2010 Annual Report - Adoptedassets.encompasscu.com.au/files/AGM/AGM 2010/ECU... · 2010 ANNUAL...

2010 ANNUAL FINANCIAL REPORT

A.C.N. 087 650 011 Incorporated in Australia

Registered Office: 59 Buckingham St

SURRY HILLS NSW 2010 Telephone Number: 13 13 61

ENCOMPASS CREDIT UNION LIMITED 2010 Annual Financial Report ACN 087 650 011

CHAIRMAN’S REPORT It is with pleasure that I report on the performance of your Credit Union on behalf of the Board of Directors. Your Board welcomed two new Directors during the year, Alex Claassens and Gillian George. They replaced Paul Collins (retired) and Sandra Fields (not re-elected). I would like to acknowledge both Paul and Sandra’s contribution to your Credit Union. Paul served as a Director for 25 years and Sandra for 9 years, both giving their time and commitment to making Encompass the success it is today. Thank you. To Alex and Gillian welcome to the Board. Both bring new knowledge and experience to help guide the Credit Union in the years to come. Economic Environment In last year’s Annual Report, I advised members of the difficult times being experienced around the world by financial institutions. We saw the full impact of the Global Financial Crisis (GFC) hit countries and economies around the world which threw a number of countries into recession. In Australia we were much more fortunate as our economy was very strong during the GFC period. This is due to the strong financial institutions in Australia (Banks, Building Societies and Credit Unions). However, we have seen the dominance of the big four Banks increase during the GFC and their market domination should be a worrying concern as we move forward into the future. Good competition among a number of financial institutions is good for Australia. The Reserve Bank, in noting the strong Australian economy and the strong exports, started to slow the economy down by increasing interest rates. At the beginning of 2009 we saw interest rates at their lowest level in nearly fifty (50) years. By October 2009 the Reserve Bank started increasing interest rates and since October 2009 they have raised interest rates six times as the economy recovers strongly from the Global Financial Crisis (GFC). This brought different challenges to last year as institutions competed for retail deposits and sources for funding loan demand. We have seen an interest rate price war over the last twelve months as institutions build up their retail deposit base. At Encompass we must offer our members good interest rates on their deposits and loans and this places pressure on interest rate margins and profitability.

I am pleased to say our profitability after tax was $617,000 (a 32% increase) compared to $464,000 in 2009. A great result in difficult times. The future will be difficult but we can already see an improvement in the economy as there are early signs of the Australian economy recovering. Your Credit Union is well placed to meet these challenges with a strong capital and liquidity position, but we cannot be complacent. Acknowledgements I would like to thank the many who contributed to our performance over the past year and in particular: • our host employer groups; • members for their continued support; • my fellow Board members; and • the management and staff who have

committed themselves to servicing our members.

It was another year well done and my sincere thanks to all. Rod Paul Chairman


CHIEF EXECUTIVE OFFICER’S REPORT It is with pleasure I report to members on another successful year for their Credit Union. It was a difficult year as we still battled the impacts of the Global Financial Crisis (GFC). We saw competition for members deposits intensifying, official interest rates increase six times during the year as the Reserve Bank increased interest rates and increased legislative and compliance pressure. Whilst Australian financial institutions have remained strong and robust, other financial institutions around the world are only slowly recovering. It may take a little longer before we see the end of the GFC. At Encompass we are well placed to meet our members’ needs for the future. If you are looking for a good deposit rate or home loan rate think Encompass, we will be competitive. FINANCIAL RESULTS Operating surplus Operating surplus was $0.617 million after tax compared to $0.461 million the previous year. This is quite pleasing as a lot of companies have been reporting losses or substantial reductions in profit due to the economic times. We continue to see a higher level of bad debt write-offs compared to other financial institutions as a result of some members who had overextended themselves in the good times and found it difficult to maintain the repayment levels in the ensuing tough economic times. However, changes to our lending criteria have seen a further reduction in write-offs this year and a further reduction is expected in the coming year. Capital position At the 30 June 2010 members’ equity stood at $33.033 million. Our capital position, in excess of 25%, is well in excess of the minimum capital requirement under Prudential Standards set down by APRA.

Total assets At 30 June 2010 total assets stood at $238 million compared to $232 million last year.

Loan balances At 30 June 2010 total loan balances were $172.3 million compared to $168.9 million last year. During the year we saw a reduction of unsecured loan balances due to tighter lending criteria, whilst our mortgage portfolio increased by just on $12 million.

Savings balances At 30 June 2010 total savings balances were $190.8 million compared to $190.6 million last year. Corporate governance A strong corporate governance culture is essential as the Credit Union operates in a heavily regulated environment. During the year we saw the introduction of new laws in relation to Consumer Credit Lending which required the development of new policies and procedures. The Credit Union is required to comply with both Commonwealth & State legislation across all areas of operations. Compliance with legislative requirements was once again met during the year. Appreciation I would like to finish by thanking the many people working for our host employer groups who supply valuable assistance to the Credit Union. At Encompass we also work closely with our alliance partners: NSW Railway Institute, State Transit Bus Institute (STBI), RTA Rec Club, Permanent Way Institution (PWI), Waste Contractors and Recyclers Association (WCRA) and others, to jointly promote the benefits and services that we offer to our members. As part of our commitment to Corporate Social Responsibility the Credit Union supports Credit Union Foundation Australia (CUFA) in its mission to establish financial literacy programs in developing countries. It is always great to see first hand the difference our contribution makes to the children in these countries (for further details please visit www.cufa.com.au). I must also acknowledge the support given to me by the Board, management and staff, as this is essential for building a successful organisation. I would also like to thank our Chairman Rod Paul, for his support and commitment during a very challenging year.

Brian Bennett Chief Executive Officer CPA, FAMI, AIMM


DIRECTORS' REPORT

Your Directors present their report on the Credit Union for the financial year ended 30 June 2010. The Credit Union is a company registered under the Corporations Act 2001. INFORMATION ON DIRECTORS The names of the Directors in office at any time during or since the end of the year are:

Name Experience and Qualifications Position and Special Responsibilities

P J H (Peter) Boonstra - Elected Director 2008-Present - Transport Manager with WorleyParsons 2009-

Present - Chairperson of Board Risk Committee November

2007-December 2008 - Director appointed to Casual Vacancy November

2007-November 2008 - Board appointed Director November 2004-

November 2007 - Project Director Design and Engineering with

RailCorp, service 1978-2009

- B.E. Mec. (UTS), M.E.M. (UTS), Grad. Dip. Sys. Eng. (Uni Wollongong), Mec. Cert. (Syd Tech)

- National Manager Railways (Austrade) January 1992-July 1993 (Secondment)

- Director Australian Railway Industry Corporation (ARIC) 1995-1997

- Member NSW Permanent Way Institute-Secretary 2000-Present

- Member Rail Track Association of Australia (RTAA)- RailCorp Representative on Management Committee

- Member Australasian Mutual’s Institute Limited (AMI) 2005-Present

Director of Encompass Credit Union Limited Member of the Board Risk Committee until November 2009 Member of the Board Audit Committee November 2009-Present

A (Alex) Claassens - Elected Director 2009-Present - State Secretary, Rail Tram and Bus Union

2010-Present - Locomotive Divisional Secretary, Rail Tram

and Bus Union NSW 2004-2009 - Train Driver with RailCorp 1978-current - Director and Chairman of AISF (Australian

Industry Skills Futures Pty Ltd) Nov 2005-2009; - Employees Representative on the State Rail

Authority Board 1999–2002 - Member Australasian Mutual’s Institute Limited

(AMI) 2009-Present

Director of Encompass Credit Union Limited Member of Board Audit Committee November 2009-Present

P D (Paul) Collins - Elected Director 1984-November 2009 - Retired - Vice Chairperson 1991-2008 - Formerly Train Driver, 48 years service with

Railcorp - Member of the Justices’ Association - Member Australasian Institute Credit Union

Directors (AICUD)1996-2005 - Associate Fellow Australasian Mutual’s Institute

Limited (AMI) 2006-November 2009

Director of Encompass Credit Union Limited until November 2009 Member of the Board Audit Committee December 2008-November 2009

S V (Sandra) Fields

- Elected Director 2000-November 2009 - Retired - Formally Project Manager with Railcorp - MA (Auckland NZ) History - BA (Auckland NZ) English/History - Dip Accountancy (Auckland NZ) - Dip Secondary Teaching (NZ) - Executive Director Australian Technical Analyst

Association (1998-2000)

Director and Deputy Chairperson of Encompass Credit Union Limited until November 2009 Member of the Board Audit Committee December 2008-November 2009 Member of the Board Corporate Governance Committee December 2008-November 2009



Cont. S V (Sandra) Fields

- Member Australasian Institute Credit Union Directors (AICUD) 2000-2005

- Associate Fellow Australasian Mutual’s Institute Limited (AMI) 2006-November 2009

G (Gillian) George - Elected Director 2009-Present - Senior Business Analyst with Railcorp, service

1982-Present - Director of NSW Railway Institute 2000-Present - Certificate Human Resource Management SIT - Member Australasian Mutual’s Institute Limited

(AMI) 2009-Present

Director of Encompass Credit Union Limited Member of the Board Risk Committee November 2009-Present

M D (Mark) Harris

- Elected Director 2007-Present - Business Development Manager (Rail) with

Laing O’Rourke 2009-Present - Chairperson of the Board Risk Committee

December 2008-Present - Member of the Board Corporate Governance

Committee December 2008-Present - Program Director with Railcorp until 2009, started

as cadet Civil Engineer in 1981 - B.E.Civil Hons. (UTS) - Advanced Diploma in Project Management - President of the Permanent Way Institution of

NSW 2001-Present - Member of Rail Track Association of Australia-

Representative on the Management Committee - Member of the Australian Institute of Project

Managers 2005-Present - Member Australasian Mutual’s Institute Limited

(AMI) 2007-Present

Director of Encompass Credit Union Limited Member of Board Risk Committee November 2007-Present Chairperson of the Board Risk Committee December 2008-Present Member of the Board Corporate Governance & Remuneration Committee December 2008-Present

M P (Michael) Kyriacou - Elected Director 2008-Present - University Lecturer in Business Law UNSW - Deputy Chairperson November 2007-December

2008 - Member of Board Executive Committee until

November 2007-December 2008 - Director appointed to Casual Vacancy November

2007-November 2008 - Board appointed Director November 2004-

November 2007 - B.A. (UNSW), M. Com (UNSW) LLB (Sydney)

LLM (London) - Solicitor and barrister of the Supreme Court of

New South Wales, High Court of Australia - Formerly Commercial lawyer, corporate legal

counsel - Member Australasian Mutual’s Institute Limited

(AMI) 2005-Present

Director of Encompass Credit Union Limited Member of Board Audit Committee November 2007-Present

T W (Bill) Pascoe - Elected Director 1982-Present - Retired - Member of Board Executive Committee 1991-

December 2008 - Vice Chairperson 1991-December 2008 - Chairperson Board Audit Committee 1993-

December 2008 - Certified Practicing Accountant (CPA) - Member of the Financial Planning Association - Formally Head of Finance with SRA - Previously 45 years service in SRA - Member Mutual’s Audit & Governance

Professionals Institute (MAGPI) 2002-present - Member Australasian Institute Credit Union

Directors (AICUD) 1996-2005 - Associate Fellow Australasian Mutual’s Institute

Limited (AMI) 2006-Present

Director of Encompass Credit Union Limited Member of the Board Risk Committee December 2008-November 2010 Member of the Board Audit Committee November 2010-Present



R V (Rod) Paul - Chairperson November 2007-Present - Elected Director 1977-Present - Solicitor - Chairperson of Board Executive Committee

November 2007-December 2008 - Secretary of Board 1977-1990 - Deputy Chairperson 1992-November 2007 - B.A. (Sydney), Dip Ed (U.N E.), Dip Law

(Supreme Court of NSW), M.A. (Sydney), NSW Department of Education Teaching Certificate

- Member Australasian Institute Credit Union Directors (AICUD)1996-2005

- Associate Fellow Australasian Mutual’s Institute Limited (AMI) 2006-Present

Chairperson of Encompass Credit Union Limited from November 2007-Present Director of Encompass Credit Union Limited Member of Board Audit Committee November 2007-Present Member of Board Risk Committee November 2007-Present Chairperson of the Board Corporate Governance & Remuneration Committee December 2008-Present

E (Eric) Priestley

- Elected Director 2007-Present - Sales Manager with STA 1999-Present - Finance and Administration Manager with STA

1997-1999 - Bachelor of Business, Accounting (UTS) - Certificate of Transport Management (Sydney

University) CTM - Member Australasian Mutual’s Institute Limited

(AMI) 2007-Present

Director of Encompass Credit Union Limited Member of Board Audit Committee November 2007-Present Chairperson of the Board Audit Committee December 2008-Present Member of the Board Corporate Governance & Remuneration Committee December 2008-Present

G C (Graham) Truelove

- Elected Director 1986-Present - Retired - Formerly Publicity Manager with SRA - Previously 38 years with SRA - Member Australasian Institute Credit Union

Directors (AICUD)1996-2005 - Associate Fellow Australasian Mutual’s Institute

Limited (AMI) 2006-Present

Director and Deputy Chairperson of Encompass Credit Union Limited Member of Board Risk Committee December 2007-Present Member of the Board Corporate Governance & Remuneration Committee November 2009-Present


DIRECTORS' REPORT (continued)

Meetings Attended

Board (B)

Audit

Committee (A)

Corporate Governance &

Remuneration Committee (C)

Risk

Committee (R)

Name

Meetings

Eligible to

Attend in

Period

Meetings

Attended

Meetings

Eligible to

Attend in

Period

Meetings

Attended

Meetings

Eligible to

Attend in

Period

Meetings

Attended

Meetings

Eligible to

Attend in

Period

Meetings

Attended

Peter Boonstra

B, R, A 9 8 2 2 - - 3 3

Alex Claassens

B,A 5 5 2 2 - - - -

Paul Collins

B, A 4 4 2 0 - - - -

Sandra Fields

B, C, A 4 3 2 2 2 2 - -

Gillian George

B,R 5 5 - - - - 3 3

Mark Harris

B, C, R 9 8 - - 3 3 6 5

Michael Kyriacou

B, A, R 9 8 2 2 - - 3 3

Bill Pascoe

B, R, A 9 8 2 2 - - 3 2

Rod Paul

B, C, R, A 9 9 4 2 3 2 6 3

Eric Priestley

B, C, A 9 8 4 4 3 3 - -

Graham Truelove

B, R 9 9 - - 1 0 6 5

B = Eligible to attend Board meetings for some or all of the period, A = Eligible to attend Audit Committee meetings for some or all of the period, C = Eligible to attend Corporate Governance Committee meetings for some or all of the period, R = Eligible to attend Risk Committee meetings for some or all of the period. The role of the Audit Committee is to assist the Board in the discharge of its responsibilities by way of monitoring the compliance with prudential and statutory requirements to which the Credit Union and its associated Companies are obliged to comply. The role of the Corporate Governance Committee is to monitor compliance with governance obligations and assist the Board in discharging its responsibilities. The role of the Risk Committee is to assist the Board in the discharge of its responsibilities in respect of the identification, measurement and mitigation of the risks faced by the Credit Union. DIRECTORS’ BENEFITS No Director has received or become entitled to receive during, or since the end of the financial year, a benefit because of a contract made by the Credit Union, controlled entity, or a related body corporate with a Director, a firm of which a Director is a member or an entity in which a Director has a substantial financial interest, other than that disclosed in Note 31 of the financial report. COMPANY SECRETARY The following person held the position of Company Secretary during the financial year: Mr Simon Andrew Brasier ACIS, PNA was appointed Company Secretary on 1 November 2006. Mr Brasier has been employed by Encompass Credit Union since 1990, most recently as the Executive Manager Business Relationships and Finance.


DIRECTORS' REPORT (continued) INDEMNIFYING OFFICER OR AUDITOR Insurance premiums have been paid to insure each of the Directors and Officers of the Credit Union, against any costs and expenses incurred by them in defending any legal proceeding arising out of their conduct while acting in their capacity as a Director or Officer of the Credit Union. In accordance with normal commercial practice disclosure of the premium amount and the nature of the insured liabilities is prohibited by a confidentiality clause in the contract. No insurance cover has been provided for the benefit of the auditors of the Credit Union.

FINANCIAL PERFORMANCE DISCLOSURES PRINCIPAL ACTIVITIES The principal activities of the Credit Union during the year were the provision of retail financial services to members in the form of taking deposits and giving financial accommodation as prescribed by the Constitution. No significant changes in the nature of these activities occurred during the year. OPERATING RESULTS The net profit of the Credit Union for the year after providing for income tax was $617,000 (2009: $464,000). DIVIDENDS No dividends have been paid or declared since the end of the financial year and no dividends have been recommended or provided for by the Directors of the Credit Union. REVIEW OF OPERATIONS The results of the Credit Union’s operations from its activities of providing financial services to its members did not change significantly from those of the previous year. The result for the year was affected by:

• A decline in personal loan balances. • An increase in mortgage loan balances. • An increase in the level of liquid funds held. • Bad debt write offs. • An increase in the cost of deposits and borrowings. • Receipt of proceeds from the sale of the IDPC.

SIGNIFICANT CHANGES IN STATE OF AFFAIRS There were no significant changes in the state of the affairs of the Credit Union during the year. EVENTS OCCURRING AFTER BALANCE DATE No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect in subsequent years the operations, or state of affairs of the Credit Union. LIKELY DEVELOPMENTS AND RESULTS No other matters, circumstances or likely developments have arisen since the end of the financial year which have significantly affected or may significantly affect in subsequent years: (i) the operations of the Credit Union; (ii) the results of those operations; or (iii) the state of affairs of the Credit Union in the financial years subsequent to this financial year. ROUNDING The amounts contained in the financial statements have been rounded to the nearest one thousand dollars in accordance with ASIC Class Order 06/51. The Credit Union is permitted to round to the nearest one thousand ($’000) for all amounts except prescribed disclosures which are shown in whole dollars.


DIRECTORS' REPORT (continued) AUDITOR INDEPENDENCE The auditor has provided the following declaration of independence to the Board as prescribed by the Corporations Act 2001.

DECLARATION OF INDEPENDENCE BY WAYNE BASFORD

TO THE DIRECTORS OF ENCOMPASS CREDIT UNION LIMITED

As lead auditor of Encompass Credit Union Limited for the year ended 30 June 2010, I declare that, to the best of my knowledge and belief, there have been no contraventions of:

• the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and • any applicable code of professional conduct in relation to the audit.

BDO Audit (NSW-VIC) Pty Ltd

Dated in Sydney, this 26th day of September 2010 This report is made in accordance with a resolution of the Board and is signed for and on behalf of the Directors by: Rod Paul, Director Signed and dated this 28th day of September 2010

DIRECTORS’ DECLARATION The Directors of Encompass Credit Union Limited declare that:

1. The financial statements, comprising the statement of comprehensive income, statement of financial

position, statement of cash flows, statement of changes in equity, and accompanying notes, are in

accordance with the Corporations Act 2001 and:

(a) comply with Accounting Standards and the Corporations Regulations 2001; and

(b) give a true and fair view of the company’s financial position as at 30 June 2010 and of its

performance for the year ended on that date.

2. The company has included in the notes to the financial statements an explicit and unreserved statement of

compliance with International Financial Reporting Standards.

3. In the directors’ opinion, there are reasonable grounds to believe that the company will be able to pay its

debts as and when they become due and payable.

This declaration is made in accordance with a resolution of the Board of Directors and is signed for and on

behalf of the directors by:

Rod Paul, Director Signed and dated this 28th day of September 2010


INDEPENDENT AUDIT REPORT To the members of Encompass Credit Union Limited We have audited the accompanying financial report of Encompass Credit Union Limited, which comprises the Statement of Financial Position as at 30 June 2010, and the Statement of Comprehensive Income, statement of changes in equity and Statement of Cash Flows for the year ended on that date, a summary of significant accounting policies, other explanatory notes and the Directors’ declaration. DIRECTORS’ RESPONSIBILITY FOR THE FINANCIAL REPORT The Directors of the Credit Union are responsible for the preparation and fair presentation of the financial report in accordance with Australian Accounting Standards (including the Australian Accounting Interpretations) and the Corporations Act 2001. This responsibility includes establishing and maintaining internal control relevant to the preparation and fair presentation of the financial report that is free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. In Note 1, the Directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements, that compliance with the Australian equivalents to International Financial Reporting Standards ensures that the financial report, comprising the financial statements and notes, complies with International Financial Reporting Standards. AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control.

An audit also includes

evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the financial report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. INDEPENDENCE In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, provided to the Directors of Encompass Credit Union Limited on 26th September 2010, would be in the same terms if provided to the Directors as at the date of this auditor’s report. AUDITOR’S OPINION In our opinion the financial report of Encompass Credit Union Limited is in accordance with the Corporations Act 2001, including: (a) giving a true and fair view of the company’s financial position as at 30 June 2010 and of its performance

for the year ended on that date; and (b) complying with Australian Accounting Standards (including the Australian Accounting Interpretations)

and the Corporations Regulations 2001; and

(c) the financial report also complies with International Financial Reporting Standards as disclosed in Note 1.

BDO Chartered Accountants

Level 18, 2 Market Street Sydney NSW 2000 Signed and dated this 30th day of September 2010


STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 30 JUNE 2010 Note 2010

$’000 2009

$’000 Interest revenue 2a 15,204 17,544 Interest expense 2c (6,384) (8,615) NET INTEREST INCOME 8,820 8,929 Fee commission and other income 2b 2,529 2,903 NET INTEREST INCOME AND OTHER INCOME 11,349 11,832

NON INTEREST EXPENSES Impairment losses on loans and advances 2d (501) (791) Fee and commission expenses (934) (1,336) (1,435) (2,127) General administration - Employees’ compensation and benefits (4,618) (4,795) - Depreciation and amortisation 2f (528) (436) - Information technology (715) (756) - Office occupancy (1,195) (1,089) - Other administration (916) (1,116) Total general administration (7,972) (8,192) Other operating expenses (1,022) (968) TOTAL NON INTEREST EXPENSES (10,429) (11,287)

PROFIT BEFORE INCOME TAX 920 545 Income tax expense 3 (303) (81) PROFIT AFTER INCOME TAX 617 464

The above Statement of Comprehensive Income should be read in conjunction with the accompanying notes.


STATEMENT OF CHANGES IN MEMBER EQUITY

FOR THE YEAR ENDED 30 JUNE 2010

Capital Retained profits

Reserve for credit

losses

Other reserves

Total

$’000 $’000 $’000 $’000 $’000 Total as at 1 July 2008 183 24,474 460 6,379 31,496 Revaluation of property - - - 456 456 Profit for the year - 464 - - 464 Transfers to (from) Reserves 14 (14) - - - Transfers to (from) Reserves - 29 (29) - - Total as at 30 June 2009 197 24,953 431 6,835 32,416

Revaluation of property - - - - - Profit for the year - 617 - - 617 Transfers to (from) Reserves 16 (16) - - - Total as at 30 June 2010 213 25,554 431 6,835 33,033


STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2010

Note 2010 $’000

2009 $’000

ASSETS Cash 4 4,350 2,656 Advances to other financial institutions 5 27,000 29,000 Investment securities 6 25,654 22,321 Receivables 7 977 798 Prepayments 135 128 Loans and advances to members 8 & 9 172,306 168,914 Available for sale investments 10 807 770 Property, plant and equipment 11 6,040 6,366 Taxation assets 12 473 943 Intangible assets 13 92 130 TOTAL ASSETS 237,834 232,026 LIABILITIES Borrowings 14 10,000 5,000 Deposits from members 15 190,886 190,606 Creditor accruals and settlement accounts 16 3,034 3,125 Provisions 18 550 548 Deferred income tax liability 19 331 331 TOTAL LIABILITIES 204,801 199,610 NET ASSETS 33,033 32,416

MEMBER EQUITY Capital reserve account 20 213 197 Asset revaluation reserve 21 2,270 2,270 General reserve for credit losses 22 431 431 General reserve 4,565 4,565 Retained earnings 25,554 24,953 TOTAL MEMBER EQUITY 33,033 32,416

Table of other notes to accounts

23 Financial risk management objectives and policies 24 Categories of financial instruments 25 Maturity profile of financial assets and liabilities 26 Interest rate change profile of financial assets and liabilities 27 Net fair value of financial assets and liabilities 28 Financial commitments 29 Standby borrowing facilities 30 Contingent Liabilities 31 Disclosures on directors and other key management personnel 32 Economic dependency 33 Superannuation liabilities 34 Notes to statement of cash flows 35 Corporate information

The above Statement of Financial Position should be read in conjunction with the accompanying notes.


STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 30 JUNE 2010 Note 2010

$’000 2009 $’000

OPERATING ACTIVITIES REVENUE INFLOWS Interest received 14,807 18,071 Fees and commissions 1,725 2,042 Dividends 235 233 Other income 437 429 REVENUE OUTFLOWS Interest paid (6,162) (8,617) Suppliers and employees (9,630) (9,729) Income taxes paid 168 (191) NET CASH FROM REVENUE ACTIVITIES 34b 1,580 2,238 INFLOWS FROM OTHER OPERATING ACTIVITIES Member loans (net movement) (3,906) 6,236 Member deposits and shares (net movement) 433 11,252 Receivables from other financial institutions (net movement) 2,000 (29,000) NET CASH FROM OPERATING ACTIVITIES 34c 107 (9,274) INVESTING ACTIVITIES INFLOWS Proceeds on sale of investment in shares 91 51 Proceeds on sale of property, plant and equipment 93 37 Proceeds of investment securities redemption - 12,493 OUTFLOWS Purchase of CFP shares - (1) Purchase of property plant and equipment (209) (564) Purchase of intangible assets (54) (73) Purchase of investment securities (3,334) - NET CASH FROM INVESTING ACTIVITIES (3,413) 11,943 FINANCING ACTIVITIES INFLOWS (OUTFLOWS) Proceeds on borrowings - (2,000) Repayment of borrowings 5,000 - NET CASH FROM FINANCING ACTIVITIES 5,000 (2,000) TOTAL NET CASH INCREASE/(DECREASE) 1,694 669 Cash at beginning of year 2,656 1,987 CASH AT END OF YEAR 34a 4,350 2,656

The above Statement of Cash Flows should be read in conjunction with the accompanying notes.


NOTES TO THE FINANCIAL STATEMENTS

1. STATEMENT OF ACCOUNTING POLICIES This financial statement is prepared for Encompass Credit Union Limited as a single entity for the year

ended 30 June 2010. The report was authorised for issue on 28 September 2010 in accordance with a resolution of the Board. The financial report is presented in Australian dollars. The financial report is a general purpose financial report which has been prepared in accordance with Australian equivalents to International Financial Reporting Standards (AIFRS), Interpretations of the Australian Accounting Standards Board, and the Corporations Act 2001. Compliance with Australian equivalents to International Financial Reporting Standards ensures the financial statements and notes comply with the International Financial Reporting Standards (IFRS).

a. Basis of measurement

The financial statements have been prepared on an accruals basis and are based on historical costs, which do not take into account changing money values or current values of non current assets with the exception of real property and available for sale assets which are stated at fair value. The accounting policies are consistent with the prior year unless otherwise stated.

b. Loans to members (i) Basis of recognition

All loans are initially recognised at fair value, net of transaction costs incurred and inclusive of loan origination fees. Loans are subsequently measured at amortised cost. 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 loans using the effective interest method. Loans to members are reported at their recoverable amount representing the aggregate amount of principal and unpaid interest owing to the Credit Union at balance date, less any allowance or provision against debts considered doubtful. A loan is classified as impaired where recovery of the debt is considered unlikely as determined by the Board.

(ii) Interest earned Term loans & overdraft - The loan interest is calculated on the basis of daily balances outstanding

and is charged in arrears to a member’s account on the last day of each month. Credit cards - The interest is calculated on the basis of the daily balance outstanding on cash

advances and purchases in excess of the payment due date and is charged in arrears to a member’s account on the 25th day of each month. Purchases are granted up to 55 days interest free until the due date for payment.

Non accrual loan interest - While still legally recoverable, interest on accounts other than mortgage

loans is not brought to account as income where the Credit Union is informed that the member has deceased. Interest on accounts where a loan is impaired is not bought to account as income. A loan is classified as impaired where recovery of the debt is considered unlikely as determined by the Board.



(iii) Loan origination fees and discounts

Loan establishment fees - Loan establishment fees and discounts are initially deferred as part of the loan balance, and are brought to account as income over the expected life of the loan. The amounts brought to account are included as part of interest revenue. Transaction costs - Transaction costs are expenses which are direct and incremental to the establishment of the loan. These costs are initially deferred as part of the loan balance, and are brought to account as a reduction to income over the expected life of the loan. The amounts brought to account are included as part of interest revenue.

(iv) Fees on loans

The fees charged on loans after origination of the loan are recognised as income when the service is provided or costs are incurred.

c. Loan impairment (i) Specific provision

A provision for losses on impaired loans is recognised when there is objective evidence that the impairment of a loan has occurred. Estimated impairment losses are calculated on either a portfolio basis for loans of similar characteristics, or on an individual basis. The amount provided is determined by management and the Board to recognise the probability of loan amounts not being collected in accordance with terms of the loan agreement. The critical assumptions used in the calculation are as set out in Note 9. Note 23 details the credit risk management approach for loans.

The APRA Prudential Standards require a minimum provision to be maintained, based on specific

percentages on the loan balance which are contingent upon the length of time the repayments are in arrears.

An assessment is made at each Statement of Financial Position date to determine whether there is objective evidence that a specific financial asset or a group of financial assets is impaired. Evidence of impairment may include indications that the borrower has defaulted, is experiencing significant financial difficulty, or where the debt has been restructured to reduce the burden to the borrower.

(ii) Reserve for credit losses

In addition to the above specific provision, the Board has recognised the need to make an allocation

from retained earnings to ensure there is adequate protection for members against the prospect that some members will experience loan repayment difficulties. The reserve is based on estimation of potential risk in the loan portfolio based upon:

- the level of security taken as collateral; - the type of loan; and - the likelihood of loan loss based on historic analysis.

(iii) Renegotiated loans

Loans which are subject to renegotiated terms which would have otherwise been impaired do not have the repayment arrears diminished and interest continues to accrue to income. Each renegotiated loan is retained at the full arrears position until the normal repayments are reinstated and brought up to date and maintained for a period of 6 months.



d. Bad debts written off (direct reduction in loan balance) Bad debts are written off from time to time as determined by management and the Board when it is

reasonable to expect that the recovery of the debt is unlikely. Bad debts are written off against the doubtful debts expense in the Statement of Comprehensive Income, or against impairment provision where previously provided.

e. Property, plant and equipment

Land and buildings are measured at fair value less accumulated depreciation. Revaluation increments are credited to the asset revaluation reserve, unless it reverses a previous decrease in value in the same asset previously debited to the Statement of Comprehensive Income. Revaluation decreases are debited to the Statement of Comprehensive Income unless it directly offsets a previous revaluation increase in the same asset in the asset revaluation reserve.

Property, plant and equipment, with the exception of freehold land, are depreciated on a straight line basis so as to write off the net cost of each asset over its expected useful life to the Credit Union. The useful life is adjusted as appropriate at each reporting date. The estimated useful life of the assets at balance date are as follows:

- Buildings – 40 years. - Leasehold Improvements – the lesser of 10 years or the term of the lease. - Plant and Equipment – 2.5 to 7 years.

Assets less than $300 are not capitalised. f. Deposits with other financial institutions Term deposits and Negotiated Certificates of Deposits with other financial institutions are unsecured

and have a carrying amount equal to their principal amount. Interest is paid on the daily balance at maturity. All deposits are in Australian currency. The accrual for interest receivable is calculated on a proportional basis of the expired period of the term of the investment. Interest receivable is included in the amount of receivables in the Statement of Financial Position.

g. Equity investments and other securities

Investments in shares are classified as available for sale assets. Investments in shares where a market value is readily available are re-valued to market value, with the

gains and losses reflected in equity through the asset revaluation reserve. Investments in shares which do not have ready market and are not capable of being reliably valued are

recorded at the lower of cost or recoverable amount. Investments in shares where no market value is readily available are carried at cost less any provision for impairment.

All investments are in Australian currency.



h. Member deposits

(i) Basis for measurement Member savings and term investments are quoted at the aggregate amount of money owing to depositors. (ii) Interest payable

Interest on savings is calculated on daily balances and posted to members’ accounts monthly. Interest

on term deposits is calculated on a daily basis and posted to members’ accounts fortnightly, monthly, annually or on maturity. Interest on savings is brought to account on an accrual basis in accordance with the interest rate terms and conditions of each savings and term deposit account as varied from time to time. The amount of the accrual is shown as part of amounts payable.

i. Borrowings

Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost. 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 borrowings using the effective interest method.

j. Provision for employee benefits Provision is made for the Credit Union’s liability for employee benefits arising from services rendered

by employees to balance date. Employee benefits have been measured at their nominal amount. Provision for long service leave is on a pro-rata basis from commencement of employment with the

Credit Union based on the present value of its estimated future cash flows. Annual leave is accrued in respect of all employees on pro-rata entitlement for part year of service and

leave entitlement due but not taken at balance date. Contributions are made by the Credit Union to employees’ superannuation funds and are charged to

the Statement of Comprehensive Income as incurred. k. Leasehold on premises

Leases, where the lessor retains substantially all the risks and rewards of ownership of the net asset, are classified as operating leases. Payments made under operating leases (net of incentives received from the lessor) are charged to the Statement of Comprehensive Income on a straight-line basis over the period of the lease. A provision is recognised for the estimated make good costs on the operating leases, based on the net present value of the future expenditure at the conclusion of the lease term.



l. Income tax The income tax expense shown in the Statement of Comprehensive Income is based on the operating

profit before income tax adjusted for any non tax deductible, or non assessable items between accounting profit and taxable income. Deferred Tax Assets and Liabilities are recognised using the Statement of Financial Position liability method in respect of temporary differences arising between the tax bases of assets or liabilities and their carrying amounts in the financial statements. Current and deferred tax balances relating to amounts recognised directly in equity are also recognised directly in equity.

Deferred tax assets and liabilities are recognised for all temporary differences between carrying amounts

of assets and liabilities for financial reporting purposes and their respective tax bases at the rate of income tax applicable to the period in which the benefit will be received or the liability will become payable. These differences are presently assessed at 30%.

Deferred tax assets are only brought to account if it is probable that future taxable amounts will be

available to utilise those temporary differences. The recognition of these benefits is based on the assumption that no adverse change will occur in income tax legislation; and the anticipation that the Credit Union will derive sufficient future assessable income and comply with the conditions of deductibility imposed by the law to permit a future income tax benefit to be obtained.

m. Intangible assets

Items of computer software which are not integral to the computer hardware owned by the Credit Union are classified as intangible assets. Computer software is amortised over the expected useful life of the software. The expected useful life ranges from 2 to 5 years.

n. Goods and services tax (GST) As a financial institution the Credit Union is input taxed on all income except other income from

commissions and some fees. An input taxed supply is not subject to GST collection, and similarly the GST paid on purchases cannot be recovered. As some income is charged GST, the GST on purchases is generally recovered on a proportionate basis. In addition, certain prescribed purchases are subject to reduced input tax credits (RITC), of which 75% of the GST paid is recoverable.

Revenue, expenses and assets are recognised net of the amount of GST, except where the amount of

the GST incurred is not recoverable from the Australian Tax Office (ATO). In these circumstances, the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense.

Receivables and payables are stated with the amount of GST included where applicable GST is

collected. The net amount of GST recoverable from, or payable to, the ATO is included as a current asset or current liability in the Statement of Financial Position. Cash flows are included in the Statement of Cash Flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from, or payable to, the ATO are classified as operating cash flows.

o. Impairment of assets

At each reporting date the Credit Union assesses whether there is any indication that individual assets are impaired. Where impairment indicators exist, the recoverable amount is determined and impairment losses are recognised in the Statement of Comprehensive Income where the asset's carrying value exceeds its recoverable amount. A recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purpose of assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Where it is not possible to estimate a recoverable amount for an individual asset, the recoverable amount is determined for the cash-generating unit to which the asset belongs.



p. Accounting estimates and judgements

Management has made judgements when applying the Credit Union’s accounting policies with respect to the classification of assets as available for sale. The details of the critical accounting estimates and assumptions are set out in Note 9 for the impairment provisions for loans.

The significant accounting judgements are related to the determination of the provision for impairment of loans are set out in Note 9.

q. New or emerging standards

Certain new accounting standards and interpretations have been published that are not mandatory for 30 June 2010 reporting periods. The Credit Union’s assessment of the impact of these new standards and interpretations is set out below.

AASB Reference Nature of Change Application Date Impact on Initial Application

AASB 9 Issued December 2009 Financial Instruments

Amends the requirements for the classification and measurement of financial assets

Periods beginning on or after 1 January 2013

Due to the recent release of these amendments and that adoption is only mandatory for the 30 June 2014 year end, the entity has not yet made an assessment of the impact of these amendments.



2010 $’000

2009 $’000

2. STATEMENT OF COMPREHENSIVE INCOME a. Analysis of interest revenue Category of interest bearing assets Cash – deposits at call 131 345 Advances to other financial institutions 2,237 2,413 Loans and advances to members 12,833 14,786 Income tax 3 - Total interest revenue 15,204 17,544 b. Non interest revenue comprises

Fee and commission revenue Loan fee income – other than loan origination fee 257 237 Other fee income 940 1,459 Insurance commission 279 193 Other commission 253 258 Total fee and commission revenue 1,729 2,147 Other income Gain on sale of available for sale investments not previously in equity 128 51 Dividends received 235 233 Bad debts recovered 147 157 Income from property (rental income) 274 270 Gain on disposal of property, plant and equipment - 43 Miscellaneous revenue 16 2 Total other income 800 756 Total non interest revenue 2,529 2,903

c. Interest expenses

Analysis of interest expense

Category of interest bearing liabilities Deposits from members 6,008 8,147 Borrowings 376 468 Total interest expenses 6,384 8,615

d. Impairment losses on loans and advances

Increase in provision for impairment 28 2 Bad debts written off directly against profit 473 789 Total impairment losses on loans and advances 501 791

e. Individually significant items of income and expenditure

Expenditure The following items of expense are shown as part of Administration expenses and considered to be significant to the understanding of the financial performance:

Redundancy payments to staff 52 140



2010 $’000

2009 $’000

Income The following items of income are shown as part of Other Income and considered to be significant to the understanding of the financial performance:

Disposal of shares in CU Financial Advisory Service Pty Limited

-

51

Dividends from sale of Visa IPO - 137 Dividends from sale of shares in CFP 147 - Profit on disposal of shares in CFP 128 - f. Prescribed expense disclosures General administration – employees costs include: Net movement in annual leave accrual (78) 47 Net movement in employee long service leave provision 2 79 General administration – depreciation expense comprises: Buildings 83 - Plant and equipment 202 234 Leasehold improvements 151 89 Amortisation of software 92 113 528 436

General administration – office occupancy costs include: Property operating minimum lease payments 786 744

2010 2009 $ $ Other operating expenses include: Auditor’s remuneration (excluding GST) - Audit fees – prior year 10,500 27,500

- Audit fees – current year 150,500 152,857 - Other services – taxation 5,500 5,000 - Other services – compliance 6,000 6,000 - Other services – other 6,800 18,094 179,300 209,451

3. INCOME TAX EXPENSE

a. Income tax expense comprises amounts set aside as: Provision for income tax - current year 206 68

Under (Over) provision in prior year - 29 Decrease (Increase) in the prior year deferred tax asset

account

97

(16) Income tax expense attributable to operating profit 303 81



2010

$’000 2009

$’000 b. The prima facie tax payable on operating profit is

reconciled to the income tax expense in the accounts as follows:

Profit from operations 920 545

Prima facie tax payable on operating profit before income tax at 30%

276

164 Tax effect of expenses not deductible 1 1 Expenses of a capital nature for tax - (19) Medium credit union transitional rate adjustment - (8) Imputation adjustment 31 30 Franking rebate (102) (100) Income tax attributable to current operating profit 206 68

c. Franking credits Franking credits held by the Credit Union after adjusting for

franking credits that will arise from the payment of income tax payable as at the end of the financial year is:

3,506

3,405

4. CASH Cash on hand 338 305 Deposits at call 4,012 2,351 4,350 2,656

5. ADVANCES TO OTHER FINANCIAL INSTITUTIONS Deposits with banks 15,000 12,000 Deposits with other societies (ADIs) 12,000 17,000 27,000 29,000

Deposits with Cuscal are disclosed as Security Investments in Note 6.

6. SECURITY INVESTMENTS Negotiable certificates of deposit - Cuscal (refer Note 32) 21,724 18,373

Negotiable certificates of deposit - Banks 3,930 3,948 25,654 22,321



2010

$’000 2009

$’000 7. RECEIVABLES Interest receivable on deposits with other financial

institutions

662

253 Sundry debtors and settlement accounts 315 545 977 798

8. LOANS AND ADVANCES a. Amount due comprises: Overdrafts and credit cards 6,833 9,465 Line of credit 10,415 12,277 Term loans 155,268 147,604 Total loans and advances 172,516 169,346 Unamortised loan origination fees (79) (66) 172,437 169,280 Provision for impaired loans (Note 9) (131) (366) Net loans and advances 172,306 168,914

b. Credit quality – Security held against loans Secured by mortgage over real estate 148,582 132,425 Secured by cash collateral 469 313 Partly secured by goods mortgage 9,413 14,887 Wholly unsecured 14,052 21,721 Total loans and advances 172,516 169,346

It is impractical to provide a valuation of the security held against loans due to the large number of assets to be valued to arrive at the amount. A breakdown of the loan balances with security held as a mortgage against real estate based on the loan to valuation ratio (LVR) is as follows: LVR less than 80% $112,571,000 (2009: $105,516,000), LVR more than 80% with mortgage insurance $21,544,000 (2009: $16,714,000), LVR between 80% and 90% not mortgage insured $8,234,000 (2009 $9,060,000) (many of these loans marginally exceeded 80% LVR due to the addition of loan costs to the amount borrowed), LVR more than 90% not mortgage insured $1,707,000 (2009 $1,135,000).

2010 $’000

2009 $’000

c. Concentration of loans The values disclosed below include Statement of Financial Position values and undrawn facilities as described in Notes 9 and 23.

(i) Loans to Individual or related groups of members which exceed 10% of members’ equity in aggregate

-

-



(ii) Loans by purpose:

2010 $’000

2009 $’000

Loans to natural persons Residential loans and facilities 144,574 132,425 Personal loans and facilities 23,908 32,976 Business loans and facilities 4,034 3,945 172,516 169,346

(iii) Loans to members are concentrated solely in

Australia. Loans to members are principally in the following regions:

NSW 165,987 163,038

Other 6,529 6,308

172,516 169,346

Loans to members are concentrated to individuals employed in the Government Transport industry

9. PROVISION ON IMPAIRED LOANS a. Total provision comprises Specific provision 131 366

b. Movement in the specific provision Balance at the beginning of year 366 585 Transfers from Statement of Comprehensive Income 28 2 Bad debts written off provision (263) (221) Specific provision balance at end of year 131 366

c. Impaired loans written off Amounts written off against the provision for impaired loans 263 221 Amounts written off directly to expense 473 789 Total bad debts 736 1,010 Bad Debts recovered in the period (147) (157) 589 853



d. Analysis of loans that are impaired or potentially impaired by class

In the Note below: - Carrying value is the amount on the Statement of Financial Position. - Impaired loans value is the loan balances which are past due more than 90 days or an over limit

facility past due more than 14 days. Also included are loan balances on which a provision has been taken up due to the account being considered doubtful.

- Provision for impairment is the amount of the impairment provision allocated to the impaired loans. 2010 2010 2010 2009 2009 2009

Carrying value

Impaired

Loans

Provision for

impairment

Carrying

value

Impaired

Loans

Provision for

impairment $’000 $‘000 $’000 $’000 $’000 $’000

Loans to members Mortgages 144,574 383 26 132,425 458 41 Personal 15,645 148 84 23,511 441 234 Credit cards and overdraft 8,263 40 21 9,465 105 91 Total to natural persons 168,482 571 131 165,401 1,004 366 Corporate borrowers 4,034 - - 3,945 - - Total 172,516 571 131 169,346 1,004 366

e. Analysis of loans that are impaired or potentially impaired based on age of repayments outstanding

2010 2010 2009 2009 Carrying

value Provision Carrying

Value Provision

$’000 $’000 $’000 $’000

Non impaired loans and facilities 170,258 - 167,930 41 Non impaired 30 to 90 days in arrears 1,685 - 593 - Non impaired over 90 days in arrears 217 - 277 - Impaired up to 90 days in arrears 172 30 - - Impaired 90 to 182 days in arrears 92 39 282 120 Impaired 182 to 273 days in arrears 9 5 66 49 Impaired 273 to 365 days in arrears 34 27 39 32 Impaired over 365 days in arrears 9 9 54 54 Impaired over limit facilities over 14 days in arrears 40 21 105 70 Total 172,516 131 169,346 366

The impaired loans are generally not secured against residential property. Some impaired loans are secured by bill of sale over motor vehicles or other assets of varying value. It is not practicable to determine the fair value of all collateral as at the balance date due to the variety of assets and conditions.



f. Loans with repayments past due but not regarded as impaired

There are loans which are not considered to be impaired as the value of related security over residential property is in excess of the loan due. It is not practicable to determine the fair value of all collateral as at the balance date due to the variety of assets and condition.

Loans with repayments past due but not impaired are in arrears as follows:

Within

1- 3 Months

3 - 6 Months

6 - 12 Months

Over 12 Months

Total

$’000 $’000 $’000 $’000 $’000

2010

Mortgage secured 1,525 217 - - 1,742

Personal loans 164 - - - 164

Credit cards and overdrafts 579 - - - 579

Total 2,268 217 - - 2,485

2009

Mortgage secured 322 277 - - 599

Personal loans 1,408 - - - 1,408

Credit cards and overdrafts 635 - - - 635

Total 2,365 277 - - 2,642

2010 $’000

2009 $’000

g. Loans renegotiated

Some loans that were previously past due or impaired, have been renegotiated by the Credit Union and are no longer regarded as impaired. Details of these loans are:

Value of renegotiated loans renegotiated during the year and not now regarded as impaired

Book value of the renegotiated loans at balance date 104 1,121

Book value of these loans which are well secured 47 1,021

Book value of these loans which are not well secured 57 100

Well secured loans are secured by registered mortgage over real estate.

h. Key assumptions in determining the provision for impairment

In the course of the preparation of the annual report the Credit Union has determined the likely impairment loss on loans which have not maintained loan repayments in accordance with the loan contract. In identifying the impairment likely from these events, the Credit Union is required to estimate the potential impairment using the length of time the loan is in arrears and the historical losses arising in past years. Given the relatively small number of impaired loans, the circumstances may vary for each loan over time resulting in higher or lower impairment losses.



Note 2010

$’000 2009

$’000 10. AVAILABLE FOR SALE INVESTMENTS Shares in unlisted companies – at cost Cuscal Limited 32 714 714 TransAction Solutions Limited 32 93 - Combined Financial Processing Limited 32 - 56 Total value of investments 807 770

Investments in unlisted available shares Cuscal Limited (Cuscal)

The shareholding in Cuscal is measured at cost as its fair value could not be measured reliably. This company supplies services to organisations and does not have an independent business focus. These shares are held to enable the Credit Union to receive essential banking services – refer to Note 32. The shares are not able to be traded and are not redeemable. The financial reports of Cuscal record net tangible asset backing of these shares exceeding their cost value. Based on the net assets of Cuscal, any fair value determination on these shares is likely to be greater than their cost value, but due to the absence of a ready market and restrictions on the ability to transfer the shares, a market value is not able to be determined readily. The Credit Union is not intending, nor able to dispose of these shares, without a majority of Cuscal shareholder approval. TransAction Solutions Limited (TAS) The shareholding in TAS is measured at cost as its fair value could not be measured reliably. This company operates the computer facility on behalf of the Credit Union in conjunction with other organisations – refer to Note 32. The shares are not able to be traded and are not redeemable. Combined Financial Processing Limited (CFP) The shareholding in CFP was acquired by TAS on 1 April 2010. The CFP shares in the prior year were measured at cost as its fair value could not be measured reliably. This company operated the computer facility on behalf of the Credit Union in conjunction with other organisations – refer to Note 32..

2010

$’000 2009

$’000 11. PROPERTY, PLANT AND EQUIPMENT Fixed assets Land – at fair value 2,598 2,598 Buildings – at fair value 2,502 2,502 Provision for depreciation (83) - 2,419 2,502 Total land & buildings 5,017 5,100 Plant and equipment – at cost 1,693 1,967 Provision for depreciation (1,087) (1,303) 606 664 Capitalised leasehold improvements at cost 647 1,404 Provision for amortisation (230) (802) 417 602 Total property, plant and equipment 6,040 6,366



2010 $’000

2009 $’000

Land and buildings – valuation Land and buildings have been valued at a market value: 5,100 5,100

The value has been based upon an independent valuation. The most recent valuation was performed as at 30 June 2009, by Darren Keen, Certified Practicing Valuer No. 2542. No significant changes in the market values have occurred in the past 12 months.

Movements in the asset balances during the year were:

2010 2009

Property Plant and equipment

Leasehold improvements

Total

Property

Plant and equipment

Leasehold improvements

Total

$‘000 $‘000 $‘000

$‘000 $‘000 $‘000 $‘000 $‘000

Opening balance 5,100

664

602

6,366 4,448

674

364

5,486

Revaluation - - - - 652 - - 652

Purchases - 209 - 209 - 237 327 564

Assets disposed

- (65)

(34) (99)

- (13)

-

(13)

Depreciation charge (83) (202) (151)

(436) - (234)

(89)

(323)

Balance at the end of the year 5,017

606

417

6,040 5,100

664

602

6,366

2010 $’000

2009 $’000

12. TAXATION ASSETS Deferred tax asset 397 700 Tax instalments in excess of liability 17 76 243 473 943 Deferred tax asset comprises Accrued expenses not deductible until incurred 43 32 Provisions for impairment on loans 39 110 Provisions for employee benefits 250 273 Fixed assets 7 193 Unamortised loan origination fees 24 20 Franking Credits recoverable in future 53 86 TAS share scrip rollover (19) - Deferred income - (14) 397 700



2010 $’000

2009 $’000

13. INTANGIBLE ASSETS Computer software 469 416 Provision for amortisation (377) (286) 92 130

Movement in the assets balances during the year were: Opening balance 130 170 Purchases 54 73 Depreciation charge (92) (113) Balance at the end of the year 92 130

14. BORROWINGS

Borrowings 10,000 5,000

15. DEPOSITS FROM MEMBERS

Member deposits - at call 105,240 107,916 - term 85,443 82,479 Member withdrawable shares 203 211 Total deposits & shares 190,886 190,606

Concentration of member deposits

Significant individual member deposits which in aggregate represent more than 10 % of the total liabilities: - -

Member deposits at balance date were principally received from individuals residing in Australia. A significant proportion of members are employed in the government transport industry.

16. CREDITOR ACCRUALS AND SETTLEMENT ACCOUNTS

Creditors and accruals 569 693 Interest payable on deposits 1,538 1,316 Sundry creditors 645 755 Accrual for annual leave 282 361 Total amounts payable 3,034 3,125

17. TAXATION LIABILITIES

Provision for income tax (Refer Note 12) (76) (243)

Provision for income tax comprises:

Provision – previous year (243) (81) Amount paid - - Refund from prior year 243 52 Over/under statement in prior year Transferred to tax expense - (29)

Provision for tax for current year - - Instalments paid in current year (76) (243)

(76) (243)



2010 $’000

2009 $’000

18. PROVISIONS Long service leave 550 548 Total provisions 550 548

19. DEFERRED INCOME TAXATION LIABILITIES Provisions for deferred income tax 331 331

Deferred income tax liability comprises: Tax on re-valued property held in equity 331 331

20. CAPITAL RESERVE ACCOUNT Balance at the beginning of the year 197 183 Transfer from retained earnings on share redemptions 16 14 Balance at the end of year 213 197

Share Redemption The capital reserve account represents the amount of redeemable preference shares redeemed by the Credit Union since 1 July 1999. Legislation requires that the redemption of the shares be made out of profits. Since the value of the shares has been paid to members in accordance with the terms and conditions of the share issue, the capital reserve account represents the amount of profits appropriated to the account.

2010

$’000 2009

$’000 21. ASSET REVALUATION RESERVES

Asset revaluation reserve – land & buildings Balance at start of year 2,270 1,814 Increase due to revaluation - 651 Deferred tax liability - (195) Total asset revaluation reserves 2,270 2,270

22. GENERAL RESERVE FOR CREDIT LOSSES General reserve for credit losses 431 431

General reserve for credit losses This reserve records amount previously set aside as a

general provision and is maintained to comply with the APRA Prudential Standards

Balance at start of year 431 460 Increase (decrease) transferred from retained earnings - (29) Balance at end of year 431 431



23. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES

Introduction

The Board has endorsed a policy of compliance and risk management to suit the risk profile of the Credit Union.

The Credit Union’s risk management focuses on the major areas of market risk, credit risk and operational risk. Authority flows from the Board to the Board Risk Committee and the Board Audit Committee. Both these committees are integral to the management of risk. The main elements of risk governance are as follows:

Board: This is the primary governing body. It approves the level of risk to which the Credit Union is exposed and the framework for reporting and mitigating those risks. Board Risk Committee: This is a key body in the control of risk. The committee, which comprises representatives from the Board, works closely with representatives of management. The Board Risk Committee does not form a view on the acceptability of risks but rather reviews risks and controls that are used to mitigate those risks and makes recommendations to the Board. This includes the identification, assessment and reporting of risks. Monitoring is carried out by the Board Risk Committee through the regular review of operational reports. Risk controls are also reviewed by the Board Risk Committee to confirm whether risks are within the parameters outlined by the Board. The Board Risk Committee carries out a regular review of all operational areas to ensure that operational risks are being properly controlled and reported. It also ensures that contingency plans are in place to achieve business continuity in the event of serious disruptions to business operations. The Board Risk Committee monitors compliance with the framework laid out in the policy and reports in turn to the Board, where actual exposures to risks are assessed against prescribed limits. Board Audit Committee: Its key role in risk management is the assessment of the controls that are in place to mitigate risks. The Board Audit Committee considers and confirms that the assessment of significant risks and controls is incorporated into the internal audit plan. The Board Audit Committee receives the internal audit reports and provides feedback to the Board and the Board Risk Committee for their consideration. Credit Committee – Credit risk: This management committee meets at least monthly and has responsibility for managing and reporting credit risk exposure. It scrutinises operational reports and monitors exposures against limits determined by the Board. The committee also determines the credit risk of loans in the banking book, ensures provisioning is accurate and determines controls that need to be in put in place regarding the authorisation of new loans. The committee has responsibility for implementing policies to ensure that all large credit exposures are properly pre-approved, measured and controlled. Details concerning a prospective borrower are subject to a criteria-based decision-making process. Criteria used for this assessment includes credit references, loan-to-value ratio on security and a borrower’s capacity to repay which vary according to the value of the loan or facility. The committee ensures that all large credit exposure facilities are approved in accordance with authorisation requirements stipulated in Board policy. All loans are managed weekly through the monitoring of the scheduled repayments. Accounts where the arrears are over 90 days, or over limit facilities over 14 days, have appropriate provisions charged against them. Other provisions are taken up on accounts considered doubtful and the status of these loans is reported to the Board on a collective basis each month. Arrears are strictly controlled. The size of the loan book is such that it is possible to monitor each individual exposure to evaluate whether specific provisions are necessary and adequate. A dedicated collections team implements the Credit Union’s credit risk policy. Additionally, a collective provision is held to cover any losses where there is objective evidence that losses are present in components of the loans and advances portfolio at the Statement of Financial Position date.



Asset and liability committee (ALCO) – Market risk: This management committee meets at least monthly and has responsibility for managing interest rate risk exposures, and ensuring that the finance functions adhere to exposure limits outlined in the Market Risk Management Policy. Internal audit: The internal audit process is performed on an outsourcing basis to BDO. A comprehensive Internal Audit Plan details the actions to be performed and the frequency of their action. The internal audit process undertakes the testing of controls and the assessment of the Credit Union’s operations in accordance with the requirements of the Board Audit Committee. Key risk management policies encompassed in the overall risk management framework include: - Market Risk Management Policy - Liquidity Risk Management Policy - Credit Risk Management Policy - Operations Risk Management Policy (incorporating data risk management) The Credit Union has undertaken the following strategies to minimise the risks arising from financial instruments:

a. Market risk and hedging policy

The objective of the Credit Union’s market risk management is to manage and control market risk exposures in order to optimise risk and return. Market risk is the risk that changes in interest rates, foreign exchange rates or other prices and volatilities will have an adverse effect on the Credit Union's financial position or results. The Credit Union is not directly exposed to currency risk or other significant price risk. The Credit Union does not trade in the financial instruments it holds on its books. The Credit Union is exposed only to interest rate risk arising from changes in market interest rates. The management of market risk is the responsibility of the ALCO committee. Interest rate risk Interest rate risk is the risk of variability of the fair value or future cash flows arising from financial instruments due to the changes in interest rates. Encompass Credit Union does not have a treasury operation and does not trade in financial instruments. Interest rate risk in the banking book The Credit Union is exposed to interest rate risk in its banking book due to mismatches between the repricing dates of assets and liabilities. Interest rate risk on the banking book is measured, reported and actioned by the ALCO at least monthly. ALCO recommendations are reported to the Board at each Board meeting. In the banking book the most common risk the Credit Union faces arises from fixed rate assets and liabilities. This exposes the Credit Union to risk should interest rates change. The level of mismatch in the banking book is set out in Note 26. The table set out at Note 26 displays the period that each asset and liability will reprice as at the balance date.



Method of managing risk The Credit Union performs interest rate sensitivity analysis to assist with the management of interest rate risk. The assumptions used to perform interest rate sensitivity analysis are set out below.

Interest rate sensitivity analysis The Credit Union’s exposure to market risk is measured and monitored using interest rate sensitivity models. The Credit Union performs interest rate sensitivity analysis to assist with the management of its interest rate risk. This is performed by measuring the net interest rate repricing gap between assets and liabilities and ensuring that the resulting exposures are quantified and managed. Identified excessive repricing mismatch risks can be mitigated through targeted fixed rate interest products available through investment assets and term deposit liabilities. The Credit Union has policies in place to allow the use of derivatives to manage interest rate risk. There are no derivative transactions at balance date. An independent review of the interest rate risk profile is conducted by Protecht Advisory Pty Ltd, an independent risk management consultancy. The Board monitors these risks through the reports from Protecht Advisory Pty Ltd. Based on the calculations as at balance date, a 1% upwards movement in market interest rates would result in an increase in annual net profit of $87,700 (2009 $132,200). Conversely, a 1% downwards movement in market interest rates would result in a decrease in annual net profit by a similar amount. Interest rate sensitivity analysis measures the profit impact resulting from timing changes in the banking book of the Credit Union for the next 12 months. The calculation is performed based on the following assumptions: - interest rate changes would be applied equally over to the loan products and term deposits; - the rate change would be as at the beginning of the 12 month period and no other rate changes

would be effective during the period; - term deposits would all reprice to the new interest rate at the term maturity, or be replaced by

deposit with similar terms and rates applicable; - access savings deposits would not reprice in the event of a rate change; - fixed rate loans would all reprice to the new interest rate at the contracted date; - mortgage loans would reprice to the new interest rate within 28 days; - personal loans would reprice after a 3 month delay; - all loans would be repaid in accordance with the current average repayment rate (or contractual

repayment terms); - the value and mix of call savings to term deposits will be unchanged; and - the value and mix of personal loans to mortgage loans will be unchanged. There has been no material change to the Credit Union’s exposure to market risk or the way the Credit Union manages and measures market risk in the reporting period.

b. Liquidity risk

Liquidity risk is the risk that the Credit Union may encounter difficulties raising funds to meet commitments associated with financial instruments. It is the policy of the Board that the Credit Union maintains adequate cash reserves and committed credit facilities so as to meet member withdrawal demands when requested.



The Credit Union manages liquidity risk by: - continuously monitoring actual daily cash flows and longer term forecasted cash flows; - monitoring the maturity profiles of financial assets and liabilities; - maintaining adequate reserves, liquidity support facilities and reserve borrowing facilities; and - monitoring the prudential liquidity ratio daily. The Credit Union has a longstanding arrangement with the industry liquidity support, Credit Union Financial Support Services (CUFSS), which can access industry funds to provide support to the Credit Union should it be necessary at short notice. The Credit Union is required to maintain at least 9% of total adjusted liabilities as liquid assets capable of being converted to cash within 24 hours under the APRA Prudential Standards. The Credit Union policy is to apply a minimum 12% of funds as liquid assets to maintain adequate funds for meeting member withdrawal requests. The ratio is checked daily. Should the liquidity ratio fall below this level, management and the Board would generally address the matter by raising funds from new deposits or by drawing down on the borrowing facilities available. Note 29 describes the borrowing facilities available at balance date. These facilities are in addition to the support from CUFSS. The maturity profile of the financial liabilities, based on the contractual repayment terms are set out in Note 25. The ratio of liquid funds over the past year is set out below:

2010 %

2009 %

As at 30 June 20.17 16.89 Average for the year 18.35 20.74 Minimum during the year 16.45 16.68

c. Credit risk

Credit risk is the risk that members, financial institutions and other counterparties will be unable to meet their obligations to the Credit Union which may result in financial loss. Credit risk arises principally from the Credit Union’s loan book and investment assets.

Credit risk – Loans

The analysis of the Credit Union’s loans by class, is as follows:

2010 2010 2010 2009 2009 2009

Carrying value

Undrawn Facilities

Maximum exposure

Carrying value

Undrawn Facilities

Maximum exposure

$’000 $’000 $’000 $’000 $’000 $’000

Mortgages 144,574 7,496 152,070 132,425 8,313 140,738

Personal 15,645 1,166 16,811 23,511 1,780 25,291

Credit cards and overdrafts 8,263 17,396 25,659 9,465 18,067 27,532

Total to natural persons 168,482 26,058 194,540 165,401 28,160 193,561

Corporate borrowers 4,034 - 4,034 3,945 - 3,945

Total 172,516 26,058 198,574 169,346 28,160 197,506

Carrying value is the value on the Statement of Financial Position. Maximum exposure is the value on the Statement of Financial Position plus the undrawn facilities (loans approved but not advanced, redraw facilities, line of credit facilities, overdraft facilities and credit card limits).



Concentrations are described in note 8c. The method of managing credit risk is by way of strict adherence to credit assessment policies before the loan is approved and close monitoring of defaults in the repayment of loans thereafter. The Credit Risk Management Policy has been approved by the Board to ensure that loans are only made to members that are creditworthy. The Credit Union has established policies which address: - credit assessment and the approval requirements of loans and facilities; - security requirements; - limits of acceptable exposure; - reassessment and review of the credit exposures; - establishing appropriate provisions to recognise the impairment of loans and facilities; - debt recovery procedures; and - review of compliance with the above policies. A regular review of compliance is conducted as part of the internal audit scope. Past due and impaired A financial asset is past due when the counterparty has failed to make a payment when contractually due. Past due does not mean that counterparty will never pay, but it can trigger various actions such as renegotiation, enforcement of covenants, or legal proceedings. Once the past due exceeds 90 days, loans are regarded as impaired, unless other factors indicate the impairment should be recognised sooner. Daily reports monitor the loan repayments to detect delays in repayments. Recovery action is generally undertaken within 7 days. External collection agents may be engaged to assist with recovery action where this is deemed appropriate. The exposures to losses arise predominantly in facilities not secured by registered mortgages over real estate. If such evidence exists, the estimated recoverable amount of that asset is determined and any impairment loss, based on the net present value of future anticipated cash flows, is recognised in the Statement of Comprehensive Income. In estimating these cash flows, management makes judgements about a counterparty’s financial situation and the net realisable value of any underlying collateral. In addition to specific provisions against individually significant financial assets, the Credit Union makes collective assessments for each financial asset portfolio segmented by similar risk characteristics. Statement of Financial Position provisions are maintained at a level that management deems sufficient to absorb probable incurred losses in the Credit Union’s loan portfolio from homogenous portfolios of assets and individually identified loans. A provision for incurred losses is established on all past due loans after a specified period of repayment default, where it is probable that some of the capital will not be repaid or recovered. The provisions for impaired and past due exposures relate to the loans to members. The past due value represents the loan balances which are past due by 90 days or more or an over limit facility past due more than 14 days . Details are as set out in Note 9.



Bad debts Amounts are written off when collection of the loan or advance is considered to be remote. All write offs are on a case by case basis, taking account of the exposure at the date of the write off.

On secured loans, the write off takes place on ultimate realisation of collateral value, or from claims on any lenders mortgage insurance.

A reconciliation in the movement of both past due and impaired exposure provisions is provided in Note 9. Collateral securing loans Loans secured by residential property in Australia represent a significant proportion of the loan book. The Credit Union is therefore exposed to declines in the Loan to Value Ratio (LVR) should the property market be subject to a decline.

The risk of losses from the loans undertaken is primarily reduced by the nature and quality of the security taken.

The majority of loans secured by residential mortgages carry a LVR of 80% or less. Note 8b describes the nature and extent of the security held against the loans held as at the balance date.

Concentration risk – Individuals Concentration risk is a measurement of the Credit Union’s exposure to an individual counterparty (or group of related parties). If prudential limits are exceeded as a proportion of the Credit Union’s regulatory capital (10 per cent) a large exposure is considered to exist. No capital is required to be held against these but APRA must be informed. APRA may impose additional capital requirements if it considers the aggregate exposure to all loans over the 10% capital benchmark, to be higher than acceptable. The aggregate value of large exposure loans are set out in Note 8c. The Credit Union holds no significant concentrations of exposures to members. Concentration exposures to counterparties are closely monitored. Concentration risk – Industry The Credit Union has a concentration in retail lending for members who comprise employees and family in the transport industry. This concentration is considered acceptable on the basis that the Credit Union was formed to service these members, and the employment concentration is not exclusive. Should members leave the industry, loans continue to be repaid from other employment opportunities. Details of the geographical and industry concentrations are set out in Note 8c. Credit risk – Liquid investments There is a concentration of credit risk with respect to investment receivables with the placement of investments in Cuscal. Directors have established a policy to manage this risk. The risk of losses from the liquid investments undertaken is reduced by the nature and quality of the independent rating of the investment body and by limiting the extent of exposure to any one organisation. Under the liquidity support scheme at least 3.2% of the total assets must be invested in Cuscal. This is to permit the scheme to have adequate resources to meet its obligations if needed. The Board policy is to maintain at least 80% of the investments in Cuscal Limited. Cuscal hold a rating of AA-.



d. Operational risk

Operational risk is the risk of loss to the Credit Union resulting from deficiencies in processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks. Operational risks in the Credit Union relate mainly to those risk arising from a number of sources including legal compliance, business continuity, data infrastructure, outsourced services failures, fraud and employee errors. The Credit Union’s objective is to manage operational risk so as to balance the avoidance of financial losses through the implementation of controls, whilst avoiding procedures which inhibit innovation and creativity. These risks are managed through the implementation of polices and systems to monitor the likelihood of the events and minimise the impact. Systems of internal control are enhanced through: - the segregation of duties between employee duties and functions, including approval and

processing duties; - documentation of the policies and procedures, employee job descriptions and responsibilities, to

reduce the incidence of errors and inappropriate behavior; - implementation of the whistle blowing policies to promote a compliant culture and awareness of

the duty to report exceptions by staff; - education of members to review their account statements and report exceptions to the Credit

Union promptly; - effective dispute resolution procedures to respond to member complaints; - effective insurance arrangements to reduce the impact of losses; and - contingency plans for dealing with the loss of functionality of systems or premises or staff. Fraud The Credit Union is exposed to losses from a range of fraudulent activities. The Credit Union has systems in place which are considered to be robust enough to prevent any material loss from fraud. During the period losses from fraud occurred in a number of areas which included card skimming, internet password theft and PIN theft. IT systems The Credit Union has outsourced the IT systems management to an Independent Data Processing Centre (IDPC) which is owned by a group of credit unions. This organisation has the experience to manage any short-term problems and has a contingency plan to manage any related power or systems failures. Other network suppliers are engaged on behalf on the Credit Union by the industry body, Cuscal, to service the settlements with other financial institutions for a range of transactions which include direct entry, ATM, Visa and Bpay. The worst case scenario for IT systems identified would be the failure of the Credit Union’s core banking system and the failure of IT network suppliers leading to the inability of the Credit Union to meet member obligations and service requirements. To mitigate this risk a full disaster recovery plan is in place to cover medium to long-term problems.

e. Capital management The capital levels are prescribed by APRA. Under the APRA Prudential Standards (APS) capital is determined in three components: - credit risk; - market risk (trading book); and - operations risk. The market risk component is not required as the Credit Union is not engaged in a trading book for financial instruments.



Capital resources

Tier 1 capital Tier 1 capital of the Credit Union comprises: - Retained profits - Realised reserves

Tier 2 capital

Tier 2 capital consists of capital instruments that combine the features of debt and equity in that they are structured as debt instruments, but exhibit some of the loss absorption and funding flexibility features of equity. There are a number of criteria that capital instruments must meet for inclusion in Tier 2 capital resources as set down by APRA.

Tier 2 capital of the Credit Union comprises:

- Available for sale reserve which arises from the revaluation of financial instruments categorised as

available for sale and reflects the net gains in the fair value of those assets in the year. This is included within upper Tier 2 capital.

- A general reserve for credit losses.

The Credit Union’s available for sale (AFS) reserve, and an asset revaluation reserve on the land and buildings are discounted to 45% of the value net of any capital gains tax and estimated costs of sale. Capital in the Credit Union is made up as follows: 2010 2009 $’000 $’000 Tier 1 General reserve 4,565 4,565 Retained earnings and capital reserve 25,767 25,150 30,332 29,715 Less prescribed deductions (869) (1,192) Net tier 1 capital 29,463 28,523 Tier 2 General reserve for credit losses 431 431 Asset revaluation reserve (on property discounted to 45% ) 1,022 1,022 1,453 1,453 Less prescribed deductions (380) (362) Net tier 2 capital 1,073 1,091 Total Tier 1 and Tier 2 capital 30,536 29,614



APS 110 requires that a minimum capital level of 8% as compared to the risk weighted assets is maintained at any given time. The Board has set a policy to maintain a minimum total capital level of 13% as compared to the risk weight assets at any given time. The risk weights attached to each asset are based on the weights prescribed by APRA in its Guidance Note AGN 112-1. Risk weightings are applied based on the level of underlying security. Credit Union on Statement of Financial Position assets are risk weighted as follows:

Carrying Value

Risk Weighted

Value 2010 2010 $’000 $’000 Cash 0% 338 - Loans secured by cash collateral 0% - - Deposits in highly rated ADIs 20% - 50% 57,334 13,584 Standard loans secured against eligible residential mortgages up to 80% LVR

35%

119,539

41,839

Standard loans secured against eligible residential mortgages over 80% LVR

36% - 100%

24,518

12,994

Other assets 100%- 400% 34,582 34,725 Total on Statement of Financial Position risk weighted assets 236,311 103,142

The risk weighted assets processes were modified by APRA as from the 1 January 2008 as part of the Basel 2 prudential framework enhancements. Comparative data is not available on the revised methods. The capital ratio as at the end of the financial year over the past 5 years is as follows:

2010 2009 2008 2007 2006

25.70% 24.19% 22.84% 20.83% 21.90%

The capital ratios reported for 2007 and prior reflect the previous methodology. The level of capital ratio can be affected by growth in assets relative to growth in reserves and by changes in the mix of assets. To manage the Credit Union’s capital the Board and management review the ratio monthly and monitor major movements in asset levels. A five (5) year capital budget projection of the capital levels is maintained annually to address how strategic decisions or trends may impact on the capital level.

Pillar 2 – Capital requirement for operational risk exposures This capital component was introduced as from the 1 January 2008 and coincided with changes in the asset risk weightings for specified loans and liquid investments. Previously no operational charge was prescribed. The Credit Union uses the standardised approach which is considered to be most suitable for its business given the small number of distinct transaction streams. The operational risk capital requirement is calculated by mapping the Credit Union’s three year average level of net interest income and net non-interest income to the Credit Union’s various business lines. Based on this approach, the Credit Union’s operational risk capital requirement at balance date was $13,315,404 (2009 $12,603,380). It is considered that the standardised approach accurately reflects the Credit Union’s operational risk other than for the specific items set out below.



2010

$’000 2009

$’000 24. CATEGORIES OF FINANCIAL INSTRUMENTS a. The following information classifies the financial

instruments into measurement classes:

Financial assets – at amortised cost

Cash 4,350 2,656

Receivables from financial institutions 27,000 29,000

Investment securities 25,654 22,321

Receivables 662 253

Loans to members 172,306 168,914

Total loans and receivables 229,972 223,144

Available for sale investments – at cost 807 770

Total financial assets 230,779 223,914

Financial liabilities – at amortised cost

Short term borrowings 10,000 5,000

Creditors 2,107 2,009

Deposits from members 190,886 190,606

Total financial liabilities 202,993 197,615

b. Assets measured at fair value

Fair value measurement at end of

the reporting period using:

2010 $’000 $’000 $’000 $’000

Balance Level 1 Level 2 Level 3

Available-for-sale financial assets:

Equity investments 807 0 0 807

2009 $’000 $’000 $’000 $’000

Balance Level 1 Level 2 Level 3

Available-for-sale financial assets:

Equity investments 770 0 0 770

The fair value hierarchy has the following levels:

(a) quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);

(b) inputs other than quoted prices included within Level 1 that are observable for the asset or liability,

either directly (i.e. as prices) or indirectly (i.e. derived from prices) (Level 2); and

(c) inputs for the asset or liability that are not based on observable market data (unobservable inputs)

(Level 3).

The level 3 investments are held at cost and relate to the shares in the trade association body Cuscal Limited and the IDPC, TransAction Solutions Limited. These shares are held to maintain services for the settlement with other financial institutions, treasury, and IT support services. They are not readily realisable by way of sale or transfer.



Financial assets

Cash 4,012 - - - - 338 4,350

Receivables from ADI’s 8,104 2,050 17,796 - - - 27,950 Investment securities 9,000 13,000 4,000 - - - 26,000 Loans to members 6,584 6,074 16,880 66,957 225,358 - 321,853 Available for sale - - - - - 807 807

Total financial assets 27,700 21,124 38,676 66,957 225,358 1,145 380,960

Financial liabilities

Borrowings 10,066 - - - - - 10,066 Deposits from members call 105,240 - - - - 203 105,443 Deposits from members term 10,127 33,563 41,520 3,626 - - 88,836 Creditors - - - - - 569 569

Total financial liabilities 125,433 33,563 41,520 3,626 - 772 204,914

2009

Within 1 month

1-3 months

3-12 months

1-5 years

After 5 years

No Maturity

Total

$’000 $’000 $’000 $’000 $’000 $’000 $’000 Financial assets

Cash 2,351 - - - - 305 2,656 Receivables from ADI’s 9,068 9,112 11,224 - - 29,404 Investment securities 5,500 16,000 1,000 - - - 22,500 Loans to members 7,437 6,146 17,436 67,613 188,493 - 287,125 Available for sale - - - - - 770 770

Total financial liabilities 24,356 31,258 29,660 67,613 188,493 1,075 342,455

Financial liabilities Borrowings 5,025 - - - - - 5,025 Deposits from members call 107,916 - - - - 211 108,127 Deposits from members term 15,880 22,249 40,022 7,100 - - 85,251 Creditors - - - - - 693 693 Total financial liabilities 128,821 22,249 40,022 7,100 - 904 199,096

25. MATURITY PROFILE OF FINANCIAL ASSETS AND LIABILITIES

Monetary assets and liabilities have differing maturity profiles depending on the contractual term. The table below shows the period in which different monetary assets and liabilities held will mature and be eligible for renegotiation or withdrawal. Financial assets and liabilities are at the undiscounted values (including future interest expected to be earned or paid). Accordingly these values will not agree to the Statement of Financial Position.

2010 Within 1 month

1-3 months

3-12 months

1-5 years

After 5 years

No Maturity

Total

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



26. INTEREST RATE CHANGE PROFILE OF FINANCIAL ASSETS AND LIABILITIES Financial assets and liabilities have conditions which allow interest rates to be amended either on

maturity (term deposits, term investments and fixed loans) or after adequate notice is given (variable loans and savings). The table below shows the respective value of funds where interest rates are capable of being altered within the prescribed time bands, being the earlier of the contractual repricing date, or maturity date.

The following tables detail those assets and liabilities exposed to interest rate change:

2010

Weighted average interest

Within 1 month

1-3

months

3-12

months

1-5

years

After 5 years

Non interest bearing

Total % $’000 $’000 $’000 $’000 $’000 $’000 $’000 ASSETS Cash 2.26 4,012 - - - - 338 4,350 Advances to other financial institutions

6.11

8,000

2,000

17,000

-

-

-

27,000

Investment securities 4.80 8,911 12,822 3,921 - - - 25,654 Receivables - - - - - - 662 662 Loans & advances 7.87 124,693 1,925 22,429 23,259 - - 172,306 Available for sale - - - - - - 807 807 Total financial assets 145,616 16,747 43,350 23,259 - 1,807 230,779

LIABILITIES Borrowings 5.40 10,000 - - - - - 10,000 Deposits other FI’s 6.50 - 1,000 - - - 1,000 Deposits from members 3.91 114,321 31,783 39,937 3,642 - 203 189,886 Creditors - - - - - - 2,107 2,107 Total financial liabilities 124,321 31,783 40,937 3,642 - 2,310 202,993 Undrawn commitments 26,058 - - - - - 26,058 Total financial liabilities and undrawn commitments 150,379 31,783 40,937 3,642 - 2,310 229,051

2009

Weighted average interest

Within 1 month

1-3

months

3-12

months

1-5

years

After 5 years

Non interest bearing

Total

% $’000 $’000 $’000 $’000 $’000 $’000 $’000 ASSETS Cash 2.65 2,351 - - - - 305 2,656 Advances to other financial institutions

4.48

9,000

9,000

11,000

-

-

-

29,000

Investment securities 6.25 5,470 15,870 981 - - - 22,321 Receivables - - - - - - 253 253 Loans & advances 8.55 129,108 4,095 16,989 18,722 - - 168,914 Available for sale - - - - - - 770 770 Total financial assets 145,929 28,965 28,970 18,722 - 1,328 223,914

LIABILITIES Borrowings 7.80 5,000 - - - - - 5,000 Deposits other FI’s 6.20 - - 1,000 - - - 1,000 Deposits from members 4.42 76,703 22,123 70,446 20,123 - 211 189,606 Creditors - - - - - - 2,009 2,009 Total financial liabilities 81,703 22,123 71,446 20,123 - 2,220 197,615 Undrawn commitments 28,160 - - - - - 28,160 Total financial liabilities and undrawn commitments 109,863 22,123 71,446 20,123 - 2,220 225,775



27. NET FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES

Fair value has been determined on the basis of the present value of expected future cash flows under the terms and conditions of each financial asset and financial liability. Significant assumptions used in the determining the cash flows are that the cash flows will be consistent with the contracted cash flows under the respective contracts. The information is only relevant to circumstances at balance date and will vary depending on the contractual rates applied to each asset and liability, relative to market rates and conditions at the time. No assets held are regularly traded by the Credit Union, and there is no active market to assess the value of the financial assets and liabilities. The values reported have not been adjusted for the changes in credit ratings of the assets. The calculation reflects the interest rate applicable for the remaining term to maturity not the rate applicable to the original term.

2010 2009 Fair Value Book Value Variance Fair Value Book Value Variance

$’000 $’000 $’000 $’000 $’000 $’000 ASSETS Cash 4,350 4,350 - 2,656 2,656 - Advances to other financial institutions 27,008 27,000

8

29,054

29,000

54

Investment securities 25,658 25,654 4 22,309 22,321 (12) Receivables 662 662 - 253 253 - Loans & advances 176,379 172,306 4,073 169,796 168,914 882 Available for Sale 807 807 - 770 770 - Total financial assets 234,864 230,779 4,085 224,838 223,914 924

LIABILITIES Borrowings 10,002 10,000 2 5,002 5,000 2 Deposits from other FI’s 1,000 1,000 - 1,001 1,000 1 Deposits from members 189,722

189,886

(164) 189,746

189,606 140

Creditors 2,107 2,107 - 2,009 2,009 - Total financial liabilities 202,831 202,993 (162) 197,758 197,615 143

2010 $’000

2009

$’000 28. FINANCIAL COMMITMENTS

a. Outstanding loan commitments

Loans approved but not funded 1,751 3,519 b. Loan redraw facilities

Loan redraw facilities available 6,911 6,574 c. Undrawn borrowing facilities

Loan facilities available to members for overdrafts, credit cards and line of credit loans are as follows:

Total value of facilities approved 34,644 39,809 Less Amount advanced (17,248) (21,742) Net undrawn value 17,396 18,067

These commitments are contingent on members

maintaining credit standards and on-going repayment terms on amounts drawn. Total Financial commitments 26,058 28,160



2010

$’000 2009

$’000 d. Computer commitments

The costs committed under contracts with TAS (formally CFP) and UDA are as follows:

Not later than one year 674 348 Later than 1 year but not 2 years 674 351 Later than 2 years but not 5 years 826 747 Later than 5 years - 36

2,174 1,482

e. Lease expense commitments for operating leases on

property occupied by the Credit Union

Not later than one year 656 745 Later than one year but not later than five years 1,740 1,409 Over five years 9 20 2,405 2,174

Future minimum sublease payments expected to be received under non-cancellable subleases at the reporting date are $42,000 (2009: $163,097). The operating leases are in respect of property used for providing branch and/or ATM services to members. There are no contingent rentals applicable to leases taken out. The terms of the leases are for between 2 to 6 years and options for renewal are usually obtained for a further 3 to 6 years. There are no restrictions imposed on the Credit Union so as to limit the ability to undertake further leases, borrow funds or issue dividends (although these are subject to restrictions in the Constitution).

29. STANDBY BORROWING FACILITIES

The Credit Union maintains the following guaranteed borrowing facilities with Cuscal:

2010 Current Net

Gross Borrowing Available

$’000 $’000 $’000

Loan facility 7,000 - 7,000

Overdraft facility 3,000 - 3,000

Other - - -

Total standby borrowing facilities 10,000 - 10,000

2009 Current Net Gross Borrowing Available

$’000 $’000 $’000

Loan facility 7,000 - 7,000

Overdraft facility 3,000 - 3,000

Other - - -

Total standby borrowing facilities 10,000 - 10,000

Withdrawal of the loan facility is subject to the availability of funds at Cuscal. Cuscal holds an equitable mortgage charge over all of the assets of the Credit Union as security against loan and overdraft amounts drawn.



30. CONTINGENT LIABILITIES

Liquidity support scheme The Credit Union is a member of the Credit Union Financial Support Scheme Limited (CUFSS) a company limited by guarantee, established to provide financial support to member credit unions in the event of a liquidity or capital problem. As a member, the Credit Union is committed to maintaining 3.2% of the total assets as deposits with Cuscal. Under the terms of the Industry Support Contract (ISC), the maximum call for each participating credit union would be 3.2% of the credit union's total assets (3% under loans and facilities and 0.2% under the cap on contributions to permanent loans). This amount represents the participating credit union's irrevocable commitment under the ISC. At balance date there were no loans issued under this arrangement.

Guarantees The Credit Union has provided a guarantee to Cuscal for drawings made by a member up to a limit of $10,000 in order that Cuscal can settle the funds transferred by way of direct debit with other financial institutions. The guarantee is cancellable by either the Credit Union or Cuscal. The Credit Union has arrangements with the member to maintain sufficient funds in their account to settle the payments as and when required.

31. DISCLOSURES ON DIRECTORS and other KEY MANAGEMENT PERSONNEL (KMP) a. Remuneration of KMP

KMP are those Directors and employees having authority and responsibility for planning, directing and controlling the activities of the Credit Union, directly or indirectly. Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. KMP have been taken to comprise of the 9 Directors (2009:9) and the 4 (2009:4) members of executive management responsible for the day to day financial and operational management of the Credit Union. The aggregate compensation of KMP during the year comprising amounts paid, payable or provided for was as follows:

2010 Directors and

other KMP

2009 Directors and

other KMP $ $

(i) short-term employee benefits 864,883 813,248 (ii) post employment benefits - superannuation contributions 160,689 235,920 (iii) other long term benefits - net increases in long service leave provision 47,943 25,201 (iv) termination benefits - - Total 1,073,515 1,074,369

In the above table, remuneration shown as short term benefits means (where applicable) wages, salaries, superannuation contributions, paid annual leave, paid sick leave, bonuses and the value of fringe benefits received. It excludes out of pocket expense reimbursements. The remuneration of the Board and senior management for 2009 has been amended due to the inclusion of additional non monetary, annual leave, superannuation and remuneration amounts that were not included in the 2009 amount reported. The revised amounts shown in the 2009 column have been compiled in a manner consistent with the amounts reflected for 2010. All remuneration to Directors was approved by the members at the previous Annual General Meeting of the Credit Union. The total remuneration paid in aggregate to Directors during the year ending 30 June 2010 was $168,758 (2009: $133,247).



2010

$

2009

$ b. Loans to Directors and other KMP

(i) Aggregate value of loans and facilities to KMP 1,648,850 949,172

(ii) Total value of revolving credit facilities to KMP 1,157,000 1,105,000

Amounts drawn down and included in (i) (8,651) (352,094) Net balance available 1,148,349 752,906

(iii) Aggregate value of loans disbursed to KMP during

the year.

Revolving credit facilities 424,921 348,469 Term loans 507,862 48,276 932,783 396,745

(iv) Aggregate value of revolving credit facility limits

granted to KMP during the year.

13,000

7,000

(v) Interest and other revenue earned on loans and

revolving credit facilities to KMP

101,439

71,788

The Credit Union’s policy for lending to KMP is that all loans are approved and deposits accepted on the same terms and conditions which applied to members for each class of loan or deposit with the exception of certain loans to KMP who are not Directors. KMP who are not Directors may receive a concessional rate of interest on their loans and facilities, in accordance with the enterprise bargaining agreement between the Credit Union and its employees. There are no loans which are impaired in relation to the loan balances with KMP. There are no benefits or concessional terms and conditions applicable to the close family members of KMP. There are no loans which are impaired in relation to the loan balances with close family relatives of KMP.

2010

$ 2009

$ Other transactions between related parties including deposits from KMP

Total value term and savings deposits from KMP 453,745 389,153

Total interest paid on deposits to KMP 15,399 14,398

The Credit Union’s policy for receiving deposits from KMP is that all transactions are approved and deposits accepted on the same terms and conditions which are available to other members for each type and size of deposit.



c. Transactions with other related parties

Other transactions between related parties include deposits from Director related entities or close family members of KMP. The Credit Union’s policy for receiving deposits from related parties is that all transactions are approved and deposits accepted on the same terms and conditions which are available to other members for each type and size of deposit. There are no benefits paid or payable to the close family members of KMP. There are no service contracts to which KMP or their close family members are an interested party.

32. ECONOMIC DEPENDENCY

The Credit Union has an economic dependency on the following suppliers of services. a. Cuscal Limited (Cuscal)

Cuscal is an Approved Deposit Taking Institution registered under the Corporations Act 2001 and the Banking Act. This entity:

(i) provides the license rights to Visa Card in Australia and facilitates settlement arrangements with Bankers for ATM, Visa Card and cheque transactions, as well as the production of Visa Cards and Redicards for use by members; and

(ii) provides treasury and money market facilities to the Credit Union. The Credit Union has

invested the majority of its liquid assets with Cuscal to maximise return on funds, and to comply with the Liquidity Support Scheme requirements.

b. First Data International Limited (FDI) This entity operates the computer network used to link Redicards and Visa Cards operated through

Reditellers and other approved ATM suppliers to the Credit Union's IT Systems. c. Ultradata Australia Pty Limited (UDA)

This entity provides and maintains the application software utilised by the Credit Union. This product, known as CORVIS was sold by Cuscal to UDA in February 2004. The Credit Union converted to the UDA “The Credit Union Solution” core banking systems in August 2007.

d. TransAction Solutions Limited (TAS) Combined Financial Processing Pty Limited (CFP) was acquired by TransAction Solutions on 1 April

2010.

This entity operates the computer facility on behalf of the Credit Union in conjunction with other credit unions. The Credit Union has a management contract with the company to supply computer support staff and services to meet the day-to-day needs of the Credit Union and compliance with the relevant APRA Prudential Standards.

33. SUPERANNUATION LIABILITIES

The Credit Union contributes to various employee selected superannuation funds for the purpose of Superannuation Guarantee payments and the payment of other superannuation benefits on behalf of employees. The funds are administered independently. The Credit Union has no interest in the various superannuation funds, other than as a contributor.



2010

$’000 2009

$’000 34. NOTES TO STATEMENT OF CASH FLOWS a. Reconciliation of cash

Cash includes cash on hand, and deposits at call with other financial institutions and comprises:

Cash on hand 338 305 Deposits at call 4,012 2,351 Total cash 4,350 2,656

b. Reconciliation of cash from operations to accounting profit

The net cash increase/(decrease) from operating activities is reconciled to the operating profit after tax.

Profit after income tax 617 464 Bad debts written off 473 789 Depreciation expense 528 436 Provisions for staff leave (76) 126 Accrued taxes 20 (1) Provision for income tax 167 (162) Gain on sale of investments (128) (51) Accrued expenses (124) 182 Interest payable 222 (2) Provisions for loans 28 - Loss (Gain) on sale of assets 6 (26) Interest receivable (409) 573 Prepayments (6) 7 Sundry debtors and other receivables (24) (103) Deferred tax asset 303 53 GST receivable (30) - Amortised loan fees 13 (47)

Net cash from revenue activities 1,580

2,238

c. Non revenue operations Movement in loans balances (3,906) 6,236 Movement in liquid investment balances 2,000 (29,000) Movement in deposit balances 433 11,252 Net cash from operating activities 107 (9,274)

35. CORPORATE INFORMATION

The Credit Union is a company limited by shares registered under the Corporations Act 2001. The address of the registered office is 59 Buckingham Street, Surry Hills, NSW, 2010. The address of the principal place of business is 59 Buckingham Street, Surry Hills, NSW, 2010. The nature of the operations and its principal activities are the provision of deposit taking facilities and loan facilities to the members of the Credit Union.

2010 Annual Report - Adoptedassets.encompasscu.com.au/files/AGM/AGM 2010/ECU... · 2010 ANNUAL...

Documents

Transcript of 2010 Annual Report - Adoptedassets.encompasscu.com.au/files/AGM/AGM 2010/ECU... · 2010 ANNUAL...