financial assets, the fair value measurement is based on its highest and best use. Valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, are used, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. Assets and liabilities measured at fair value are classified, into three levels, using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Classifications are reviewed at each reporting date and transfers between levels are determined based on a reassessment of the lowest level of input that is significant to the fair value measurement. For recurring and non-recurring fair value measurements, external valuer’s may be used when internal expertise is either not available or when the valuation is deemed to be significant. External valuer’s are selected based on market knowledge and reputation. Where there is a significant change in fair value of an asset or liability from one period to another, an analysis is undertaken, which includes a verification of the major inputs applied in the latest valuation and a comparison, where applicable, with external sources of data. NOTE 11. CURRENT ASSETS - DERIVATIVE FINANCIAL INSTRUMENTS Consolidated 2016 $’000 Forward foreign exchange contracts - cash flow hedges Electricity derivatives – cash flow hedges 2015 $’000 495 523 - - 504 9,978 Total return swaps 9,483 1,027 Refer to note 10 for further information on fair value measurement. 63 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 11. CURRENT ASSETS - DERIVATIVE FINANCIAL INSTRUMENTS (continued) Forward foreign exchange contracts Vocus have designated into forward exchange hedge relationships to buy and sell specified amounts of foreign currency denominated in USD and Philippine Peso in the future at stipulated exchange rates. The objective of entering the forward exchange contracts is to protect Vocus against unfavourable exchange rate movements for high probable forecasted purchase of inventory and payments for services. The forward exchange contracts mature within the next financial year and have been designated based on forecasted foreign currency denominated purchases. Gains or losses recognised in the cash flow hedge reserve in equity on forward foreign exchange contracts as of 30 June 2016 will be released to the income statement when the underlying anticipated transactions affect the income statement or included in the carrying value of asset or liabilities acquired. Interest rate swaps Vocus currently holds interest swap agreements to protect the syndicated loan facility from exposure to increasing interest rates. A hedge relationship was designated on this date. Under these interest rate swap agreements, the Group pays a fixed rate of interest between 2.16% and 2.80% per annum, and receives interest at a variable rate. The contracts require settlement of net interest receivable or payable each 90 days. The next settlement is on 21 September 2016. The gain or loss from remeasuring the hedging instruments at fair value is recognised in other comprehensive income and deferred in equity in the cash flow hedge reserve, to the extent that the hedge is effective. It is reclassified into profit or loss when the hedged interest expense is recognised. Electricity derivatives Vocus manages this exposure of floating purchase price of electricity through purchase of electricity futures contracts from the Australian Energy Market Operator (AEMO). The hedged anticipated electricity purchase and sale transactions are expected to occur for each half hour period throughout the next quarter from the reporting date consistent with the forecast demand from customers over this period. Gains or losses recognised in the cash flow hedge reserve in equity on the forward foreign exchange contracts as of 30 June 2016 will be released to the income statement when the underlying anticipated purchase or sale transactions are recognised in the income statement. Accounting policy for derivative financial instruments Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to their fair value at each reporting date. The accounting for subsequent changes in fair value depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Derivatives are classified as current or non-current depending on the expected period of realisation. Cash flow hedges Cash flow hedges are used to cover exposure to variability in cash flows that is attributable to particular risks associated with a recognised asset or liability or a firm commitment which could affect profit or loss. The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, whilst the ineffective portion is recognised in profit or loss. Amounts taken to equity are transferred out of equity and included in the measurement of the hedged transaction when the forecast transaction occurs. Cash flow hedges are tested for effectiveness on a regular basis both retrospectively and prospectively to ensure that each hedge is highly effective and continues to be designated as a cash flow hedge. If the forecast transaction is no longer expected to occur, the amounts recognised in equity are transferred to profit or loss. If the hedging instrument is sold, terminated, expires, exercised without replacement or rollover, or if the hedge becomes ineffective and is no longer a designated hedge, the amounts previously recognised in equity remain in equity until the forecast transaction occurs. 64 | VOCUS.COM.AU