NOTE 12. CURRENT LIABILITIES - DERIVATIVE FINANCIAL INSTRUMENTS Consolidated 2016 2015 $’000 $’000 Forward foreign exchange contracts - cash flow hedges 1,326 - Interest rate swap contracts - cash flow hedges 2,207 - 439 - 3,972 - Total return swaps Refer to note 9 for further information on financial instruments. Refer to note 10 for further information on fair value measurement. Total return swaps The current liability in respect of total return swaps comprise marked-to-market gains in relation to the 16% relevant interest in Macquarie Telecom Group Limited. The Macquarie Telecom swap is currently scheduled to settle on 30 December 2016, but can be extended by mutual consent. NOTE 13. NON-CURRENT LIABILITIES - DERIVATIVE FINANCIAL INSTRUMENTS Consolidated 2016 Forward foreign exchange contracts - cash flow hedges 2015 $’000 $’000 32 - 5,358 - 5,390 Interest rate swap contracts - cash flow hedges - Refer to note 9 for further information on financial instruments. Refer to note 10 for further information on fair value measurement. NOTE 14. CONTINGENT LIABILITIES Consolidated 2016 2015 $’000 Guarantees $’000 29,293 3,059 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. NOTE 15. COMMITMENTS Consolidated 2016 2015 $’000 $’000 Lease commitments - operating The operating leases relate primarily to offices and data centre locations. Committed at the reporting date but not recognised as liabilities, payable: Within one year 31,581 5,784 One to five years 87,403 20,153 More than five years 59,401 42,777 178,385 68,714 65 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 15. COMMITMENTS (continued) Consolidated 2016 2015 $’000 $’000 9,031 2,666 Lease commitments - finance Committed at the reporting date and recognised as liabilities, payable: Within one year One to five years 16,724 6,438 More than five years 13,117 12,559 Total commitment 38,872 21,663 Less: Future finance charges (9,754) (8,175) Net commitment recognised as liabilities 29,118 13,488 Representing: Lease liability - current (note 32) 7,737 1,764 21,381 11,724 29,118 Lease liability - non-current (note 33) 13,488 7,541 - Backhaul IRU commitments - finance Backhaul IRU commitments represent an indefeasible right to use (IRU) purchased to access NBN Points of Interconnect. The liability is accounted for as a finance lease and is payable in annual instalments over a six year period, whilst the asset is recorded as an intangible and amortised over its effective life. Committed at the reporting date and recognised as liabilities, payable: Within one year One to five years 28,355 - Total commitment 35,896 - Less: Future finance charges (4,641) - Net commitment recognised as liabilities 31,255 - Representing: Backhaul IRU liability - current (note 32) 5,992 - 25,263 - 31,255 Backhaul IRU liability - non-current (note 33) - Network equipment (related to finance lease commitments) Finance lease commitments includes contracted amounts for various network plant and equipment at the following values under finance leases expiring within one to five years. Under the terms of the leases, there is an option to acquire the leased assets for predetermined residual values on the expiry of the leases. Network equipment - at cost Less: Accumulated depreciation Written down value 37,651 13,766 (13,175) (4,364) 24,476 9,402 7,285 6,810 (1,601) (1,353) 5,684 5,457 Fibre network (related to finance lease commitments) Finance lease commitments includes contracted amounts for various network plant and equipment at the following values under finance leases expiring within one to five years. Under the terms of the leases, there is an option to acquire the leased assets for predetermined residual values on the expiry of the leases. Fibre network - at cost Less: Accumulated depreciation Written down value 66 | VOCUS.COM.AU NOTE 15. COMMITMENTS (continued) Consolidated 2016 2015 $’000 $’000 Within one year 16,679 20,582 One to five years 39,388 49,287 - 6,839 56,067 76,708 Purchase commitments - IRU capacity The purchase commitments relate to the purchase programme for additional undersea cable capacity, announced on 19 February 2015. Capacity is allocated and paid in annual instalments over a six year period. Committed at the reporting date but not recognised as assets or liabilities, payable: More than five years NOTE 16. CURRENT ASSETS - TRADE AND OTHER RECEIVABLES Consolidated 2016 Other receivables Accrued revenue $’000 100,532 21,154 (4,234) (573) 96,298 Trade receivables Less: Provision for impairment of receivables 2015 $’000 20,581 5,302 1,861 42,779 240 144,379 22,682 Impairment of receivables An expense of $7,474,000 (2015: $322,000) has been recognised in profit or loss in respect of impairment of receivables for the year ended 30 June 2016. The increase is a reflection of the nature of the acquired M2 Consumer business. The ageing of the impaired receivables provided for above are as follows: Consolidated 2016 1 to 3 months overdue 2015 $’000 $’000 186 212 4,048 361 4,234 Greater than 3 months overdue 573 Movements in the provision for impairment of receivables are as follows: Consolidated 2016 Opening balance Additional provisions recognised Receivables written off during the year as uncollectable Closing balance 2015 $’000 $’000 573 652 7,474 359 (3,813) (438) 4,234 573 67 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 16. CURRENT ASSETS - TRADE AND OTHER RECEIVABLES (continued) Past due but not impaired Customers with balances past due but without provision for impairment of receivables amount to $24,019,000 as at 30 June 2016 ($1,350,000 as at 30 June 2015). These balances were not considered a credit risk on the aggregate balances after reviewing credit terms of customers based on recent collection practices. The ageing of the past due but not impaired receivables are as follows: Consolidated 2016 $’000 1 to 3 months overdue Greater than 3 months overdue 2015 $’000 20,308 640 3,711 710 24,019 1,350 Accounting policy for trade and other receivables Trade receivables are initially recognised at fair value and subsequently measured at amortised cost, less any provision for impairment. Trade receivables are generally due for settlement within 14 to 60 days. Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectable are written off by reducing the carrying amount directly. A provision for impairment of trade receivables is raised when there is objective evidence that Vocus will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation and default or delinquency in payments (more than 90 days overdue) are considered indicators that the trade receivable may be impaired. In determining this, management makes judgment as to whether there is observable data indicating that there has been a significant change in the payment ability of the debtor, or whether there have been significant changes with adverse effect in the technological, market, economic or legal environment in which the debtor operates in. The amount of the impairment allowance is the difference between the asset’s carrying amount and the present value of estimated future cash flows. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between the estimated loss and actual loss experience. Other receivables are recognised at amortised cost, less any provision for impairment. NOTE 17. CURRENT ASSETS - INVENTORIES Consolidated 2016 Stock on hand - at net realisable value 2015 $’000 $’000 12,924 - Accounting policy for inventories Stock on hand is stated at the lower of cost and net realisable value. Cost comprises of purchase and delivery costs, net of rebates and discounts received or receivable. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. 68 | VOCUS.COM.AU NOTE 18. CURRENT LIABILITIES - TRADE AND OTHER PAYABLES Consolidated 2016 2015 $’000 Trade payables Revenue received in advance Accruals Goods and services tax payable $’000 116,907 15,207 39,738 - 101,157 5,691 8,384 1,021 22,780 2,258 288,966 Other payables 24,177 Refer to note 9 for further information on financial instruments. Increase in trade and other payables in the current year predominantly due to acquisition of Amcom and merger with M2. Accounting policy for trade and other payables These amounts represent liabilities for goods and services provided prior to the end of the financial year and which are unpaid. Due to their short-term nature they are measured at amortised cost and are not discounted. The amounts are unsecured and are usually paid within 30 days of recognition. NOTE 19. NON-CURRENT ASSETS - OTHER Consolidated 2016 $’000 Accrued revenue Prepayments Subscriber acquisition costs Other deposits 2015 $’000 732 822 2,763 162 14,475 834 547 432 18,517 2,250 Accounting policy for subscriber acquisition costs Costs directly attributable to obtaining subscribers are capitalised pursuant to Interpretation 1042 Subscriber Acquisition Costs. Costs are capitalised when directly attributable to acquiring a new customer on a fixed term contract. The costs include the provision of equipment, commissions paid to internal and external sales personnel and non-refundable installation costs. Costs are amortised over the average term of the customer contract, generally being between 12 and 36 months. NOTE 20. CURRENT LIABILITIES - OTHER Consolidated 2016 $’000 Lease incentive and rent straight lining Deposits held Deferred revenue Other current liabilities 2015 $’000 569 30 326 120 62,202 1,035 3,744 92 66,841 1,277 69 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 21. NON-CURRENT LIABILITIES - OTHER Consolidated 2016 2015 $’000 $’000 Lease incentive and rent straight lining 5,789 782 Deferred revenue 6,935 3,746 Other non-current liabilities 1,044 - 13,768 4,528 NOTE 22. CURRENT LIABILITIES - PROVISIONS Consolidated 2016 2015 $’000 Employee benefits Deferred consideration $’000 16,665 973 2,000 3,300 Special dividends - 5,381 Onerous contracts 5,495 - Make good - - 473 25,020 Other 860 10,127 Deferred consideration Deferred consideration represents the obligation to pay consideration at a later time following the acquisition of a business or assets. Special dividends Dividends represents dividends 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. Onerous contracts A provision has been made for onerous contracts in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it. The provision is calculated based on the lower of the cost of fulfilling the contract and any compensation or penalties arising from failure to fulfil the contract. Make good Make good represents the present value of the estimated costs to make good the premises leased by Vocus at the end of the respective lease terms. Other Other represents the present value of the estimated costs that will be incurred until the end of specified redundant lease terms. 70 | VOCUS.COM.AU NOTE 22. CURRENT LIABILITIES - PROVISIONS (continued) Movements in provisions Movement in provisions, excluding employee benefits, during the current financial year is set out below: Consolidated - 2016 Deferred consideration Special dividends Onerous Make good Other $’000 $’000 $’000 $’000 $’000 Carrying amount at the start of the year 3,300 5,381 - - 473 Additions through business combinations (note 40) 2,000 - 5,495 839 - Amounts transferred from non-current Amounts paid - - - 21 - (2,838) (5,381) - - (473) Unused amounts reversed to other gains (462) - - - - Carrying amount at the end of the year 2,000 - 5,495 860 - Accounting policy for provisions Provisions are recognised when there is a present (legal or constructive) obligation as a result of a past event, it is probable Vocus will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. If the time value of money is material, provisions are discounted using a current pre-tax rate specific to the liability. The increase in the provision resulting from the passage of time is recognised as a finance cost. Accounting policy for employee benefits Short-term employee benefits Liabilities for wages and salaries, including non-monetary benefits and annual leave expected to be settled within 12 months of the reporting date are recognised in other payables in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Expenses for sick leave are recognised when the leave is taken and are measured at the rates paid or payable. Commissions incurred in securing long term customer contracts are amortised over the weighted-average duration of closed contracts during each period. NOTE 23. NON-CURRENT LIABILITIES - PROVISIONS Consolidated 2016 2015 $’000 $’000 Employee benefits 2,039 468 Onerous contracts 2,435 - - 208 6,836 1,765 11,310 2,441 Warranties Make good Onerous contracts Refer to Note 22. Make good Refer to Note 22. 71 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 23. NON-CURRENT LIABILITIES - PROVISIONS (continued) Movements in provisions Movement in provisions, excluding employee benefits, during the current financial year is set out below: Onerous contracts Adjustment for FX $’000 208 1,765 2,435 - 5,046 - Additions through business combinations (note 40) Payments $’000 - Carrying amount at the start of the year Warranties $’000 Consolidated - 2016 Make good (208) - - - 25 2,435 Carrying amount at the end of the year - 6,836 Accounting policy for other long-term employee benefits The liability for annual leave and long service leave not expected to be settled within 12 months of the reporting date is measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted using market yields at the reporting date on corporate bond rates with terms to maturity and currency that match, as closely as possible, the estimated future cash outflows. NOTE 24. INTERESTS IN JOINT VENTURES Interests in joint ventures are accounted for using the equity method of accounting. Information relating to joint ventures that are material to Vocus are set out below: Ownership interest Name Principal place of business / Country of incorporation New Zealand 2015 % Connect 8 Limited 2016 % 50.00% 50.00% Accounting policy for joint ventures A joint venture is a form of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement. Investments in joint ventures are accounted for using the equity method. Under the equity method, the share of the profits or losses of the joint venture is recognised in profit or loss and the share of the movements in equity is recognised in other comprehensive income. Investments in joint ventures are carried in the statement of financial position at cost plus post-acquisition changes in Vocus’ share of net assets of the joint venture. Goodwill relating to the joint venture is included in the carrying amount of the investment and is neither amortised nor individually tested for impairment. Income earned from joint venture entities reduce the carrying amount of the investment. 72 | VOCUS.COM.AU NOTE 24. INTERESTS IN JOINT VENTURES (continued) Summarised financial information Connect 8 Limited 2016 2015 $’000 $’000 822 2,084 Other current assets 3,361 1,255 Non-current assets 7,527 5,802 11,710 9,141 1,832 2,114 Summarised statement of financial position Cash and cash equivalents Total assets Trade and other payables Non-current liabilities 191 179 Total liabilities 2,023 2,293 Net assets 9,687 6,848 Revenue 16,796 8,948 Expenses (14,225) (7,481) 2,571 1,467 Summarised statement of profit or loss and other comprehensive income Profit before income tax Income tax expense Profit after income tax Other comprehensive income Total comprehensive income (721) (417) 1,850 1,050 - - 1,850 1,050 Reconciliation of Vocus’ carrying amount Opening balance Share of profit after income tax from discontinued operations Capital invested in the year Foreign exchange movements Closing carrying amount 3,728 - 925 525 - 3,203 281 - 4,934 3,728 NOTE 25. NON-CURRENT ASSETS - PLANT AND EQUIPMENT Consolidated 2016 2015 $’000 $’000 Fibre assets - at cost 354,124 132,935 Less: Accumulated depreciation (19,464) (5,759) 334,660 127,176 62,477 50,530 (13,754) (8,250) 48,723 42,280 69,702 36,790 Data centre assets - at cost Less: Accumulated depreciation Network equipment - at cost Less: Accumulated depreciation (8,113) (5,507) 61,589 31,283 Other plant and equipment - at cost 104,268 6,101 Less: Accumulated depreciation (26,827) (2,221) 77,441 3,880 522,413 204,619 73 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 25. NON-CURRENT ASSETS - PLANT AND EQUIPMENT (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Data centre assets Network equipment Other plant and equipment Total $’000 $’000 $’000 $’000 $’000 Fibre assets Consolidated Balance at 1 July 2014 34,393 19,863 6,515 2,613 63,384 Reclassifications 18,954 4,318 8,574 2,391 34,237 Additions through business combinations (note 40) 78,028 22,590 20,324 1,793 122,735 (96) (623) (49) (983) (1,751) (1,232) 43 (334) (125) (1,648) Disposals Exchange differences Transfers in/(out) Depreciation expense Balance at 30 June 2015 Additions Additions through business combinations (note 40) Reclassifications 59 (696) 153 484 - (2,930) (3,215) (3,900) (2,293) (12,338) 127,176 42,280 31,283 3,880 204,619 41,654 3,862 11,810 19,990 77,316 162,958 7,791 31,800 64,570 267,119 (493) (7) 3,294 (483) 2,311 Disposals Exchange differences Transfers in/(out) (39) - - (638) (677) 5,724 301 1,542 1,021 8,588 11,108 - (8,635) (2,473) - Depreciation expense (13,428) (5,504) (9,505) (8,426) (36,863) Balance at 30 June 2016 334,660 48,723 61,589 77,441 522,413 No impairment indicators are present relating to the carrying value of plant and equipment and network equipment. Accounting policy for property, plant and equipment Plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Depreciation is calculated on a straight-line basis to write off the net cost of each item of property, plant and equipment over their expected useful lives as follows: Fibre Data centre Network equipment Plant and equipment 10-50 years 5-15 years 5-8 years 3-15 years The residual values, useful lives and depreciation methods are reviewed, and adjusted if appropriate, at each reporting date. Leasehold improvements and plant and equipment under lease are depreciated over the unexpired period of the lease or the estimated useful life of the assets, whichever is shorter. An item of property, plant and equipment is derecognised upon disposal or when there is no future economic benefit. Gains and losses between the carrying amount and the disposal proceeds are taken to profit or loss. 74 | VOCUS.COM.AU NOTE 26. NON-CURRENT ASSETS - INTANGIBLES Consolidated 2016 2015 $’000 Goodwill - at cost $’000 2,960,303 43,242 Brands - at cost 190,500 - IRU capacity - at cost 153,392 79,037 Less: Accumulated amortisation Customer intangibles - at cost Less: Accumulated amortisation (26,716) (20,714) 126,676 58,323 376,531 20,846 (26,365) (1,969) 350,166 18,877 Software - at cost 139,793 5,151 Less: Accumulated amortisation (12,499) (1,387) 127,294 3,764 2,494 1,440 Other intangibles - at cost Less: Accumulated amortisation (365) (252) 2,129 1,188 3,757,068 125,394 75 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 26. NON-CURRENT ASSETS - INTANGIBLES (continued) Reconciliations Reconciliations of the written down values at the beginning and end of the current and previous financial year are set out below: Software Brand & other intangibles Total $’000 $’000 $’000 1,313 2,696 1,358 84,859 - 1,951 77 2,240 18,113 - - 49,716 - - (96) (151) (5,699) - 52 2 3 134 Goodwill IRU capacity Customer intangibles $’000 $’000 $’000 17,014 62,478 - 212 Additions through business combinations (note 40) 31,603 - Disposals (5,452) 77 Consolidated Balance at 1 July 2014 Additions Exchange differences Transfers in/(out) - - (8) (1) 499 490 Amortisation expense - (4,367) (593) (788) (598) (6,346) 43,242 58,323 18,877 3,764 1,188 125,394 - 19,372 - 9,478 2,319 31,169 2,916,946 55,175 355,643 124,696 192,327 3,644,787 (3,108) - - - (785) (3,893) 3,223 (192) 42 468 2 3,543 - - - - (2,309) (2,309) Balance at 30 June 2015 Additions Additions through business combinations (note 40) Disposals* Exchange differences Reclassifications Amortisation expense Balance at 30 June 2016 - (6,002) (24,396) (11,112) (113) (41,623) 2,960,303 126,676 350,166 127,294 192,629 3,757,068 * isposal of goodwill D Disposal of goodwill in the current year amounting to $1,159,000 arose on the sale of L7 Solutions Pty Ltd, which was acquired as part of the Amcom group on July 8 2015, to Cirrus Network Holdings on 15 December 2015. L7 represented the IT integration arm of the former Amcom business. Disposal of goodwill in the current year amounting to $1,949,000 arose as a result of the sale by the Aggregato business (of which Vocus has a 61.2% interest) of its US assets. This business was acquired as part of the merger with M2 Group Ltd on 22 February 2016. 76 | VOCUS.COM.AU NOTE 26. NON-CURRENT ASSETS - INTANGIBLES (continued) Consolidated 2016 2015 $’000 $’000 2,309,484 14,826 650,819 28,416 2,960,303 43,242 Allocation of Goodwill Goodwill has been allocated for impairment testing purposes to the following cash-generating units: ➜➜ Australia ➜➜ New Zealand In the previous period, Vocus operated as a single CGU. Goodwill for 2015 has been restated for the change in cash-generating units in 2016. The carrying amount of goodwill was allocated to cash-generating units as follows: ➜➜ Australia ➜➜ New Zealand Impairment testing In accordance with Vocus’ accounting policy, impairment testing has been undertaken at 30 June 2016 for all groups of cash generating units (‘CGUs’) with indefinite life intangible assets or where there is an indication of impairment. The testing has been conducted using a fair value less costs of disposal model which is higher than the value in use. The recoverable amount of the Australia and New Zealand CGUs have been determined based on a fair value less costs of disposal calculation based on future cash flows. The recoverable amount was verified against external indicators such as EBITDA multiples of comparable market transactions. This is further supported by the fact that the market capitalisation of the Group as at year end exceeds net assets by $1,317,644,000. The key assumptions used in the calculation are: ➜➜ Forecasts for capital expenditure based on past experience required to maintain current fixed asset levels as well as expand the network to support future growth ➜➜ Post tax discount rates for Australia and New Zealand of 8.9% and 9.0%, respectively ➜➜ Five year cash flow forecasts as approved by Senior Management including expected synergistic benefits from recent mergers ➜➜ Long term growth rate of 3% ➜➜ 5% cost to sell The Directors believe that any reasonably possible change in the key assumptions by which recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the group of CGUs. Accounting policy for intangible assets Intangible assets acquired as part of a business combination, other than goodwill, are initially measured at their fair value at the date of the acquisition. Intangible assets acquired separately are initially recognised at cost. Indefinite life intangible assets are not amortised and are subsequently measured at cost less any impairment. Finite life intangible assets are subsequently measured at cost less amortisation and any impairment. The gains or losses recognised in profit or loss arising from the de-recognition of intangible assets are measured as the difference between net disposal proceeds and the carrying amount of the intangible asset. The method and useful lives of finite life intangible assets are reviewed annually. Changes in the expected pattern of consumption or useful life are accounted for prospectively by changing the amortisation method or period. 77 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 26. NON-CURRENT ASSETS - INTANGIBLES (continued) Goodwill Goodwill arises on the acquisition of a business. Goodwill is not amortised. Instead, goodwill is tested annually for impairment, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Impairment losses on goodwill are taken to profit or loss and are not subsequently reversed. Brands Brands have indefinite useful lives. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at cash-generating unit level consistent with the methodology outlined for goodwill above. Such intangibles are not amortised. Assets with indefinite useful lives are reviewed each reporting period to determine whether the indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis. Intellectual property Significant costs associated with intellectual property are deferred and amortised on a straight-line basis over the period of their expected benefit, being their finite life of 10 years. Indefeasible Right to Use (‘IRU’) Indefeasible right to use capacity are brought to account as intangible assets at cost, being the present value of the future cash flows payable for the right. Costs associated with IRU’s are deferred and amortised on a straight-line basis over the period of their expected benefit. Software Costs associated with software, including those associated with capitalised development costs, are amortised on a straightline basis over the period of their expected benefit, being its finite life of between 3 to 8 years. An intangible asset arising from development expenditure on an internal project is recognised only when the Group can demonstrate the technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete and its ability to use or sell the asset, how the asset will generate future economic benefits, the availability of resources to complete the development and the ability to measure reliably the expenditure attributable to the intangible asset during its development. All other research costs are expensed as incurred. Following the initial recognition of the development expenditure, the cost model is applied requiring the asset to be carried at cost less any accumulated amortisation and accumulated impairment losses. Any expenditure so capitalised is amortised over the period of expected benefit from the related project. The carrying value of an intangible asset arising from development expenditure is tested for impairment annually when the asset is not yet available for use or more frequently when an indication of impairment arises during the reporting period. Customer intangibles Customer intangibles acquired in a business combination are amortised on a straight-line basis over the period of their expected benefit, being their expected finite life of between 4 to 15 years. Other intangibles Other intangibles are amortised on a straight-line basis over the period of their expected benefit, except in the case of brands, which are not subsequently amortised. 78 | VOCUS.COM.AU NOTE 27. INCOME TAX EXPENSE Consolidated 2016 2015 $’000 $’000 23,392 7,766 3,994 680 Income tax expense Current tax Deferred tax - origination and reversal of temporary differences Adjustment recognised for prior periods Aggregate income tax expense 528 (11) 27,914 8,435 Deferred tax included in income tax expense comprises: Increase in deferred tax assets (note 28) (5,782) (403) Increase in deferred tax liabilities (note 29) 9,776 1,083 Deferred tax - origination and reversal of temporary differences 3,994 680 Profit before income tax expense 92,166 28,285 Tax at the statutory tax rate of 30% 27,650 8,486 - 179 Numerical reconciliation of income tax expense and tax at the statutory rate Tax effect amounts which are not deductible/(taxable) in calculating taxable income: Amortisation of intangibles Entertainment expenses 156 48 Share-based payments 623 275 Non-assessable income (previously treated as assessable) 124 - Donations and other adjustments (86) 3 Transaction costs 803 600 Tax allowances and incentives Non-taxable other gains Sundry items (1,985) (556) (97) (1,548) Adjustment recognised for prior periods Difference in overseas tax rates Movement in timing differences Income tax expense 326 106 27,514 7,593 528 (11) (128) 78 - 775 27,914 8,435 Consolidated 2016 2015 $’000 $’000 69 (132) 8 (95) 77 (227) Amounts charged/(credited) directly to equity Deferred tax assets (note 28) Deferred tax liabilities (note 29) Accounting policy for tax Income tax for the period is the tax payable on that period’s taxable income based on the applicable income tax rate for each jurisdiction, adjusted by changes in deferred tax attributable to temporary differences, unused tax losses and the adjustment recognised for prior periods, where applicable. 79 NOTES TO THE FINANCIAL STATEMENTS CONTINUED 30 JUNE 2016 NOTE 27. INCOME TAX EXPENSE (continued) Deferred tax Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, except for (i) when the deferred tax asset or liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and that, at the time of the transaction, affects neither the accounting nor taxable profits; or (ii) when the taxable temporary difference is associated with interests in subsidiaries, associates or joint ventures, and the timing of the reversal can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future. 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. The carrying amount of recognised and unrecognised deferred tax assets are reviewed each reporting date. Deferred tax assets recognised are reduced to the extent that it is no longer probable that future taxable profits will be available for the carrying amount to be recovered. Previously unrecognised deferred tax assets are recognised to the extent that it is probable that there are future taxable profits available to recover the asset. Deferred tax assets and liabilities are offset only where there is a legally enforceable right to offset and they relate to the same taxable authority on either the same taxable entity or different taxable entities which intend to settle simultaneously. Tax consolidation legislation Vocus Communications Limited and its 100% owned Australian subsidiaries formed a tax Consolidated group with effect from 14 September 2010. Vocus Communications Limited is the head entity of the tax Consolidated group. Members of Vocus have entered into a tax sharing agreement that provides for the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations. No amounts have been recognised in the financial statements in respect of this agreement on the basis that the possibility of default is remote. Tax effect accounting by members of the tax Consolidated group Measurement method adopted under AASB Interpretation 1052 Tax Consolidated Accounting The head entity and the controlled entities in the tax Consolidated group continue to account for their own current and deferred tax amounts. Vocus has applied the stand-alone taxpayer approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax Consolidated group. The current and deferred tax amounts are measured in a systematic manner that is consistent with the broad principles in AASB 112 Income Taxes. The nature of the tax funding agreement is discussed further below. In addition to its current and deferred tax amounts, the head entity also recognises current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax Consolidated group. Nature of the tax funding agreement Members of the tax Consolidated group have entered into a tax funding agreement. The tax funding agreement requires payments to/from the head entity to be recognised via an inter-entity receivable/(payable) which is at call. To the extent that there is a difference between the amount charged under the tax funding agreement and the allocation under AASB Interpretation 1052, the head entity accounts for these as equity transactions with the subsidiaries. 80 | VOCUS.COM.AU NOTE 28. NON-CURRENT ASSETS - DEFERRED TAX Consolidated 2016 2015 $’000 $’000 37 37 13,392 284 Deferred tax asset comprises temporary differences attributable to: Amounts recognised in profit or loss: Tax losses Receivables Property, plant and equipment Accruals and provisions Unrealised foreign exchange loss Expenses deductible over five years 502 973 25,156 1,772 424 665 11,037 30 Unearned income 1,208 - Other 5,647 1,682 57,403 5,443 Opening balance 5,443 3,114 Credited to profit or loss (note 27) 5,782 403 Deferred tax asset Movements: Credited/(charged) to equity (note 27) (69) 132 Additions through business combinations (note 40) 46,247 1,794 Closing balance 57,403 5,443 NOTE 29. NON-CURRENT LIABILITIES - DEFERRED TAX Consolidated 2016 2015 $’000 $’000 27,589 12,913 171,084 5,669 10,109 - Deferred tax liability comprises temporary differences attributable to: Amounts recognised in profit or loss: Property, plant and equipment Intangibles Customer acquisition costs Unrealised foreign exchange gain Total return swaps Other Deferred tax liability 158 157 6,660 925 720 1,635 216,320 21,299 21,299 3,092 9,776 1,083 Movements: Opening balance Charged to profit or loss (note 27) Charged/(credited) to equity (note 27) 8 (95) Additions through business combinations (note 40) 185,237 17,219 Closing balance 216,320 21,299 81