for personal use only - asx · 2017. 8. 20. · extending its contract for the sustainment of its...

1

For

per

sona

l use

onl

y

2

CGL

Specialises in managing information in

complex environments through integrating

know-how, systems and people to provide

information on an anywhere-anytime basis

For

per

sona

l use

onl

y

3

Financial results from continuing operations for the full-year

ended 30 June 2017 relative to Previous Corresponding Period

(PCP)

$98.8m total revenue

28%

$30.1m EBITDA

48%

$21.3m profit before income tax

73%

$15.4m net profit

81%

24.0¢ earnings per share

42%

12.8¢/share dividends declared

(note 25)

$11.4m net profit attributable to

members

45%

For

per

sona

l use

onl

y

Managing Complexity

4 4

4

Contents

Chairman’s report ......................................................................................................................................... 5

Operating and financial review .....................................................................................................................7

Board of Directors ....................................................................................................................................... 12

Key management personnel ........................................................................................................................ 15

Our People.................................................................................................................................................... 17

Directors’ report .......................................................................................................................................... 18

Remuneration report (audited) ................................................................................................................. 23

Auditor’s independence declaration .......................................................................................................... 37

Corporate directory .................................................................................................................................... 38

Annual financial report .............................................................................................................................. 39

Notes to the financial statements .............................................................................................................. 47

Directors’ declaration ................................................................................................................................. 92

Auditor’s report .......................................................................................................................................... 93

Shareholder information .......................................................................................................................... 100

For

per

sona

l use

onl

y

Managing Complexity

5 5

5

Chairman’s report

Dear Shareholder,

A YEAR OF STRONG PERFORMANCE

I am pleased to report a strong financial performance by The Citadel Group Limited (Citadel) for the year ended 30 June 2017.

Statutory total revenues from continuing operations were $98.8 million compared with $77.3 million in FY16;

Group gross margins have increased by 51%;

Strong cost management has contributed to a profit before income tax from continuing operations of $21.3 million, compared with $12.3 million in FY16;

Net Profit After Tax (NPAT) from continuing operations was $15.4 million compared with a FY16 result of $8.5 million;

Cash and cash equivalent reserves remain strong at $29.8 million, down from $34.6 million in FY16 due to acquisitions; and,

There was an increase in net assets by $10.9 million to $75.5 million compared to $64.6 million at 30 June 2016.

DIVIDENDS

Reflecting Citadel’s growth profile, ongoing investment in growth initiatives, and strong cash flows and balance sheet, the Directors of Citadel declared a final dividend of 8.0 cents per share, fully franked. The record and payment dates for this dividend are 25 August 2017 and 29 September 2017, respectively.

This brings the total FY17 dividend to 12.8 cents per share, fully franked.

OPERATING HIGHLIGHTS FOR THE YEAR

Highlights for the year were:

Continued deepening of relationships in technology and health verticals where Citadel traditionally enjoys longer term recurring services contracts;

Acquisition of Kapish which expands the capacity of Citadel in enterprise information management;

Successful closure of the training delivery business, Australian Business Academy (ABA);

For

per

sona

l use

onl

y

Managing Complexity

6 6

6

Contract with an Australian Federal Government agency to deliver technology solutions worth approximately $24.8m over a 24 month period; and,

Renewals of a number of large multi-year contracts in the second half of the financial year, securing a significant portion of Citadel’s future revenue and cash flow streams.

BOARD AND MANAGEMENT

It has been a pleasure to work with my colleagues on the Citadel Board and I appreciate all their efforts during the year. I would also like to thank Darren, his executive team and all the staff for their efforts in what has been a very busy and successful year.

Mark McConnell retired as an Executive Director with effect from 1 July 2016, and remains as a non-Executive Director. Mark has made a significant contribution to Citadel in his former role and continues to do so in his new role.

Darren Stanley was appointed as Chief Executive Officer of Citadel with effect from 11 November 2016, having previously been Citadel’s Deputy Chief Executive Officer. From 11 November 2016, Dr Miles Jakeman retired as Managing Director and Chief Executive Officer to become an Executive Director and Deputy Chairman charged with driving strategic growth opportunities across Citadel and management of key relationships in defence, security and law enforcement agencies.

OUTLOOK

There are many opportunities to continue growing Citadel’s businesses in both public and private markets, particularly with Citadel’s unique technology and health offerings. Growth will be organic and from selected merger and acquisition opportunities.

Finally, thanks to our shareholders for their support during the year.

Yours sincerely,

Mr Kevin McCann, AM

Chairman

21 August 2017

For

per

sona

l use

onl

y

Managing Complexity

7 7

7

Operating and financial review

I am very pleased to present this full year Operating and Financial Review for Citadel.

OVERVIEW OF THE BUSINESS

Citadel is a leader in the development and delivery of integration and managed service solutions to state and federal government departments and the private sector. For these clients, Citadel specialises in managing information in complex environments through integrating know-how, systems and people to provide information on an anywhere-anytime basis.

The majority of Citadel’s revenues are derived from long term managed services, software-as-a-service, and high quality strategic advisory services.

During the period, Citadel has successfully delivered against all of its service level agreements, continued the record of not losing any significant managed services contracts, as well as securing a number of new multi-year contracts. In addition, Citadel’s contracts associated with national security agencies continue to progress in line with budgets and forecasts.

On 31 October 2016 Citadel announced the exit of subsidiary, Australian Business Academy Pty Ltd, from the vocational education and training (VET) sector and ceased operations on 9 December 2016. This withdrawal from VET education was due to regulatory changes including reduced student loan caps, which impacted the viability of the business. The financial impacts of this decision are detailed in note 31.

OPERATIONAL HIGHLIGHTS

Following a very successful FY16, I am again pleased to advise that FY17 has been another excellent year for Citadel. Key operational highlights include:

Acquisition of Kapish Pty Ltd and Kapish Services Pty Ltd (“Kapish”) on 1 July 2016, a successful Australian software and services company, for a consideration of $14.4m. Refer to Note 30 for further detail;

Successfully extending its suite of cloud-based, ‘as-a-service’ offerings to support clients pursuing ‘secure cloud’ initiatives coupled with fully managed solutions and growth of its enterprise information solutions into broader markets, including new engagements with Unity Water, Transport and Main Roads, Queensland Police and Defence;

Extending its contract with Queensland Health (QH) until 2022 and signing an additional contract with QH worth $6.7m to deliver a fully hosted cloud-based laboratory information management solution;

For

per

sona

l use

onl

y

Managing Complexity

8 8

8

Extending its contract for the sustainment of its electronic document and records management (EDRM) environments with Defence for $23.0m over the term of the contract;

Commencement of a 5 year support contract for the New Royal Adelaide Hospital;

Securing a new contract with an Australian Federal Government agency to provide a suite of strategic integration and partnering services. Under the contract, Citadel will provide business advisory, design, information management and innovative technology implementations as part of a major ICT transformation program. Part of this contract is the delivery of technology solutions worth approximately $24.8m to be delivered over the next two years;

Ramping up the delivery of integrated audio visual, video conferencing and collaboration solutions for Monash University as part of a 5+5 year contract with the University. Delivery services have expanded to include design and logistics support and the volume of work is now twice the size of any previous program and expected to grow further;

Signing a new banking facility with ANZ on 23 December 2016 which will allow Citadel to drawdown a maximum of $50.0m over the next 5 years. As at 30 June 2017, Citadel has utilised $7.9m to satisfy the second tranche payment of the acquisition of PJA Solutions Pty Ltd;

Successfully renewing a number of multi-year contracts due to its commitment to continued performance and quality service for its customers;

Delivering another year of record growth with industry leading margins and a pipeline which will support strong organic growth in following years;

Delivering strong operational cash flows from ordinary activities with 83% of EBITDA converted to cash; and,

Continued investment in the breadth and depth of Citadel’s management team.

STATUTORY RESULTS

Statutory Group Results from Continuing Operations Summary

Citadel achieved total revenues of $98.8 million for FY17, up from $77.3 million in FY16. The increase was derived through a combination of internal growth strategies, including success on the signing and progress of new contracts, acquisition activities and execution on existing contracts.

Cost management continued to remain a focus in FY17 (continuing trends from half year accounts) in order to maintain strong gross profit margins and to execute on Citadel’s strategy of scalable solutions.

2017 2016 Variance Variance

($m) ($m) ($m) (%)

Total revenue 98.8 77.3 21.5 27.8

Gross Profit 46.1 30.5 15.6 51.1

EBITDA 30.1 20.4 9.7 47.5

Depreciation and amortisation (5.8) (4.6) 1.2 26.1

Finance costs (3.0) (3.6) (0.6) (16.7)

Tax expense (5.9) (3.7) 2.2 58.3

NPAT 15.4 8.5 6.9 81.2

For

per

sona

l use

onl

y

Managing Complexity

9 9

9

Depreciation and amortisation in FY17 was $5.8 million compared with $4.6 million in FY16 (an increase of 23.9%) with the increase relating predominantly to continued capital investment in ICT.

Capital Expenditure

Furniture & office

equipment

Plant & equipment

Computer equipment

Leasehold improve-

ments

Motor vehicles

Make good

ICT Software

Total

($m) ($m) ($m) ($m) ($m) ($m) ($m) ($m)

2016 Additions 0.0 0.1 1.0 1.0 0.2 0.2 2.5 5.0

2017 Additions 0.2 0.0 0.0 0.2 0.0 0.0 2.8 3.2

Group capital expenditure decreased during the year to $3.2 million from $5.0 million. Capital is related to expenditure on office fit-outs, demonstration equipment, and IT requirements (in support of both internal and client requirements). ICT Software included purchases for whole of group ICT Infrastructure and completion of developed IP.

Cash Flows

Cash and cash equivalents have decreased by $4.8 million during the year to $29.8 million. This decrease relates solely to the cash flows from discontinued operations. Within the continuing business, the significant cash flows generated from operations have been invested in growth by acquisition. The operating cash flows increased $13.4 million on the prior year, reflective of the continued growth of the business and strong collections from customers.

($m)

Net cash inflow from operating activities 24,934

Net cash outflow from investing activities (25,087)

Net cash inflow from financing activities 399

Net increase in cash and cash equivalents 246

Cash flows from discontinued operations (4,998)

Cash and cash equivalents at the beginning of the year 34,574

Cash and cash equivalents at the end of the year 29,822

BUSINESS STRATEGY AND PROSPECTS

Citadel will continue to solve complex information management problems for its clients and expand these offerings to a broader client base within Australia and internationally. It will execute this strategy through a mix of organic and acquisitive opportunities.

Growth strategies include deeper market penetration and expansion into adjacencies through:

Executing existing contracts and maintaining high levels of customer satisfaction;

Deepening relationships with Australian Government and State Government agencies that require securetechnologies;F

or p

erso

nal u

se o

nly

Managing Complexity

10 10

10

Continued investment in, and commercialisation of, Citadel’s unique IP around secured workflowenvironments and enterprise information management;

Expanding Citadel’s reach into bundled software-as-a-service in secure cloud offerings;

Increasing the number of profitable multi-year managed service contracts;

Adopting a more active private sector sales strategy; and,

Making acquisitions into aligned and adjacent markets.

The underlying performance of Citadel is strong. The pipeline of work for Citadel’s cloud-based information management solutions, integration services in Defence and Federal Government Agencies, and e-Health initiatives will support continued strong underlying growth in the years ahead. Furthermore, Citadel continues to pursue attractive M&A opportunities as they arise in support of its organic growth strategy.

RISK MANAGEMENT

In accordance with board policies, Citadel manages risk at Group level. The major risk events, together with possible reasons for their occurrence, are identified and recorded in risk registers in accordance with AS/NZS ISO31000:2009. Those rated as unacceptable, plus what is being done to manage these, are reported to the Board on a regular basis. Principle 7 of The Corporate Governance Statement (available on the Citadel website) outlines the process of managing risk and the engagement of the Audit, Risk and Compliance Committee.

As required by Section 299A(1) of the Corporations Act 2001, and in accordance with ASIC Regulatory Guide 247 Effective Disclosure in an Operating and Financial Review (RG 247) issued in March 2013, material business risks that could adversely affect financial performance include:

Loss of key contracts or failure to win new contracts;

Claims for indemnities or damages which may arise in connection with Citadel's key contracts;

Failure to commercialise R&D expenditure;

Disruption through technological advances or product failures; and,

Loss of key personnel & management and/or an inability to attract new talent in line with the increase inoperational scale.

REGULATORY AND ENVIRONMENTAL MATTERS

Citadel is required to carry out its activities in accordance with applicable regulations in each of the jurisdictions in which it undertakes its professional and managed services. Citadel is not aware of any matter that requires disclosure with respect to any significant regulations in respect of its operating activities, with no issues of non-compliance during the period.

Citadel operations are subject to a range of environmental regulations under the law of the Commonwealth of Australia and its States and Territories. Citadel has not incurred any liabilities under any environmental legislation.

For

per

sona

l use

onl

y

Managing Complexity

11 11

11

OUR PEOPLE

The customer focus of Citadel remains paramount as it continues to deliver on promises to existing clients and expand offerings into new arenas. Citadel’s successes are inextricably linked with the quality and performance of its people. Citadel will continue to hire and develop people with talent who align with its culture. Citadel lives by the adage that there is ‘no substitute for an abundance of talent’ and a key focus of the year has been the development of a Future Leaders Program which will ensure Citadel has the skills to continue growing the business well into the future. Citadel also looks after its people in a variety of other ways, such as through close engagement and consultation, above-industry remuneration, opportunities to participate in share ownership, promotion of continuous learning opportunities, and cross-subsidiary work and development activities amongst others.

In closing, I would like to recognise the ongoing support of our shareholders and send a vote of thanks to all of Citadel’s loyal staff, partners and clients who have significantly contributed to another year of strong growth.

Yours sincerely,

Mr Darren Stanley

Chief Executive Officer

Canberra

21 August 2017

For

per

sona

l use

onl

y

Managing Complexity

12 12

12

Board of Directors

The Directors bring to the Board relevant experience and skills, including industry and business knowledge, financial management and corporate governance.

DIRECTOR AND POSITION EXPERIENCE

Mr H Kevin McCann, AM Independent non-executive

Chairman and Director

Kevin is a Chairman with extensive experience in corporate governance and financing. He is Chairman of the Sydney Harbour Federation Trust, an Australian Government agency and the Menzies Research Centre. He is a Fellow of the Senate of the University of Sydney, Co-Vice Chair of the New Colombo Plan Reference Group, as well as a member of the Male Champions of Change. Kevin has held the role of Chairman and Director of ASX listed companies including Macquarie Group Limited and Macquarie Bank Limited, Origin Energy Limited, and is a former Chairman of ING Management Limited and Healthscope Limited.

Kevin practised as a commercial lawyer as a partner of Allens Arthur Robinson from 1970 to 2004 and was Chairman of Partners from 1995 to 2004.

Kevin has a Bachelor of Arts and Law (Honours) from Sydney University and a Master of Law from Harvard University. Kevin is also a Life Fellow of the Australian Institute of Company Directors.

He was made a Member of the Order of Australia for services to the Law, Business and the Community in 2005.

Dr Miles Jakeman Executive Director and

Deputy Chairman

Miles is a successful company founder with skills in business development, program delivery, notably in complex and secure environments and general management including staff development. He has been Citadel’s Managing Director since the Company’s inception and transitioned into his current role effective 16 November 2016. He is also Chairman of AIM-listed GetBuys plc and for over 29 years, has advised senior business leaders and government officials, including representing countries in ministerial level forums.

Miles has significant overseas working experience with multinational companies in sales, marketing and business development capacities with full profit and loss responsibilities.

Miles has a Bachelor of Science (Hons), a Graduate Diploma in Asian Studies, a Doctorate of Philosophy (PhD) in Asian Studies and a PhD in Business Leadership. He has also completed the AICD Advanced Diploma Mastering the Boardroom and the AICD Diploma of International Company Directors, plus holds an Advanced Diploma of Project Management.

Miles is a visiting Fellow at the Australian National University and a member of the Australian Institute of Company Directors. He is also a member of the not-for-profit Strategic Forum.

For

per

sona

l use

onl

y

Managing Complexity

13 13

13


Ms Deena Shiff Independent non-executive

Director

Deena has experience in managing large scale business operations in the communications industry with particular experience in developing, investing in, and managing cloud solutions and software as a service for enterprise markets. She served as a Group Managing Director at Telstra Corporation Limited between 2005 and 2013, during which time she led the Wholesale Business Division, and established Telstra’s Business Division dedicated to small to medium enterprises. These Divisions turned over between $2bn and $5bn in revenue per annum and Deena’s responsibilities spanned financial management and performance, sales, marketing and operations. In 2011 Deena established and managed Telstra’s corporate venture capital entity, Telstra Ventures. Deena was previously a partner of Mallesons Stephen Jaques, in-house corporate and regulatory counsel at Telstra, and has served as a senior executive and advisor on legal and social policy reforms for the Australian Government. In August 2017, Deena was appointed to the board of Infrastructure Australia.

Deena is currently a Non-Executive Director of the language services and data search company, Appen Limited (ASX: APX), Chairman of the global board of communications infrastructure company BAI Communications Pty Ltd and chairs the Alertness CRC Ltd, a health research collaboration. She is also on the boards of the Sydney Writers’ Festival and Opera Australia.

Deena holds a Bachelor of Science (Economics) Hons from the London School of Economics and Political Science and a Masters of Arts (Law) Hons from the University of Cambridge. She is also a Fellow of the Australian Institute of Company Directors.

For

per

sona

l use

onl

y

Managing Complexity

14 14

14


Lieutenant-General Peter

Leahy, AC Independent non-executive

Director

Peter brings to the board deep knowledge of defence strategy and requirements having had oversight of significant budgets and personnel. He retired from the Army in July 2008 after a 37 year career as a soldier. He concluded his career in the Army with the rank of Lieutenant General after a six year appointment as the Chief of Army. In this appointment he was directly responsible for Army’s $6bn annual budget. His responsibilities included the detailed management of personnel, operating and capital cost centres and the direct responsibility to raise, train and sustain the Army. He was the principle adviser to the Chief of the Defence Force on strategic matters related to the deployment of the Army on global combat operations.

Since leaving the Army, Peter has joined the University of Canberra as a Professor and Foundation Director of the National Security Institute where he teaches, writes and commentates on defence and security matters. He is a member of the Australian Institute of Company Directors and has been appointed to the Boards of Codan Limited and Electro Optic Systems Holdings Limited. He supports the Government of South Australia as a member of the Defence South Australia Advisory Board. He is also involved in charities as the Chairman of Soldier On, the Salvation Army Red Shield Appeal Committee for the Australian Capital Territory and the Australian International Military Games (Invictus). He is also a Trustee of the Prince’s Charities Australia. In 2014 he was appointed by the Minister for Defence as a member of the First Principles Review of the Department of Defence.

Peter was awarded the Companion of the Order of Australia in 2007 for eminent service to the Australian Defence Force in command of the Australian Army and strategic staff appointments.

Mr Mark McConnell

Non-Executive Director

Mark is a successful business developer whose skills cover the areas of business strategy, investor relations, capital raising and innovation. After serving as an officer in the Royal Australian Air Force for 8 years, Mark moved into the corporate world and has spent the last 17 years in a range of executive roles in the fields of aviation, technology and investment finance. He has been a director of Citadel since its formation in 2007.

Mark has founded several private companies and has been recognised with a number of entrepreneurial awards. Since 2007, he has been the Managing Director of New Territories Investments, a private equity fund that has assisted the growth strategies of multiple technology businesses in Australia, including Citadel.

Mark has a Bachelor of Science, a Graduate Diploma of Employment Relations, a Graduate Diploma of Logistics Management, and a Masters of Business Administration. He is also a Fellow of the Australian Institute of Company Directors (FAICD). Mark was awarded the ACT Young Entrepreneur of the Year in 2003 and 2006.

Mark is the Director of several private companies as well as the board of the GWS Giants Foundation.

Effective 1 July 2016, Mark moved from his role as Executive Director to Non-Executive Director after establishing and transitioning the internal capabilities for investor relations and media communications to management.

For

per

sona

l use

onl

y

Managing Complexity

15 15

15

Key management personnel

NAME AND POSITION EXPERIENCE

Dr Miles Jakeman

Executive Director and Deputy Chairman

Please refer to profile under the Board of Directors Section.

Mr Darren Stanley


Darren is a seasoned senior executive with experience in the leadership of software and services companies. Darren joined Citadel in September 2015 and was appointed Chief Executive Officer on 16 November 2016. Prior to joining Citadel Darren was MD Consulting at SMS Management and Technology Limited where he also fulfilled a number of leadership and delivery roles including Regional Director QLD, Regional Director NSW and Chairman of the Offshore Development Centre.

Darren has previously held a number of senior leadership roles including GMAC, Suncorp and Defence and he has significant international experience, including starting businesses in the UK. Darren is a Duntroon Graduate and was previously an Officer in the Royal Australian Engineer Corps. Darren has a background in project and program management with a particular strength in large scale complex programs and integration/merger of companies. Darren has a particular interest in growing Australian technology companies to be internationally recognised.

Darren has a Bachelor of Science (Honours), an MBA (Technology), Graduate Diploma of Human Resource Management and is an alumni member of Harvard University.

For

per

sona

l use

onl

y

Managing Complexity

16 16

16

NAME AND POSITION EXPERIENCE

Mr Robert (Andrew) Burns

Chief Financial Officer

Andrew is a proven leader of change with technically strong competencies in financial management, accounting, and process improvement techniques.

Andrew has been Citadel’s CFO and Company Secretary since January 2008. Prior to joining Citadel, Andrew spent 10 years with General Electric in various senior leadership roles including Finance Manager of GE Healthcare ANZ and Six Sigma Quality Leader for GE Healthcare Financial Services globally.

Andrew is a Chartered Accountant, graduate of the Australian Institute of Company Directors, as well as a Six Sigma Master Black Belt and an alumni member of Australian Graduate School of Management’s MBA Program.

For

per

sona

l use

onl

y

Managing Complexity

17 17

17

Our People

Key to the future sustainability of Citadel is the drive, innovation and expertise of its people who are focused on delivering quality results to clients. Citadel provides tailored advisory, implementation and managed services capabilities to lower risks and solve complex client problems.

Informing Citadel’s people management approach is ‘Our Corporate Character’ and Citadel’s reputation where:

our clients are paramount;

our people are the essence of our business;

we take total responsibility for our own success; and,

we are one high performing team.

Our Values

Citadel recognises the importance of hiring values-aligned talent, developing future leaders, recognising and rewarding performance, and providing a satisfying and challenging career path for its people to drive business forward. The values of the business are captured in the CARE acronym described below:

Collaborate and celebrate

Citadel believes that successful teamwork occurs when the team is equally invested in a shared purpose. Generously sharing ideas, investing time in others and celebrating our combined successes are paramount to the way in which we do business.

Autonomy with accountability

Citadel provides its people the autonomy necessary to promote innovation and rapid decision making. By holding people to account for their decisions and outcomes, Citadel achieves a high degree of ‘ownership’ of initiatives by its staff which results in positive outcomes for our clients.

Respect for others

Respect for the views of others is an embedded value of the Group. Citadel’s Code of Conduct has been established to guide employees on ethical behaviour and active listening, with the management team demonstrating the ‘tone from the top’ and enforcing the value in the conduct of all Company meetings.

Empowerment

Citadel actively promotes delegated authority across all levels of the Group. By establishing a work environment which promotes idea generation over reporting lines, Citadel is able to attract self-motivated and highly capable staff which ultimately delivers greater value for our clients and our business.

We CARE about the success of our company, we CARE about our shareholders and clients

and we CARE about our people.

We value a fair, diverse and inclusive work environment for all representing the spirit and rich

diversity of the Australian community.

For

per

sona

l use

onl

y

Managing Complexity

18 18

18

Directors’ report

DIRECTORS’ REPORT

For

per

sona

l use

onl

y

Managing Complexity

19 19

19

Directors’ report

The Directors present their report on the consolidated entity (Citadel) consisting of The Citadel Group Limited and the entities it controlled at the end of, or during the year ended 30 June 2017.

CONSOLIDATED RESULTS AND REVIEW OF THE OPERATIONS

Citadel’s statutory performance remains strong with total revenue from continuing operations increasing to $98.8 million (2016: $77.3 million) and achieving net profit before income tax from continuing operations of $21.3 million (2016: $12.3 million).

A review of the operations of the consolidated entity and its principle businesses during the financial period and the results of the operations are set out in the Chairman’s Report and the Operational and Financial Review by the Chief Executive Officer from pages 5 to 11 inclusive.

DIVIDENDS

The amounts set out below have been paid by Citadel during the financial period, or have been declared by the Directors of Citadel, by way of the dividend, but not paid during the financial period up to the date of this report. All dividends were fully franked at the tax rate indicated:

Franking tax rate %

Dividend cents per

share

Total paid / payable

$m

Dividend paid 30 September 2016 (100% franked) 30 4.8 2.2

Dividend paid 31 March 2017 (100% franked) 30 4.8 2.3

Dividend declared 21 August 2017 (100% franked) 30 8.0 3.8

For

per

sona

l use

onl

y

Managing Complexity

20 20

20

PRINCIPAL ACTIVITIES

During the year the principal continuing activities of Citadel consisted of provision of professional and managed services in the technology sector throughout Australia.

DIRECTORS

The following persons were directors of Citadel during the whole of the financial year and up to the date of this report unless noted: Mr Kevin McCann, AM; Dr Miles Jakeman; Ms Deena Shiff; Lieutenant-General Peter Leahy AC; and, Mr Mark McConnell.

DIRECTORS’ MEETINGS

The number of directors’ meetings of the company, and of meetings of the board committees held, and the number of those meetings attended by each of the Directors of the company during the financial year are:

Board meetings Audit, Risk and Compliance

Committee Nominations and

Remuneration Committee

Director A B A B A B

Mr K McCann AM 6 6 6 6 4 4

Dr M Jakeman 6 6 3 3 - -

Ms D Shiff 5 6 6 6 4 4

Lieutenant-General P Leahy AC 6 6 6 6 4 4

Mr M McConnell 5 6 3 3 - -

A – Number of meetings attended B – Number of meetings eligible to attend

SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS

Significant changes in the state of affairs of Citadel during the financial period are as follows:

Citadel announced the exit of subsidiary, Australian Business Academy Pty Ltd, from the vocationaleducation and training (VET) sector on 31 October 2016 with operations ceasing on 9 December 2016; and,

The Board appointed Mr Darren Stanley as CEO of Citadel effective 16 November 2016. Dr Miles Jakemantransitioned into an Executive Director role effective 16 November 2016 and remains on the Board asDeputy Chairman.

For

per

sona

l use

onl

y

Managing Complexity

21 21

21

MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR

The final tranche of deferred consideration for the acquisition of PJA Solutions Pty Ltd (acquired 1 June 2015) has been agreed by all parties during August 2017. A payment of date of 28 August 2017 has been confirmed with the financial impacts included in the financial statements for the current year.

In the opinion of the Directors, no other matter or circumstance has arisen since 30 June 2017 that has significantly affected, or may significantly affect:

Citadel’s operations in future financial years; Results of those operations in future financial years; or, Citadel’s state of affairs in future financial years.

COMPLIANCE WITH REGULATIONS AND ENVIRONMENTAL MATTERS

Given its client base, compliance with legislative and regulatory matters is critical for Citadel and is managed closely. As noted in the Operational and Financial Review by the Chief Executive Officer from pages 7 to 11 inclusive, Citadel is not aware of any matter that requires disclosure with respect to its operating activities and there have been no issues of non-compliance during the period.

DIRECTORS’ AND OFFICERS’ INDEMNITY/INSURANCE

The Constitution of the Company provides that the Company may indemnify (to the maximum extent permitted by law) in favour of each Director of the Company, the Company Secretary, Directors and secretaries of related bodies corporate of the Company, and previous directors and secretaries of the Company and its related bodies corporate (“Officers”), against any liability to third parties (other than related Citadel Group companies) incurred by such Officers unless the liability arises out of conduct involving a lack of good faith. The indemnity includes costs or expenses incurred by an Officer in successfully defending proceedings or in connection with an application in which the court grants relief to the specified persons under the Corporations Act 2001.

Each Director has entered into a Deed of Indemnity and Access which provides for indemnity against liability as a Director, except to the extent of indemnity under an insurance policy or where prohibited by statute. The Deed also entitles the Director to access Company documents and records, subject to undertakings as to confidentiality.

During the financial period, the Company has paid a premium in respect of a contract of insurance insuring Officers (and any persons who are Officers in the future and employees of the Company or its subsidiaries) against certain liabilities incurred in that capacity. Disclosure of the total amount of the premiums and the nature of the liabilities in respect of such insurance is prohibited by the contract of insurance.

COMPANY SECRETARY

Mr Robert (Andrew) Burns is the Joint Company Secretary and Group CFO. Mr Burns was appointed to the position of Company Secretary in 2008.

Ms Leanne Ralph was appointed as joint Company Secretary on 5 April 2016.

For

per

sona

l use

onl

y

Managing Complexity

22 22

22

NON-AUDIT SERVICES

Citadel may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the subsidiary companies and/or Citadel are important and there is no conflict of interest.

Details of the amounts paid or payable to the auditor, PricewaterhouseCoopers (PwC), for audit services provided during the year are set out in note 35 in the financial statements.

If non-audit services by the auditor are required, the Chair of the Audit and Risk Committee considers the position and ensures they are satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. During the financial year ended 30 June 2017 Citadel did engage other PwC staff (separate to those of the PwC audit team) to provide non-audit services, including the provision of taxation advice. The Directors are satisfied that the provision of these non-audit services by PwC did not compromise the auditor independence requirements of the Corporations Act 2001 based on the following:

All non-audit services were reviewed by the Audit and Risk Committee to ensure they did not impact theimpartiality and objectivity of the auditor in accordance with APES 110 Code of Ethics for ProfessionalAccountants); and,

None of the services undermine the general principles relating to auditor independence as set out in APES110 Code of Ethics for Professional Accountants.

AUDITOR’S INDEPENDENCE DECLARATION

A copy of the auditors’ independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 37.

CORPORATE GOVERNANCE STATEMENT

Citadel and the Board are committed to achieving and demonstrating the highest standards of corporate governance. Citadel has reviewed its corporate governance practices against the Corporate Governance Principles and Recommendations (3rd edition) published by the ASX Corporate Governance Council.

The 2017 Corporate Governance Statement is dated as at 30 June 2017 and reflects the corporate governance practices in place throughout the 2017 financial year. The 2017 Corporate Governance Statement was approved by the Board on 21 August 2017. A description of Citadel’s current corporate governance practices is set out in Citadel’s corporate governance statement which can be viewed at http://investors.citadelgroup.com.au/investors/?page=Corporate-Governance.

For

per

sona

l use

onl

y

http://investors.citadelgroup.com.au/investors/?page=Corporate-Governance

Managing Complexity

23 23

23

Remuneration report (audited)

The Directors present Citadel’s 2017 remuneration report outlining key aspects of the remuneration policy and framework, and remuneration awarded for the 2017 financial year.

During the financial period the Nominations and Remuneration Committee (NRC) benchmarked the remuneration policy and incentive plans of proxy companies to ensure alignment of the key management personnel (KMP) remuneration packages to the performance of the company and the interests of the shareholders.

The report is structured as follows:

a) KMP covered in this report

b) Remuneration policy and link to performance

c) Elements of remuneration

d) Link between remuneration and performance

e) Remuneration expenses for non-executive and executive KMP

f) Contractual arrangements for non-executive and executive KMP

g) Remuneration consultant

h) Other statutory information.

For

per

sona

l use

onl

y

Managing Complexity

24 24

24

a) KMP covered in this report

Name Position

H K McCann

M Jakeman

D Shiff

P Leahy

M McConnell

D Stanley

R Burns

Chairman

Executive Director and Deputy Chairman

Non-executive Director




Chief Financial Officer/Joint Company Secretary

b) Remuneration policy and link to performance

Citadel’s executive remuneration philosophy is to align executive remuneration with shareholder interests by:

providing levels of Fixed Remuneration (FR) and incentive pay sufficient to attract and retain individualswith the skills and experience required to build on and execute Citadel’s business strategy;

focusing executives on what is important by ensuring incentive remuneration is contingent on outcomesthat grow and/or protect shareholder value, and can be directly influenced by executive action;

balancing the mix of Short Term Incentives (STI) and Long Term Incentives (LTI) to ensure any focus onannual results does not offset the need to invest and nurture the business for longer term success as asustainable and growing business;

managing risk by deferring a proportion of incentive payments and reserving the right to exercise discretionin the event that excessive risk taking or inappropriate outcomes are discovered after performance hasinitially been assessed;

aligning the interests of executives and shareholders by ensuring a suitable proportion of remuneration isreceived as a share-based payment; and,

combining earnings growth performance targets and share-based payments (inclusive of dividends) thatbalance the goals of achieving both sustainable growth and yield.

Citadel’s Nominations and Remuneration Committee (NRC) is made up of independent non-executive directors. The NRC reviews and makes recommendations to the Board on remuneration packages and policies related to the directors, KMPs and senior executives, to ensure that the remuneration policies and practices are consistent with Citadel’s strategic goals and human resources objectives. Based on Citadel’s philosophy and benchmarking with proxy companies, the remuneration program is practically applied as follows:

For

per

sona

l use

onl

y

Managing Complexity

25

The table below represents a summary of the existing executive remuneration elements as well as the proposed changes in FY18

Element Purpose Performance metrics Potential value for FY17 Changes in FY2018

FR – not at risk

Provide competitive market salary including superannuation

Nil Positioned at median rate for similar listed entities

KMP FR will remain at FY17 levels with greater focus on rewarding performance in FY18.

STI - all at risk Achieve budgeted growth across the business

Budgeted Group EBITDA and non-financial measures.

The relevant split for determining STIs is shown below: 50% EBITDA 25% Profitable growth in Managed Services 25% Employee satisfaction

50% of the STI award vests immediately and is payable in cash. The remaining 50% is payable 12 months post award.

CEO: target of 50% of FR (max of 67%) ED: target of 35% of FR (max of 47%) CFO: target of 35% of FR (max of 47%)


FY18 STI value target has increased by 5% (max 6%) in line with the Board’s focus on rewarding performance; FR has not increased.

The performance criteria has remained unchanged being: 50% EBITDA: 25% Profitable growth in Managed Services 25% Employee satisfaction

No change to vesting.

LTI - all at risk Achieve long term sustainable growth and return for shareholders

The performance criteria is: 50% Revenue and EBITDA Growth Matrix over 3 years 50% Underlying Cash EPS over 3 years

All share rights vest at the end of the 3 year performance period at which time they convert to ordinary shares.



FY18 The performance criteria below have remained unchanged: 50% Revenue and EBITDA Growth Matrix over 3 years 50% Underlying Cash EPS over 3 years No change to vesting.

Note the performance measures are described in more detail on page 27-30.

The NRC reviews current market conditions and the approaches to STI and LTI plans for listed entities to ensure that our plans reflect a fair and reasonable approach that offers value to shareholders as well as employees. The remuneration packages of the Executive KMP are benchmarked annually with proxy companies to ensure they represent value to the Executive and the Shareholders. For FY18 the Board have approved a 5% increase in the target STI (6% of max) for the ED, CEO and CFO. This increase is 100% at risk. There has been no increase in their underlying FR.

For

per

sona

l use

onl

y

Managing Complexity

26 26

26

Balancing short-term and long-term performance

In FY18 the STI plan is set at a maximum of 73% (FY17: 67%) of FR for the CEO and 53% (FY17: 47%) of FR for all other KMP. The LTI plan remains a set maximum of 60% (FY17: 60%) of FR for the CEO and 40% (FY17: 40%) of FR for the ED and CFO. The STI and LTI target and maximum values are determined in order to drive performance without encouraging excessive risk-taking.

Both STI and LTI plans incorporate vesting periods to align employees’ interests with shareholder interests and to retain talented employees.

Assessing performance

CEO – The Board formally assesses the CEO’s performance. All Key Performance Indicators (KPIs) arecarefully considered by the NRC, which evaluates the CEO’s performance and makes recommendationsto the Board.

Senior Executives – The CEO reviews the performance of the senior executives on an annual basis.Individuals perform self-assessments using pre-determined ratings and evaluation criteria, includingthe business performance of the Group, whether strategic objectives are being achieved, and thedevelopment of management and personnel. The CEO will then provide feedback on that person’sperformance using the same format. A meeting is then held between the CEO and the individual todiscuss issues raised and any discrepancies between the self-assessment and CEO review. The CEO willdiscuss the results of the review with the NRC, which evaluates performance and makesrecommendations to the Board.

In an event of unacceptable performance, including but not limited to, serious misconduct, misalignment with Citadel values, excessive risk taking or a material misstatement in Citadel’s financial statements, the NRC can cancel or defer performance-based remuneration.

c) Elements of remuneration

(i) Fixed annual remuneration (FR)

Executives may receive their FR as cash, or cash with non-monetary benefits such as car allowances. FR is reviewed annually, or on promotion. It is benchmarked against market data for comparable roles in companies in a similar industry and with similar market capitalisation. This ensures that executives are fairly remunerated while taking into account their experience and performance. Superannuation is included in FR.

In FY17, there were a number of changes to the FR of the executive team:

On 1 July 2016 Mr Mark McConnell changed roles from an Executive Director to a Non-ExecutiveDirector and as a result his FR was reduced to reflect only the directors’ fees of a Non-ExecutiveDirector;

On 1 July 2016 the CFO received an increase in FR of approximately 9.5% to ensure executiveremuneration remained in line with the remuneration philosophy; and,

On 16 November 2016 Dr Miles Jakeman changed roles from the Managing Director to ExecutiveDirector and Deputy Chairman and Mr Darren Stanley was appointed to the role of CEO. The FR of bothexecutives was adjusted to reflect the change in roles. There was no change in the total FR expense forCitadel as a result of the change in roles.F

or p

erso

nal u

se o

nly

Managing Complexity

27 27

27

(ii) Short-term incentives (STI)

Participants in the STI Plan have a target and maximum cash payment which is set as a percentage of their FR. Actual STI payments in any given year may be at, above, or below target depending on the achievement of financial and non-financial criteria as set by the Board, in accordance with the terms of the STI Plan, which may be varied from time-to-time by the Board. The current STI Plan provides for financial and non-financial components of the incentive, each weighted at 75% and 25%, respectively.

In FY17 there were three separate STI performance conditions, with 50% of the STI tested against an EBITDA performance condition, 25% tested against an expansion of profitable multi-year managed services business lines performance condition, and 25% tested against an employee satisfaction performance condition. These measures have been selected as a reasonable representation of a balanced scorecard approach for the KMP. There is no change to the STI performance conditions in FY18.

These measures are tested annually after the end of the relevant financial year.

Payments under the STI Plan are phased evenly over two years, with payments made after the release of full year financial results to the ASX. Half of all STI payments are deferred for 12 months and subject to a final review by the NRC and the Board, which retains the right to exercise discretion to forfeit some or all payments if the employee has not remained in service, a material misstatement is required, results were obtained with excessive risk taking, or in cases of employee underperformance or misconduct.

All payments under the STI Plan are determined by the Board, in their absolute discretion.

(ii) Long-term incentives (LTI)

The LTI consists of a share rights plan provided to key management personnel and eligible senior leadership members with certain vesting conditions attached to the rights. Citadel introduced annual grants of LTI with:

An initial performance period of three years; and, Vesting contingent upon specified performance requirements, such as a 3 Year Revenue and EBITDA

Growth Matrix and earnings per share over the 3 year performance period.

There is no change to the LTI performance conditions in FY18.

Key terms of the share rights plan for FY17 were as follows:

Award A share right will vest and become exercisable to the extent that the applicable performance conditions detailed below are satisfied at the end of the relevant performance period (being 1 July 2016 to 30 June 2019 for both the Revenue and EBITDA Growth Matrix and Underlying Cash EPS Performance Condition).

Performance conditions

The Share Rights are subject to the following Performance Conditions:

50% of the total Share Rights granted will be tested based on growth in Citadel’srelative Revenue and EBITDA Growth Matrix over the 3 year performance periodwhich is equally weighted between the two metrics (Revenue and EBITDA GrowthCondition); and,For

per

sona

l use

onl

y

Managing Complexity

28 28

28

50% of the total Share Rights granted will be tested based on growth in Citadel’s earnings per share (Underlying Cash EPS Performance Condition).

The Relative Revenue and EBITDA Growth Performance Condition and the Underlying Cash EPS Performance Condition are independent of each other and will be assessed separately.

Each Performance Condition will be tested after the end of the relevant Performance Period (likely to be at the Board meeting following the relevant annual results announcement, so that final audited numbers are available for the Underlying Cash EPS Performance Condition).

Revenue and EBITDA Growth Condition

50% of the Share Rights in the FY17 LTI grant will be tested against the Revenue and EBITDA Growth which is directly linked to the objective of sustained profitable growth.

The table below reflects the assessment of this Performance Condition, with Revenue and EBITDA being the total of these measures over the 3-year performance period;

The 3 year target for both Revenue and EBITDA is established based on the business strategy, existing growth profiles and expected growth rates;

The 3 year target for both Revenue and EBITDA approved by the board reflects a compound annual growth rate of greater than 10%;

The 3 year target is to be modified for the expected Revenue and EBITDA of any major acquisitions over the remaining proportion of the Performance Period from the date of completion for the acquisition; and,

The Board in its absolute discretion may adjust the achieved revenue growth by up to 15% if the Board determines the quality of the revenue is lower than expectation.

Key: Red – Significantly below target; Yellow – Below target; Green – On target

%of LTI Award 90% 95% 100% 105% 110% 115% 120% 125% 130%

90% 55% 60% 65% 70% 75% 80% 85% 90% 95%

95% 60% 65% 70% 75% 80% 85% 90% 95% 100%

100% 65% 70% 75% 80% 85% 90% 95% 100% 100%

105% 70% 75% 80% 85% 90% 95% 100% 100% 100%

110% 75% 80% 85% 90% 95% 100% 100% 100% 100%

115% 80% 85% 90% 95% 100% 100% 100% 100% 100%

120% 85% 90% 95% 100% 100% 100% 100% 100% 100%

125% 90% 95% 100% 100% 100% 100% 100% 100% 100%

130% 95% 100% 100% 100% 100% 100% 100% 100% 100%

3 Year

Total

Revenue

as a % of

Target

3 Year Total EBITDA as a % of Target

For

per

sona

l use

onl

y

Managing Complexity

29 29

29

Underlying Cash EPS Performance Condition

50% of the Share Rights in the FY17 LTI grant will be tested against the Underlying Cash EPS Performance Condition.

The definition used for Underlying Cash EPS is basic EPS per Australian Accounting Standards adjusted for Non-Cash accounting adjustments:

The tax adjusted amortisation of acquired intangible assets;

The tax adjusted finance expense relating to deferred consideration; and,

The Underlying EPS measure calculated inclusive of any asset impairment or accelerated amortisation.

The Underlying Cash EPS Performance Condition requires the compound annual growth rate (CAGR) in Citadel’s basic EPS over the period 1 July 2016 to 30 June 2019 (the Underlying EPS Performance Period) to exceed 10% before any of the share rights subject to the condition vest.

The EPS Performance Condition is measured on a sliding scale of relative targets set by the NRC:

No Share Rights will be awarded for an EPS CAGR of less than 10%;

50% of Share Rights will be awarded for an EPS CAGR of 10%;

75% of Share Rights will be awarded for an EPS CAGR of 15%; or,

100% of Share Rights will be awarded for an EPS CAGR of 20% or greater.

Share Rights Upon satisfaction of any performance and vesting conditions, each Share Right will, at the Company’s election, convert to a share on a one-for-one basis or entitle the participant to receive cash to the value of a share. Each vested share right also entitles a participant to receive a cash amount equivalent to the value of any dividend or distribution paid on a share on or after the date of grant. Share rights do not carry any voting rights. For accounting purposes, the value of these share rights are expensed on a straight line basis over the vesting period. In the event of a takeover of the Company or the sale of its main undertaking, or that of a business unit, all of the Share Rights shall be allocated to the holder with no further performance or vesting conditions on the date the takeover, merger or sale is completed.

Shares Shares issued under the plan will rank equally with the other issued shares. Depending on the terms of issue, the shares may be subject to disposal restrictions, which means the shares may not be disposed of or dealt with for a period of time. Shares allocated on vesting or exercise of a share right carry the same rights and entitlements as other issued shares, including dividend and voting rights. F

or p

erso

nal u

se o

nly

Managing Complexity

30 30

30

Restrictions Under the FY17 LTI offer, shares allocated on vesting of share rights will not be subject to any further dealing restrictions. Therefore, participants may immediately deal with shares allocated, subject to complying with the Citadel Share Trading Policy.

Dilution Any new shares issued on vesting of share rights will be restricted to a maximum of 5% of total issued shares over the previous five years.

Amendments To the extent permitted by the ASX Listing Rules, the Board retains the discretion to vary the terms and conditions of the share rights plan. This includes varying the number of shares rights or the number of shares to which a participant is entitled upon a reorganisation of capital of Citadel.

d) Link between remuneration and performance

Citadel has performed well in FY17 with management delivering an EBITDA result of $30.1m from continuing operations. As a result, the Board awarded key management personnel 82% of the maximum STI. As detailed in the STI plan, 50% of the award will be paid in cash and 50% will be deferred for 12 months and subject to a final review by the NRC.

Metric Target Performance Impact on incentive award

EBITDA Budgeted EBITDA $30.1 m continued operations

Above target

Managed Services Growth

10% Annual Growth 26.5% Above target

Employee Satisfaction 82% 82% On target

Statutory performance indicators

Citadel aims to align executive remuneration to its strategic and business objectives and the creation of shareholder wealth. The table below shows measures of Citadel’s financial performance over the last five years as required by the Corporations Act 2001. However, these are not necessarily consistent with the measures used in determining the variable amounts of remuneration to be awarded to KMPs. As a consequence, there may not always be a direct correlation between the statutory key performance measures and the variable remuneration awarded.

Statutory Results:

Metric 2017 2016 2015 2014 2013

Revenue ($’000) 100,862 85,143 72,970 49,927 50,278

Net profit attributable to members ($’000)

8,643 8,230 6,525 4,134 3,438

Dividends paid to members ($’000) 4,541 4,949 4,110 1,277 1,277

Basic earnings per share (cents) 18.2 17.6 16.1 12.4 10.3

Share price as at 30 June 5.09 5.40 3.88 NA NA

KMP STI as a % percent of net profit attributable to members

4.17% 4.33% 7.61% NA NA For

per

sona

l use

onl

y

Managing Complexity

31 31

31

e) Remuneration expenses for non-executive and executive KMP

The following table details the actual remuneration expense for Citadel’s KMP for the current and previous financial year measured in accordance with the requirements of the accounting standards. The remuneration expense by Citadel’s KMP reflects the remuneration plan approved in the November 2016 AGM.

Name Year Short-term employee benefits Post-employment

benefits

Long-term employee benefits

Share-based

payments (amount expensed

in the period)

Total

Cash salary & fees

Cash bonus ETP & Other

Super Long service leave

Options & rights

Non-executive directors

K McCann 2017 120,548 - - 11,452 - 33,390 165,390

2016 117,808 - - 11,192 - 37,661 166,661

D Shiff 2017 76,000 - - - - 16,695 92,695

2016 73,500 - - - - 18,831 92,331

P Leahy 2017 76,000 - - - - 16,695 92,695

2016 73,500 - - - - 18,831 92,331

M McConnell 2017 61,935 - 195,0001 4,405 - - 261,340

2016 170,054 - - 18,568 - - 188,622

Executive directors

M Jakeman 2017 391,250 148,785 - - - 89,250 629,285

2016 433,333 206,572 - - - 50,625 690,530

Other key management personnel

D Stanley 2017 383,895 131,041 - 30,215 2,420 179,501 727,072

2016 247,041 53,258 4,409 28,591 450 176,691 510,440

R Burns 2017 302,664 80,402 - 13,657 10,554 96,828 504,105

2016 257,594 96,070 - 23,621 12,259 164,333 553,877

Total KMP remuneration expensed

2017 1,412,292 360,228 195,000 59,729 12,974 432,359 2,472,582

2016 1,372,830 355,900 4,409 81,972 12,709 466,972 2,294,792

1 Represents eligible termination payments paid on 1 July 2016 due to move from executive to non-executive director.

For

per

sona

l use

onl

y

Managing Complexity

32 32

32

f) Contractual arrangements for non-executive and executive KMP

All Executive KMPs (these being Mr Darren Stanley, Dr Miles Jakeman and Mr Robert (Andrew) Burns) are bound by their employment or contractor agreement. The contractual arrangements have been factored into the preceding table: Mr Darren Stanley CEO Terms of Agreement: Employment agreement commencing 16/11/2016 (continuing service since 21/9/2015) Base Package: (FR) $450,000 STI: target of 50% of FR (max of 67%) LTI: target of 45% of FR (max of 60%) Termination: either party may terminate the agreement by giving six month’s written notice. Dr Miles Jakeman Executive Director and Deputy Chairman Terms of Agreement: Services contract commencing 16/11/2016 (continuing service since 6/9/2002) Base Fee: (FR) $290,000 Director’s Fees: $66,000 STI: target of 35% of FR (max of 47%) LTI: target of 30% of FR (max of 40%) Termination: either party may terminate the agreement by giving six month’s written notice. Mr Robert (Andrew) Burns Terms of Agreement: CFO employment agreement commencing 1/7/2016 (continuing service since 8/1/2008) Base Package: (FR) $306,600 STI: target of 35% of FR (max of 47%) LTI: target of 30% of FR (max of 40%) Termination: either party may terminate the agreement by giving six month’s written notice.

Non-executive Directors

All non-executive directors enter into a letter of appointment, which includes fees for chairing or participating on board committees as detailed below. The letter summarises the board policies and terms, including remuneration, relevant to the office of director with the company.

The maximum annual aggregate non-executive directors’ fee pool is $0.5 million (2016: $0.3 million), which includes $10,000 paid to the Chairs of the ARCC and the NRC. This does not include ETP payments made to an Executive Director on transition to non-Executive Director.

From 1 July 2016 to 30 June 2017

$’000

Base fees (per position)

Chair 132,000

Other non-executive directors 66,000

g) Remuneration consultant

The NRC engages Guerdon Associates as remuneration consultants to review specific aspects of existing remuneration policies and to provide recommendations on incentive plan design. Payment for these services in the current year was $11,565 (FY16 $26,057). F

or p

erso

nal u

se o

nly

Managing Complexity

33 33

33

Citadel has confirmed that any remuneration recommendations have been made free from undue influence by members of key management personnel.

The following arrangements were made to ensure that the remuneration recommendations were free from undue influence:

Guerdon Associates was engaged by, and reported directly to, the Chair of the NRC with the agreement for the provision of remuneration consulting services being executed by the Chair under delegated authority on behalf of the Board;

The report containing the remuneration recommendations was provided by Guerdon Associates directly to the Chair; and,

Guerdon Associates was permitted to speak to management throughout the engagement to understand company processes, practices and other business issues and obtain management perspectives. However, Guerdon Associates was not permitted to provide any member of management with a copy of their draft or final report that contained the remuneration recommendations.

h) Other statutory information

The following table shows the relative proportions of actual remuneration earnt by Citadel’s KMP in the current and prior financial year that are linked to performance and those that are fixed, based on the amounts disclosed as statutory remuneration expense on page 31:

(i) Relative proportions of fixed vs variable remuneration expense Fixed remuneration Remuneration linked to performance

Name 2017 2016 2017 2016

Non-executive directors

K McCann 100% 100% - -

D Shiff 100% 100% - -

P Leahy 100% 100% - -

M McConnell 100% 100% -

Executive directors

M Jakeman 61% 67% 39% 33%

Other key management personnel

D Stanley 64% 50% 36% 50%

R Burns 63% 58% 37% 42%

(ii) Share-based payments granted as incentive compensation Share Options No change has been made to the share options issued to non-executive directors on 1 November 2014, which was a one off incentive. If a non-executive director ceases to be a director, any options issued to that director which have not become exercisable automatically lapse. In the event of a takeover of Citadel or the same of its main undertaking all of the options shall be exercisable on the date the takeover, merger or sale is completed. The options do not carry any participation rights in new share issues. On 22 November 2016, one-sixth of the options issued to the independent non-executive directors on 1 November 2014 were exercised into ordinary shares (nil during FY16). The exercise price of the options was $2.70 and the market price was $5.00 per share. Share rights: On 16 November 2016, share rights were granted to the Executive KMP for nil consideration in relation to the FY17 LTI. These share rights have a vesting period of 3 years.

For

per

sona

l use

onl

y

Managing Complexity

34 34

34

On 16 November 2016, share rights were granted to Darren Stanley for nil consideration as a part of the transition to the CEO role. These share rights have a service condition and vesting period of 12 months. On 22 November 2016, two-thirds of the share rights issued to Andrew Burns on 1 November 2014 were exercised into ordinary shares (one-third issued during FY16). Refer below for details on the number of ordinary shares that were granted on exercise of the rights. The consideration paid for the share rights was nil and the market price $5.00 per share. Shares: As of 6 November 2015, 32,051 shares valued at $150,000 were issued to Darren Stanley. The shares were issued as part of the recruitment process of Darren Stanley in to the role of Deputy Chief Executive Officer. No consideration was paid for the shares, the share price as of the grant date was $4.68.

For

per

sona

l use

onl

y

Managing Complexity

35 35

35

(iii) Key management personnel equity holdings

Name Held at 1 July 2016 1

Granted during year

Share rights in lieu of dividends

Vested, exercised and

sold

Held at 30 June 2017

K McCann Options 300,000 - - (50,000) 250,000

Rights - - - - -

Shares 100,000 50,000 - (42,000) 108,000

D Shiff Options 150,000 - - (25,000) 125,000

Rights - - - - -

Shares - 25,000 - (15,000) 10,000

P Leahy Options 150,000 - - (25,000) 125,000

Rights - - - - -

Shares - 25,000 - (19,000) 6,000

M Jakeman Options - - - - -

Rights 59,974 21,928 - - 81,902

Shares 8,399,5072 - - - 8,399,507

M McConnell Options - - - - -

Rights - - - - -

Shares 6,626,306 - - - 6,626,306

R Burns Options - - - - -

Rights 113,767 23,188 2,916 (91,805) 48,066

Shares 60,352 91,805 - (45,000) 107,157

D Stanley Options - - - - -

Rights 31,620 80,914 - - 112,534

Shares 32,051 - - - 32,051

1The opening balance differs to the closing balance disclosed in the FY16 Annual Report as the figures in the FY16 Annual Report for rights granted was based on target share rights to be awarded. It is best practice to report the maximum share instruments that will be awarded and, as such, the opening balance has been restated.

2This number includes shares owned by Jakeman Superannuation Fund.

For

per

sona

l use

onl

y

Managing Complexity

36 36

36

DIRECTORS’ DECLARATION

This report is made in accordance with a resolution of Directors.

Mr Kevin McCann, AM

Chairman

Canberra

21 August 2017

For

per

sona

l use

onl

y

PricewaterhouseCoopers, ABN 52 780 433 757 28 Sydney Avenue, FORREST ACT 2603, GPO Box 447, CANBERRA CITY ACT 2601 T: + 61 2 6271 3000, F: + 61 2 6271 3999, www.pwc.com.au

Liability limited by a scheme approved under Professional Standards Legislation.

Auditor’s Independence Declaration

As lead auditor for the audit of The Citadel Group Limited for the year ended 30 June 2017, I declare that to the best of my knowledge and belief, there have been:

(a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and

(b) no contraventions of any applicable code of professional conduct in relation to the audit.

This declaration is in respect of The Citadel Group Limited and the entities it controlled during the period.

David Murphy Canberra Partner PricewaterhouseCoopers

21 August 2017

For

per

sona

l use

onl

y

Managing Complexity

38 38

38

Corporate directory

DIRECTORS Mr Kevin McCann, AM (Chairman)

Dr Miles Jakeman (Deputy Chairman) – from 16 November 2016

Ms Deena Shiff

Lieutenant-General Peter Leahy, AC (Retd)

Mr Mark McConnell

SECRETARY Mr Robert Andrew Burns

Ms Leanne Ralph

PRINCIPAL PLACE OF BUSINESS

11 Faulding Street

SYMONSTON ACT 2609 AUSTRALIA

Telephone: (02) 6124 0800

Fax: (02) 6201 0550

REGISTERED OFFICE 11 Faulding Street


Telephone: (02) 6124 0800

Fax: (02) 6201 0550

STOCK EXCHANGE LISTING Australian Securities Exchange

SHARE REGISTRY Link Market Services Limited

Level 12, 680 George Street

SYDNEY NSW 2000 AUSTRALIA

Telephone: 1300 554 474

AUDITOR PricewaterhouseCoopers

28 Sydney Ave

FORREST ACT 2603 AUSTRALIA

Telephone: (02) 6271 3000

WEBSITE ADDRESS www.citadelgroup.com.au

The company is limited by shares, incorporated and domiciled in Australia. F

or p

erso

nal u

se o

nly

http://www.citadelgroup.com.au/

Managing Complexity

39 39

39

Annual financial report

ANNUAL FINANCIAL REPORT YEAR ENDED 30 JUNE 2017

For

per

sona

l use

onl

y

Managing Complexity

40 40

40

Annual financial report

The Citadel Group Limited (Citadel) statements are the consolidated statements consisting of Citadel and its subsidiaries.

The financial report is presented in Australian Dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated.

Citadel is a company limited by shares, incorporated and domiciled in Australia. Its registered office is:

11 Faulding Street


Telephone: (02) 6124 0800

Fax: (02) 6201 0550

A description of the nature of the consolidated entity’s operations and its principal activities is included in the Directors’ report on page 19, which is not part of this financial report.

The financial statements were authorised for issue by the Directors on 21 August 2017. The Directors have the power to amend and reissue the financial statements.

Through the use of the internet, we have ensured that corporate reporting is timely, complete, and available globally at minimum cost to Citadel. All press releases and other information are available on Citadel’s website: www.citadelgroup.com.au

For

per

sona

l use

onl

y

http://www.citadelgroup.com.au/

Managing Complexity

41 41

41

Contents Consolidated statement of profit or loss and other comprehensive income ........................................... 42 Consolidated statement of financial position ........................................................................................... 43 Consolidated statement of changes in equity............................................................................................ 45 Consolidated statement of cash flows ....................................................................................................... 46 Notes to the financial statements ...............................................................................................................47 Note 1 – Significant accounting policies ....................................................................................................47 Note 2 – Revenues ...................................................................................................................................... 52 Note 3 – Individually significant expense items ....................................................................................... 54 Note 4 – Expense items .............................................................................................................................. 54 Note 5 – Income tax expense ...................................................................................................................... 55 Note 6 – Earnings per share ...................................................................................................................... 58 Note 7 – Cash and cash equivalents .......................................................................................................... 59 Note 8 – Trade and other receivables ....................................................................................................... 60 Note 9 – Inventories ................................................................................................................................... 60 Note 10 – Other current assets ................................................................................................................... 61 Note 11 – Plant and equipment .................................................................................................................. 62 Note 12 – Intangible assets ........................................................................................................................ 64 Note 13 – Subsidiaries ................................................................................................................................ 68 Note 14 – Trade and other payables .......................................................................................................... 70 Note 15 – Interest bearing liabilities: current ........................................................................................... 70 Note 16 – Interest bearing liabilities: non current .................................................................................... 71 Note 17 – Other payables: non current ...................................................................................................... 71 Note 18 – Obligations under finance leases ............................................................................................... 71 Note 19 – Provisions .................................................................................................................................... 72 Note 20 – Make good provision ................................................................................................................. 73 Note 21 – Other liabilities: current .............................................................................................................74 Note 22 – Contributed equity .....................................................................................................................74 Note 23 – Reserves (net of income tax) ..................................................................................................... 75 Note 24 – Retained earnings ...................................................................................................................... 75 Note 25 – Dividends .................................................................................................................................... 75 Note 26 – Capital management ..................................................................................................................76 Note 27 – Financial risk management ....................................................................................................... 77 Note 28 – Share-based payments .............................................................................................................. 82 Note 29 – Related party transactions ........................................................................................................ 83 Note 30 – Business combinations ............................................................................................................. 84 Note 31 – Discontinued operations ........................................................................................................... 87 Note 32 – Reconciliation of the net profit after tax to the net cash flow from continuing operations .. 88 Note 33 – Operating lease arrangements .................................................................................................. 88 Note 34 – Commitments and contingencies ............................................................................................. 89 Note 35 – Remuneration of auditors ......................................................................................................... 89 Note 36 – Parent entity financial information.......................................................................................... 90 Note 37 – Events occurring after the balance sheet date .......................................................................... 91

For

per

sona

l use

onl

y

Managing Complexity

42 42

42

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

NOTES 2017

$’000

2016

$’000

Sale of goods and rendering of services 2(a) 97,125 74,874

Other income 2(b) 1,720 2,380

98,845 77,254

Cost of sale of goods and rendering of services (51,036) (44,408)

Distribution, sales and marketing (1,265) (1,916)

Occupancy (1,391) (1,211)

Administration (20,775) (15,124)

Finance costs 4(b) (3,066) (3,579)

Share of net profit of associates accounted for using the equity method

- 1,260

Profit before income tax 21,312 12,276

Income tax expense 5 (5,906) (3,754)

Net profit for the year from continuing operations 15,406 8,522

Net (loss)/profit from the year from discontinued operations 31 (2,781) 363

Net profit for the year 12,625 8,885

Other comprehensive income, net of tax - -

Total comprehensive income for the year 12,625 8,885

Profit attributable to:

Owners of The Citadel Group Limited 8,643 8,230

Non-controlling interests 3,982 655

Earnings per share for profit from continuing operations attributable to the ordinary equity holders of the parent entity:

Notes Cents Cents

Basic earnings per share 6 24.0 16.9

Diluted earnings per share 6 23.7 16.3

Earnings per share for profit attributable to the ordinary equity holders of the parent entity:

Notes Cents Cents

Basic earnings per share 18.2 17.6

Diluted earnings per share 17.9 17.0

The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes. F

or p

erso

nal u

se o

nly

Managing Complexity

43 43

43

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

NOTES

2017 $’000

2016 $’000

ASSETS

Current assets

Cash and cash equivalents 7(a) 29,822 34,574

Trade and other receivables 8 17,077 12,469

Inventories 9 2,027 1,098

Other current assets 10 7,243 3,327

TOTAL CURRENT ASSETS 56,169 51,468

Non – current assets

Plant and equipment 11 6,211 5,969

Intangible assets 12 68,358 59,291

Investments at cost 14 14

TOTAL NON – CURRENT ASSETS 74,583 65,274

TOTAL ASSETS

130,752 116,742

LIABILITIES

Current liabilities

Trade and other payables 14 16,839 9,924

Interest bearing liabilities 15 3,714 298

Provisions 19 3,721 2,534

Other current liabilities 21 19,185 20,366

TOTAL CURRENT LIABILITIES

43,459 33,122

Non – current liabilities

Other payables 17 337 12,335

Interest bearing liabilities 16 5,148 970

Deferred tax liabilities 5(d) 5,987 5,410

Provisions 19 370 347

TOTAL NON – CURRENT LIABILITIES 11,842 19,062

TOTAL LIABILITIES

55,301 52,184

NET ASSETS

75,451 64,558

For

per

sona

l use

onl

y

Managing Complexity

44 44

44

NOTES

2017 $’000

2016 $’000

EQUITY Equity attributable to owners of the parent entity

Contributed equity 22 53,722 48,172

Reserves (net of income tax) 23 1,413 1,004

Retained earnings 24 15,872 11,770

Capital and reserves attributable to owners of The Citadel Group Limited 71,007 60,946

Non-controlling interests 13(b) 4,444 3,612

TOTAL EQUITY 75,451 64,558

The above consolidated statement of financial position should be read in conjunction with the accompanying notes.

For

per

sona

l use

onl

y

Managing Complexity

45

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

Attributable to owners of The Citadel Group Limited

Notes Contributed Equity

Reserves (net of income tax)

Retained Earnings Non-controlling

interests Total Equity

$’000 $’000 $’000 $’000 $’000

Balance at 1 July 2015 47,849 649 8,489 - 56,987

Total comprehensive income for the year - - 8,230 655 8,885

Transactions with owners in their capacity as owners, net of income tax:

Non-controlling interests on acquisition of subsidiary 30(d) - - - 2,957 2,957

Dividends paid 25 - - (4,949) - (4,949)

Share based payments 28(b) 150 528 - - 678

Exercise of share rights 173 (173) - - -

Balance at 30 June 2016 48,172 1,004 11,770 3,612 64,558

Total comprehensive income for the year 8,643 3,982 12,625

Transactions with owners in their capacity as owners, net of income tax:

Shares issued to satisfy deferred consideration 5,000 - - - 5,000

Dividends paid 25 & 13(b)

- - (4,541) (3,150) (7,691)

Contributions of equity, net of income tax 268 - - - 268

Share based payments 28(b) - 691 - - 691

Exercise of share rights 282 (282) - - -

Balance at 30 June 2017 53,722 1,413 15,872 4,444 75,451 For

per

sona

l use

onl

y

Managing Complexity

46 46

46

CONSOLIDATED STATEMENT OF CASH FLOWS

NOTES 2017

$’000

2016

$’000

Cash flows from operating activities

Receipts from customers 98,110 80,646

Payments to suppliers and employees (67,234) (66,514)

Income taxes paid (5,421) (2,849)

Interest & borrowing costs paid (727) (547)

Interest & other income received 206 423

Net cash inflow from operating activities 32 24,934 11,159

Cash flows from investing activities

Payments for plant & equipment (1,891) (1,568)

Proceeds from sale of plant & equipment - 5

Proceeds from the maturity of short-term deposits - 1,554

Dividends received - 1,575

Payment for acquisition of subsidiary, net of cash acquired 30(e) (23,196) (1,495)

Payments for capitalised development costs - (1,484)

Net cash (outflow) from investing activities (25,087) (1,413)

Cash flows from financing activities

Proceeds from issuance of shares 321 73

Dividends paid (7,691) (4,949)

Proceeds from loans 10,000 708

Repayment of loans (2,107) (5,393)

Repayment of lease liabilities (124) (66)

Net cash (outflow)/inflow from financing activities 399 (9,627)

Net (decrease)/increase in cash and cash equivalents 246 119

Cash flows of discontinued operations 31 (4,998) (1,973)

Cash and cash equivalents at the beginning of financial year 34,574 36,428

Cash and cash equivalents at the end of the year 7(b) 29,822 34,574

The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. For

per

sona

l use

onl

y

Managing Complexity

47 47

47

Notes to the financial statements

Statement of compliance

These financial statements are general purpose financial statements which have been prepared in accordance with the Corporations Act 2001, Australian Accounting Standards and Interpretations issued by the Australian Accounting Standards Board, and comply with other requirements of the law.

The financial statements comprise the consolidated financial statements of The Citadel Group Limited (Citadel). For the purposes of preparing the consolidated financial statements, Citadel is a for-profit entity.

Basis of preparation

The consolidated financial statements have been prepared on the basis of historical cost, except for certain financial instruments that are measured at revalued amounts or fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair values of the consideration given in exchange for goods and services. All amounts are presented in Australian dollars, unless otherwise noted.

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, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, Citadel takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of AASB 2 Share-based payments, leasing transactions that are within the scope of AASB 117 Leases, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in AASB 2 or value in use in AASB 136 Impairment of Assets.

Citadel is a company of the kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191, dated 24 March 2016, and in accordance with that Instrument amounts in the financial report are rounded off to the nearest thousand dollars, unless otherwise indicated.

NOTE 1 – SIGNIFICANT ACCOUNTING POLICIES

(a) Principles of consolidation

(i) Subsidiaries

Subsidiaries are all entities (including structured entities) over which Citadel has control. Citadel controls an entity Citadel is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to Citadel. They are deconsolidated from the date that control ceases.

The acquisition method of accounting is used to account for business combinations by Citadel (refer to note 1(f)).

Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated. Unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by Citadel.

For

per

sona

l use

onl

y

Managing Complexity

48 48

48

(ii) Associates

Associates are all entities over which Citadel has significant influence but not control or joint control. This is generally the case where Citadel holds between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting (see (iii) below), after initially being recognised at cost.

(iii) Equity method

Under the equity method of accounting, the investments are initially recognised at cost and adjusted thereafter to recognise Citadel’s share of the post-acquisition profits or losses of the investee in profit or loss, and Citadel’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from associates and joint ventures are recognised as a reduction in the carrying amount of the investment.

When Citadel’s share of losses in an equity-accounted investment equals or exceeds its interest in the entity, including any other unsecured long-term receivables, Citadel does not recognise further losses, unless it has incurred obligations or made payments on behalf of the other entity.

Unrealised gains on transactions between Citadel and its associates are eliminated to the extent of Citadel’s interests in these entities. Unrealised losses are also eliminated unless the transactions provide evidence of an impairment of the asset transferred. Accounting policies of equity accounted investees have been changed where necessary to ensure consistency with the policies adopted by Citadel.

(b) Foreign currency translation

(i) Functional and presentation currency

Items included in the consolidated financial statements of each of Citadel’s entities are measured using Australian dollars $A (‘the functional currency’). The consolidated financial statements are presented in Australian dollars, which is CGL’s functional and presentation currency.

(ii) Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the consolidated statement of profit or loss and other comprehensive income.

(c) Goods and services tax (GST)

Revenues, expenses and assets are recognised net of the amount of associated GST, unless the GST incurred is not recoverable from the taxation authority. 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 taxation authority is included with other receivables or payables in the balance sheet.

Cash flows are presented on a gross basis. The GST components of cash flows arising from investing or financing activities which are recoverable from, or payable to the taxation authority, are presented as operating cash flow.

(d) New, revised or amending Accounting Standards and Interpretations adopted

Citadel has applied the following standards and amendments for the first time for the reporting period commencing 1 July 2016:

AASB 2015-1 Amendments to Australian Accounting Standards – Annual Improvements to Australian Accounting Standards 2012-2014 Cycle F

or p

erso

nal u

se o

nly

Managing Complexity

49 49

49

AASB 2015-2 Amendments to Australian Accounting Standards – Disclosure Initiative: Amendments to AASB 101

AASB 2015-9 Amendments to Australian Accounting Standards – Scope and application Paragraphs

AASB 2015-1 includes a number of amendments to Australian Accounting Standards including AASB 119 where it clarifies that the rate used to discount post-employment benefit obligations should be determined by reference to market yields at the end of the reporting period on high quality corporate bonds. The amendments apply to annual periods beginning on or after 1 January 2016. The adoption of this standard did not have a material impact on Citadel’s consolidated financial statements.

AASB 2015-2 includes amendments to AASB 101 to give some guidance on how to apply the concept of materiality in practice. The adoption of this standard did not have a material impact on Citadel’s consolidated financial statements.

AASB 2015-9 includes amendments to AASB 8, AASB 133 and AASB 1057 to move Australian specific application paragraphs from each standard into a combined standard. The adoption of this standard did not have a material impact on Citadel’s consolidated financial statements.

(e) Standards and Interpretations in issue not yet adopted

At the date of authorisation of the financial statements, the Standards and Interpretations listed below were in issue but not yet effective.

Standard/Interpretation Effective for annual reporting periods beginning on or after

Expected to be initially applied in the financial year ending

AASB 9 Financial Instruments, and the relevant amending standards

1 January 2018 30 June 2019

AASB 15 Revenue from Contracts with Customers


AASB 16 Leases 1 January 2019 30 June 2020

AASB 2016-5 Amendment to Australian Accounting Standards – Classification and Measurement of Share-based Payment Transactions


AASB 9 issued in December 2009, introduced new requirements for the classification and measurement of financial assets. AASB 9 was amended in December 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition. Citadel does not expect any material impact from the requirements of the amended standard as there are currently no hedges in place and the changes are not expected to materially impact other financial assets and liabilities held by Citadel.

AASB 15 is a new standard for the recognition of revenue and will replace AASB 118 which covers contracts for goods and services and AASB 111 which covers construction contracts. The new standard is based on the principle that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. The standard permits a modified retrospective approach for the adoption.

A preliminary assessment of the new standard has identified the contract types which will be most impacted are fixed price contracts for technology consulting and integration services (refer to Note 2), as these contracts may contain a large implementation component that is completed over an extended period. Under the previous

For

per

sona

l use

onl

y

Managing Complexity

50 50

50

standard the revenue recognition policy for these contracts was based on the percentage complete method. Under the new standard Citadel is required to determine if control has been established which may be on completion or achievement of predetermined deliverables before the revenue is recognised. Citadel has not yet calculated the quantum of the impact of the new standard.

AASB 16 provides a comprehensive model for the identification of lease arrangements and their treatment in the financial statements of both lessees and lessors. The accounting model for lessees will require lessees to recognise all leases on balance sheet, except for short-term leases and leases of low value assets. Citadel has performed a quantitative assessment and does not consider the implementation of the standard to have a significant impact given the small number of affected leases (note 33 provides details of current operating lease arrangements). Additional disclosure will be required to recognise a lease asset and lease liability on the statement of financial position.

AASB 2016-5 includes amendments to AASB 2 to clarify the treatment for share based payments where there are modifications to the terms and conditions that change the classification and measurement of cash-settled payments for the effects of vesting and non-vesting conditions.

The adoption of these Standards and Interpretations in issue but not yet effective will impact Citadel’s accounting policies and will result in changes to information currently disclosed. Citadel does not intend to adopt any of these pronouncements before their effective dates. There are no other standards that are not yet effective and that would be expected to have a material impact on Citadel in the current or future reporting periods and on foreseeable future transactions.

(f) Business combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value which is calculated as the sum of the acquisition-date fair values of assets transferred by Citadel, liabilities incurred by Citadel and the equity instruments issued by Citadel in exchange for control of the acquire. Acquisition-related costs are recognised in profit or loss as incurred.

At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, with the exception of deferred tax liabilities which are measured in line with AASB 112.

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interests in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If those amounts are less than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised directly in profit or loss as a bargain purchase.

Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.

Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such re-measurement are recognised in profit or loss.

For

per

sona

l use

onl

y

Managing Complexity

51 51

51

(g) Critical accounting judgements and key sources of estimation uncertainty

(i) Significant accounting judgements

The preparation of financial statements requires the use of accounting estimates which, by definition, will seldom equal the actual results. Management also needs to exercise judgement in applying Citadel’s accounting policies. The estimates, judgements and assumptions are based on historical experience, adjusted for current market conditions and other factors that are believed to be reasonable under the circumstances and are reviewed on a regular basis. Actual results may differ from these estimates.

The areas that involved a higher degree of judgement or complexity are included in the following notes:

Note 2 – Percentage of completion

Note 12 – Fair value of acquired intangibles

Note 12 – Impairment of goodwill and intangibles with indefinite useful lives

Note 28 – Fair value of share options issued to employees

Note 28 – Share-based payment arrangements

Note 30 – Fair value of consideration on acquisition

For

per

sona

l use

onl

y

Managing Complexity

52 52

52

NOTE 2 - REVENUES

Significant accounting policies

Citadel recognises revenue when the amount of revenue can be reliably measured, it is probable that future economic benefits will flow to the entity and specific criteria have been met for each of Citadel’s activities as described below. The amount of revenue is not considered to be reliably measurable until all contingencies relating to the sale have been resolved. Citadel bases its estimates on historical results, taking into consideration the type of customer, the type of transaction and the specifics of each arrangement.

Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and duties and taxes paid.

Generally, Citadel records the full gross amount of sale proceeds as revenue. However, if Citadel is acting as an agent, revenue is recorded on a net basis (being the gross amount billed less the amount paid to the supplier acting as a principal in the arrangement).

(i) Sale of technological products

In addition to the recognition criteria noted above, revenue from the sale of technological products is recognised when:

Citadel has passed the risk and rewards of ownership in the goods to the buyer;

Citadel retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold; and,

The costs incurred or to be incurred in respect of the transaction can be measured reliably.

2017 2016

$’000 $’000

(a) Sale of goods and rendering of services

Rendering of services 69,102 44,138

Sale of goods 16,143 8,575

Construction contract revenue - 12,923

Licence fees 11,880 9,238

97,125 74,874

(b) Other Income

Finance revenue 182 398

Net foreign exchange (10) (7)

Gain on fair value of associate immediately prior to acquisition - 1,479

Gain on fair value re-measurement of financial instruments 1,316 356

Other income 232 154

1,720 2,380

Total revenue 98,845 77,254

For

per

sona

l use

onl

y

Managing Complexity

53 53

53

(ii) Rendering of services

Educational and training services (discontinued operation)

Revenue from education and training services is recognised in the accounting period in which the delivery of the programme occurs. The recognition of revenue is based on the number of teaching days completed in relation to the total teaching days for the programme.

Technology consulting and integration services

The revenue of time and material contracts is recognised at the contractual rates as labour hours are delivered and direct expenses are incurred.

For fixed services contracts, revenue is recognised on a straight line basis over the contractual term of the contract.

For fixed price contracts, revenue is recognised under the percentage of completion method.

Where a loss is expected to occur, it is recognised immediately in the statement of profit or loss and other comprehensive income. If circumstances arise that may change the original estimate of the revenue, costs or extent of progress towards completion, the estimates are revised. These revisions may result in increases or decreases in revenue and costs and are reflected in the period in which the circumstances that give rise to the revision became known by management.

Software development

The revenue recognition policy for software development services is the same as noted above for fixed price contracts.

(iii) Licence fees

Revenue from licence fees for use of developed software is recognised on a straight line basis over the term of the licence. If the licence is perpetual and has no ongoing obligations, the revenue is recognised at the point of sale.

(iv) Dividends

Dividends are recognised as revenue when the right to receive payment is established.

(v) Finance revenue

Finance revenue is recognised as it accrues, taking into account the effective yield on the financial asset, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount on initial recognition.

(vi) Gain on fair value re-measurement of financial instruments

Gain on fair value re-measurement of financial instruments reflects the gain from management’s re-estimate of contingent consideration which is based on an average EBITDA measure. If the expectation of the payable amount is lower than previously estimated, the difference is recognised directly in the statement of profit or loss and other comprehensive income as other income.

Critical accounting estimates

(i) Percentage of completion

The percentage of completion is determined by the aggregated cost of effort for the individual contract incurred at the end of the reporting period compared with the estimated budgeted effort. Management’s estimation of the cost incurred to date and the budgeted cost are primarily based on the labour effort employed in the contract. Corresponding revenue from contract work is also estimated by management based on the percentage of completion and contracted revenue. Citadel regularly reviews and revises the estimation of both contract revenue and contract cost in the budget prepared for each contract as these contract progresses.

For

per

sona

l use

onl

y

Managing Complexity

54 54

54

NOTE 3 – INDIVIDUALLY SIGNIFICANT EXPENSE ITEMS

Citadel has identified a number of items which are material due to the significance of their nature and/or amount. These are listed separately here to provide a better understanding of the financial performance of Citadel.

NOTE 4 – EXPENSE ITEMS

2017 2016

$’000 $’000

Acquisition-related costs 322 -

Rent expense 1,826 987

Governance costs 549 136

2,697 1,123

2017 2016

$’000 $’000

(a) Breakdown of expenses by nature

Changes in inventory of finished goods and work in progress 13,907 8,238

Employee benefits expenses 23,413 16,438

Depreciation 982 725

Amortisation 4,737 3,863

(b) Finance costs

Finance charges payable under invoice financing & trade facility 25 219

Finance charges payable under finance leases 29 18

Overdraft charges & bank fees 665 240

Liabilities: unwinding of discount 2,347 3,102

Total finance costs expensed 3,066 3,579

For

per

sona

l use

onl

y

Managing Complexity

55 55

55

NOTE 5 – INCOME TAX EXPENSE

Refer below for details on Citadel’s tax funding arrangement as a tax consolidated group. Movements in and closing balances of deferred tax during the year are summarised below:

2017 2016

$’000 $’000

(a) Income Tax Expense relating to continuing operations

Current Tax

7,101 2,505

Current Tax – adjustment to prior year

(312) 462

Deferred Tax

(883) 787

5,906 3,754

Deferred income tax (revenue) expense included in income tax expense comprises:

Decrease/(Increase) in deferred tax assets (not including any increase through business combinations)

(415) 149

Increase/(Decrease) in deferred tax liabilities (not including any increase through business combinations)

(468) 638

(883) 787

(b) Numerical reconciliation of income tax expense to prima facie tax payable

Profit from continuing operations before income tax expense 21,312 12,276

At the Group’s statutory income tax rate of 30 % (2016: 30%) 6,394 3,683

Gain on fair value increases (395) (549)

Research & development credit (486) (329)

Dividends - 70

Imputation credits - (473)

Unwinding of discount 705 931

Under/(over) provision of prior year income tax (312) 421

Income tax expense recognised in profit or loss (relating to continuing operations)

5,906 3,754

(c) Current tax liabilities

Provision for income tax 19 2,030 927

2,030 927

(d) Deferred tax balances are presented in the statement of financial position as follows:

Deferred tax liabilities 5,987 5,410

Net deferred tax liability 5,987 5,410

For

per

sona

l use

onl

y

Managing Complexity

56 56

56

2017

Opening balance

Recognised in profit or loss

Recognised in other

comprehensive income

Closing balance

$,000 $,000 $,000 $,000

Provisions 468 45 - 513

Inventory obsolescence 9 25 - 34

Doubtful debts 28 43 - 71

Prepayments (8) 3 - (5)

IPO costs 570 (190) - 380

Capital legal fees 3 2 - 5

Accrued expenses 157 386 - 543

R & D (409) (400) - (809)

Accrued revenue (95) (1,303) - (1,398)

Share based payments 155 123 - 278

Intangible assets (6,436) 2,170 - (4,266)

Other liabilities 94 7 - 101

Amortisation 54 (28) - 26

(5,410) 883 - (4,527)

Deferred tax liability assumed on acquisition (1,460)

Net deferred tax liability expected to be settled after more than 12 months

(5,987)

Net deferred tax assets / (liabilities) (5,987)

2016 $,000 $,000 $,000 $,000

Provisions 601 (133) - 468

Inventory obsolescence 47 (38) - 9

Doubtful debts 17 11 - 28

Prepayments (7) (1) - (8)

IPO costs 761 (191) - 570

Capital legal fees 5 (2) - 3

Accrued expenses 229 (72) - 157

R & D (209) (200) - (409)

Accrued revenue (79) (16) - (95)

Share based payments 49 106 - 155

Intangible assets (3,378) (400) - (3,778)

Other liabilities 38 56 - 94

Amortisation 28 26 - 54

(1,898) (854) - (2,752)

Deferred tax liability assumed on acquisition (2,658)

Net deferred tax assets expected to be recovered after more than 12 months

(5,410)

Net deferred tax assets / (liabilities) (5,410)

For

per

sona

l use

onl

y

Managing Complexity

57 57

57


Income tax expense represents the sum of the tax currently payable and deferred tax.

(i) Current tax

The income tax expense or credit for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and to unused tax losses. Citadel’s current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period.

(ii) Deferred tax

Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated 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 & loss. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the balance sheet 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 liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences and it is probable that the differences will not reverse in the foreseeable future.

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 entity 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.

Citadel and its wholly owned Australian controlled entities implemented the tax consolidation legislation as of 1 July 2005. The head entity, Citadel and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. Citadel has applied the allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the consolidated group.

In addition to its own current and deferred tax amounts, Citadel also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from the controlled entities in the tax consolidated group.

Assets or liabilities arising under the tax funding agreements with the tax consolidated entities are recognised as amounts receivable or payable to other entities in Citadel. Any difference between the amounts assumed and amounts receivable or payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly owned tax consolidation entities.

For

per

sona

l use

onl

y

Managing Complexity

58 58

58

NOTE 6 – EARNINGS PER SHARE

(a) Employee share rights

Share rights granted to employees are considered to be potential ordinary shares. They have been included in the determination of diluted earnings per share as the participants still remain employed by Citadel. They have not been included in the determination of basic earnings per share. Details relating to the rights are set out in note 28(a).

2017 2016

Cents per share Cents per share

Basic earnings per share 24.0 16.9

Diluted earnings per share 23.7 16.3

$’000 $’000

(a) Basic earnings per share

The earnings and weighted average number of ordinary shares used in the calculation of basic earnings per share are as follows:

Profit from continuing operations for the year attributable to owners of Citadel 11,424 7,867

Earnings from continuing operations used in the calculation of basic earnings per share

11,424 7,867

Profit for the year from discontinued operations used in the calculation of basic earnings per share from discontinued operations

(2,781) 363

Earnings used in the calculation of basic earnings per share 8,643 8,230

Weighted average number of ordinary shares for the purposes of basic earnings per share

47,549 46,702

(b) Diluted earnings per share

The earnings used in the calculation of diluted earnings per share are as follows:

Earnings used in the calculation of basic earnings per share 11,424 7,867

Earnings used in the calculation of diluted earnings per share 11,424 7,867

Profit for the year from discontinued operations used in the calculation of basic earnings per share from discontinued operations

(2,781) 363

Earnings used in the calculation of diluted earnings per share 8,643 8,230

Weighted average number of ordinary shares used in the calculation of basic earnings per share

47,549 46,702

Shares deemed to be issued for no consideration in respect of:

Options 228 240

Employee share rights 529 472

Contingently issuable shares on business combinations - 926

Weighted average number of ordinary shares used in the calculation of diluted earnings per share

48,306 48,340

For

per

sona

l use

onl

y

Managing Complexity

59 59

59


(i) Basic earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of Citadel, 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 year.

(ii) Diluted earnings per share

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account the after income tax effect of interest and other financing costs associated with 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 7 – CASH AND CASH EQUIVALENTS


Cash and cash equivalents includes cash on hand, 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 and bank overdrafts.

(a) Cash and cash equivalents per the statement of financial position 2017 2016

$’000 $’000

Cash at bank and in hand 6,179 24,361

Short-term deposit 23,643 10,213

29,822 34,574

(b) Cash and cash equivalents reconciliation for cash flow purposes

Cash at bank and in hand 6,179 24,361

Short-term deposit 23,643 10,213

29,822 34,574

For

per

sona

l use

onl

y

Managing Complexity

60 60

60

NOTE 8 – TRADE AND OTHER RECEIVABLES


Trade receivables are recognised initially at fair value and subsequently measured at amortised cost, less an impairment provision. Trade receivables are generally due for settlement between 30 and 60 days from the date of invoice.

Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off. An impairment provision is established when there is objective evidence that Citadel will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of the provision is recognised in the income statement.

NOTE 9 – INVENTORIES

(i) Assigning costs to inventories

The costs of individual items of inventory are determined using weighted average costs.

2017 2016

$’000 $’000

Trade receivables 17,062 12,081

Provision for doubtful debts (237) (92)

Other receivables 252 480

17,077 12,469

The aging analysis of trade receivables is as follows:

Past due

Total Neither Past Due nor impaired

30 to 60 days 60 to 90 days >90 days

$’000 $’000 $’000 $’000 $’000

30-Jun-17 17,062 15,015 1,552 254 241

30-Jun-16 12,081 8,480 2,752 121 728

Provision for doubtful debts relates wholly to trade receivables >90 days.

2017 2016

$’000 $’000

Finished goods 2,140 1,128

Provision for obsolescence (191) (30)

Work in progress 78 -

2,027 1,098

For

per

sona

l use

onl

y

Managing Complexity

61 61

61

(ii) Amounts recognised in profit and loss

There were no reversals of write-down in the current year (2016: nil).


Work in progress and finished goods are stated at the lower of cost and net realisable value. Cost comprises direct materials and direct labour. Costs are assigned to individual items of inventory on the basis of weighted average costs. Costs of purchased inventory are determined after deducting rebates and discounts. 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.

NOTE 10 – OTHER CURRENT ASSETS

2017 2016

$’000 $’000

Prepayments 414 237

Income accrual 6,828 3,089

Short-term deposits 1 1

7,243 3,327

For

per

sona

l use

onl

y

Managing Complexity

62

NOTE 11 – PLANT AND EQUIPMENT

Furniture &

office equipment

Plant & equipment

Computer equipment

Leasehold improvements

Motor vehicles

Make good assets

ICT Software

Total

$’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000

Cost

Balance at 1 July 2015 439 198 1,127 1,362 204 332 1,003 4,665

Additions 17 76 964 1,047 173 217 2,488 4,982

Disposals/write-offs (185) (10) (5) (187) (121) (132) - (640)

Balance at 1 July 2016 271 264 2,086 2,222 256 417 3,491 9,007

Additions (including transfers from assets under construction and acquired through business combinations)

212 - 38 146 32 - 2,801 3,229

Disposals/write-offs (234) - (238) (1,689) - (258) (135) (2,554)

Cost at 30 June 2017 249 264 1,886 679 288 159 6,157 9,682

Accumulated depreciation

Balance at 1 July 2015 (201) (96) (350) (327) (137) (244) (673) (2,028)

Depreciation for the year (44) (36) (627) (393) (24) (71) (307) (1,502)

Disposals/write-off 116 - 3 121 120 132 - 492

Balance at 1 July 2016 (129) (132) (974) (599) (41) (183) (980) (3,038)

Depreciation for the year (42) (28) (351) (605) (33) (66) (751) (1,876)

Disposals/write-off 48 - 200 941 - 160 94 1,443

Accumulated depreciation at 30 June 2017 (123) (160) (1,125) (263) (74) (89) (1,637) (3,471)

Net book value at 30 June 2017 126 104 761 416 214 70 4,520 6,211

Net book value at 30 June 2016 142 132 1,112 1,623 215 234 2,511 5,969 For

per

sona

l use

onl

y

Managing Complexity

63


All plant and equipment is stated at historical cost less accumulated depreciation and any accumulated impairment losses. Historical cost includes expenditure that is directly attributable to the acquisition of the items.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to Citadel and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

Depreciation on assets is calculated using the straight line or diminishing value method to allocate their cost, net of their residual values, over their estimated useful lives, as follows:

Furniture and office equipment 3-8 years

Plant and equipment 5-10 years

Computer equipment 3-5 years

ICT Software 2-10 years

Motor vehicles 3-5 years

Leasehold improvements Term of lease

The asset’s residual value and useful life is reviewed, and adjusted if appropriate, at each balance sheet date.

An asset’s carrying amount is written down immediately to its recoverable amount if the asset’s carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing sales proceeds with carrying amount. These are included in the statement of profit or loss and other comprehensive income.

An item of plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset.

(i) (i) Impairment of non-financial assets other than goodwill and indefinite life intangibles

Non-financial assets other than goodwill and intangible assets that have an indefinite useful life are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows which are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other than goodwill that suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

(ii) Significant accounting judgements

Acquired software valuation

Citadel measures ICT Software at fair value for financial reporting purposes when non-monetary assets are given as consideration in line with the requirements of AASB 138 Intangible Assets. In estimating the fair value, Citadel adopts a discounted cash flow approach. This methodology requires significant assumptions regarding expected future revenue streams and the discount rate.

Where a signed contract is available which details the future revenue charges, these amounts are used as the basis for expected future revenue. Citadel also uses transactions of a similar nature as a guide to determining expected revenue from selling licences and/or managed services for the software. The level of risk associated with the software is considered when calculating the discount rate in addition to the average borrowing rate Citadel would be able to obtain from external funding.

Citadel amortises ICT Software acquired through non-monetary exchange in line with the useful lives detailed above, and perform impairment testing on an annual basis.

For

per

sona

l use

onl

y

Managing Complexity

64

NOTE 12 – INTANGIBLE ASSETS

Goodwill Business process,

software and product

development

Trademarks & other rights

Patents & licences

Customer contracts

Total

$’000 $’000 $’000 $’000 $’000 $’000

Cost

Balance at 1 July 2015 26,420 29,663 54 121 11,026 67,284

Additions – capitalised development costs and acquired through business combinations

2,974 1,111 1 - - 4,086

Disposals and transfers to fixed assets

- (772) - - - (772)

Total Cost at 30 June 2016 29,394 30,002 55 121 11,026 70,598

Additions – capitalised development costs and acquired through business combinations

6,162 3,696 301 - 5,073 15,232

Disposals/write-off and transfers to fixed assets

- (1,792) - (121) - (1,913)

Total Cost at 30 June 2017 35,556 31,906 356 - 16,099 83,917

Accumulated amortisation and impairment

Balance at 1 July 2015 (5,995) (1,248) - - (92) (7,335)

Amortisation expense - (2,872) - - (1,103) (3,975)

Disposals/write-off - 3 - - - 3

Total Accumulated Amortisation at 30 June 2016

(5,995) (4,117) - - (1,195) (11,307)

Amortisation expense - (3,174) - - (1,610) (4,784)

Disposals/write-off - 532 - - - 532

Total Accumulated Amortisation at 30 June 2017

(5,995) (6,759) - - (2,805) (15,559)

Net book value

30 June 2017 29,561 25,147 356 - 13,294 68,358

30 June 2016 23,399 25,885 55 121 9,831 59,291

For

per

sona

l use

onl

y

Managing Complexity

65

Goodwill and other intangible assets with indefinite useful lives have been allocated for impairment testing purposes to the cash-generating units listed below.

Goodwill Trademarks & other rights

Patents & Licences

Total

$’000 $’000 $’000 $’000

Education - - 121 121

Knowledge 7,885 51 - 7,936

Technology & Integration 8,325 - - 8,325

Health 7,189 4 - 7,193

30 June 2016 Total 23,399 55 121 23,575

Education - - - -

Knowledge 14,047 352 - 14,399

Technology & Integration 8,325 - - 8,325

Health 7,189 4 - 7,193

30 June 2017 Total 29,561 356 - 29,917

Citadel tests whether goodwill has suffered any impairment on an annual basis. The recoverable amount of a cash generating unit (CGU) is determined based on value-in-use calculations which require the use of assumptions, which are detailed below. The calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using the estimated growth rates stated below. The growth rates used in the cash flow predications are limited by the accounting standards to growth from existing markets and existing products. Expansion into adjacent markets and products have been excluded from these growth assumptions.

Forecasted Revenue

Compound Annual Growth

Rates

Discount Rate Terminal Rate

% % %

Knowledge 6.1 15.5 1.0

Technology & Integration 8.6 15.5 1.0

Health 2.9 15.5 1.0

These assumptions have been used for the analysis of each CGU within an operating division. Management determined budgeted gross margin based on past performance and its expectations for the future. The compound annual growth rates used are based on past performance and continued growth planned without further strategic initiatives approved by management. The discount rates used reflect specific risks relating to Citadel and the markets in which we operate. The directors and management have considered and assessed reasonably possible changes for key assumptions and have not identified any instances that could cause the carrying amount of a CGU to exceed its recoverable amount.

For

per

sona

l use

onl

y

Managing Complexity

66


Intangible assets acquired separately or in a business combination are initially measured at cost. The cost of an intangible asset acquired in a business combination is its fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised and expenditure is recognised in profit or loss in the year which the expenditure is incurred.

The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over their useful life and tested for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset.

Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash-generating unit level consistent with the methodology outlined for goodwill below. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed each reporting period to determine whether indefinite life assessment continues to be supportive. 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.

Gains or losses arising from de-recognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in profit or loss when the asset is derecognised.

(i) Goodwill

Goodwill acquired in a business combination is initially measured at cost of the business combination being the excess of the consideration transferred over the fair value of Citadel’s net identifiable assets acquired and liabilities assumed. If this consideration transferred is lower than the fair value of the net identifiable assets of the subsidiary acquired, the difference is recognised in profit or loss.

After initial recognition, goodwill is measured at cost less any accumulated impairment losses.

For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of Citadel’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of Citadel are assigned to those units or groups of units. Each unit or group of units to which the goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.

Goodwill impairment reviews are undertaken annually or more frequently if events or changes in circumstances indicate a potential impairment. If the recoverable amount of the cash-generating unit to which goodwill has been allocated is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss. An impairment loss recognised for goodwill is not reversed in subsequent periods.

(ii) Research and development costs

Research costs are expensed as incurred. An intangible asset arising from development expenditure on an internal project is recognised only when Citadel 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.

For

per

sona

l use

onl

y

Managing Complexity

67

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.

A summary of the policies applied to Citadel’s intangible assets is as follows:

Goodwill Business process,

software and product

development

Trademarks & other rights

Patents & licences

Customer contracts

Useful lives Indefinite 3 – 10 years Indefinite Indefinite 5-10 years

Impairment testing

Annually Annually Annually Annually Annually

(iii) Patents and licences

The patents and licences have been granted for a minimum of 10 years by the relevant government agency with the option of renewal without significant cost at the end of this period provided that Citadel meets certain predetermined targets. The fact that patents and licences have previously been renewed and that the evidence supports the meeting of these targets have allowed Citadel to determine that there is no foreseeable limit to the period over which the assets are expected to generate net cash inflows for Citadel. Thus, the assets have indefinite useful lives. Costs capitalised include external direct costs of materials and service in acquiring the patents or licences.

(iv) Trademarks and other rights

Costs capitalised include external direct costs of materials and service in acquiring the trademarks and other rights.

(v) IT development and software

Costs incurred in developing products or systems and costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation and/or cost reduction are capitalised. Costs capitalised include external direct costs of materials and service, direct payroll and payroll related costs of employees’ time spent on the project.

IT development costs include only those costs directly attributable to the development phase and are only recognised following completion of technical feasibility and where Citadel has an intention and ability to use the asset.

(vi) Customer contracts

Customer contracts acquired as part of a business combination are recognised at fair value at the date of acquisition and are subsequently amortised on a straight-line based on the timing of projected cash flows of the contracts over their estimated useful lives.

Significant assumptions

Fair value of acquired intangibles

The fair value of intangible assets acquired in a business combination has been determined using a discounted cash flow approach. This methodology requires significant assumptions regarding the future revenue streams, EBITDA results, the proportion of EBITDA attributable to software versus customer contracts, and the discount rate.

For

per

sona

l use

onl

y

Managing Complexity

68

Future revenue streams and EBITDA results are determined using budget estimates and forecasts taking into consideration the expected revenue arising from contracts and the costs associated with delivering those contracts. The level of risk associated with the software was also considered when calculating the discount rate. Citadel amortises the acquired intangibles in line with the useful lives detailed above and will perform impairment testing on an annual basis.

Impairment of goodwill and intangibles with indefinite useful lives

Citadel tests for impairment of goodwill and intangibles with indefinite useful lives on at least an annual basis. This requires estimates of the recoverable amount of the cash generating units using a value-in-use discounted cash flow methodology, to which the goodwill and intangibles with indefinite useful lives are allocated.

NOTE 13 – SUBSIDIARIES

(a) Material subsidiaries

Details of Citadel’s material subsidiaries at the end of the reporting period are as follows:

Name of subsidiary Principal activity Place of incorporation and operation

Proportion of ownership interest and voting power held by Citadel

2017 2016

Australian Business Academy Pty Ltd (ABA)

Education provider Australia 100% 100%

Frontier Group Australia Pty Ltd (FGA)

Specialist consulting and HR solutions provider

Australia 100% 100%

ServicePoint Australia Pty Ltd (SAPL)

Technology and integration services

Australia 100% 100%

Jakeman Business Solutions Pty Ltd (JBS)

Knowledge management and advisory services

Australia 100% 100%

Citadel Health Pty Ltd (CH)

Technology and managed services

Australia 100% 100%

Citadel Health Management Pty Ltd (CHM)


Australia 100% 100%

Kapish Pty Ltd (i) Technology and managed services

Australia 100% -

Kapish Services Pty Ltd (i)


Australia 100% -

filosoph-e Pty Ltd (FIL)

Information and Communications Technology managed services provider

Australia 50% 50%

(i) On 1 July 2016, Citadel acquired Kapish Pty Ltd and Kapish Services Pty Ltd (“Kapish”), a successful Australian software and services company for a total cost of $14.4m (Note 30).

For

per

sona

l use

onl

y

Managing Complexity

69

(b) Non-controlling interests (NCI) Set out below is summarised financial information for each subsidiary that has non-controlling interests that are material to Citadel. The amounts disclosed for each subsidiary are before inter-company eliminations.


Citadel recognises non-controlling interests in an acquired entity either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. This decision is made on an acquisition-by-acquisition basis. For the non-controlling interests in filosoph-e Pty Ltd, Citadel elected to recognise the non-controlling interests at its proportionate share of the acquired identifiable net assets. See note 1 for Citadel’s accounting policies for business combinations.

filosoph-e Pty Ltd 2017 2016

$’000 $’000

Summarised balance sheet

Total current assets 14,213 11,841

Total current liabilities (4,211) (2,154)

Total non-current liabilities (1,113) (2,463)

Net assets 8,889 7,224

2017 2016

$’000 $’000

Accumulated NCI 4,444 3,612

Summarised statement of profit or loss and other comprehensive income

Profit for the year attributed to NCI 3,982 655

Total comprehensive income for the year 3,982 655

Dividends paid to NCI 3,150 -

Summarised cash flow

Cash flows from operating activities 6,987 157

Cash flows from investing activities - -

Cash flow from financing activities (6,300) -

Net increase in cash and cash equivalents 687 157

For

per

sona

l use

onl

y

Managing Complexity

70

NOTE 14 – TRADE AND OTHER PAYABLES

2017 2016

$’000 $’000

Trade creditors 6,949 5,332

Other payables 1,812 1,633

GST payable 1,600 1,151

Accrued expenses 6,478 1,808

16,839 9,924


These amounts represent liabilities for goods and services provided to Citadel prior to the end of financial year which are unpaid. These amounts are carried at amortised cost and due to their short term nature they are not discounted. These amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months after the reporting period.

NOTE 15 – INTEREST BEARING LIABILITIES: CURRENT

2017 2016

$’000 $’000

Secured bank loan (a) 3,334 -

Unsecured loans 40 40

Finance lease Liability (note 18) 340 258

3,714 298

The bank facilities are issued by ANZ Bank. The debt facilities are held by the legal parent The Citadel Group Limited and are secured by a fixed and floating charge over Citadel’s assets. Each subsidiary of Citadel has agreed to a cross collateral mortgage debenture securing the parent entity’s debt facility. All covenants relating to these facilities have been complied with during the 2017 and 2016 reporting periods. The current average effective interest rate on the facilities is 3.3% per annum (2016: 5.9% per annum). The carrying amount of the current and non-current borrowings approximates their fair value.


Interest bearing liabilities are initially recognised at fair value, net of transaction costs incurred. Interest bearing liabilities are subsequently measured at amortised cost using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in the statement of comprehensive income over the period of the liability using the effective interest method.

Interest bearing liabilities are removed from the statement of financial position when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in other income or other expenses.

Interest bearing liabilities are classified as current liabilities unless Citadel has an unconditional right to defer settlement of the liability for at least 12 months after the reporting date.

For

per

sona

l use

onl

y

Managing Complexity

71

NOTE 16 – INTEREST BEARING LIABILITIES: NON CURRENT

2017 2016

$’000 $’000

Secured bank loan 4,532 -

Finance lease liabilities (note 18) 616 970

5,148 970

NOTE 17 – OTHER PAYABLES: NON CURRENT

2017 2016

$’000 $’000

Lease liability 337 314

Consideration Liabilities - 12,021

337 12,335

NOTE 18 – OBLIGATIONS UNDER FINANCE LEASES

Citadel leased certain of its equipment under finance leases. The average lease term is 4 years (2016: 5 years). Citadel has options to purchase the equipment for a nominal amount at the end of the lease terms. Citadel’s obligations under finance leases are secured by the lessor’s title to the leased assets.

Interest rates underlying all obligations under finance leases are fixed at respective contract dates ranging from 5.0% to 7.8% (2016: 5.0% to 7.8%) per annum.

Minimum lease payments Present value of

minimum lease payments

2017 $’000

2016 $’000

2017 $’000

2016 $’000

Not later than one year 387 314 340 258

Later than one year and not later than five years 646 1,057 616 970

Later than five years - - - -

1,033 1,371 956 1,228

Less future finance charges (77) (143) - -

Present value of minimum lease payments 956 1,228 956 1,228

Included in the consolidated statement of financial position

- current interest bearing liabilities 340 258

- non-current interest bearing liabilities 616 970

956 1,228

For

per

sona

l use

onl

y

Managing Complexity

72


Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets held under finance leases are initially recognised as assets of Citadel at their fair value at the inception of the lease or, if lower, at the present value of the minimum lease payments. The corresponding liability to the lessor is included in the statement of financial position as a finance lease obligation.

Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss. Contingent rentals are recognised as expenses in the periods in which they are incurred.

Operating lease payments are recognised as an expense on a straight-line basis over the lease term, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed. Contingent rentals arising under operating leases are recognised as an expense in the period in which they are incurred.

In the event that lease incentives are received to enter into operating leases, such incentives are recognised as a liability. The aggregate benefit of incentives is recognised as a reduction of rental expense on a straight-line basis, except where another systematic basis is more representative of the time pattern in which economic benefits from the leased asset are consumed.

NOTE 19 – PROVISIONS

2017 2016

$’000 $’000

Employee benefits (a) 1,726 1,561

Make good provision (note 20) 335 393

Provision for income tax (note 5) 2,030 927

4,091 2,881

Current 3,721 2,534

Non-current 370 347

4,091 2,881

(a) The provision for employee benefits relates to Citadel’s liability for long service leave and annual leave.


(i) (i) Provisions

(j) Provisions for make good obligations are recognised when Citadel has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount has been reliably estimated. Provisions are not recognised for future operating losses. Where there are a number of similar obligations the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period. The discount rate used to determine the present value is a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as interest expense.

For

per

sona

l use

onl

y

Managing Complexity

73

(ii) Employee benefits

A liability is recognised for benefits accruing to employees in respect of wages and salaries, annual leave, long service leave, and vesting personal leave when it is probable that settlement will be required and they are capable of being measured reliably.

Liabilities recognised in respect of short-term employee benefits are measured at their nominal values using the remuneration rate expected to apply at the time of settlement and are recognised in other payables where the liability is expected to be settled within 12 months. Expenses for non-vesting personal leave are recognised when the leave is taken and are measured at the rates paid or payable.

Liabilities recognised in respect of long term employee benefits, including annual leave and long service leave not expected to be settled within 12 months, are measured as the present value of the estimated future cash flows to be made by Citadel in respect of services provided by employees up to reporting date. 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 end of the reporting period of corporate bonds with terms and currencies that match, as closely as possible, the estimated future cash outflows. Re-measurements as a result of experience adjustments and changes in assumptions are recognised in profit or loss.

NOTE 20 – MAKE GOOD PROVISION

2017 2016

$’000 $’000

Opening amount as at 1 July 393 332

Additional make good provision accrued - 226

Make good provision paid (58) (165)

Closing amount as at 30 June 335 393

Current provision 259 317

Non-current provision 76 76

Total make good provision 335 393

Provisions are considered current if they are expected to crystallise in the next 12 months.

Citadel is required to restore all leased premises to their original condition with the exception of the principle place of business in Symonston ACT. A provision has been recognised for the present value of the estimated expenditure required to remove any leasehold improvements. These costs have been capitalised as part of the cost of leasehold improvements and are amortised over the shorter of the term of the lease or the useful life of the assets.

For

per

sona

l use

onl

y

Managing Complexity

74

NOTE 21 – OTHER LIABILITIES: CURRENT

2017 2016

$’000 $’000

Deferred income 5,899 5,031

Consideration liabilities 13,286 15,335

19,185 20,366


A deferred income balance is recognised as a liability when Citadel either received payment or raised an invoice in advance of delivering contracted goods and services. The balance of the deferred income account is amortised to revenue in the period when the goods are delivered or the services rendered.

NOTE 22 – CONTRIBUTED EQUITY

2017 2016 2017 2016

Shares Shares $,000 $,000

Fully paid ordinary shares issued 47,894,599 46,744,240 53,722 48,172

Details Number of

shares $,000

Opening balance 1 July 2015 46,651,234 47,849

Conversion of rights (i) 45,004 100

Employee share scheme 15,951 73

Rights issued on sign-on (ii) 32,051 150

Balance 30 June 2016 46,744,240 48,172

Conversion of rights (i) 91,805 231

Employee share scheme 9,649 51

Exercise of options – proceeds received (note 28) 100,000 268

Granted as consideration 948,905 5,000

Closing balance 30 June 2017 47,894,599 53,722

(i) During the year, share rights issued to executives were exercised into ordinary shares. (ii) Ordinary shares were issued to the CEO, Mr Darren Stanley, as a sign-on bonus. Refer to the Remuneration Report for further details.

(a) Ordinary shares

Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of Citadel in proportion to the number of and amounts paid on the shares held.

On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote.

Ordinary shares have no par value and Citadel does not have a limited amount of authorised capital.

For

per

sona

l use

onl

y

Managing Complexity

75


Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds. Incremental costs directly attributable to the issue of new shares or options for the acquisition of a business are not included in the cost of the acquisition as part of the purchase consideration.

NOTE 23 – RESERVES (NET OF INCOME TAX)

2017 2016

$’000 $’000

Equity-settled employee benefits 1,413 1,004

1,413 1,004

Balance at beginning of year 1,004 649

Value of share options and rights to employees 691 528

Exercise of rights and options (282) (173)

Balance at end of year 1,413 1,004

NOTE 24 – RETAINED EARNINGS

2017 2016

$’000 $’000

Retained earnings 15,872 11,770

Balance at beginning of year 11,770 8,489

Profit attributable to owners of Citadel 8,643 8,230

Payment of dividends (note 25) (4,541) (4,949)

Balance at end of year 15,872 11,770

NOTE 25 – DIVIDENDS

2017 2016

$’000 $’000

(a) Dividends paid – to ordinary shareholders (excludes non-controlling interests)

Final dividend paid 30 September 2016: 4.8 cents per share fully franked based on tax paid at 30% (2016: 5.8 cents per share fully franked based on tax paid at 30%)

2,243 2,706

Interim dividend paid 31 March 2017: 4.8 cents per share fully franked dividend based on tax paid at 30% (2016: 4.8 cents per share fully franked based on tax paid at 30%)

2,298 2,243

Total dividend paid 4,541 4,949

(b) Dividends not recognised at the end of the reporting period

For

per

sona

l use

onl

y

Managing Complexity

76

Since year end the Directors have recommended the payment of a dividend of 8.0 cents fully franked based on tax paid at 30% (2016: 4.8 cents fully franked).

3,831

2,243


A provision is made for the amount of any dividend declared, being appropriately authorised and no longer at the discretion of the entity, on or before the end of the financial year but not distributed at balance date.

NOTE 26 – CAPITAL MANAGEMENT

Citadel’s objectives when managing capital are to safeguard their ability to continue as a going concern, so that they can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, Citadel may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt. Consistently with others in the industry, Citadel monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including ‘interest bearing liabilities’ as shown in the consolidated statement of financial position) less cash and cash equivalents. Total capital is calculated as ‘equity’ as shown in the consolidated statement of financial position plus net debt.

During 2017, Citadel’s strategy has maintained a net asset gearing ratio of (0.10) (2016: (0.09) net asset position) due to strong cash balances at 23% of total assets (2016: 30%). This is considered appropriate for the current conditions.

The gearing ratio at 30 June 2017 and 30 June 2016 was as follows:

2017 2016

$’000 $’000

Net (asset)/debt (7,715) (5,990)

Total equity 75,451 64,558

Net debt to equity ratio (0.10) (0.09)

As at 30 June 2017 and 30 June 2016, Citadel held more cash and cash equivalents than debt.

For

per

sona

l use

onl

y

Managing Complexity

77

NOTE 27 – FINANCIAL RISK MANAGEMENT

Citadel’s activities expose it to a variety of financial risks: market risk (including currency risk, and interest rate risk), credit risk and liquidity risk. Citadel’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the financial performance of Citadel.

Financial risk management is carried out by Citadel’s corporate centre (Group Treasury) and reported to the Board. Group Treasury identifies and evaluates financial risks in close co-operation with Citadel’s operating units.

Citadel’s principal financial instruments are summarised below:

2017 2016

$’000 $’000

Financial assets

Cash and bank balances (including short term investments > 3 months) 29,822 34,574

Loans and receivables 17,077 12,469

Financial liabilities

Amortised cost (trade and other payables , finance leases, and vendor facilities) 17,796 11,152

Bank loans 7,865 -

Consideration liabilities 13,286 27,356

(a) Market risk

(i) Currency risk

Citadel sources goods and services internationally and is exposed to foreign exchange risk arising from currency exposures with respect to the NZ dollar, US dollar and Canadian dollar.

To date the foreign exchange risk exposure through international sourcing of services has been considered immaterial with no specific management strategies adopted.

Citadel’s exposure to foreign currency risk at the end of the reporting period, expressed in Australian dollars, was as follows:

2017 2016

$’000 $’000

USD Trade receivables 11 -

CAD Trade receivables 15 -

NZD Trade receivables 10 -

During the year, the following foreign-exchange related amounts were recognised in the statement of profit or loss and other comprehensive income:

2017 2016

$’000 $’000

Net foreign exchange (loss)/gain included in other income/(other expenses) (10) (7)

For

per

sona

l use

onl

y

Managing Complexity

78

Citadel’s exposure to foreign currency risk is considered immaterial and therefore, movements in the US, Canadian and New Zealand dollar are not considered to have a material impact on post-tax profit or other components of equity.

(ii) Cash flow and fair value interest rate risk

Citadel’s main interest rate risk arises from long-term borrowings as well as working capital facilities including overdrafts and invoice financing. Borrowings issued at variable rates expose Citadel to cash flow interest rate risk. The risk is managed by Citadel by regularly monitoring cash flow requirements.

As at the reporting date, Citadel had the following variable rate borrowings outstanding:

2017 2016

Average interest rate

%

$’000 Average interest rate

%

$’000

Short term interest bearing investments (interest revenue) 0.9 23,643 4.8 10,213

Short term bank facilities (interest expense) - - 5.9 -

At 30 June 2017, if interest rates had changed by -/+ 100 basis points from the year-end rates with all other variables held constant, post-tax profit for the year would have been:

2017 2016

Outstanding at year end

$’000

Sensitivity (after tax)

-/+ 100 bps $

Outstanding at year end

$’000

Sensitivity (after tax)

-/+ 100 bps $

Short term interest bearing investments 23,643 (2,026)/2,026 10,231 (4,913)/4,913

Short term bank facilities - - - 418/(418)

(b) Credit risk

Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to government and wholesale customers, including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted. Government customers are classified as Commonwealth, State and Local. Citadel has not separately assessed the credit risk for a government customer. If there is no independent rating for wholesale customers, finance assesses the credit quality of the customer, taking into account its financial position, past experience and other factors.

Sales to wholesale customers are required to be settled in cash, cheque or EFT, mitigating credit risk. Credit risk for deposits (loans) outstanding with employees is assessed by taking into account the individuals’ position and time in Citadel, past experience and other factors. All employees make payments through the payroll system.

Citadel trades only with recognised, credit worthy third parties and, as such, collateral is not requested nor is it Citadel’s policy to securitise its trade and other receivables.

In addition, receivable balances are monitored on an ongoing basis. Citadel has not experienced significant levels of bad debt.

The maximum exposure to credit risk at the reporting date is the carrying amount of the financial assets as summarised following.

For

per

sona

l use

onl

y

Managing Complexity

79

2017 2016

$’000 $’000

Financial assets

Petty cash 2 2

Cash at bank

Australian Banks Rating of A or Better 6,179 24,341

Short term deposits

Australian Banks Rating of A or Better 23,641 10,231

Total cash and cash equivalents 29,822 34,574

Total receivables

Commonwealth government 3,037 1,818

State government 1,369 887

Local government 1,262 477

Customers independently rated B or above 4,524 4,190

Wholesale customers 6,780 4,403

Related parties and associates 90 306

Total trade receivables 17,062 12,081

Financial assets

Associated entities 252 480

Total other receivables and employee loans 252 480

Total financial assets 47,136 47,135

Citadel has increased the provision against trade receivables by $0.2 million during the year (2016: $0.03 million increase).

(c) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and cash equivalents, the availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Citadel manages liquidity risk by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

For

per

sona

l use

onl

y

Managing Complexity

80

(i) Maturities of financial assets and liabilities

The amounts disclosed below in the table are the contractual undiscounted cash flows. Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.

0 – 12 months 12 – 24 months 24 – 48 months 48 + months

$’000 $’000 $’000 $’000

Financial assets

Cash and cash equivalents 29,822 - - -

Trade and other receivables 17,077 - - -

Financial assets 46,899 - - -

Financial liabilities

Trade payables (non-interest bearing) 6,949 - - -

Other payables (non-interest bearing) 3,413 - - -

Bank Loans 3,333 3,304 1,228 -

Accrued liabilities (non-interest bearing) 6,478 - - -

Consideration liabilities 13,286 - - -

Finance lease liability 340 340 276 -

Financial liabilities 33,799 3,644 1,504 -

Net financial assets/(liabilities) 13,100 (3,644) (1,504) -

The Directors consider that the carrying amounts of financial assets and financial liabilities recognised in the consolidated financial statements approximate their fair values.

(d) Recognised fair value measurements

(i) Fair value hierarchy

This section explains the judgements and estimates made in determining the fair values of the financial instruments that are recognised and measured at fair value in the financial statements. To provide an indication about the reliability of the inputs used in determining fair value, Citadel has classified its financial instruments into the three levels prescribed under the accounting standards. An explanation of each level follows underneath the table.

Level 1 Level 2 Level 3 Total

Notes $’000 $’000 $’000 $’000

Consideration Liabilities – Current - - 13,286 13,286

Consideration Liabilities – Non current - - - -

Total financial liabilities as at 30 June 2017 - - 13,286 13,286

Consideration Liabilities – Current - - 15,335 15,335

Consideration Liabilities – Non current - - 12,021 12,021

Total financial liabilities as at 30 June 2016 - - 27,356 27,356

There were no transfers between levels during the year.

For

per

sona

l use

onl

y

Managing Complexity

81

Level 1: The fair value of financial instruments traded in active markets (such as publicly traded derivatives, and trading and available-for-sale securities) is based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by Citadel is the current bid price. These instruments are included in level 1.

Level 2: The fair value of financial instruments that are not traded in an active market (for example, over-the-counter derivatives) is determined using valuation techniques which maximise the use of observable market data and rely as little as possible on entity-specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2.

Level 3: If one or more of the significant inputs is not based on observable data, the instrument is included in level 3. This is the case for consideration liabilities.

(ii) Valuation techniques used to determine fair values

Specific valuation techniques used to value financial instruments include:

Discounting of budget and forecast cash flow results, using a discount rate that is reflective of the risk associated with the instrument.

The above methodology has been used to determine the fair value of consideration liabilities.

(iii) Fair value measurements using significant unobservable inputs (level 3)

The following table presents the changes in level 3 items for the period ended 30 June 2017:

Consideration Liabilities

Total

$’000 $’000

Opening balance as at 1 July 2016 27,356 27,356

Acquisitions 2,534 2,534

Payments satisfied during the year (cash and shares) (17,635) (17,635)

Recognised in profit before income tax – unwinding of discount 2,347 2,347

Recognised in profit before income tax – gain on fair value adjustment (1,316) (1,316)

Total financial liabilities 13,286 13,286

(iv) Valuation inputs and relationships to fair value

The following table summarises the quantitative information about the significant unobservable inputs used in level 3 fair value measurements.

Fair value as at 30 June 2017

Unobservable inputs

Range of inputs

Relationship of unobservable inputs to fair value

Description $’000 2017

Consideration Liabilities

13,286 Risk-adjusted discount rate

7-18% A change in the discount rate by 100 bps would

increase/decrease the fair value by $0.02m

Expected

average EBITDA

$7.5m - $10m

If expected average EBITDA were 10% higher or lower, the FV would increase/decrease by

$4.3m

For

per

sona

l use

onl

y

Managing Complexity

82

(v) Valuation processes

For the purposes of determining the fair value of consideration paid to acquire a business, Citadel uses the services of external valuation experts. The fair value is reassessed by the finance team at least once every six months, in line with Citadel’s half-yearly reporting periods. The main level 3 inputs used by Citadel are derived and evaluated as follows:

Discount rates for financial liabilities are determined using a capital asset pricing model to calculate a rate that reflects current market assessments of the time value of money and the risk specific to the liability; and,

Expected average EBITDA is estimated based on the entity’s knowledge of the business and the likely impact of the current economic environment.

NOTE 28 – SHARE-BASED PAYMENTS

(a) Employee share rights plan

Details of the share rights plan for senior management personnel are provided below. Note that the terms of the plan are consistent with those offered to KMP as disclosed in the Remuneration Report.

2017 2016

Number of rights to deferred shares granted on 1 October 2015 (i) - 162,271

Weighted average fair value of rights at grant date: 1 October 2015 - $4.50

Number of rights to deferred shares granted on 1 October 2016 (ii) 159,291 -

Weighted average fair value of rights at grant date: 1 October 2016 $5.29 -

(i) On 1 October 2015, a total of 184,580 share rights were issued at a weighted average fair value of $4.50 per share right. As a result of employee movements, 22,309 share rights lapsed during the year ended 30 June 2016. As at 30 June 2017, 162,271 share rights remaining on issue.

(ii) On 1 October 2016, a total of 159,291 share rights were issued at a weighted average fair value of $5.29 per share right. All share rights under this grant remain on issue as at 30 June 2017.

(b) Employee Share Scheme

The employee share scheme was launched in FY16 and provides permanent full-time and part-time employees who are Australian tax residents and are aged 18 years or over, with the opportunity to purchase shares from pre-tax income via salary sacrifice.

(c) Share Options

Share options were issued to non-executive directors on 1 November 2014, which was a one off incentive. If a non-executive director ceases to be a director, any options issued to that director which have not become exercisable automatically lapse. In the event of a takeover of Citadel or the same of its main undertaking all of the options shall be exercisable on the date the takeover, merger or sale is completed. The options do not carry any participation rights in new share issues.

On 22 November 2016, one-sixth of the options issued to the independent non-executive directors on 1 November 2014 were exercised into ordinary shares (nil during FY16). The exercise price of the options was $2.70 and the market price was $5.00 per share. The remaining five-sixths become exercisable on 1 November 2017. Set out below is a summary of the options issued under the plan.

For

per

sona

l use

onl

y

Managing Complexity

83

2017 2016

Exercise price per share option

Number of options

Exercise price per share option

Number of options

As at 1 July 2.70 600,000 2.70 600,000

Exercised during the year 2.70 (100,000) - -

As at 30 June 2.70 500,000 2.70 600,000

Total expenses arising from share-based payment transactions recognised during the year as part of employee benefit expenses were as follows:

2017 2016

$’000 $’000

Options expensed over vesting period 68 76

Share rights granted 572 379

Shares issued under employee share offer 51 223

691 678

Significant assumptions

(i) (i) Fair value of share options issued to non-executive directors

Citadel uses the Black-Scholes model for determining the fair value of share options issued that takes into account the exercise price, the term of the options, the impact of dilution, the share price at grant date and expected volatility of the underlying share, the expected dividend yield, the risk free interest rate for the term of the option and the correlations and volatilities of the peer group companies.

(ii) Share-based payments arrangements

Equity-settled share-based payments to employees and others providing similar services are measured at the fair value of the equity instruments at the grant date.

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on Citadel’s estimate of equity instruments that will eventually vest, with a corresponding increase in equity. At the end of each reporting period, Citadel revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimate, if any, is recognised in profit or loss such that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the equity-settled employee benefits reserve.

NOTE 29 – RELATED PARTY TRANSACTIONS

(a) Trading transactions

During the year, group entities entered into the following trading transactions with associates and other related parties:

2017 2016

$’000 $’000

Sales of goods and services – associates and other related parties - 2,863

Purchases of goods or services – associates and other related parties - 15,978

For

per

sona

l use

onl

y

Managing Complexity

84

Share of revenue from associates - 1,260

Sale of goods and services to related parties were made at Citadel’s usual list prices. Purchases were made at market price.

No guarantees have been given or received. No provisions for doubtful debts have been raised in relation to any outstanding balances, and no expense has been recognised in respect of bad or doubtful debts due from related parties.

(b) Subsidiaries

Interests in subsidiaries are set out in Note 13(a).

(c) Key Management Personnal Compensation

Detailed compensation arrangements relating to key management personnel are disclosed in the Remuneration Report.

(d) Other related party transactions

(i) Jakeman Family Trust

Citadel has entered into a contract with the Jakeman Family Trust (JFT) for the provision of services by Dr Miles Jakeman details of which are included in the Remuneration Report.

NOTE 30 – BUSINESS COMBINATIONS

Citadel acquired 100% of Kapish Pty Ltd and Kapish Services Pty Ltd (“Kapish”) during 2017 (2016: filosoph-e or “FIL” 25%):

Principal activity Date of acquisition

Proportion of shares

acquired

Consideration transferred

% $’000

Kapish Pty Ltd and Kapish Services Pty Ltd (Kapish) Technology and

managed services 1 July 2016 100 14,399

This business aligns with Citadel’s existing offerings, allowing Citadel to expand its activities and execute its growth strategy.

Citadel acquired Kapish, a successful Australian software and services company for a total cost of $16.0m. In accordance with the requirements of AASB 3 Business Combinations the cost has been split between consideration of $14.4m and post-acquisition employee expenses of $1.6m reflecting that a ‘hold back’ portion of $1.6m was conditional on the two former owners being employed in the business for a period of two years. The fair value of consideration is $14.4m, with goodwill of $6.2m recognised from the acquisition and $9.0m in acquired intangible assets, net of $1.5m in deferred tax liabilities assumed.

(a) Fair value of consideration transferred

2017 2016

Kapish FIL

$’000 $’000

Cash paid 11,482 2,650

Contingent consideration (i) 2,917 350

For

per

sona

l use

onl

y

Managing Complexity

85

Total 14,399 3,000

(i) The following contingent consideration has been included in the respective acquisitions:

Kapish (KAP)

An amount of $2.917 million was included in the assessment of contingent consideration for the current year based on the agreed payment schedule. This amounts to 30% of the total purchase price less the ‘hold back’ portion of employee liabilities, all discounted over the term of the agreement.

filosoph-e Pty Ltd (FIL)

An amount of $0.350 million was included in the assessment of contingent consideration for the prior year based on the expected renewal of certain Department of Defence contracts. These contracts were renewed in the current year.

Significant Accounting Policies

In order to comply with accounting policy note 1(f), Citadel adopted a number of assumptions relating to the appropriate discount rate to apply to future tranches when determining the present and the expected future performance of the acquired entity.

Future performance was based on budget estimates and forecasts taking into consideration the expected revenue arising from contracts and the costs associated with delivering those contracts. The discount rate was determined using Citadel’s existing cost of debt and equity. Citadel obtained the assistance of valuation experts in this process.

(b) Fair value of assets acquired and liabilities assumed at the date of acquisition

2017 2016

Kapish FIL

$’000 $’000

Assets

Cash and cash equivalents 1,171 1,255

Trade and other receivables 2,157 9,499

Other 1,569 5

Deferred tax assets 61 -

Property, plant and equipment 56 -

Work in progress 23 -

Intangible assets: software and customer contracts 9,038 -

Liabilities

Trade and other payables 501 4,114

Provision for employee benefits 168 -

Income in advance 2,804 8

Provision for tax 401 -

Other 442 722

Deferred tax liabilities on acquired intangible assets 1,522 -

Net assets acquired 8,237 5,915

For

per

sona

l use

onl

y

Managing Complexity

86

The receivables and other debtors acquired in the Kapish transactions with a fair value of $2.2 million had gross contractual amounts of $2.2 million. The best estimate at acquisition date of the contractual cash flows not expected to be collected is nil.

The receivables and other debtors acquired in the filosoph-e transaction with a fair value of $9.5 million had gross contractual amounts of $9.5 million. The best estimate at acquisition date of the contractual cash flows not expected to be collected is nil.

(c) Non-controlling interests

The non-controlling interest (50% ownership interest in FIL) recognised at the acquisition date was measured by reference to the fair value of the non-controlling interest and amounted to $2.96 million. The fair value was measured by taking the present ownership’s proportionate share in the recognised amounts of FIL’s identifiable net assets.

(d) Goodwill arising on acquisition

2017 2016

FIL

$’000 $’000

Consideration transferred 14,399 3,000

Plus: non-controlling interests - 2,957

Plus: fair value of equity interest held by Citadel immediately before the acquisition date - 2,932

Less: fair value of identifiable net assets acquired (8,237) (5,915)

Goodwill arising on acquisition 6,162 2,974

Goodwill arose in the acquisition of these entities because the consideration paid for the combination effectively included amounts in relation to the benefits of expected synergies, revenue growth, future market development and the assembled workforce. These benefits are not recognised separately from goodwill because they do not meet the recognition criteria for identifiable intangible assets.

None of the goodwill arising on these acquisitions is expected to be deductible for tax purposes.

(e) Net cash outflow on acquisition of subsidiaries

Year ended 30 June 2017

Year ended 30 June 2016

$’000 $’000

Consideration paid in cash for acquisitions during the year 13,776 2,750

Less: Cash and cash equivalent balances acquired (1,171) (1,255)

Deferred consideration settled during the period for PJA Solutions Pty Ltd (acquired 1 June 2015) 10,241 -

Deferred consideration settled during the period for filosoph-e Pty Ltd 350 -

Outflow of cash – investing activities 23,196 1,495

For

per

sona

l use

onl

y

Managing Complexity

87

(f) Impact of acquisitions on the results of Citadel

Included in the profit after tax for the year is $1.9 million attributable to the additional business generated by Kapish (2016: $1.3 million from FIL).

NOTE 31 – DISCONTINUED OPERATIONS

Citadel announced the exit of Australian Business Academy Pty Ltd, a subsidiary, from the vocational education and training (VET) sector on 31 October 2016 and ceased operations on 9 December 2016. This withdrawal from VET education was due to regulatory changes and reduced student loan caps. As a result, the subsidiary was reported as a discontinued operation in the current period.

(a) Earnings per share from discontinued operation

2017 2016

$’000 $’000

Revenue 1,997 7,795

Other income 21 94

Expenses (5,551) (7,405)

(Loss)/Profit before income tax (3,533) 484

Income tax benefit/(expense) 752 (121)

(Loss)/Profit from discontinued operation (2,781) 363

Net cash (outflow)/inflow from operating activities (4,998) (781)

Net cash (outflow) from investing activities - (1,362)

Net cash (outflow)/inflow from financing activities - 170

Net decrease in cash generated by the operation (4,998) (1,973)

2017 2016

Cents per share Cents per share

Basic earnings per share from discontinued operation (5.9) 0.8

Diluted earnings per share from discontinued operation (5.8) 0.8

For

per

sona

l use

onl

y

Managing Complexity

88

NOTE 32 – RECONCILIATION OF THE NET PROFIT AFTER TAX TO THE NET CASH FLOW FROM CONTINUING OPERATIONS

2017 2016

$’000 $’000

Profit for the year 15,406 8,522

Depreciation and amortisation 5,817 4,913

Unwinding of discount 2,347 3,102

Share-based payments 847 812

Other movements 2 17

Non-monetary consideration received for licence and service revenue - (402)

Share of net profit of associates accounted for using the equity method - (1,259)

Gain on fair value re-measurement of financial instruments (1,316) (356)

Gain on fair value of associate immediately prior to acquisition - (1,478)

(Increase)/decrease in trade and other receivables (2,289) 8,671

(Increase)/decrease in inventories (907) 734

(Increase)/decrease in income accruals and other assets (3,328) (955)

(Increase)/decrease in prepayments 1,112 47

Increase/(decrease) in trade payables 4,147 (2,923)

Increase/(decrease) in tax liabilities (1,038) (574)

Increase/(decrease) in provisions 121 22

Increase/(decrease) in other liabilities 4,013 (7,734)

Net cash inflow from operating activities 24,934 11,159

NOTE 33 – OPERATING LEASE ARRANGEMENTS

Operating leases relate to commercial leases for office premises with lease terms of between 3 and 5 years. Citadel does not have an option to purchase the leased land and buildings at the expiry of the lease periods.

2017 2016

Payments recognised as an expense: $’000 $’000

Minimum lease payments 1,826 1,710

Operating leases:

- Not later than one year 1,755 1,669

- Later than one but not later than five years 3,686 5,233

Aggregate lease expenditure contracted for at 30 June 5,441 6,902

Future minimum lease payments expected to be received in relation to non-cancellable sub-leases of operating leases

48 111

For

per

sona

l use

onl

y

Managing Complexity

89

NOTE 34 – COMMITMENTS AND CONTINGENCIES

Finance lease liabilities and non-cancellable operating lease commitments are disclosed in notes 18 and 33 to the financial statements.

As at 30 June 2017, Citadel has a total of $3.7 million in bank guarantees outstanding (2016: $3.8 million) relating to office premises and the nRAH project.

As at 30 June 2017, there were no contingent assets or liabilities (2016: nil).

NOTE 35 – REMUNERATION OF AUDITORS

During the year the following fees were paid or payable for services provided by the auditor of Citadel, and its related practices.

2017 2016

$’000 $’000

Remuneration of the external auditors PricewaterhouseCoopers

- Audit and review of financial statements 207 140

Total remuneration for audit and other assurance services 207 140

During the year the following fees were paid or payable for non-audit services by the auditor of Citadel.

2017 2016

$’000 $’000

Taxation Services

- Taxation Advice 15 36

Total taxation services 15 36

Other services

- Accounting services 3 -

Total other services 3 -

It is Citadel’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where PricewaterhouseCoopers’ expertise and experience with Citadel are important. These assignments are principally tax advice and due diligence works for merger and acquisition activities.

For

per

sona

l use

onl

y

Managing Complexity

90

NOTE 36 – PARENT ENTITY FINANCIAL INFORMATION

2017 2016

$’000 $’000

Assets

Current assets 9,615 22,344

Total assets 78,979 77,340

Liabilities

Current liabilities 32,481 25,209

Total liabilities 36,179 36,617

Net assets 42,800 40,723

Shareholders’ equity Issued capital 49,533 43,983

Retained earnings (8,147) (4,264)

Reserves - share based payments 1,414 1,004

Total equity 42,800 40,723

Profit (loss) for the year of the parent entity 659 2,783

Total comprehensive income of the parent entity 659 2,783

(a) Guarantees

During the years ended 30 June 2017 and 30 June 2016, Citadel had signed a cross-collateral mortgage debenture with ANZ bank for the outstanding debt of all entities within Citadel.

In addition, Citadel has $0.7 million (2016: $0.7 million) in bank guarantees outstanding relating to office premises.

(b) Contingent Assets and Liabilities

As at 30 June 2017 there are no contingent assets or liabilities (2016: nil).

(c) Contractual Commitments for the acquisition of property plant and equipment

As at 30 June 2017 there are no contractual commitments for the acquisition of property, plant and equipment (2016: nil).

Significant Accounting Policies

The financial information for the parent entity, The Citadel Group Limited, has been prepared on the same basis as the consolidated financial statements, except as set out below.

(j) Investments in subsidiaries and associates

Investments in subsidiaries are accounted for at cost. Such investments include both investments in shares issued by the subsidiary and other parent entity interests that in substance form part of the parent entity’s investment in the subsidiary. These include investments in the form of interest-free loans which have no fixed repayment terms and which have been provided to subsidiaries as an additional source of long term capital.

Trade amounts receivable from subsidiaries in the normal course of business and other amounts advanced on commercial terms and conditions are included in receivables.

For

per

sona

l use

onl

y

Managing Complexity

91

NOTE 37 – EVENTS OCCURRING AFTER THE BALANCE SHEET DATE

As of the date of signing, the final tranche of deferred consideration for the acquisition of PJA Solutions Pty Ltd (acquired 1 June 2015) has been agreed by all parties. A payment date of 28 August 2017 has been confirmed with the financial impacts included in the financial statements for the current year.

No other significant event has occurred that would require a change to or disclosure in the full year report.

For

per

sona

l use

onl

y

Managing Complexity

92

Directors’ declaration

In the Directors’ opinion:

a. the financial statements and notes set out on pages 39 to 91 are in accordance with the Corporations Act 2001, including:

i. complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements;

ii. giving a true and fair view of the consolidated entity’s financial position as at 30 June 2017 and of its performance, for the financial year ended on that date; and,

b. there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable.

The Directors have been given the declaration by the Chief Executive Officer required by section 295A of the Corporations Act 2001.

This declaration is made in accordance with a resolution of the Directors.

Mr Kevin McCann, AM

Chairman

Canberra

21 August 2017

For

per

sona

l use

onl

y

PricewaterhouseCoopers, ABN 52 780 433 757 28 Sydney Avenue, FORREST ACT 2603, GPO Box 447, CANBERRA CITY ACT 2601 T: + 61 2 6271 3000, F: + 61 2 6271 3999, www.pwc.com.au

Liability limited by a scheme approved under Professional Standards Legislation.

Independent auditor’s report To the shareholders of The Citadel Group Limited

Report on the audit of the financial report

Our opinion

In our opinion:

The accompanying financial report of The Citadel Group Limited (the Company) and its controlled entities (together the Group) is in accordance with the Corporations Act 2001, including:

(a) giving a true and fair view of the Group's financial position as at 30 June 2017 and of its financial performance for the year then ended

(b) complying with Australian Accounting Standards and the Corporations Regulations 2001.

What we have audited

The Group financial report comprises:

the consolidated statement of financial position as at 30 June 2017

the consolidated statement of changes in equity for the year then ended

the consolidated statement of cash flows for the year then ended

the consolidated statement of profit or loss and other comprehensive income for the year then ended

the notes to the consolidated financial statements, which include a summary of significant accounting policies

the directors’ declaration.

Basis for opinion

We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial report section of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Independence

We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.

Our audit approach

An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement. Misstatements may arise due to fraud or error. They are considered material if

For

per

sona

l use

onl

y

individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report.

We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as a whole, taking into account the management structure of the Group, its accounting processes and controls and the industry in which it operates.

Materiality

For the purpose of our audit we used overall Group materiality of $1,050,000, which represents

approximately 5% of the Group’s profit before tax from continuing operations.

We applied this threshold, together with qualitative considerations, to determine the scope of our audit and

the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements on the

financial report as a whole.

We chose Group profit before tax from continuing operations as the materiality benchmark because, in our

view, it is the benchmark against which the performance of the Group is most commonly measured. We

excluded discontinued operations as they are unusual or infrequently occurring items impacting profit and

loss.

We utilised a 5% threshold based on our professional judgement, noting it is within the range of commonly

acceptable thresholds.

Audit Scope

Our audit focused on where the Group made subjective judgements; for example, significant accounting

estimates involving assumptions and inherently uncertain future events.

The Group includes nine subsidiaries which operate across New South Wales, Victoria, Queensland, and the

Australian Capital Territory. Given that the accounting records for all entities are held and managed by a

central finance function located in Canberra the majority of our audit procedures were performed at the

Group’s Canberra office.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report for the current period. The key audit matters were addressed in the

For

per

sona

l use

onl

y

context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes of a particular audit procedure is made in that context. We communicated the key audit matters to the Audit, Risk and Compliance Committee.

Key audit matter How our audit addressed the key audit matter

Goodwill impairment assessment

(Refer to note 12) [$29.6m]

The Group’s goodwill of $29.6m is

recognised across the three Cash

Generating Units (“CGUs”): Knowledge,

Technology and Integration, and Health.

We considered the assessment of

impairment of goodwill associated with

the Technology and Integration, and

Health CGUs to be a key audit matter

given:

the carrying value of goodwill is

material ($8.3m and $7.2m

respectively)

the relatively smaller difference

between the recoverable amount

and the carrying value for the

Technology and Integration CGU;

and

the carrying value in the Health

CGU is dependent on a small

number of contracts and as a result

cash flows are particularly sensitive

to volume and retention

assumptions.

Assessing the carrying value of goodwill

requires the Group to make estimates of

uncertain future cash flows in models.

Given the specific situations for these

CGUs discussed above the impairment

outcome may be sensitive to reasonably

possible changes in the assumptions. The

significant assumptions include

customer volumes and retention, the

earnings before interest, tax,

depreciation and amortisation

We evaluated the Group’s cash flow forecasts, which include customer

volume and retention assumptions, and the process by which they

were developed. We compared the Group’s forecasts for the previous

5 financial years, including 2017, with the actual results for those

years to assess the historical accuracy of forecasting.

We checked that the forecast used in the valuation model was

consistent with the Board approved budget and strategic plan for the

Technology and Integration, and Health CGUs, and that the

determination of key assumptions were subject to oversight from the

directors.

We assessed the assumptions and methodology used for the

impairment test, in particular, those assumptions relating to the

discount rate and EBITDA growth rates. To do this we performed a

number of procedures including the following:

evaluated the appropriateness of the discount rate adopted.

Assisted by our valuations experts, we identified an acceptable

range of discount rates based on market data and industry

research

evaluated the underlying cash flow assumptions in relation to

EBIDTA with reference to historical results, current year results

and expected project pipelines, and considered external

industry information and market data

checked the calculations in the valuations model for

mathematical accuracy; and

tested the sensitivity of the calculations by varying key

assumptions and applying other values within a reasonably

possible range, for example by reducing certain growth

assumptions.

We evaluated the adequacy of the disclosures made in note 12 in

relation to the key assumptions used in the impairment assessment

in light of outcomes of the above analysis and the requirements of

Australian Accounting Standards. For

per

sona

l use

onl

y


(“EBITDA”), growth, terminal growth

and discount rates.

Kapish business combination


On 1 July 2016 the Group acquired 100%

of the shares in Kapish Pty Ltd and

Kapish Services Pty Ltd (collectively

“Kapish”) for $14.4m. The consideration

included an element which was deferred

over two years.

The acquisition of a business is complex

and Australian Accounting Standards

require the Group to identify all assets

and liabilities of Kapish and estimate the

fair value of each item. The fair value of

these items may be significantly different

to the historical cost, which had been

previously recorded by the acquired

business. Also, the items may not

previously have met the recognition

criteria under Australian Accounting

Standards.

The acquisition of Kapish was a key audit

matter given:

its significance to the Group

significant judgement is involved in

assigning a fair value to the assets

and liabilities acquired; and

the nature of purchase consideration

including a deferred amount paid to

the former owners of Kapish who

are also employees of the Group,

and the accounting complexities

associated with this.

We read key transaction documents in relation to the acquisition of

Kapish and assessed how the Group estimated the fair value of the

assets and liabilities identified in the acquisition, and allocated the

purchase consideration, including deferred consideration.

In relation to the fair value of the assets and liabilities identified we

focussed on significant judgements made by the Group in assessing

the fair value of software and customer relationships recognised. To

do this we performed a number of procedures including the following:

evaluated the methodology used by the Group’s valuation

experts in preparing the purchase price allocation against the

requirements of Australian Accounting Standards

evaluated cash flow forecasts in the fair value models by

comparing the forecasted revenue and EBIDTA to historical

Kapish performance; and

compared the discount rate adopted in determining the fair

value of assets acquired to the Group’s historical cost of capital,

and that of other market participants.

We assessed the accounting treatment of the current and deferred

consideration including whether any elements of the consideration

were required to be allocated to the purchase price or ongoing

remuneration arrangements in line with Australian Accounting

Standards.

Deferred consideration for

business combinations


The Group’s deferred consideration of

We read the Share Sale Agreement and assessed how the Group

calculated the contingent consideration liability. To do this we

performed a number of procedures including the following:

evaluated the appropriateness of the revenue excluded and the

For

per

sona

l use

onl

y


$13.3m relates to two business

combinations; PJA Solutions (now CGL

Health) ($12.5m) and Kapish ($0.8m).

The consideration relating to PJA

Solutions is contingent on “average

EBIDTA” over the three year period

ended 30 June 2017. We considered this

a key audit matter given it is material

and there is significant judgement

required in determining the allocation of

revenue and expenses within the defined

average EBIDTA calculation, in line with

the requirements of the Share Sale

Agreement, and the associated discount

rate.

expenses included in the average EBIDTA calculation through

testing this allocation on a sample basis against the

requirements of the Share Sale Agreement

compared the discount rate adopted to the Group’s historical

cost of capital, and that of other market participants in the same

line of business; and

checked the calculation of the contingent consideration liability

for mathematical accuracy.

We agreed the final payment amount, upon which the deferred

consideration liability is calculated at 30 June 2017, to written

confirmation provided to the Group by the seller of PJA Solutions.

Accrued revenue


Several of the Group’s customers require

practical completion of works to be

approved by them prior to invoices being

issued. This process can extend the time

that revenue is held as accrued, and

cause a significant timing difference

between revenue recognition and cash

collection.

We considered the recoverability of

accrued revenue recognised in the

Kapish, CGL Health, and ServicePoint

subsidiaries as a key audit matter given:

they are material and there has been

a significant increase in the balance

year-on-year ($3.7m increase)

there is judgement required to

determine the timing of recognition

and whether any allowance is

required in case the full amount may

not be recovered.

We evaluated the recognition and recoverability of accrued revenue in

relation to Kapish, CGL Health, and ServicePoint. To do this we:

evaluated the Group’s accrued revenue accounting policies

against the requirements of Australian Accounting Standards;

and

tested individual accrued revenue items on a sample basis to

assess the timing of recognition and recoverability based on the

services delivered and contractual requirements, and

subsequent receipt.

For

per

sona

l use

onl

y

Other information

The directors are responsible for the other information. The other information comprises the Annual Report and the Director's Report included in the Group’s annual report for the year ended 30 June 2017 but does not include the financial report and our auditor’s report thereon.

Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial report, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the directors for the financial report

The directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.

In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Auditor’s responsibilities for the audit of the financial report

Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report.

A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at: www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our auditor's report.

For

per

sona

l use

onl

y

Report on the remuneration report

Our opinion on the remuneration report

We have audited the remuneration report included in pages 23 to 36 of the directors’ report for the year ended 30 June 2017.

In our opinion, the remuneration report of The Citadel Group Limited for the year ended 30 June 2017 complies with section 300A of the Corporations Act 2001.

Responsibilities

The directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards.

PricewaterhouseCoopers

David Murphy Canberra Partner 21 August 2017

For

per

sona

l use

onl

y

Managing Complexity

100

Shareholder information

Additional information required under ASX Listing Rule 4.10 and not shown elsewhere in this Annual Report is as follows. This information is current as at 21 July 2017.

In accordance with ASX Listing Rule 4.10.19, Citadel confirms that it has used the cash and assets in a form readily convertible to cash that it had at the time of admission to the ASX in a way consistent with its business objectives.

1. DISTRIBUTION OF SHAREHOLDERS

The distribution of issued capital is as follows:

Holding Total No. of Shares Held

No. of Shareholders

1 – 1,000 1,001 – 5,000

5,001 – 10,000 10,001 – 100,000 100,001 and over

263,971 876,030 879,707

3,151,442 42,723,494

547 329 113 115

21

47,894,644 1,125

2. DISTRIBUTION OF PERFORMANCE RIGHTS HOLDERS

Holding Total No. of

Rights Held

No. of Shareholders

1 – 1,000 1,001 – 5,000

5,001 – 10,000 10,001 – 100,000 100,001 and over

- - -

205,532 104,595

- - - 9 1

310,127 10

3. DISTRIBUTION OF OPTIONS

The distribution of unquoted options on issue are:

Holding Total No. of

Options Held No. of

Shareholders

1 – 1,000 1,001 – 5,000

5,001 – 10,000 10,001 – 100,000 100,001 and over

- - - -

500,000

- - - - 3

4. 500,000 3

4. TWENTY LARGEST SHAREHOLDERS

The twenty largest holders of quoted equity securities are listed below:

ORDINARY SHARES

Shareholder Number Held % of Issued Shares

Jakeman Enterprises Pty Ltd

8,309,009 17.35

Bryony McConnell 6,626,306 13.84

HSBC Custody Nominees (Australia) Limited

4,158,646 8.68

PJA Australia Pty Ltd 3,948,950 8.25

JP Morgan Nominees Australia Limited

3,582,850 7.48

National Nominees Limited

3,524,754 7.36

Citicorp Nominees Pty Limited

3,037,514 6.34

BNP Paribas Nominees Pty Ltd

2,144,892 4.48

BNP Paribas Noms Pty Ltd 1,484,134 3.1

One Managed Investment Funds Limited

1,065,000 2.22

UBS Nominees Pty Ltd 764,477 1.6

Skills4Life Pty Ltd 642,117 1.34

RBC Investor Services Australia Nominees Pty Limited

614,779 1.28

Brispot Nominees Pty Ltd 599,569 1.25

Citicorp Nominees Pty Limited

569,073 1.19

New Territories Investments Pty Ltd

473,000 0.99

The Plant Consulting Group Pty Ltd

352,401 0.74

Skills4Life Pty Ltd (Superannuation)

274,236 0.57

Ms Susan Jane Irvine 219,388 0.46

Jeanmar Pty Ltd 178,253 0.37 For

per

sona

l use

onl

y

Managing Complexity

101

5. SUBSTANTIAL SHAREHOLDERS

The names of the Substantial Shareholders listed in the Company’s Register as at 21 July 2017:

ORDINARY SHARES

Shareholder Number Held % of Issued Shares

Jakeman Enterprises Pty Ltd

8,309,009 17.35

Bryony McConnell 6,626,306 13.84

PJA Australia 3,948,950 8.25

Copia Investment Partners Limited

3,417,569 7.14

6. LESS THAN MARKETABLE PARCELS OF ORDINARY SHARES

There are 33 shareholders with unmarketable parcels totalling 231 shares.

7. UNQUOTED EQUITY SECURITIES

The company had the following unquoted securities on issue as at 21 July 2017:

Security No. of securities

Unquoted Options Unquoted Rights

500,000 310,127

8. RESTRICTED SECURITIES

The company had the following restricted securities on issue as at 21 July 2017:

Class No. of Shares

% of issued capital

Fully paid ordinary shares – mandatory escrow Restricted until 31 May 2018 Restricted until 31 Dec 2018 Restricted until 30 Jun 2019 Restricted until 30 Dec 2019 Restricted until 30 Jun 2020

3,122,863 1,089 8,873

946 8,703

6.52 0.00 0.02 0.00 0.02

9. VOTING RIGHTS

In accordance with the Constitution each member present at a meeting whether in person, or by proxy, or by power of attorney, or in a duly authorised representative in the case of a corporate member, shall have one vote on a show of hands,

and one vote for each fully paid ordinary share, on a poll.

Performance rights and Options have no voting rights.

10. ON-MARKET BUY-BACKS

There is no current on-market buy-back in relation to the Company’s securities.

For

per

sona

l use

onl

y

Managing Complexity

102

The Citadel Group Limited

ABN: 79 127 151 026

2017

For

per

sona

l use

onl

y

for personal use only - asx · 2017. 8. 20. · extending its contract for the sustainment of its...

Documents