Next: Directors' Responsibility Statement

Notes to the Financial Statements

For the year ended 31 December 2016

1. Reporting entity and statutory base

Reporting entity

These financial statements are for NZX Limited (the Company) and its subsidiaries (together referred to as the Group).

The Group operates New Zealand securities, derivatives and energy markets, including building and maintaining the infrastructure on which they operate. It provides funds management services including superannuation and Exchange Traded Funds (ETFs), as well as building and operating wealth management platforms for other providers. It also provides a range of information and data to support market growth and development in the securities and agricultural sectors.

The Company is incorporated and domiciled in New Zealand, registered under the Companies Act 1993 and is an FMC reporting entity under the Financial Markets Conduct Act 2013 (FMCA). These financial statements have been prepared in accordance with that Act and the Financial Reporting Act 2013. The Company is listed and its ordinary shares are quoted on the NZX Main Board.

Basis of preparation

These are the Group financial statements for the year ended 31 December 2016. They have been prepared in accordance with New Zealand Generally Accepted Accounting Practice (NZ GAAP). They comply with New Zealand equivalents to International Financial Reporting Standards (NZ IFRS) and other applicable Financial Reporting Standards, as appropriate for profit oriented entities. The financial statements also comply with International Financial Reporting Standards (IFRS).

The measurement basis adopted in the preparation of these financial statement is historical cost, modified by the revaluation of certain financial instruments as identified in the accompanying notes. These financial statements are presented in New Zealand Dollars ($), which is the Company’s functional currency. All financial information presented in New Zealand Dollars has been rounded to the nearest thousand, except when otherwise indicated.

Basis of consolidation

The Group financial statements are prepared by consolidating the financial statements of all the entities that comprise the Group, being the Company and its subsidiaries. Consistent accounting policies across the parent and all subsidiaries and associates are employed in the preparation and presentation of the Group financial statements.

  1. Business combinations

Business combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred to the Group. On acquisition, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. In determining the fair value of assets acquired, NZX assesses identifiable intangible assets including brands, intellectual property, software, management rights and any other identifiable intangible assets using recognised valuation methodologies and with reference to suitably qualified experts. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill.

  1. Investments in subsidiaries

Subsidiaries are entities controlled by the Group. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

In preparing the Group financial statements all intercompany balances and transactions, and unrealised profits arising within the Group are eliminated in full.

  1. Investment in associates

Associates are all entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting and are initially recognised at cost. The Group’s share of its associates' post-acquisition profits or losses is recognised in the Income Statement. Since the sale of its investment in Link Market Services Limited in June 2015, the Group has no investment in associates.

Accounting policies

Accounting policies that summarise the measurement basis used and are relevant to the understanding of the financial statements are provided throughout the accompanying notes.

The accounting policies adopted have been applied consistently throughout the periods presented in these financial statements.

There are no new standards, amendments or interpretations that have been issued and are not yet effective, that are expected to have a significant impact on the Group.

Accounting estimates and judgements

The preparation of the financial statements in conformity with NZ IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. The principal areas of judgement, including information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the next financial year, for the Group in preparing these financial statements are set out in:

  • note 2 - intangible assets
  • note 3 - goodwill
  • note 23 - share based payments

2. Intangible assets

Intangible assets are initially measured at cost. The direct costs associated with the development of software and website assets for internal use are capitalised where success is probable and the capitalisation criteria of NZX's accounting policy and NZ IFRS are met. The cost of intangible assets acquired in a business combination is their fair value at the date of the acquisition. Intangible assets with a finite life are amortised from the date the asset is ready for use on a straight-line basis over its estimated life which is as follows:

  • Software and websites: 3-9 years
  • Management rights: 20 years

At each reporting date, the Group reviews the carrying amounts of its intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. This is outlined in note 4 below.

Where estimated useful lives or recoverable values have diminished due to technological change or market conditions, amortisation is accelerated.

Software and websites
$000

Brands, Trademarks and rights to use Brands
$000

Data archives, customer lists, databases, and other IP
$000

Management rights
$000

Intangible work in progress
$000

Total
$000

Gross carrying amount

Balance at 1 January 2015

37,654

7,906

3,132

2,344

384

51,420

Additions

-

-

255

-

3,263

3,518

Disposals

(133)

-

-

-

-

(133)

Acquired on acquisition of businesses

2,273

-

-

15,772

-

18,045

Transfer from WIP

1,276

-

-

-

(1,276)

-

Balance at 31 December 2015

41,070

7,906

3,387

18,116

2,371

72,850

Additions

198

-

-

-

5,762

5,960

Disposals

(10,161)

-

-

-

-

(10,161)

Transfer from WIP

2,406

-

-

-

(2,406)

-

Balance at 31 December 2016

33,513

7,906

3,387

18,116

5,727

68,649

Accumulated amortisation & impairment

Balance at 1 January 2015

23,075

4,982

-

-

-

28,057

Amortisation expense

5,016

-

-

789

-

5,805

Disposals

(13)

-

-

-

-

(13)

Balance at 31 December 2015

28,078

4,982

-

789

-

33,849

Amortisation expense

5,474

208

167

793

-

6,642

Impairment expense

-

793

-

-

-

793

Disposals

(10,002)

-

-

-

-

(10,002)

Balance at 31 December 2016

23,550

5,983

167

1,582

-

31,282

Net Book Value

As at 31 December 2015

12,992

2,924

3,387

17,327

2,371

39,001

As at 31 December 2016

9,963

1,923

3,220

16,534

5,727

37,367

3. Goodwill

Carrying amount

2016
$000

2015
$000

Balance at beginning of the year

35,764

13,233

Acquired on acquisition of SuperLife Limited

-

20,730

Acquired on acquisition of Apteryx business

-

1,494

Acquired on acquisition of other business

-

307

Balance at end of the year

35,764

35,764

A cash generating unit (CGU) to which goodwill has been allocated is tested for impairment annually, and whenever there is an indicator of impairment based on the performance of the CGU relative to expected future performance and other relevant factors. For the year ended 31 December 2016, the directors have reviewed the carrying value of goodwill for impairment and determined that no impairment exists. A description of the impairment tests carried out and the key assumptions used is set out in note 4.

4. Impairment tests

Indefinite life intangible assets are reviewed for impairment annually. They are also reviewed for impairment whenever there are indicators of impairment, as are finite life intangible assets.

A summary of the CGUs to which intangible assets have been allocated as at 31 December 2016 is outlined below:

Software & websites
$000

Other finite life intangible
$000

Indefinite life intangible
$000

Work in progress
$000

Total other intangible
$000

Goodwill
$000

TOTAL
$000

Cash generating unit

Clearing House

3,873

-

-

3,887

7,760

-

7,760

Agri

54

1,777

-

21

1,852

2,489

4,341

Grain Information Unit

263

1,774

6

-

2,043

3,009

5,052

Funds Management

962

14,192

2,344

13

17,511

20,729

38,240

Wealth Technologies

960

-

-

1,154

2,114

1,494

3,608

Energy

826

-

-

573

1,399

7,720

9,119

Direct data

18

126

1,458

-

1,602

323

1,925

Other

Other intangible assets

477

-

-

-

477

-

477

Other computer software

2,530

-

-

79

2,609

-

2,609

9,963

17,869

3,808

5,727

37,367

35,764

73,131

Impairment test

For the year ended 31 December 2016, the directors have reviewed all intangible assets for impairment using discounted cash flow analysis, comparable EBITDA multiple analysis and/or other factors as appropriate to the asset being tested. All impairment tests have been undertaken on a value in use basis.

Key assumptions used in the calculation of recoverable amounts in discounted cash flow analysis are consistent with those used and disclosed in the financial statements for the year ended 31 December 2015 unless indicated otherwise. Discounted cash flow analysis using a forecast period of five years was used for all CGUs, other than Agri where a ten year forecast period was used, and Energy where a forecast period of eight years was used to match the remaining contractual period. The analysis also used an independently assessed WACC of 10.35% (2015: 10.4%) for New Zealand CGUs and 12.76% (2015: 12.3%) for Australian CGUs (and were stress tested at higher rates). A terminal growth rate of 2.0% p.a. has been used to extrapolate cash flow projections beyond five years in New Zealand and 2.5% p.a. in Australia. Management has assessed the long term economic outlook data available, and assessed that the use of a 2% p.a. and 2.5% p.a. terminal growth rate in 2016 were appropriate, consistent with the prior year. Where relevant, EBITDA multiples were used to cross-check the discounted cash flow analysis for established businesses.

The review of the carrying values of goodwill and intangible assets has determined that all the CGUs have recoverable amounts exceeding their carrying values. Therefore no impairment charges are required at 31 December 2016. An impairment expense of $793,000 on Agri brand assets was recognised in the current financial year as a result of impairment testing completed at the 30 June 2016 half year reporting period (refer note 7).

Further information on specific assumptions underlying the CGU discounted cash flow analysis is set out below.

  1. Clearing House

Other than the general assumptions outlined above, the principal assumption on which the discounted cash flows for this CGU are dependent is the future revenue growth rate. Future revenue growth is dependent on growth in equity and dairy derivatives markets. Growth in equity markets has been forecast based on historical growth rates, while dairy derivatives are expected to trade within a range of 3% to 36% (2015: 5% to 25%) of their respective underlying markets by the end of the forecast period (currently this range is 1% to 8%). This assumption is based on trading statistics for similar derivative products in overseas markets.

  1. Agri

Other than the general assumptions outlined above, the principal assumption on which the discounted cash flows for the Agri CGU is dependent is the future revenue growth rate which is assumed to be up to 10% during the explicit forecast period. The Company considers this reasonable based on historical experience. The value of the Agri information business was cross checked against the EBITDA multiples of listed media entities.

  1. Grain Information Unit

Other than the general assumptions outlined above, the principal assumption on which the discounted cash flows for the Grain Information Unit CGU are dependent is the future revenue growth rate which is assumed to be 2%. The Company considers this reasonable based on historical experience.

  1. Funds Management

Smartshares Limited acquired the management rights for SmartOZZY, SmartMOZY, and the SmartMIDZ funds for a total value of $2,344,000. These are held in the Group accounts with an indefinite life, as there is no expiry date for these rights and they are expected to apply indefinitely. Additionally the acquisition of SuperLife Limited has resulted in additional management rights acquired of $15,772,000, which are held in the Group accounts as a finite life asset to be amortised over 20 years and goodwill of $20,730,000. Other than the general assumptions outlined above, the principal assumption on which the discounted cash flows are dependent is the future level of funds under management which is assumed to grow between 10.0% pa to 20.0% pa during the explicit forecast period.

  1. Energy

The carrying value of the Energy CGU is comprised mainly of a goodwill amount of $7,720,000. This business has a significant reliance on service provider contracts it has in place with the Electricity Authority (EA) which were renewed in late 2015 for the eight year period 1 May 2016 to April 2024, with the EA having an option to renew for a further 3 years. As a result of this renewal, NZX has certainty of minimum cash flows to be received over the contract period which, and along with additional uncontracted consulting revenue, support the current carrying value of the CGU.

5. Segment reporting

The Group has three revenue generating segments, as described below, which are the Group‘s strategic business areas, and a Corporate segment which has no revenue but includes all costs that are shared across the organisation. In prior periods the Group had five reportable segments and the change to three distinct groups is to better reflect each business's growth prospects and investment requirements. The reportable segments are:

  • Markets - operator and regulator of securities and derivatives markets and provider of trading, post-trade and data services for securities and derivatives, as well as the provider of a central securities depository. It also includes the Fonterra Shareholders' Market and the energy markets business, which comprises the contracts operated on behalf of the Electricity Authority;
  • Funds Services - provider of superannuation, KiwiSaver and Exchange Traded Funds (ETF) and funds administration platforms; and
  • Agri - provider of information, news, data and analysis relating to the agriculture sectors in New Zealand and Australia through printed publications and online services.

The Group’s CEO (the chief operating decision maker) reviews internal management reports for each of these strategic areas on a regular basis. The Group’s revenue is analysed into each of the reportable segments. Expenses incurred are allocated to these segments only if they are direct and specific expenses to one of the three segments. The remaining expenses that relate to activities shared across the group are reported in a Corporate segment.

The Group's assets and liabilities are analysed into each of the revenue generating segments, apart from those assets and liabilities that are utilised on a shared basis, which are allocated to the Corporate segment.

Segmental information for the year ended 31 December 2016

Markets
$000

Agri
$000

Funds Services
$000

Corporate
$000

Total
$000

Operating revenue

52,902

11,610

13,032

-

77,544

Operating expenses

(11,835)

(10,755)

(13,348)

(19,089)

(55,027)

Total segment result

41,067

855

(316)

(19,089)

22,517

Segment assets

123,360

11,991

46,822

11,791

193,964

Segment liabilities

(77,788)

(2,012)

(15,525)

(28,964)

(124,289)

Net assets

45,572

9,979

31,297

(17,173)

69,675

Segmental information for the year ended 31 December 2015

Markets
$000

Agri
$000

Funds Services
$000

Corporate
$000

Total
$000

Operating revenue

49,902

12,567

10,682

-

73,151

Operating expenses

(12,390)

(11,527)

(8,956)

(15,699)

(48,572)

Total segment result

37,512

1,040

1,726

(15,699)

24,579

Segment assets

110,480

15,225

44,702

23,340

193,747

Segment liabilities

(68,329)

(2,763)

(16,015)

(30,472)

(117,579)

Net assets

42,151

12,462

28,687

(7,132)

76,168

Geographical information

In presenting information on the basis of geographical segments, segment revenue is based on the geographical location of customers. Segment non-current assets are based on the geographical location of the assets.

Revenue

2016
$000

2015
$000

New Zealand

63,000

59,838

Australia

6,139

6,402

Other

8,405

6,911

Total revenue

77,544

73,151

Non-current assets

2016
$000

2015
$000

New Zealand

72,491

75,886

Australia

3,899

4,213

Total non-current assets

76,390

80,099

6. Loss on disposal of businesses and property, plant and equipment

2016
$000

2015
$000

Gain on disposal of property, plant and equipment

2

29

Loss on disposal of business - Clear Grain Exchange

(469)

-

(467)

29

During the period the Group disposed of the business and assets of:

  • Rural magazine publications Dairy Exporter and Country-wide, effective 1 November 2016; and
  • The Clear Grain Exchange, effective 1 December 2016.

7. Impairment expense

At 30 June 2016, NZX recognised an impairment of part of the residual value of brand assets in relation to NZX's Agri business, reflecting future expectations for rural publications. These assets were subsequently sold as part of the disposal of the Group's rural magaine titles, refer note 6.

8. Adjustment to provision for earnout

The provision for the Apteryx (now NZX Wealth Technologies) earnout was calculated at 31 December 2015 based on a probability weighted range of possible outcomes against the earnout targets required to be met, at the latest by 31 March 2017, for any payment to be made. The Group has reassessed the probability of meeting the targets at 31 December 2016 and with only a short time left to the final earnout deadline it has become clear that the targets will not be met. Accordingly, the earnout provision has been adjusted to nil.

The earnout receivable from the sale of Link Market Services was received during the period and accordingly no accrual remains in respect of this item at 31 December 2016.

A provision for the final earnout payment for the acquisition of SuperLife was initially recognised in 2015 at 90% of the amount payable. In 2016 the provision has been increased to 95% reflecting the fact that funds under management are currently ahead of the earnout target (refer note 19).

9. Operating revenue

Revenue is recognised to the extent that it is probable that the economic benefit will flow to NZX and the revenue can be measured reliably, regardless of when the payment is being made. Revenue is measured at the fair value of the consideration received or receivable. The specific revenue recognition criteria for the classes of revenue are as follows:

  1. Markets:
    1. Securities information revenue is recognised over the period the service is provided.
    2. Issuer services consists of revenue from annual listing fees, initial listing fees, subsequent capital raisings and regulatory services. Initial and subsequent listing fees are recognised when the listing or subsequent capital raising event has taken place. Annual listing fees are billed on 30 June for the following 12 month period and are recognised on a straight line basis over this 12 month period. Fees for regulatory services are recognised when the service is provided.
    3. Trading fees, from the trading of debt and equities securities, are recognised at trade date.
    4. Participant services consist of annual participant fees and initial participant fees. Initial participant fees are recognised when the participant's application has been approved. Annual participant fees are billed on 30 June for the following 12 month period and are recognised on a straight line basis over this 12 month period.
    5. Fees for debt and equity clearing and settlement, which are recognised at settlement date (currently two days after initial trade date).
    6. Fees for the trading of derivatives and commodities are recognised at trade date. Fees for derivative market clearing and settlement are recognised at settlement date.
    7. Revenue from the provision of energy post-trade systems and technology services and advisory and related services is recognised over the period the service is provided.
  2. Funds Services - revenue for the provision of funds services is recognised when the services are rendered.
  3. Agri - agricultural information revenue consists of subscriptions and advertising fees. Subscription revenues are recognised on a straight line basis over the subscription period. Advertising revenues are recognised when the advertisement is published.

10. Operating expenses

Professional fees comprise:

2016
$000

2015
$000

Legal expenses

(3,560)

(3,604)

Other professional fees

(2,033)

(1,995)

Total professional fees

(5,593)

(5,599)

Legal expenses for the current year includes $3.0 million (2015: $3.1 million) incurred in relation to the Ralec litigation, refer to note 27. Other significant legal costs in 2016 related to the FMCA compliance project. Other significant legal costs in 2015 related to the cost of establishing new Smartshares ETFs and the acqusition of Apteryx (now NZX Wealth Technologies).

Other expenses comprise:

2016
$000

2015
$000

Operating lease rental expense

(1,832)

(1,421)

Directors' fees

(370)

(406)

Remuneration paid to Group auditors

(321)

(306)

Remuneration paid to other auditors

(3)

(3)

Other operating expenses

(3,028)

(2,715)

Total other expenses

(5,554)

(4,851)

The directors' fees have declined this year as the number of board members reduced from seven to six following the Annual Meeting in May 2015.

Remuneration paid to Group auditors

2016
$000

2015
$000

Audit and review of NZX Group and subsidiary statutory financial statements

(128)

(134)

Audit of statutory financial statements for Funds managed by Smartshares Limited, an NZX subsidiary

(153)

(104)

Total audit fees

(281)

(238)

Prospectus extraction reports and operation reviews for Funds managed by Smartshares Limited

-

(29)

Annual operational audit of the Clearing House

(35)

(34)

Annual depository assurance engagement of New Zealand Depository Limited

(5)

(5)

Total other audit related services

(40)

(68)

Total fees paid to the auditor

(321)

(306)

11. Funds held on behalf of third parties

2016
$000

2015
$000

Bond deposits

1,506

1,346

Collateral deposits

57,794

55,287

Funds held on behalf of clients

11,547

5,153

70,847

61,786

The collateral deposits represent balances deposited by participants to cover margins on outstanding settlement obligations for cash market, stock lending transactions and derivative contracts. Funds lodged as margin collateral are interest bearing and are carried at the amounts deposited which represent fair value. Interest earned on collateral deposits is returned to participants and a collateral management fee is charged. There is an equal and opposite amount disclosed under current liabilities for the total amount repayable to participants.

The funds held on behalf of clients represent balances deposited by participants in addition to their cash collateral requirements. The funds are lodged in a non interest bearing account and are carried at the amount deposited which represents fair value. There is an equal and opposite amount disclosed under current liabilities for the total amount repayable to participants.

The bond deposits represent balances deposited by issuers, required as a condition of listing on NZX's markets. Funds lodged as bond deposits are interest bearing and are carried at the amounts deposited which represent fair value. There is an equal and opposite amount disclosed under current liabilities for the total amount repayable to issuers.

12. Gain on sale of associate

Effective 1 July 2015 the Group sold its 50% stake in Link Market Services Limited (Link) to the other 50% shareholder for $14.3 million. The net sale proceeds comprised:

  • $13.8 million of initial consideration received on settlement on 30 June 2015;
  • $623,000 of contingent consideration payable based on the future performance of Link, which was received during 2016; less
  • A liability to issue NZX shares to the value of $125,000 as a retention amount in respect of key employees of Link Market Services in three years time if these employees remain with Link.

A gain on sale of $11.8 million was recognised in 2015, calculated as follows:

2016
$000

2015
$000

Disposal of associate

Proceeds from sale of associate

-

14,298

Less carrying value

-

(2,491)

Gain on sale of associate

-

11,807

13. Taxation

  1. Income tax expense recognised in profit or loss

2016
$000

2015
$000

Tax expense comprises:

Current tax expense

6,119

7,507

Prior period adjustment

-

47

Deferred tax relating to the origination and reversal of temporary differences

(1,622)

(1,478)

Total tax expense

4,497

6,076

The prima facie income tax expense on pre-tax accounting profit from operations reconciles to the income tax expense in the financial statements as follows:

2016
$000

2015
$000

Profit before income tax expense

13,679

29,948

Income tax calculated at 28%

(3,830)

(8,385)

Non-deductible expenses

(667)

(1,398)

Non-taxable gain on sale of associate

-

3,306

Equity accounted earnings of associate

-

115

(4,497)

(6,362)

Under provision of income tax in prior year

-

(45)

Tax credits

-

331

(4,497)

(6,076)

  1. Current tax liabilities

2016
$000

2015
$000

Balance at beginning of the year

(2,113)

(195)

Current year charge

(6,165)

(7,507)

Prior period adjustment

(137)

(944)

Tax paid

7,824

6,533

Balance at end of year

(591)

(2,113)

  1. Deferred tax liability

2016
$000

2015
$000

Balance at beginning of the year

(5,938)

(2,663)

Current year movement

1,622

1,478

Deferred tax on acquisition

-

(4,724)

Prior period adjustments

(7)

(29)

Balance at end of the year

(4,323)

(5,938)

Deferred tax balance comprises:

Employee entitlements

867

761

Doubtful debts

147

85

Property, plant and equipment, and software

(5,643)

(6,920)

Other

306

136

(4,323)

(5,938)

  1. Imputation credit account

2016
$000

2015
$000

Imputation credits available for use in subsequent reporting periods

12,694

14,830

14. Earnings per share

Basic earnings per share at 31 December 2016 is calculated by dividing the profit for the year by the weighted average number of ordinary shares outstanding during the period. An adjustment to take into account the shares issued under the Team and Results share plans (refer note 23) is made to weighted average number of shares used in the calculation of the diluted earnings per share at 31 December 2016.

  1. Basic earnings per share

2016
$000

2015
$000

Profit for the year ($000)

9,182

23,872

Weighted average number of ordinary shares for the purpose of earnings per share (in thousands)

267,914

263,539

Basic earnings per share (cents per share)

3.4

9.1

  1. Diluted earnings per share

2016
$000

2015
$000

Profit for the year ($000)

9,182

23,872

Weighted average number of ordinary shares for the purpose of earnings per share (in thousands)

269,696

263,941

Fully diluted earnings per share (cents per share)

3.4

9.0

15. Bank overdraft and cash flow reconciliation

  1. Bank overdraft facility

The Group has access to an overdraft facility which was established in 2015 to allow the Group flexibility in its working capital management. The facility limit is $10.0 million and has no fixed expiry date. The bank may cancel the facility by giving 30 days written notice. The effective interest rate of the facility at 31 December 2016 was 3.85% (2015: 4.15%).

  1. Reconciliation of profit for the year to net cash provided by operating activities

2016
$000

2015
$000

Profit for the year

9,182

23,872

Share of profit of associate

-

(411)

Gain on sale of associate

-

(11,807)

Share based payment bonus accrual

470

653

Non cash interest expense on investing activity

357

343

Depreciation and amortisation expense

7,936

6,990

Impairment in intangible and goodwill

793

-

Disposal of assets

365

-

Adjustment to provision for earnout

(731)

-

9,190

(4,232)

(Increase) in receivables and prepayments

(3,118)

(1,324)

Increase in trade payables and other liabilities

1,457

436

Increase in current tax liability

(1,522)

992

(Decrease) in deferred tax liability

(1,615)

(1,449)

(4,798)

(1,345)

Net cash provided by operating activities

13,574

18,295

16. Receivables and prepayments

Receivables and prepayments are initially recognised at the fair value of the amounts to be received. They are subsequently measured at amortised cost (using the effective interest method) less impairment losses, if any.

2016
$000

2015
$000

Trade receivables

9,807

7,022

Provision for doubtful debts

(560)

(302)

9,247

6,720

Sundry debtors

1,791

2,013

Prepayments

2,204

2,094

Accrued proceeds for disposal of Link Market Services

-

623

Accrued interest

76

90

Accrued income

746

29

Financial asset - current amount

1,859

-

Total current receivables and prepayments

15,923

11,569

Financial asset - non current amount

-

1,827

Total receivables and prepayments

15,923

13,396

The current financial asset at 31 December 2016 (2015: non current financial asset) represents the loan owed by the former CEO under the CEO share plan, as described in note 23.

  1. Movement in provision for doubtful debts

The Company maintains a provision for doubtful debts when there is objective evidence of its customers being unable to make required payments and also makes a provision for doubtful debts on all balances greater than 90 days overdue which have not been subject to review.

2016
$000

2015
$000

Balance at beginning of the year

(302)

(278)

Amounts written off during the year

-

54

(Increase)/decrease in provision recognised in profit or loss

(258)

(78)

Balance at end of the year

(560)

(302)

17. Property, plant and equipment

Property, plant and equipment is carried at cost less accumulated depreciation and impairment. The cost of assets is the value of the consideration given to acquire the assets and the value of other directly attributable costs incurred in bringing the assets to the location and condition necessary for their intended use.

Depreciation is recognised in the Income Statement and is calculated on a straight line basis so as to write off the net cost of each asset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or estimated useful life, whichever is the shorter, using the straight line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period.

The following estimated useful lives are used in the calculation of depreciation:

  • Computer equipment: 3 - 7 years
  • Furniture and equipment: 3 - 10 years
  • Leasehold improvements: 5 - 10 years
  • Motor vehicles: 3 years

Computer equipment
$000

Furniture and equipment
$000

Leasehold improvements
$000

Motor Vehicles
$000

Capital work in progress
$000

Total
$000

Net book value at 1 January 2016

791

745

1,905

45

21

3,507

Additions during the year

802

167

38

25

73

1,105

Transfers from WIP during the year

14

-

70

-

(84)

-

Depreciation expense for the year

(694)

(320)

(239)

(41)

-

(1,294)

Disposals during the year

(37)

(9)

-

(6)

(7)

(59)

Net book value at 31 December 2016

876

583

1,774

23

3

3,259

18. Trade payables

Trade payables and accruals are initially recognised at fair value less transaction costs (if any). They are subsequently measured at amortised cost using the effective interest method.

2016
$000

2015
$000

Trade payables

607

248

Goods and services tax payable

1,090

727

Accrued expenses

3,834

4,807

Accrued interest

101

100

5,632

5,882

19. Other liabilities

2016
$000

2015
$000

Employee benefits

5,530

4,430

Unearned income

8,273

7,860

Deferred consideration payable on Apteryx acquisition

-

1,223

Earn out accrual

-

75

Total current other liabilities

13,803

13,588

Non current - Deferred consideration on SuperLife acquisition

9,093

8,272

Total other liabilities

22,896

21,860

Deferred consideration on SuperLife acquisition

NZX acquired 100% ownership of SuperLife Limited, a provider of superannuation, KiwiSaver, and managed investments products, effective 1 January 2015.

In addition to the initial consideration of $20 million, the sale and purchase agreement provided for additional consideration of up to $15.0 million dependent on the retention and growth of SuperLife's Funds Under Management (FUM) over a three year period ending 31 December 2017. These further payments, if targets are achieved, were $5.0 million of NZX ordinary shares at an issue price of $1.21 per share (issued January 2016) and up to $10.0 million in cash.

Up to $10.0 million in cash will become payable after 31 December 2017, with the amount payable dependant on the rate of growth in FUM over the three year earnout period. No additional amount is payable if FUM is less than $1.41 billion at 31 December 2017 (equivalent to a 7% compound annual growth rate). The full $10.0 million is payable if FUM exceeds $1.57 billion (equivalent to an 11% compound annual growth rate). Partial payment of the earnout amount will result if FUM at 31 December 2017 is between $1.41 billion and $1.57 billion.

Based on the expected probabilities of achieving the earnout, taking into account historic growth rates, the Group has accrued for 95% (2015: 90%) of the $10.0 million of contingent consideration (present valued) that will be paid at the end of the three year period if the 11% growth target is met.

20. Term loan

2016
$000

2015
$000

Current

-

-

Non-current

20,000

20,000

Total term loans

20,000

20,000

The $20.0 million term loan has an expiry date of 16 January 2019. The facility is unsecured and contains two financial covenants which have been met throughout the year:

  • The ratio of interest bearing debt to EBITDA shall not exceed 3.5 times; and
  • The ratio of EBITDA to interest shall exceed 4.0 times.

The weighted effective interest rate at 31 December 2016 was 2.60% (31 December: 3.62%).

21. Shares on issue

The Company had 268,315,689 fully paid ordinary shares as at 31 December 2016 (2015: 263,919,546 fully paid ordinary shares). The holders of ordinary shares are entitled to receive dividends as declared and are entitled to one vote per share at meetings. Included within this total is 1,575,000 fully paid ordinary shares (2015: 1,575,000 fully paid ordinary shares) issued under the CEO share plan as outlined in note 23.

At 31 December 2016 the Company has 2,018,493 restricted shares (2015: 315,889 restricted shares) on issue under the NZX Limited employee share plan - Team and Results held by entities within the Group. All shares issued under the employee share plan are subject to transfer conditions and eligibility criteria before they are able to vest as ordinary shares. Until those transfer conditions and/or eligibility criteria are met, none are quoted on the NZX Main Board.

Movement in share capital

Number

$000

Balance at 1 January 2015

255,613,669

29,975

Issue of fully paid ordinary shares

8,305,877

10,000

Share based contingent consideration accrued

-

5,000

Share based payments

-

2,341

Non-vesting shares

-

(88)

Balance at 31 December 2015

263,919,546

47,228

Issue of fully paid ordinary shares

4,396,143

69

Share based payments

-

345

Non-vesting shares

-

(86)

Balance at 31 December 2016

268,315,689

47,556

22. Dividends

2016

2015

For year ended

Cents per share

Total $000

Cents per share

Total $000

Dividends declared and paid

March 2015

31 Dec 14

3.00

7,916

September 2015

31 Dec 15

3.00

7,918

March 2016

31 Dec 15

3.00

8,043

September 2016

31 Dec 16

3.00

8,051

Total dividends paid for the year

6.00

16,094

6.00

15,834

Refer to note 29 for details of the second half 2016 dividend.

23. Share based payments

  1. CEO share plan

A CEO share scheme was in place under the former CEO's employment contract. The scheme runs for a period of five years expiring mid 2017 and will continue in place until its conclusion as part of the agreed transition for the former CEO who resigned as an employee effective 31 December 2016.

Pursuant to the terms of the scheme, 1,575,000 new ordinary shares were issued on 31 December 2012 at an issue price of $1.19 per share, being the volume weighted average price of NZX shares for the 10 business days ended on Friday 4 May 2012 (the business day immediately preceding the CEO's start date).

The issue price of the shares is funded by a loan from NZX, which bears interest at NZX's cost of bank funding. The shares are entitled to dividends and are held by a nominee wholly owned by NZX for the duration of the scheme.

If over the period of the scheme NZX's total shareholder return (TSR) exceeds a margin of 1% over NZX's weighted average cost of capital (to be determined annually by the Board), the former CEO will receive a taxable bonus equivalent to the amount of the loan and will receive a transfer of the shares on full repayment of the loan and any accrued interest. For the purposes of determining the hurdle rate, the initial 2012 issue price has been set at $1.10 which was the price on the day of the release of the 1H results (20/8/2012) under the previous CEO. If the hurdle rate is not met, then on expiry of the scheme the former CEO will not receive the bonus, will be required to repay the loan from his own resources and will receive a transfer of shares.

The Group historically accounted for the scheme in accordance with NZ IFRS 2 by calculating the fair value of the shares and recognising this as an expense on a straight line basis over the five year term of the plan. The total fair value was determined to be $383,000. The fair value was calculated by reference to an independent valuation which was based on the following assumptions:

  • Grant date: 2 August 2012
  • Share price on grant date: $1.19
  • Historic volatility (NZX share price): 29%

As a result of the former CEO ceasing employment on 31 December 2016, the remaining unrecognised balance of $38,300 has been recognised in the current period.

  1. Employee and other restricted shares

NZX Limited employee share plan - Team and Results

The NZX Limited employee share plan – team and results (Team and Results Plan) was implemented in May 2010.

Under the terms of the Team and Results Plan, NZX offers selected employees (Participants) non-participating redeemable shares (Restricted Shares) which will be reclassified as NZX ordinary shares at the completion of the term of the Team and Results Plan, subject to certain eligibility and transfer conditions.

Both the Team and Results components of the Team and Results Plan are offered on terms of three years.

If the eligibility or transfer conditions are not met, the Restricted Shares are redeemed by NZX. The proceeds from the redemption of the Restricted Shares will be applied in repayment of the Loan, which will discharge any obligation on the Participant to repay the Loan. Following redemption, the Participant will not receive any entitlements, such as distributions or dividends, issued in respect of the Restricted Shares. The effect of this is that the Participant receives no shares or cash and the Loan is repaid.

Details of Restricted Shares issued under the Team and Results Plan, transfers of shares to NZX employees and redemptions of shares during the period are set out below:

Number of shares
000

Average share price
$

Balance at 1 January 2015

496

1.23589

Shares transferred to NZX employees

(41)

1.34146

Redemptions

(139)

1.25899

Balance at 31 December 2015

316

1.21203

Shares issued

2,311

1.09303

Shares transferred to NZX employees

(196)

1.21429

Redemptions

(412)

1.06796

Balance at 31 December 2016

2,019

1.10500

Total financial assistance provided by NZX under the Team & Results Plan as at 31 December 2016 was $2,231,000 (2015: $383,000).

24. Financial instruments

The Group’s activities expose it to a variety of financial risks including credit risk, liquidity risk and market risk (including foreign currency risk and interest rate risk).

The Board of directors has overall responsibility for the establishment and oversight of the Group’s risk management framework, including the management of financial risk. The Board has established an Audit and Risk Committee (Committee), which is responsible for developing and monitoring the Group’s financial risk management policies (except for those relating to clearing and settlement activities discussed below). The Committee reports regularly to the Board of directors on its activities.

The NZX Group undertakes securities clearing and settlement activities for the listed equities, debt and derivatives markets through its clearing house New Zealand Clearing and Depository Corporation Limited (NZCDC or the Clearing House). These activities expose NZCDC and the NZX Group to several significant financial risks. Management of these risks is the responsibility of the Board of directors of NZCDC. The NZCDC Board reports to the main NZX Board on a regular basis on its risk management activities.

The specific financial risks faced by the Group, the way in which they are managed and their impact on the financial statements are discussed below:

  1. Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Credit risk arises from three principal sources:

  • Receivables from customers arising in the normal course of business;
  • Investment of surplus cash and Clearing House risk capital with financial institutions;
  • Credit risk arising from the activities of the Clearing House, which is discussed separately in section (g).

Excluding Clearing House activities, NZX has no significant concentrations of credit risk from general customers, with balances receivable spread across a broad portfolio of customers. NZX does not require collateral to be provided against receivables incurred in the ordinary course of business, although listed issuers and participants in NZX's equity and debt markets are required to provide a bond that may be called upon in the event of default on financial obligations.

The status of trade receivables at the reporting date was as follows.

2016
$000

2015
$000

Not past due

4,818

5,148

Past due 0 - 30 days

1,514

540

Past due > 30 days

3,475

1,334

9,807

7,022

In summary, trade receivables are determined to be impaired as follows.

2016
$000

2015
$000

Gross trade receivables

9,807

7,022

Individual impairment

(153)

(155)

Collective impairment

(407)

(147)

9,247

6,720

The movement in the allowance for impairment in respect of trade and other receivables during the year is set out in note 16(a).

For investment of risk capital and surplus cash balances, NZX follows a treasury policy that requires investments to be held only with high credit quality counterparties and sets limits on NZX's exposure to individual counterparties. The counterparty limits are as follows:

  • The greater of $10 million or 60% of cash and cash equivalents for registered banks that operate in New Zealand with a minimum credit rating of AA-; and
  • 30% of total cash and cash equivalents for other institutions with a minimum credit rating of A- (the total exposure for other institutions cannot exceed 50% of the total cash and cash equivalents).
  1. Foreign exchange risk

NZX primarily derives revenues and incurs expenses in local currencies (NZD for New Zealand operations and AUD for Australian operations). In a minority of cases however, receipts and payments are in foreign currencies (principally USD). NZX utilises foreign currency receipts to offset purchases denominated in foreign currencies. The Company determines forward exposures, and considers these in line with internal policies and procedures. It may enter into forward exchange agreements to keep any exposure to an acceptable level, though no such contracts were considered necessary in the current or prior financial year. Monetary assets and liabilities are kept to an acceptable level by buying or selling foreign currencies at the spot rate.

Foreign exchange risk also arises on the translation of NZX's investment in its Australian operations and intercompany balances between the parent and these entities. NZX does not attempt to hedge this risk.

  1. Interest rate risk

NZX is exposed to interest rate risk in that future interest rate movements will affect the interest that it pays on borrowings and the cash flows and the market value of investment assets. NZX does not currently use any derivative products to manage interest rate risk.

The Group's investment assets, particularly those designated as risk capital, are generally required to be readily convertible into cash. These are therefore invested in short term interest bearing assets or held as bank deposits at floating rates of interest. This reduces the risk of movements in the market value of financial investments, but increases the Group's exposure to changes in cash flows as a result of shot term movements in interest rates.

During 2015, the group drew down $20 million of term debt. $10 million of this was to fund the acquisition of SuperLife Limited, while $10 million was to provide for additional risk capital in the Clearing House. The interest period for the debt utilised to provide risk capital is set to match as closely as possible the interest period for the related short term investments in which the risk capital is held, thus minimising the net interest rate risk to the Group.

As at balance date, none of the Group's investments or term debt were subject to interest periods of greater than three months.

An analysis of the sensitivity of the Group's earnings to movements in interest rates is shown below. As at both 31 December 2016 and 2015 the Group's interest bearing assets exceeded its interest bearing liabilities, hence an increase in interest rates would have had a positive impact on earnings.

2016
$000

2015
$000

Effect on net interest income:

1% increase in interest rate

274

398

1% decrease in interest rate

(274)

(398)

This above information is calculated using the Group's cash balances (less the $20.0 million held as risk capital for Clearing House), the Group's term debt, and the bank balances of $15.7 million (2015: $18.2 million) held by the Funds managed by the Group's subsidiary, Smartshares Limited. The Funds' bank balances are included in Smartshares Limited as the manager of these Funds is entitled to interest on amounts held in respect of distributions received (including distributions in respect of securities on loan under any securities lending programme undertaken by the Fund) and interest earned on application monies.

  1. Liquidity risk management

Liquidity risk is the risk that the Group will be unable to realise its assets on a sufficiently timely basis to meet its financial liabilities as they fall due. Liquidity risk arises from the general activities of the Group as well as in specific situations in the operation of the Clearing House. Clearing House liquidity risk is discussed in section (g).

The Group manages its general liquidity risk by maintaining adequate cash reserves, maintaining a sufficient term to maturity for its term borrowings and maintaining adequate overdraft facilities to provide it the flexibility to absorb predicted variability in cash flows. It continuously monitors forecast and actual cash flows to assist with determining the appropriate levels of cash reserves and borrowing capacity.

The table below summarises the Group's exposure to liquidity risk based on the undiscounted contractual cash flows and maturities of term debt.

Term loan

Total contractual cash flows
$000

Less than 1 year
$000

1-2 years
$000

2-5 years
$000

More than 5 years
$000

31 December 2016

(21,040)

(520)

(20,520)

-

-

31 December 2015

(21,448)

(724)

(20,724)

-

-

  1. Accounting classification and fair values

The fair value of the financial instruments, which comprise cash and cash equivalents, funds held on behalf of third parties, receivables, trade payables, other liabilities and term loans, approximates their carrying amounts in these accounts.

  1. Energy Clearing House

NZX, through its subsidiary Energy Clearing House Limited (ECH), is the electricity-market operation service provider responsible for ensuring that market participants pay or are paid the correct amount for the electricity they generated or consumed during the previous month. ECH also manages the prudential security requirements of participants, intended to ensure payers can meet their obligations in the market.

At 31 December 2016, ECH has outstanding payables and receivables for the purchase and sale of electricity, and the settlement of transmission losses. These items are not recorded in the Group’s statement of financial position, because the energy market participants have accepted the risks associated with electricity settlement.

In discharging its obligations under the Electricity Industry Participation Code, ECH is required to ensure that purchasers maintain adequate levels of prudential security. Participants can comply with this obligation in a number of ways, including third party guarantees, letters of credit and deposits of cash with the ECH.

ECH holds cash deposit security on trust, and does not recognise the security provided in its statement of financial position. There was $11,789,209 cash held from such deposits at 31 December 2016 (2015: $9,743,875).

  1. Clearing House counterparty credit risk

The Clearing House acts as a central counterparty to trades on NZX's securities and derivatives markets. Trades that enter the Clearing House are immediately novated such that the Clearing House becomes the buyer to every sell trade and the seller to every buy trade. As buy and sell settlement transactions that are novated to the Clearing House offset each other, the Group is not directly exposed to price movements in the underlying equities or derivatives.

For the period between trade date and settlement date, the Clearing House is exposed to credit risk on the buy trade as participants could default on their obligations to deliver cash in exchange for the securities acquired by the Clearing House on the buy side of the trade.

Should the buying participant fail to deliver cash, the Clearing House must still meet its obligation to buy the securities from the selling participant. In this instance the Clearing House is subject to liquidity risk as it may be unable to realise sufficient cash to pay for the securities it is acquiring.

If the buying participant defaults on its obligation to deliver cash and the Clearing House acquires the securities, it then becomes exposed to market price risk on the securities acquired. If the price of the securities falls, the Clearing House would incur a loss on the disposal of those securities.

Credit risk

Counterparty credit risk is primarily managed in two ways. Firstly, through imposing requirements on participants, including minimum capital adequacy requirements, that aim to ensure that participants maintain sufficient capital and liquidity to meet their obligations to the Clearing House on an ongoing basis. Secondly, through calculating margin requirements on participants' open positions and requiring participants to post this margin as collateral as security for the trades. Margin requirements are calculated for each participant based on that participant’s unsettled transaction in each security. Margin rates for each security are based on the underlying characteristics of the security and its price volatility. Margin requirements are calculated on a daily basis using current market prices. Each day, margin requirements are compared to collateral held and a margin call made where necessary. Participants are then required to post additional eligible collateral. Eligible collateral includes cash, bank performance bonds, and securities (including New Zealand and US government securities and NZX 50 listed securities). Securities provided as collateral are subject to a prudential value discount, commonly referred to as a "haircut".

The Group is also exposed to counterparty credit risk through New Zealand Clearing Limited (NZCL) by acting as central counterparty for securities lending transactions. As NZCL is exposed to the full principal value of each loan, NZCL requires collateral to be posted equal to 105% of the loan. All loans are revalued on a daily basis and additional collateral required where appropriate.

Liquidity risk

Liquidity risk is managed through a combination of the collateral held from participants, the Clearing House's own cash reserves and a specific liquidity facility which provides short term liquidity in the event of a participant default.

Collateral from the defaulting participant would be applied towards meeting the settlement obligations on the other side of the trade. The Clearing House also holds risk capital in cash and highly liquid investments, which is available to meet the buy side obligations of defaulted transactions. As at 31 December 2016 the Clearing House held risk capital of $20 million (31 December 2015: $20 million). Finally, on 30 December 2014 the Clearing House entered into an agreement with a major New Zealand fund manager to provide liquidity support in the form of $50 million of securities or cash. Use of this facility is limited to situations where a participant default has occurred. The Clearing House may access the facility to obtain liquidity in the form of securities or cash, collateralised against cash or eligible securities provided by the Clearing House to the Fund Manager. The facility was for an initial term of two years ending December 2016. This has been extended for another two years ending December 2018.

Market risk

The risk that the Clearing House will realise a loss from liquidating securities that it becomes the owner of as a result of a participant default is managed by maintaining sufficient participant collateral and risk capital to absorb projected losses. Any losses incurred are initially funded from the defaulting participant's margin collateral. Should this be insufficient to cover the losses, then these must be met from the Clearing House's own risk capital. The Clearing House regularly stress tests clearing participant exposures against the total amount of margin collateral and risk capital resources.

Clearing balances outstanding

As at 31 December 2016, NZCL has a right to receive $5.610 million (2015: $13.872 million) from Clearing Participants and an obligation to pay $5.610 million (2015: $13.872 million) to Clearing Participants for the settlement of cash market transactions. All of these outstanding transactions were settled subsequent to 31 December 2016. The aggregate absolute value of all net outstanding cash market settlement transactions at 31 December 2016 was $58.613 million (2015: $111.193 million). In addition, at 31 December 2016, the total value of outstanding securities loans was $1.605 million (2015: $5.205 million) and the absolute notional value of open derivative contracts was US$128.71 million (2015: US$57.560 million) and NZD$103.06 million (2015:NZD$nil).

Cash collateral held to cover these outstanding settlement positions at 31 December 2016 was $35.707 million (2015: $35.542 million). In addition, at 31 December 2016 no collateral (2015: $5.5 million) was held by way of performance bonds.

25. Related party transactions

  1. Transactions with key management personnel

Key management personnel comprises the Group’s senior management team. Key management personnel compensation comprised the following:

2016
$000

2015
$000

Short-term employee benefits

4,177

3,758

Share-based payments

141

218

Resignation benefits

1,305

-

5,623

3,976

  1. Transactions with directors and other entities NZX directors are associated with

The Company regularly enters into transactions under normal commercial terms and conditions with other entities that some of the directors may sit on the Board of or are employed by.

Directors fees for the year were $370,000 (2015: $406,000) and have been included in other expenses (note 10).

  1. Transactions with other related parties

During 2015, the Group made sales to and purchases from its associate, Link Market Services Limited (Link), the amounts of which are set out below. The Group had no associates in 2016 following the disposal of Link in June 2015.

2016
$000

2015
$000

Transactions with related parties

Sales to Link Market Services Limited

-

275

Interest on receivable from former CEO

106

104

Purchases from Link Market Services Limited

-

(184)

Balances with related parties

Receivable from Link Market Services Limited

-

-

Current receivable from former CEO

1,877

34

Non current receivable from former CEO

-

1,827

Payable to Link Market Services Limited

-

-

  1. Transactions with managed funds

Management fees are received from the funds managed by wholly owned subsidary Smartshares Limited and are shown in the Income Statement as funds management revenue. Management fees were also received from the funds managed by wholly owned subsidary SuperLife Limited which was amalgamated into Smartshares Limited on 9 November 2016.

26. Lease commitments as lessee

Non-cancellable operating lease payments

2016
$000

2015
$000

Non-cancellable operating lease payments:

Up to 1 year

1,927

2,020

1 - 2 years

1,827

1,851

2 - 5 years

3,852

4,996

> 5 years

-

491

7,606

9,358

The Group leases a number of office premises under operating leases. The leases have a remaining period of between one to five years, with options to renew beyond the initial expiry date.

27. Contingent liabilities

Ralec Litigation

The Ralec litigation, disclosed as a contingent liability in the period year, was heard in the High Court in New Zealand between May 2016 and July 2016. The final judgement was released on 16 November 2016. No damages or compensation were awarded to either party.

Final settlement was reached between the parties to the dispute on 1 December 2016. As a result, there will be no appeal by either party of the High Court's decision.

There are therefore no contingent liabilities as at 31 December 2016.

28. Capital commitments

2016
$000

2015
$000

Capital expenditure commitments:

Software development

710

1,368

710

1,368

29. Subsequent events

Dividend

Subsequent to balance date the Board declared a second half 2016 dividend of 3.00 cents per share, to be paid on 24 March 2017 (with a record date of 10 March 2017). This is in line with the NZX dividend policy adopted on 21 February 2014.