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2014 | Annual Report

ABN 14 003 348 730

Reckon Limited Annual Report

for the Financial Year Ended 31 December 2014

4 Our results at a glance
5 Message to shareholders from the Chairman and Group CEO
8 Directors’ Report
17 Remuneration Report
46 Corporate Governance Statement
56 Auditor’s Independence Declaration
57 Independent Auditor’s Report
59 Directors’ Declaration
60 Consolidated Statement of Profit or Loss
61 Consolidated Statement of Profit or Loss and Other Comprehensive Income
62 Consolidated Statement of Financial Position
63 Consolidated Statement of Changes in Equity
65 Consolidated Statement of Cash Flows
66 Notes to the Financial Statements

113 Additional Information as at 6 March 2015

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Our Results at a Glance

Operating Revenue

Operating revenue was up 3% to $100.8 million from $98.1 million.

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EBITDA

Group EBITDA was up 10% to $37.1 million from $33.9 million.*

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EPS

EPS was up 11% to 14.2 cents per share from 12.8 cents per share.*

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Excludes proceeds of sale of investment in Connect2Field of $1.4 million in 2013.

Message to shareholders from the Chairman and Group CEO

Overview

The last year has seen Reckon progress significantly in its evolution:

Moving from a publisher of small business accounting software to a developer of proprietary solutions;
Conducting that development under its own Reckon brand;
Opening world markets for its proprietary solutions, especially for cloud based small business accounting products;
Continuing to grow its International and Accountant Group;
Moving to a primarily subscription revenue based business;
Launching its Freedom campaign, which represents our internal value systems as well as the ‘freedom’ we hope our solutions bring to our clients and customers to pursue their financial goals.

Financial performance targets were once again achieved notwithstanding significant investment in moving to a subscription business and investing in taking the Reckon One cloud product to the United Kingdom, as well as taking document management solutions to the USA.

Reckon remains committed to offering a comprehensive and dynamic product range encompassing cloud, hosted, or desktop solutions for accountants, bookkeepers and businesses to meet their needs and preferences regardless of their size or stage of development.

Reckon software is designed to connect small and medium sized businesses with their accountants for the transfer of both accounting data and content through the cloud. Reckon has over 300,000 active customers and supports over 6,000 professional partners.

Key performance metrics (Non-IFRS)

~~Group~~	~~2014~~	~~2013~~	~~% Change~~	~~Amount Change~~
Revenue	$100.8 million	$98.1 million	3%	$2.7 million
~~EBITDA*~~	~~$37.1 million~~	~~$33.9 million~~	~~10%~~	~~$3.2 million~~
NPAT*	$17.6 million	$16.7 million	5%	$0.9 million
~~EPS*~~	~~14.2 cents per share~~	~~12.8 cents per share~~	~~11%~~	~~1.4 cents~~

*Excludes proceeds of sale of investment in Connect2Field in 2013 of $1.4 million.

Dividend

On 10 February 2015, the board declared a final dividend of 4.75 cents per share. The dividend was 60% franked. The interim dividend announced on 12 August 2014 was 4.25 cents per share franked to 90%.

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Message to shareholders from the Chairman and Group CEO (continued)

Reckon has expanded its cloud capability and reach

Specifically Reckon:

Released its next generation Reckon Accounts Hosted solution in 2014;
Launched the Reckon One cloud based accounting software product in 2014 in both Australia and New Zealand (a pure SaaS solution);
Plans to launch its Reckon One cloud based accounting software product in the United Kingdom in 2015.

The strategy to move from an upfront once-off software sales model to a subscription based model is important for the future growth of the business

The results for 2014 bear testimony to this:

Subscription revenue in the Business Group for 2014 was $16.3 million, up 12% on 2013 from $14.5 million;
86% of practice management revenue in the Accountant Group is now subscription based compared to 79% in 2013. Subscription product revenue of $22.3 million is up 9% from $20.4 million in 2013;
For the International Group subscription product revenue grew 14% from $12.2 million in 2013 to $14.0 million in 2014.

Strong volume and profit growth and judicious re-investment back onto the business has driven the positive 2014 results for Reckon. We anticipate higher revenue growth in 2015 and beyond from the groundwork done over the last few years and our ongoing commitment to achieving our cloud strategy ambitions.

	2014 Operating	2013 Operating	2014 EBITDA	2013 EBITDA
	Revenue	Revenue
Business Group	$36.8 million	$37.4 million	$19.1 million	$16.1 million
~~Accountant Group~~	~~$46.2 million~~	~~$44.5 million~~	~~$16.5 million~~	~~$16.3 million~~
International Group	$17.7 million	$16.2 million	$6.1 million	$5.1 million

Future performance

The key drivers for the future performance of all businesses are:

The continued pursuit of subscription revenue in both desktop and cloud solutions;
Investment in product development, especially cloud based products;
Agility, efficiency and adaptability in product development and the strategic expansion of products and functionality;
Organic growth of new customers and retention of existing customers by maintaining and improving relationships;
Continuing to explore territories in which to pursue sales;
Attracting and retaining talented employees through improving workplace culture;
Maintaining expenditure discipline.

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John Thame Chairman

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Clive Rabie Group CEO

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Directors’ Report

The Directors of Reckon Limited submit these financial statements for the financial year ended 31 December 2014

John Thame AAIBF FCPA

Independent Non-Executive Chairman

John Thame has a lifetime of experience in the retail financial services industry. He was managing director of Advance Bank Limited from 1986 until it merged with St George Bank Limited in January 1997 and held a variety of senior positions in his career with Advance. John was Chairman of St George Bank Limited from 2005 to 2008 and a member of the St George Bank Limited board until 1 July 2008. He is also Chairman of Abacus Property Trust Group Limited, where he has been a director since 2002. John was appointed to the board on 19 July 1999 when he was also appointed to the Audit & Risk Committee and Remuneration Committee.

Ian Ferrier AM FCA

Independent Non-Executive Director

Ian Ferrier is a Fellow of the Institute of Chartered Accountants in Australia. He has extensive experience in company corporate recovery and turn around practice. He is also a director of a number of private and public companies. Ian is also Chairman of Australian Vintage Limited having been a director since 1991 and Chairman of Goodman Group Limited since 2003 and a director of Energy One Limited. He has significant experience in property and development, tourism, manufacturing, retail, hospitality and hotels, infrastructure and aviation and service industries. Ian joined the board on 17 August 2004. Ian is Chairman of the Audit & Risk Committee and Remuneration Committee.

Greg Wilkinson

Founder, Deputy Non-Executive Chairman

Greg Wilkinson has over 30 years experience in the computer software industry. Greg entered the industry in the early 1980s in London where he managed Caxton Software, which became one of the UK’s leading software publishers. Greg co-founded Reckon in 1987 and was the Chief Executive Officer until February 2006. He was appointed to the position of Deputy Chairman in February 2006 and became a member of the board of the listed entity on 19 July 1999. He was appointed to the Audit & Risk Committee in February 2010 and Remuneration Committee in December 2011. He is also an investor and mentor to a number of cloud based start-up companies.

Clive Rabie

Group Chief Executive Officer

Clive was Chief Operating Officer of Reckon from 2001 until February 2006 and in that time played a pivotal role in its turn-around. In February 2006 Clive was appointed to the position of Group Chief Executive Oficer. He has extensive management and operational experience in the IT and retail sectors as both an owner and director of companies.

Myron Zlotnick LLM, GCertAppFin

General Counsel and Company Secretary

Myron Zlotnick has over 20 years experience as a legal practitioner, general and corporate counsel, and as a director of companies in the information, communications and technology sector. He is a member of ASIC’s Registry and Licensing Business Advisory Committee.

Marianne Kopeinig LLM, GDipApplCorpGov

Legal Counsel and Assistant Company Secretary

Marianne has over 15 years experience as a private practitioner and corporate counsel for private and ASX listed companies and broad industry experience in commercial, risk management and compliance functions.

Review of Operations and Statement of Principal Activities

Summary

Reckon Limited organises its activities into three operating groups: a Business Group, an Accountant Group, and an International Group.

The Business Group undertakes the development, sales and support of business accounting software for small to larger sized businesses and personal wealth management software branded as Reckon Accounts business, Reckon Accounts personal and Reckon One cloud products respectively.

The Accountant Group develops, supplies and supports accounting practice management, tax compliance and allied software under the Reckon APS brand to larger professional accounting firms, and under the Reckon Elite brand to smaller professional accounting firms. The Accountant Group also supplies and supports company secretarial services such as company incorporations; domain registrations; SMSF documentation and ASIC compliance management; and other documentation for human resources needs, under the Reckon Docs brand.

The International Group develops, sells and supports document management and document portal products to a wide variety of clients under the Reckon Virtual Cabinet brand and supplies software solutions to legal firms and corporations for revenue management, expense management, print solutions, business process automation, business intelligence, document service automation, scan and document management under the Reckon nQueue Billback brand.

The three Groups are supported by shared services teams which include IT, development, finance, marketing, logistics, legal and human resources.

Business Group

The Business Group distributes and supports a range of programs under the Reckon Accounts brand. These programs are generally used by small to large businesses in Australia and New Zealand. Alongside desktop and hosted accounting software the range includes a payroll and point of sale solution, as well as personal finance software.

The fastest growing product in the Reckon Accounts suite is Reckon Accounts Hosted, a convenient secure online accounting software product that very closely mimics the Reckon Accounts business range desktop package.

Reckon Accounts products include: (1) Reckon BankData, a bank feed solution which allows connections with banks and other financial institutions to download bank transaction information directly into accounting software; and (2) Reckon GovConnect, an SBR-enabled solution for lodging reports to government agencies such as the ATO.

Reckon’s newest product is Reckon One, a flexible cloud accounting solution for small businesses. The program was released in February 2014. Reckon One cloud based accounting software is based on a “designed by you” concept that allows users to tailor the solution to their needs by choosing modules their business will use. The current modules available are: Core (which includes payments and receipts, budgets and reporting); Invoices; BankData (automatic bank statement import into accounts and reconciliation); and Projects (manage revenue, costs and forecasts by project). The immediate development roadmap includes Time & Billing (timesheets and expenses); GovConnect (BAS lodgement); Inventory and Payroll and an open API for third party applications.

Users can select which modules they need and only pay for those; and can switch modules on or off as required making Reckon One a very cost-effective solution for small businesses.

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Directors’ Report (continued)

Accountant Group

The Accountant Group develops, distributes and supports the Reckon APS suite of solutions for professional service firms in Australia, New Zealand and, via a reseller arrangement, in the United Kingdom. For professional accountants these solutions also include tax and accounts production. Reckon also delivers a wide range of complementary applications for practice management.

The Reckon APS product suite continues to be considered market leading for its sophistication and depth of offering to professional accounting firms. This is reflected in the market share that Reckon APS enjoys in Australia and New Zealand.

Reckon has committed several years of research and development to delivering unique integrated practice software to work off a single platform, offering all its solutions under the collective Reckon APS suite. The suite comprises several integrated modules for several business critical functions in professional firms: Practice Management (PM); Business Intelligence and Reporting (PIQ); Document and E-mail Management (DM); Taxation (Tax); Client Accounting (XPA); Client Relationship Management (CRM); Resource Planning (RP); Superannuation (DS); Corporate Secretarial (ACR); Workpaper Management (WM); SyncDirect and others.

Reckon has also made all of the above modules available in a hosted version called APS Private Cloud.

Sync Direct is a cloud based system that allows accountants to upload financial transaction data from virtually any source and automatically enter it into their practice management system for accounts and tax return preparation purposes. It is an extremely beneficial tool for professional accounting firms as it creates a “single ledger” experience for them without being required to use the same software as their clients.

The Reckon Elite product suite includes tax return preparation tools, practice management tools and related solutions mostly used by accountants and tax agents. Reckon Elite is predominantly used in small to medium sized accounting firms compared to Reckon APS which is used by larger firms.

Reckon Docs corporate services business comprises technology for the registration and compliance management of companies and other business structures through an easy to use web based ordering system. This business provides clients with an online company registration service available 24/7; documentation and services for the establishment of a range of entities, especially trusts for self-managed superannuation funds; constitution updates and domain name registrations; and other documentation for human resources needs.

The Reckon Docs data business provides comprehensive accredited business name and ASIC information electronically combined with a highly personalised client relationship. A full range of sophisticated information services to assist customers with the provision of financial, corporate and statutory information is also offered.

Reckon Docs also offer a desktop utility called Reckon Docs Desktop (RDD) that is a simple and convenient desktop application for company registration, searches, and ASIC compliance management. This product is also integrated into the Practice Management suite of APS, known as ACR.

International Group

The International Group provides software and support services for accountants, lawyers and businesses for document management, document portal, scan, cost recovery and revenue management.

The International Group currently operates under the Virtual Cabinet and Reckon nQueue Billback brands in the United Kingdom and the USA, and has reseller arrangements in other parts of the world. In Australia, the International Group products are also sold in the Accountant Group.

The Virtual Cabinet solution enables companies to control all documents in a secure document management system. Virtual Cabinet document management fully integrates with back office systems and has the ability to link all forms of electronic files back to client records. Linked with the document portal it also provides a secure and audit trailed method to send documents to selected recipients, and provides an efficient method for professionals to collaborate with their clients.

A further 20% of Linden House Software Limited (UK), where the Virtual Cabinet product is developed, was acquired effective 2 July 2014 for $2.4 million following the retirement of one of the original owners of the business. The current shareholding in this business sits at 70%.

The Reckon nQueue Billback solutions assists law firms and commercial and government clients by enhancing the automation and processing of any operational and administrative expenses, including print, copy, scan, telephone, online searches, emails, court fees, car services, credit card charges, courier costs and more.

Reckon nQueue Billback’s software offerings can be embedded directly into multi-function devices or reside on tablet computers or terminals to provide clients with the knowledge required to run their businesses more profitably.

Development and Software that Connects

Reckon’s various product roadmaps and development efforts are co-ordinated to meet the overall strategic goal of delivering integrated solutions, on the desktop, in a hosted environment, and in the cloud, to businesses and accounting and legal professionals. The development strategy is aimed at improving collaboration between businesses, accountants, banks, government agencies and other stakeholders.

This development also takes account of demand for remote and mobile access to all solutions and applications.

Results of Operations

Results Headlines (Non-IFRS)

Revenue was up 3% to $100.8 million from $98.1 million.
EBITDA was up 10% to $37.1 million from $33.9 million.
NPAT was up 5% to $17.6 million from $16.7 million.
Basic EPS was up 11% to 14.2 cents per share from 12.8 cents per share.
A total dividend of 9 cents per share for the 2014 financial year (final dividend of 4.75 cents per share and an interim dividend of 4.25 cents per share) up 3% from 8.75 cents per share.

The above results exclude the impact of the profit on the sale of the investment in Connect2Field in 2013 of $1.4 million.

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Directors’ Report (continued)

Business Group Results

The company continues to pursue an ongoing strategy to shift the revenue model for sales from upfront once off purchases to a subscription revenue model. This has been something the company has been working on for several years and becomes more significant as products move from the desktop to the cloud where products are sold on a subscription basis only.

Subscription revenue in the Business Group for 2014 was $16.3 million, up 12% on 2013 from $14.5 million. This gain is offset by softening in other recurring, upfront and service revenue but the impact of this is expected to decrease as subscription revenue grows especially as 62% of core units (Reckon Accounts, Reckon Accounts Hosted and Reckon One) sold in 2014 were subscription based products. Significantly, 41% of the core products sold in the Business Group are online (cloud based) products.

The Business Group also showed an encouraging increase in volume growth of 4% compared to 2013. This is a positive outcome for two main reasons. Firstly it is evidence of the success of the ongoing challenging process of rebranding products to Reckon Accounts since the termination of the right to use Intuit Inc trademarks and names; and secondly it is evidence of retaining customers and gaining growth against competitive pressure in the market from cloud based products.

To meet the growing demand for cloud based products the Business Group launched the next generation of Reckon Accounts Hosted in the third quarter of 2014. The enhancements implemented related to stabilising the platform to improve the speed and performance of the product. Some additional functionality was also added.

To meet the competition in the cloud market head on, the Business Group launched its first version of Reckon One in Australia in the first quarter of 2014 and in New Zealand in the fourth quarter of 2014. It is proposed to release a next generation version of this product in the second quarter of 2015. Reckon One cloud based accounting software is expected to be launched in the United Kingdom towards the end of 2015.

The company saved approximately $5 million dollars in royalty payments in 2014 since the termination of the licence agreement with Intuit Inc. Some of this saving was re-invested in cloud infrastructure, sales capability and product development.

Accountant Group Results

As with the Business Group, the strategy to move from an upfront once off software sales model to a subscription based model is bearing success. 86% of practice management revenue in the Accountant Group is now subscription based compared to 79% in 2013. Subscription product revenue of $22.3 million is up 9% from $20.4 million in 2013. As with the Business Group, the Accountant Group showed a decline in upfront and service revenue in 2014. Reckon has reached a tipping point in the Accountant Group in terms of switching the sales model to a subscription model and we do not expect to see any further significant declines in upfront and service revenue. It is expected that there will always be a residue of upfront and service revenue in the Accountant Group.

The Reckon Docs content business was a solid contributor to the Accountant Group with revenue up 9% to $20.5 million from $18.9 million. This is attributable to improvements in search engine optimisation for online sales as well as better integration of the Accountant Group products generally to make it a one-stop shop for all professional accounting firms’ needs.

It is important to note that despite the strong growth in volume the cost base for the Accountant Group was maintained.

The nature and functionality of practice management software means that on premises installations of software are likely to remain in demand. In addition cloud based practice management solutions are very much part of the strategy and the Reckon APS Private Cloud solution is gaining momentum. Also in the cloud space, the SyncDirect solution is also gaining traction in the market.

International Group Results

As with the other Groups, in the International Group, the move to a subscription based revenue model is proving successful. Subscription product revenue grew 14% from $12.2 million in 2013 to $14.0 million in 2014. Once again this was offset to some extent by a 6% decline in upfront and service revenue, but this impact is expected to minimise over time as 78% of the International Group revenue is now subscription, up from 76% in 2013.

The Virtual Cabinet business has had a highly successful year with an increase in number of seats sold of 25% up compared to 2013. 26% of the top 100 professional accounting firms in the United Kingdom now use the Virtual Cabinet solution.

The nQueue Billback business produced solid results in the United States of America, offset by weaker results in the United Kingdom and Australia. The scan solution has been developed and is gaining traction in the market.

Dividends

On 10 February 2015, the board declared a final dividend of 4.75 cents per share (60% franked) payable to shareholders recorded on the company’s register as at the record date of 20 February 2015. Reckon does not have a dividend re-investment plan currently in operation. On 12 August 2014, the board declared an interim dividend of 4.25 cents per share (90% franked) payable to shareholders recorded on the company’s register at record date of 27 August 2014.

EBITDA

In the Business Group EBITDA margins increased from 43.1% in 2013 to 52.1% in 2014. The Business Group benefitted from the termination of the Intuit Inc royalty payment with a saving of approximately $5 million. Some of this saving was re-invested back into the business.

In the Accountant Group EBITDA margins decreased slightly from 36.5% in 2013 to 35.6% in 2014 as a result of sales mix, especially a higher percentage of lower margin Reckon Docs revenue.

In the International Group EBITDA margins increased from 31.6% in 2013 to 34.5% in 2014 despite investment in online sales capacity and expansion into the USA with Virtual Cabinet. The Virtual Cabinet business is now benefitting from scale and hence the significant improvement in margin.

Cash Flow

The company’s operating cash flow increased by 18% from $26.5 million to $31.3 million predominantly as a result of the move to a subscription revenue model where a high proportion of customers pay on a monthly basis.

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Directors’ Report (continued)

NPAT

NPAT growth was lower than EBITDA growth due to additional interest costs following the buyback of shares from Intuit Inc (referred to below under the heading “Intuit Inc”), as well as higher amortisation costs following a substantial investment in cloud product development in the last few years.

EPS

As a result of the profit growth and the selective buy-back of Intuit Inc’s shares the earnings per share increased by approximately 11% from 12.8 cents per share to 14.2 cents per share (excluding the impact of the sale of the investment in the Connect2Field business).

Intuit Inc.

On 10 February 2014 Reckon’s relationship with Intuit Inc formally ended.

From then on Reckon was not required to pay a royalty to Intuit Inc on sales of the Reckon Accounts business and personal product ranges.

Reckon does have a continued licence to the latest version of the source code for these products as at March 2014, to continue selling and to independently develop the desktop and hosted technology for a 100 year period.

But Reckon is no longer licensed to use Intuit trademarks or names.

The loss of the use of the trademarks and names presented a significant challenge as considerable reputation had been built in the market since Reckon first enjoyed the use of the trademarks and names in 1998. In anticipation of losing rights to the Intuit Inc trademarks and names Reckon commenced a product re-naming exercise from late 2012. The company has been successful in maintaining sales volumes whilst this transition occurred.

While Reckon was now free to pursue its own cloud strategy it did mean that the development had to be undertaken independently of Intuit as a result of the constraint imposed by the agreement with Intuit Inc. As such, Reckon was forced to be a late entry into the cloud market with Reckon One.

Nonetheless the product re-naming exercise was successfully completed by the end of 2012 for the Reckon Accounts personal range and by April 2013 for the Reckon Accounts business range. And Reckon One cloud based accounting software planned for release in 2013 was released in its first version in February 2014 based on changed specifications and functionality from market and customer feedback. A next generation release is expected in the second quarter of 2015.

On 12 June 2014 Reckon signed an off market selective buy-back agreement with Intuit Inc to buy back 14,828,304 shares in Reckon (representing approximately 11.45% of the total shares on issue) at $1.85 per share, for a total consideration of $27.5 million, including transaction cost. This transaction was funded by borrowings. Refer to note 14.

After completion of the buy-back approved by shareholders at a special general meeting on 22 July 2014, 14,828,304 were cancelled.

As a result of the selective buy-back and profit growth the earnings per share increased by 11% in 2014 excluding the impact of the sale of the investment in the Connect2Field business.

This transaction removed an uncertain overhang and a competitor from the register.

Reckon funded the selective share buy-back from debt facilities.

Significant Changes in State of Affairs

Other than as stated above there were no significant changes in the company’s state of affairs during the year.

Future Developments, Business Strategies and Prospects for Future Financial Years

The key drivers for the future performance of all Reckon businesses are the continued pursuit of subscription revenue in both desktop and cloud solutions; investment in product development, especially cloud based products; agility, efficiency and adaptability in product development; strategic expansion of products or functionality; organic growth from new customers and additional products and services to existing customers by maintaining and improving relationships with customer and partners; exploring potential other territories in which to pursue sales; attracting and retaining talented employees through improving workplace culture; and maintaining expenditure discipline. The company is also on the lookout for relevant, appropriate and rational acquisitions.

Specifically within the Business Group it is intended to focus on the following opportunities: organic growth in the Reckon Accounts Hosted market; implementation of the enhanced source code base for Reckon Accounts and Reckon Accounts Hosted; development of an API for Reckon Accounts Hosted enabling third party vendors to connect their solutions to Reckon Accounts products; launching the next generation version of Reckon One cloud based accounting software in the second quarter of 2015 which will include payroll and an API for third party product integration; launching Reckon Pay mobile payment solution in partnership with National Australia Bank in the second quarter of 2015; and development of cloud based solutions for Payroll and Point of Sale products.

In the Accountant Group the focus will be on organic growth from building the base of subscription revenue, especially for the Virtual Cabinet product range, Private Cloud hosted practice management solutions, Workpaper Management modules for Reckon APS practice management solutions; building on the traction that SyncDirect is getting in the market; developing solutions to take advantage of government driven taxonomies such as SBR; improving the user experience for Reckon Docs customers and adding to its product suite; marketing Reckon Docs content to the professional accountants market; and continuing to market Reckon Elite products to smaller sized professional accountants.

In the International Group the focus will be on pursuing Virtual Cabinet sales targets; launching Virtual Cabinet into the USA and taking Reckon One into the United Kingdom and pursuing the scan market for nQueue Billback.

The board has overall responsibility for the establishment and oversight of the company and Group’s financial management framework. The board oversees how management monitors compliance with risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks.

The main risk arising from the company and Group’s financial instruments are currency risk, credit risk, equity price risk, liquidity risk and cash flow interest rate risk. See note 31 to the Financial Statements for further detail of these risks.

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Directors’ Report (continued)

In addition, success in pursuing strategic ambitions is subject to certain risks. In general terms the businesses will always be subjected to domestic macro-economic pressures to the extent that these may or may not impact the confidence of small to medium sized businesses. The markets in which we operate are vigorously competitive and subject to disruption and price pressure. Ambitions to expand overseas and product development carry execution risks. Operationally, any business of this nature is subject to service interruption, infrastructure failure or data breaches.

Reckon is implementing an ISO27001 Information Security Management System (ISMS) across the Group as an assurance framework for our information security practices. This programme is expected to be completed in 2015. The risk assessment process is well under way with areas such as cloud and hosted product lines given priority.

The competitive landscape does show the emergence of disruptive operators in the cloud market, but the scale of yet to be acquired customers in all groups is large.

Matters Since the End of the Financial Year

No matter or circumstance has arisen since the end of the year that has significantly affected, or may significantly affect the company’s operations in future financial years; or the results of those operations in future financial years; or the company’s state of affairs in future financial years.

Directors’ Report (continued) Remuneration Report – Audited

1. Introduction

The Remuneration Report sets out, in accordance with section 300A of the Corporations Act: (i) the company’s governance relating to remuneration, (ii) the policy for determining the nature and amount or value of remuneration of key management personnel; (iii) the various components or framework of that remuneration; (iv) the prescribed details relating to the amount or value paid to key management personnel, as well as a description of any performance conditions; (v) the relationship between the policy and the performance of the company.

Key management personnel are the non-executive directors, the executive directors and employees who have authority and responsibility for planning, directing and controlling the activities of the consolidated entity.

2. Governance

Authority for remuneration matters rests with the Remuneration Committee which reports to the board and makes recommendations regarding remuneration to the board which has ultimate responsibility for signing off on remuneration practices and outcomes.

The Remuneration Committee is comprised of three non-executive directors, two of whom are independent.

In 2014 the chairman of the Remuneration Committee was Ian Ferrier (independent) and the other members were John Thame (independent) and Greg Wilkinson (non-independent).

Details of the meetings of the Remuneration Committee are set out on page 44.

Previously because of the size of the company and the size of the board, no formal charter was in place for the Remuneration Committee. The Remuneration Committee operated substantially in accordance with the aims and aspirations of Principle 8 of the ASX Corporate Governance Principles and Recommendations (“ASX Principles and Recommendations”). However, from 2015 onwards, the company has adopted a charter.

The charter is available on the company’s website at http://www.reckon.com.au/aboutus/corporategovernance.aspx.

At the Annual General Meeting (AGM) for the financial year ending 31 December 2013, held on 21 May 2014, shareholders representing approximately 18% of the total shares on issue at the time, but 33% of the votes actually cast on the resolution, voted against a non-binding resolution calling for approval of the remuneration report. Accordingly the 2014 Remuneration Report will deal with the key issues raised by shareholders at the AGM and will also respond to key observations made by proxy advisers about the 2013 Remuneration Report.

The Remuneration Committee sought guidance from independent consultants in relation to two aspects of the remuneration matters of the company.

In 2014 an independent consultant was engaged to advise whether the constituent companies making up the comparator group against which the company’s total shareholder return is measured for purposes of the company’s long term incentive plan was appropriate and what could be a more rational group of companies.

More relevantly to the concerns raised about the 2013 Remuneration Report, in 2015 a separate independent consultant was engaged to advise on certain aspects of remuneration policy, particularly in relation to the Remuneration Committee exercising its discretion to reward employees under the long term incentive when the performance measure was not met. Guidance was also sought in relation to the level of detail of disclosure and the extent to which the relationship between pay and performance is articulated.

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Directors’ Report (continued)

Remuneration Report – Audited (continued)

None of the consultants made remuneration recommendations as contemplated in the Corporations Act. Their advice was rather of a general nature on certain aspects of policy and disclosure. Accordingly the board does not deem it necessary to include in this Remuneration Report further details required by section 300A(1)(h) of the Corporations Act.

Because the issues concerning the Remuneration Report were raised in May 2014 after remuneration offers for 2014 to key management personnel had already been made, the 2014 remuneration framework is to some extent consistent with prior years. Based on feedback from shareholders and proxy advisers, the key differences as set out in this report relate to the level of detail of disclosure; the extent to which the relationship between pay and performance is articulated; and the elaboration of the reasons for certain decisions made by the board in 2013.

3. Policy

Setting policy for the various components of remuneration is complex. It involves managing the sometimes competing expectations and opinions of various stakeholders including shareholders with the expectations of key management personnel. Thus policy is set with consideration of the need to balance shareholder expectation (performance) with the need to attract, motivate and retain key management personnel and take account of the unique characteristics of the company and the nature of its activities during a reporting period.

Specifically, the policy is to pay the relevant officers and employees remuneration cognizant of relevant market comparisons but suited to the unique features and nuances of the company, the competitive landscape, the scale of the business, the responsibilities of the individual directors and employees, the individual talents, capabilities and experience of relevant executives, internal relativities as well as quantitative and qualitative performance.

All remuneration is reviewed annually. Generally annual increases will be assessed on a case by case basis according to the above criteria to judge whether they are justified and by how much. Consideration is given to consumer price index indicators but these are not necessarily conclusive and the board may allow increases above or below any index based upon the performance of the company and the performance of the individual key management personnel involved.

Each year the board, through the Remuneration Committee, will consider for approval the levels of remuneration for each component of remuneration as set in the annual budget, taking into account the relevant performance compared to budget, historical results and the total cost to the company for key management personnel. While individual remuneration increases have varied, the company has managed to decrease the total cost to the company over the past few years.

As the table below illustrates, there has been a decline of almost 30% in total key management personnel remuneration over the last 5 years.

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TOTAL KMP
YEAR CHANGE REASON FOR CHANGE
REMUNERATION
2010 $5,591,355 – –
Executive KMP headcount reduced from
10 to 6. Management responsibility of
Down Reckon Docs business moved under
2011 $4,349,291
22.21% Business Group. Accountant Group KMP
headcount reduced.
Down
2012 $4,149,895 KMP headcount remained the same.
4.58%
Down
2013 $3,741,242 KMP headcount remained the same.
9.85%
KMP headcount reduced from
6 to 5, but responsibilities of ex-CEO
2014 $3,981,578 Up 6.42%
of Business Group allocated to
existing executives.
----- End of picture text -----

4. Remuneration Components or Framework

For 2014, remuneration for key management personnel who are executive directors or Group executives comprises a fixed element, a short-term incentive element and a long-term incentive element.

For 2014, remuneration for non-executive directors comprises a fixed element only.

4.1 Fixed Component

The fixed component comprises cash payments.

The amounts offered are determined in accordance with the policy described above. Specifically, as stated above, the features and nuances of the company, the individual talents, capabilities and experience of relevant executives, and the need to attract and retain talent are considered important factors in assessing the fixed component to be paid to executives each year.

The Remuneration Committee does not set fixed remuneration against other comparable market capitalisation companies. In its opinion market capitalisation by itself does not present a reliable yardstick.

Fixed remuneration levels can be seen in the context of the performance of the company in the table below. The Remuneration Committee believes that in the context of the overall performance of the company the levels of total fixed remuneration levels are reasonable.

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Directors’ Report (continued)

Remuneration Report – Audited (continued)

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Operating
Revenue % EBITDA % Total fixed %
$m up or down $m up or down remuneration up or down
2006 $45.0 – $13.0 – $2,224,492 –
2007 $55.0 23% $16.5 26% $2,365,304 6%
2008 $60.0 8% $19.0 15% $2,565,493 8%
2009 $85.3 42% $25.1 32% $3,016,981 18%
2010 $90.1 6% $30.2 20% $3,223,268 7%
2011 $90.2 – % $31.3 4% $2,791,467 -13%
2012 $96.6 7% $34.0 9% $2,887,273 3%
2013 $98.1 2% $35.3 4% $2,590,547 -10%
2014 $100.8 3% $37.1 10% $2,734,516 6%
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Excluding the proceeds from the sale of the investment in Connect2Field in 2013 of $1.4 million.

For 2016, while the Remuneration Committee will pay attention to market comparisons in setting fixed remuneration levels, it will always remain mindful of performance (long and short term) and the unique characteristics of the company.

4.2 Short-Term Incentive Component (STI)

The short-term component comprises a cash payment only.

This incentive drives a contribution to the short term performance of the company by being tied to annual budgets. An additional performance hurdle that defers full payment of the short-term incentive also acts as a retention incentive.

Payment of the short term incentive is conditional upon satisfaction of performance conditions with a one year performance period but with a portion (approximately one third) of the payment being made upon the further condition that the executive remains in employment for a further one year period after the performance period.

The amounts offered are determined in accordance with the policy described above under the heading, “Policy”.

Each annual budget fixes a potential amount in which the relevant employees can share if the performance conditions are met. There are three weighted elements to the performance conditions, viz: a revenue target, an earnings before interest, tax, depreciation and amortisation (EBITDA) target, and an earnings per share (EPS) target, measured against the budgeted performance of the company.

The EBITDA target was introduced to replace NPAT in 2010 to remove a perceived duplication of earnings based targets because EPS is also a target.

The board determines the allocation of the potential amount between individual key management personnel or employees as well as the weightings that comprise the performance conditions for short term incentive offers made.

The Remuneration Committee has the power to withdraw offers that have not vested or to clawback short-term incentives paid in the case of serious misconduct or material misstatement in the financial statements respectively. The Remuneration Committee also has a discretion not to allow incentives to vest.

STI Table for 2014

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Amount earned on sliding scale
90% – 110%
Performance Weight of Potential STI
Indicator Target Actual bonus amount at 100% % of target $
Revenue $104.5m $100.8m 40% $273,856 96% $263,978
EBITDA $37.4m $37.1 40% $273,856 99% $271,907
12.1 cents/ 14.2 cents/
EPS 20% $136,928 110% $150,621
share share
Total $684,640 $686,506
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*The bonus is paid on a sliding scale. Below 90% no bonus is paid. Between 90% and 110% a pro rata increase is paid, capped at 110%.

The total above does not reconcile with the total short term incentive on the 2014 payments table as some of the key management personnel have other bonus structures agreed other than the above performance targets, and the deferred component is accounted for over the two year period. The relative increase in the potential amount for 2014 compared to 2013 is because certain key management personnel were not in the plan in 2013. Refer to the table on page 36 for the detail.

STI Table for 2013

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Amount earned on sliding scale
90% – 110%
Performance Weight of Potential STI
Indicator Target Actual bonus amount at 100% % of target $
Revenue $104.9m $98.1m 40% $237,800 94% $222,400
EBITDA $36.1m $35.2m 40% $237,800 98% $232,748
14.3 cents/ 13.9 cents/
EPS 20% $118,900 97% $115,740
share share
Total $594,500 $570,888
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*The bonus is paid on a sliding scale. Below 90% no bonus is paid. Between 90% and 110% a pro rata increase is paid, capped at 110%.

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Directors’ Report (continued)

Remuneration Report – Audited (continued)

Performance

As with fixed remuneration, the Remuneration Committee believes that in the context of the overall historical performance of the company the quantum of the total short term incentives paid is reasonable. The following table sets out (i) the historical performance targets, (ii) the percentage increase of the target over the prior year target, (iii) the actual performance achieved, (iv) the percentage increase of the actual performance over the prior year performance target, (v) the increase of the actual performance over the prior year actual performance, (vi) the total STI paid in the year together with the increase of total STI compared to the prior year and the percentage of the potential STI amount paid. The Remuneration Committee believes that this table also indicates that the performance targets set were adequately demanding. The 2014 target for operating revenue was set in the context of declining retail sales and the move from an upfront revenue model to a subscription revenue model.

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Target
Target % of % increase increase
increase or revenue of revenue or
Operating decrease Operating achieved achieved decrease
Revenue on prior revenue over target over prior NPAT on prior NPAT
Target year % achieved set year target year % achieved
2006 $45.2m na $45.0m 100% na $7.4m na $8.2m
2007 $51.1m 13% $55.0m 108% 23% $8.7m 18% $9.9m
2008 $61.4m 20% $60.0m 98% 8% $10.6m 21% $11.3m
2009 $89.9m 47% $85.3m 95% 42% $12.5m 18% $13.7m
EBITDA EBITDA
Target [1] Achieved [1]
2010 $92.3m 3% $90.1m 98% 6% $29.0m – $30.1m
2011 $96.8m 5% $90.2m 93% -% $32.5m 12% $33.1m
2012 $98.3m 2% $96.6m 98% 7% $36.0m 11% $34.0m
2013 $104.9m 7% $98.1m 94% 2% $36.1m 0% $35.3m
2014 $104.5m 0% $100.8m 96% 3% $37.4m 4% $37.1m
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Includes the proceeds from the sale of the investment in Connect2Field in 2013 of $1.4 million.
The EBIDTA target was introduced to replace NPAT in 2010 to remove a perceived duplication of earnings based targets because EPS is also a target.

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% of STI
Target released
% increase increase % increase % increase (average
% of NPAT of NPAT or % of EPS of EPS or decrease across
achieved achieved EPS decrease EPS achieved achieved of total STI KPI’s)
over target over prior Target on prior achieved over set over prioer Total on prior capped at
set year cps year % cps target year STI year 110%
110% na 5.4 na 6.2 114% na $566,253 na na
115% 21% 6.6 23% 7.5 114% 21% $575,655 2% 109%
107% 14% 7.9 20% 8.5 108% 13% $594,767 3% 103%
110% 21% 9.4 18% 10.3 110% 21% $694,134 17% 104%
104% – 10.7 14% 11.8 110% 14% $699,964 1% 103%
102% 10% 12.6 18% 13.3 106% 14% $721,444 3% 99%
94% 3% 13.9 10% 13.4 96% 0% $740,371 3% 96%
98% 4% 14.3 3% 13.9 97% 4% $640,381 -14% 96%
99% 4% 12.1 -15% 14.2 110% 2% $684,428 7% 100%
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Directors’ Report (continued)

Remuneration Report – Audited (continued)

The table below sets out the comparison between internal targets set by the company compared to consensus estimates published by market analysts and compared to actual performance for the relevant performance measures. This gives some indication of a correlation between internal targets and external objective targets. It should be noted that the analyst reports relied upon are amended and updated sometimes on several occasions each year and the numbers reported here are based on the information available at the time. The board is of the opinion that this nonetheless gives some indication of the trend of a correlation between internal targets and market expectations.

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Operating Operating
Revenue Consensus Revenue Consensus
Target Average Achieved NPAT Target Average NPAT Achieved
2006 $45.2m $46.5m $45.0m $7.4m $7.9m $8.2m
2007 $51.1m $53.8m $55.0m $8.7m $9.9m $9.9m
2008 $61.4m $63.0m $60.0m $10.6m $11.2m $11.3m
2009 $89.9m $85.7m $85.3m $12.5m $13.3m $13.7m
EBITDA EBITDA
Target [1] Achieved [1]
2010 $92.3m $93.1m $90.1m $29.0m $30.7m $30.1m
2011 $96.8m $94.6m $90.2m $32.5m $33.7m $33.1m
2012 $98.3m $96.3m $96.6m $36.0m $35.3m $34.0m
2013 $104.9m $100.1m $98.1m $36.1m $36.0m $35.3m
2014 $104.5m $102.1m $100.8m $37.4m $38.5m $36.8m
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The EBIDTA target was introduced to replace NPAT in 2010 to remove a perceived duplication of earnings based targets because EPS is also a target.

4.3 Long-term Component (LTI)

Background

The long-term incentive plan was approved by the board and approved by shareholders at a Special General Meeting on 20 December 2005.

The long term incentive comprises two possible rewards: the grant of equity in the form of performance shares; or cash payments based upon share price appreciation rights. The latter being included in the original design of the plans to accommodate the then CEO and COO whose substantial shareholding in the company at the time meant that they could not take advantage of tax deferral provisions and so instead could be offered cash payments taxed at vesting.

The long-term incentive is aimed at aligning remuneration with the longer term performance of the company and retaining the long term services of the key management personnel.

The amounts offered are determined in accordance with the policy described above under the heading, “Policy”.

The board has the power to approve the making of offers to applicable employees upon the recommendation of the CEO to the Remuneration Committee.

Performance shares (in respect of the company’s ordinary shares) awarded and/or share price appreciation rights do not vest before a performance period of three years after their grant date.

Vesting is conditional upon the company achieving defined performance criteria. Under the long term incentive plan in place for 2014 for the performance period 2012 – 2014, the performance criteria was based upon a total shareholder return (TSR) target.

A TSR is the return to shareholders over a prescribed period, based upon the growth in the company’s share price plus dividends or returns of capital for that period expressed as a percentage of the investment. The company’s TSR target is based upon the company achieving a median or higher ranking against the TSR position of individual companies within a ‘comparator group’ of companies (i.e. a group of comparable ASX listed companies preselected by the board) over the same period. If the relative TSR ranking was equal to the median, then 50% of the long-term incentive offered would vest. The balance of the offer would vest proportionally on a sliding scale between the median and the third quartile with 100% vesting (capped) if the company’s ranking equalled or exceeded the third quartile.

Vesting Scale

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COMPANY PERFORMANCE % OF OFFERED SHARES ALLOCATED
Up to, but not including the 50th percentile: 0%
At the 50th percentile: 50%
75th percentile and above on a sliding scale up to: 100%
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It became apparent by the end of 2013 that TSR was possibly not the ideal benchmark to align the achievement of the strategic imperatives of the company as it confronted a number of challenges.

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Directors’ Report (continued)

Remuneration Report – Audited (continued)

Discretion

Thus, as reported in the Remuneration Report for last year (2013), the board exercised a discretion at the beginning of 2014 to allow the long term incentives for the performance period 2011 to 2013 to vest notwithstanding that the TSR target was not reached.

The Remuneration Committee became aware after the event that there was shareholder concern about the exercise of the discretion.

To remedy this concern, the board now sets out in greater detail the changes the business is undergoing and why it exercised a discretion in 2013 for the LTI performance period 2011-2013 for performance shares or share appreciation rights offered in January 2011.

Background

Sales of new desktop small business accounting software traditionally occurred in the retail market, since the company commenced business.
Since about 2005, the gradual emergence of cloud based small business accounting products by competitors, some of whom are well capitalised with American investment, began challenging the traditional markets.
From 2009 to 2013 Reckon’s revenue from new sales from the retail market declined from $8 million a year to $1.9 million a year as customers moved to direct sales.
The majority of new sales of accounting software were going to cloud based small business accounting vendors.

The Intuit Factor

Under licence since 1998 Reckon localised and published Intuit Inc’s desktop small business accounting software under the QuickBooks brand.
The licence agreement with Intuit Inc effectively prevented Reckon from developing its own software, including for the cloud.
Intuit Inc did not have a cloud based version of the software that was suitable for Reckon in Australia because:
client data was required to be hosted in Singapore;
there was no direct access to the source code to allow Reckon to efficiently and promptly localise the software for Australian conditions.
Reckon thus entered negotiations with Intuit Inc (commencing in about early 2010) that ultimately led to termination of the licence agreement with Intuit Inc in March 2014. This meant that Reckon was allowed to:
develop its own cloud based product, Reckon One; and
own its intellectual property which would permit Reckon to sell Reckon One worldwide.
On the other hand Reckon would:
lose rights to use Intuit Inc names and trademarks, especially the QuickBooks name under which it had sold products for about 20 years;
lose the websites and search results associated with long usage of those names and trademarks;
lose access to Intuit Inc’s US$300 million annual development spend; and
have to undertake re-branding of its entire small business accounting software suite.

Market response – TSR an inappropriate measure of success

Reckon has been forthcoming in keeping investors informed of the challenges and developments.
The market has responded cautiously to the challenges, reflected in flat to negative share price growth and poor TSR results since 2011.
The register appears to have remained relatively stable suggesting some element of investor confidence in the longer term prospects.

Discretion to pay the LTI – for the performance period 2011 – 2013

In essence, Reckon’s board and management had to respond to the risk that desktop small business accounting software would become a dinosaur. Reckon had undertaken extensive negotiations with Intuit Inc to avoid this but when it realised that the desired outcome would not result from partnering with Intuit Inc, the tough decision was effectively made to go it alone.
Going alone presented a risk, but the risk of not changing and not entering the cloud based market posed a potentially greater threat to the business.
Against this background the discretion to allow the LTI for the performance period 2011 – 2013 to vest was exercised in early 2014 because:
management was faced with the challenges mentioned above and had to remain motivated within that environment;
development was well advanced to release the company’s first cloud product within 20 months of parting ways with Intuit Inc;
the results in 2013 showed revenue up 1%, EBITDA up 4% and EPS up 4%;
management had also maintained unit sales of accounting software products through the period notwithstanding the re-branding exercise.

LTI – for the performance period 2012 – 2014

The board was once again confronted with whether or not to exercise its discretion to allow the LTI for the performance period 2012-2014 to vest. The board considered the following.

In 2014, the company and management continued to face the challenges mentioned in relation to the performance period 2011-2013:

Notwithstanding the challenges, the results improved in 2014 with revenue up 3%, EBITDA up 10% and EPS up 11%, while at the same time the company invested in:
infrastructure improvements;
sales capacity;
creating market awareness of Reckon as a standalone brand;
commencing launching Virtual Cabinet in the USA;
launching Reckon One in the United Kingdom;
competing with growing heavyweight international competition.

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Directors’ Report (continued)

Remuneration Report – Audited (continued)

The board also looked at these achievements:
launch of the next generation version of Reckon Accounts Hosted in the third quarter of 2014;
development and launch of Reckon One in the first quarter of 2014;
next generation version of Reckon One on track for launch in the second quarter of 2015;
launch of Reckon One in New Zealand in the first quarter of 2014;
growth of 4% in core Business Group product units;
growth of 9% in practice management units in the Accountant Group;
growth of 10% in Reckon Docs units in the Accountant Group;
growth of 25% in Virtual Cabinet seats in the International Group;
moving the entire business, as far as possible, to a subscription based revenue model;
completing the off-market share buyback of Intuit Inc’s shareholding in the company.

The board will continue to monitor three main growth objectives of the company:

the ongoing move to a subscription based revenue model;
development of a pure cloud based small business accounting software products in Australia, New Zealand and other territories; and
ongoing focus on rebranding and brand awareness.

Based on this focus and the factors mentioned above – although TSR targets had not been reached – the board has decided as follows:

to exercise its discretion to allow only 50% of the entitements for the performance period 2012 – 2014 to vest;
a further 50% of the entitlements would only vest if certain performance targets were met by the end of June 2015.
1) the completion of the development roadmap for 2012 – 2014 of Reckon One “Evolution”, which includes:
develop and release the Reckon One next generation version;
develop and release the new Reckon One client provisioning system;
develop and release the new Reckon CRM system; and
2) complete the re-build of the Group website infrastructure.

Other factors taken into account in exercising discretion

History of share price performance

Reckon has generally provided excellent long term share price growth:

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Change in share price between beginning and end of year
(cents)
January December
2002 14 19
2003 19 68
2004 68 85
2005 85 76
2006 76 102
2007 102 139
2008 139 105
2009 105 184
2010 184 234
2011 234 234
2012 234 236
2013 236 217
2014 217 181
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Based on close of day price.
Share price growth of 1571% between 2002 and 2010.
December 2010 - Reckon announced a new licence agreement with Intuit marking commencement of possible independent cloud development.
December 2011 - Reckon announced that Intuit did not want to proceed with plans for wider geographic markets with a “light” version of Reckon APS practice management software.
2012 to 2014 marks the notice period for termination of the licence agreement.

The scale of the incentives is at a reasonable level

Shares to vest for performance period 2012–2014: 92,050 or 0.007% of the total shares on issue.
Cash value for share appreciation rights for performance period 2012-2014 is $175,000.
Note that if the additional targets referred to on page 28 are not met only half of these shares and rights will vest.
Shares to vest for performance period 2013–2015: 87,518 or 0.07% of the total shares on issue.
Cash value for share appreciation rights for performance period 2013-2015 is $189,000.
Shares to vest for performance period 2014–2016: 101,696 or 0.09% of the total shares on issue.
Cash value for share appreciation rights for performance period 2014-2016 is $189,000.

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Directors’ Report (continued)

Remuneration Report – Audited (continued)

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Number of performance Number of shares Amount paid for share
shares offered on issue at start of year % appreciation rights
2005 78,815 138,864,948 0.06% $18,750
2006 85,437 132,236,740 0.06% $43,750
2007 300,590 132,427,978 0.23% $284,833
2008 252,477 132,749,825 0.19% $34,088
2009 375,475 132,937,807 0.28% $661,843
2010 214,190 133,317,555 0.16% $980,629
2011 156,704 133,384,060 0.12% $338,360
2012 150,440 132,839,672 0.11% $105,560
2013 91,740 129,488,015 0.07% $164,329
2014 101,696 126,913,066 0.08% $157,263
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The number of shares is at the date the offer was made to employees. Some of the offers have since lapsed. This is less than one quarter of the estimated average number of shares/options/rights on offer by an updated comparator group of peers. The average of shares/rights on offer by Reckon is a negligible percentage of total shares issued.

The board understands the need to use its discretion conservatively and will consider the following in its decisions in the future:

Management has to deal with the challenge of transition from desktop to cloud across the business.
In the desktop small business accounting software market, management has to retain sales, retain customers, and commence or continue development of cloud solutions.
Management has to continue to undertake a re-branding exercise to establish Reckon as a standalone brand.
Management must deliver Reckon One as it evolves and at the same time manage development costs.
The company must maintain profitability and dividends.
New customers must be acquired.
Expansion of Reckon One to new territories.
Expansion of functionality of Reckon One to stand up to competition.

The board equally has the power to exercise a discretion the other way and decline to allow an award to vest, for example for “bad leaver” reasons. This has not been done as the below table illustrates the company has performed well on relative TSR until 2012.

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Start price End price
Grant Date Performance Period TSR (cents) (cents)
1 January 2005 2005 – 2007 85.7% 83 135
1 January 2006 2006 – 2008 53.6% 76 102
1 January 2007 2007 – 2009 92.0% 103 172
1 January 2008 2008 – 2010 101.2% 135 238
1 January 2009 2009 – 2011 159.1% 102 234
1 January 2010 2010 – 2012 54.4% 172 238
1 January 2011 2011 – 2013 0.7% 238 216
1 January 2012 2012 – 2014 -13.3% 234 180
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Based on weighted average price using the closing prices for the month preceeding the date of calculation allowing for the number of shares traded each day.

Given the historical TSR performance as well as the achievement of the operational and financial targets mentioned above the Remuneration Committee believes that the quantum and payment of the long term incentives are reasonable. Refer to the table on page 22 for an overview of performance history.

Change to LTI KPI

It became apparent that relative TSR is not an appropriate measure for the strategic imperatives that the company faced.

It is also apparent that relative TSR itself presents challenges as a suitable benchmark for performance for the company, especially in finding an appropriate peer group.

The Remuneration Committee decided a change was needed not only to measure the success of the strategy to enter the cloud market in challenge circumstances, but also to overcome the difficulty of relative TSR as a benchmark in itself.

Given the complexity of finding an appropriate benchmark, the change will only be implemented later in 2015, as offers under the existing long-term plans had already been made in January and February 2014 before proxy adviser and shareholder feedback had been received.

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Directors’ Report (continued)

Remuneration Report – Audited (continued)

The new vesting criterion for the performance period 2015 – 2017 is yet to be determined and the Remuneration Committee is considering the options to come up with a benchmark that aligns with shareholder expectations and the strategic direction of the company.

Further details of the vesting criterion will be set out in the 2015 Remuneration Report when it is finally determined.

Share appreciation plan

The share appreciation right plan represents an alternative remuneration component (to offering performance shares) under which the board can invite relevant employees to apply for a right to receive a cash payment from the company equal to the amount (if any) by which the market price of the company’s shares at the date of exercise of the right exceeds the market price of the company’s shares at the date of grant of the right. The amount ultimately paid to the employee is calculated based on the difference between the company share price at vesting and the share price at date of issue spread over the three year performance period, multiplied by the number of rights granted.

As a threshold, the same performance target set for vesting of performance shares for 2015–2017 must be met. As for the period 2012-2014 (and possibly 2013- 2015) for the same reasons articulated above, the board exercised a discretion to allow share appreciation rights to vest.

4.4 Long term retention incentive

On 24 May 2011 the Remuneration Committee approved and recommended to the board an extension to the long term incentive plan by adding a long term retention incentive. The genesis of the idea to extend the plan and offer additional performance shares was to provide a reward and an incentive for senior level employees who have a long employment history and good performance record.

It was also intended that these performance shares could be used to provide an incentive for employees with potential for a longer term contribution to the success of the company to participate in the growth of equity value of the company.

Part of the company’s success as an organisation is premised on human domain expertise and the consistency and longevity of service of key management.

The offer of these additional performance shares is designed to encourage and reward employees to commit to longevity as well as to complement other traditional forms of executive remuneration.

By rewarding those executives who commit to the company over a very long period and thereby providing management stability as the business grows and matures, the board believes long term shareholder benefits will result.

The long term retention incentives are offered to selected employees with the principal vesting condition that participants must remain employed for the term specified. The shares offered remain at risk of forfeiture until the relevant period of service has been satisfied. There is no entitlement to dividends during the relevant period of service.

Offers made are staggered in such a way that for 100% of the shares to vest, the employee must remain in employment for 10 years from the date of the initial offer, with a minimum of 7 years. In the context of the overall remuneration strategy of the company, the history of the performance of the company, and the relative number of the shares offered, the Remuneration Committee is of the view that the addition of this retention incentive to

remuneration offered is appropriate and ‘fair and reasonable’, a view supported by the independent consultant engaged at the time. The independent consultant did not make any remuneration recommendation in relation to the key management personnel for the company.

It is the Remuneration Committee’s belief that the addition of these performance shares has added to the balance and overall mix of remuneration to the applicable employees in a positive way. If the exacting service requirements are not satisfied then any costs incurred under AASB 2 will be recouped and any forfeited shares will be available for reallocation or to fund other employee equity entitlements.

Long term retention incentive offers to key management personnel

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Offered in 2011 to vest Offered in 2012 to vest Offered in 2013 to vest Offered in 2014 to vest
in 2017 conditional in 2018 conditional in 2019 conditional in 2020 conditional
on employment on employmen [t] on employment on employment
Chris
Group CFO 25,000 25,000 50,000 5,000
Hagglund
Myron General Counsel/
Company 25,000 25,000 50,000 5,000
Zlotnick Secretary
Sam MD Accountant
12,500 12,500 25,000 0
Allert Group
Rick President/CEO
Hellers nQueue Billback 0 0 25,000 0
Pete MD Business
0 0 5,000 5,000
Sanders Group
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Other information

The Remuneration Committee retains a discretion under the rules of the plans to over-rule the automatic vesting of incentives in the event of “capital events” such as takeovers or restructures.

The Remuneration Committee retains a discretion to withhold unvested offers, disallow vesting or clawback long-term incentives paid in the case of serious misconduct or material misstatement in the financial statements respectively.

There is no entitlement to dividends during any performance period.

The company’s Trading Policy prohibits directors, key management personnel and employees from entering into a transaction with securities which limit the economic risk of any unvested entitlements awarded under any Reckon equity-based remuneration scheme. Prior to presenting full-year results equity plan participants are required to confirm that they have not entered into any transactions which would contravene the company’s Trading Policy.

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Remuneration Report – Audited (continued)

Directors’ Report (continued)

5. Terms of Employment for Key Management Personnel

The executive directors and Group executives are all appointed on standard employment terms that are not fixed term contracts. These contracts include a notice period of between 1-3 months to be provided by either the executive or the company. No contract provides for termination payments except where the employee is to receive payment in lieu of notice.

Participation in the short term and long term incentive elements are not fixed entitlements arising under employment contracts. Offers made under these plans are dependent on the CEO’s recommendation and the board’s approval each year.

6. Balance Between Salary, Short-Term and Long-Term Incentives

Setting remuneration is not an exact science and an overly formulaic approach can be undesirable as the subtle divergence of approaches of the proxy advisers shows. A wide range of qualitative and quantitative factors have to be taken into account. It is the board’s opinion that the changes made in the approach to remuneration in 2015 go a long way to more expressly articulate its approach to remuneration and meet the technical deficiencies in reporting mentioned by the proxy advisers. The board believes that an adequate balance is struck between the components comprising the relevant remuneration. For short term incentives, the performance targets reflect, in part, the key factors that the company pursues in measuring its performance: volume of sales; earnings generated; and value returned to shareholders in terms of EPS. The targets also represent a measure of an incentive to encourage commitment to the business and to its growth. The audited financial results for the year are used to assess whether the performance conditions are satisfied. Audited results represent an independent accurate method of determining the attainment of the conditions. For long-term incentives, the board is considering a new performance benchmark that will pose adequate thresholds representing all stakeholders’ interests before rewards vest.

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Directors’ Report (continued) Remuneration Report – Audited (continued)

7. Remuneration Tables

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Short term employee benefits
Fixed component Short term incentive component
Office Salary Total Bonus Amount Other Short Term benefits [4]
2013 2014 2013 2014 2013 2014
Non-executive Directors [3]
John
Chairman $110,000 $115,000 $0 $0 $0 $0
Thame
Greg
Deputy Chairman $95,000 $100,000 $0 $0 $0 $0
Wilkinson
Ian
Director $95,000 $100,000 $0 $0 $0 $0
Ferrier
Executive Director [3]
Clive
CEO $683,500 $719,218 $266,165 $291,517 $0 $0
Rabie
Other key management personnel
Sam MD Accountant $345,600 $360,782 $86,435 $94,941 $10,115 $8,104
Allert Group
Pete MD Business $220,000 $235,000 $30,000 $50,136 $0 $0
Sanders Group
Richard Hellers President/CEO nQueue Billback $309,917 $345,898 $51,653 $22,099 $7,060 $7,145
Chris
CFO $405,550 $420,625 $123,965 $135,410 $0 $0
Hagglund
Myron
General Counsel $325,980 $337,994 $82,163 $90,325 $0 $0
Zlotnick
TOTAL $2,590,547 $2,734,517 $640,381 $684,428 $17,175 $15,249
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The dollar values of the long term incentive and retention component is the fair value using a model that adapts the Monte Carlo simulation approach: (1) allocated over each year of the 3 year performance period for 2012 to 2014 and (2) allocated over the 7 year period from 2014 to 2020 for shares offered as a long term retention incentive. The fair value of the performance shares offered in 2014 for the performance period 2014 to 2016 at grant date was $1.672 per share valued according to the Monte Carlo simulation approach. The fair value of the shares offered in 2014 for the long term retention incentive for the period 2014 to 2020 at 1 January 2014 was

$1.672 per share valued according to the Monte Carlo simulation approach. For the performance period 2014 to 2016 performance shares were offered as follows: Mr Hagglund (37,759 shares), Mr Zlotnick (24,555 shares) and Mr Allert (16,216 shares).

The effective date of grant for each of these participants was 1 January 2014. If the performance criteria are met, then the shares are released at no consideration on 31 December 2016. For the long term retention incentive period 2014 to 2020 performance shares were offered as set out on page 31. These shares vest on 31 December 2020 at zero cents subject to the employees remaining in employment for the period. The fair value of performance shares which vested or were forfeited during the 2014 financial year is set out in the table below. No options were granted to any person during the year as part of their remuneration. No options vested during the financial year. All options issued in previous years were fully vested in prior years. No options were exercised during 2014.

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Post employee benefits Long term employee benefits Total Remuneration
Other compensation Long term incentive component
Equity settled share based Cash settled share based
payments-Performance payments-Appreciation
Superannuation shares [1] rights [2]
2013 2014 2013 2014 [5] 2013 2014 [5] 2013 2014
$10,038 $10,781 $0 $0 $0 $0 $120,038 $125,781
$8,669 $9,375 $0 $0 $0 $0 $103,669 $109,375
$8,669 $9,375 $0 $0 $0 $0 $103,669 $109,375
$25,000 $30,000 $0 $0 $164,329 $157,263 $1,138,994 $1,197,998
$25,000 $27,500 $32,370 $38,698 $0 $0 $499,520 $530,025
$20,075 $22,031 $1,499 $2,421 $0 $0 $271,574 $309,588
$14,875 $14,199 $7,494 $7,494 $0 $0 $390,999 $396,835
$25,000 $30,000 $70,608 $90,405 $0 $0 $625,123 $676,440
$25,000 $28,412 $54,513 $69,430 $0 $0 $487,656 $526,161
$162,326 $181,673 $166,484 $208,448 $164,329 $157,263 $3,741,242 $3,981,578
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The dollar value of the share appreciation incentive in the above table is determined using a model that adapts the Monte Carlo simulation approach allocated over each year of the 3 year performance period for 2012 to 2014. The fair value of the rights offered in 2014 for the performance period 2014 to 2016 was $0.32 valued according to the Monte Carlo simulation approach. 590,625 rights were issued under the plan effective on 1 January 2014 for the performance period 2014 to 2016. The fair value of appreciation rights which vested or were forfeited during the 2014 financial year is set out in the table below.
The payment to Mr Allert is interest on loan. The payment to Mr Hellers is a contribution to medical insurance.
These values assume the performance condition referred to on page 28 has been fulfilled. If it transpires that it is not fulfilled, this will be disclosed in 2015.
To the extent that any of the above are directors of any wholly owned subsidiaries of the company no additional remuneration is paid.

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Directors’ Report (continued)

Remuneration Report – Audited (continued)

7. Remuneration Tables continued

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Percentage of available Percentage of available
Performance Related % of bonus which vested in bonus which was forfeited No of performance shares
Office amounts paid the year during the year vested
2013 2014 2013 2014 2013 2014 2013 2014 [1]
Non-executive Directors
John
Chairman 0% 0% na na na na na na
Thame
Greg
Deputy Chairman 0% 0% na na na na na na
Wilkinson
Ian
Director 0% 0% na na na na na na
Ferrier
Executive Director
Clive
CEO 38% 37% 87% 91% 13% 9% na na
Rabie
Other key management personnel
Sam MD Accountant
26% 26% 87% 91% 13% 9% 8,464 10,894
Allert Group
Pete MD Business
12% 17% 60% 91% 40% 9% 0 0
Sanders Group
Richard President/CEO
17% 9% 50% 10% 50% 90% 0 0
Hellers nQueue Billback
Chris
CFO 31% 33% 87% 91% 13% 9% 32,268 33,226
Hagglund
Myron
General Counsel 28% 30% 87% 91% 13% 9% 21,160 21,787
Zlotnick
TOTAL 61,892 80,075
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These values assume the performance condition referred to on page 28 has been fulfilled. If it transpires that it is not fulfilled, this will be disclosed in 2015.

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Value of performance shares Value of performance shares Value of appreciation rights Value of appreciation rights
vested forfeited shares vested forfeited
2013 2014 [1] 2013 2014 [1] 2013 2014 [1] 2013 2014 [1]
na na na na na na na na
na na na na na na na na
na na na na na na na na
na na na na $175,000 $175,000 $0 $0
$20,092 $25,062 $0 $0 na na na na
$0 $0 $0 $0 na na na na
$0 $0 $0 $0 na na na na
$76,598 $76,438 $0 $0 na na na na
$50,230 $50,122 $0 $0 na na na na
$146,920 $151,622 $0 $0 $175,000 $175,000 $0 $0
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Directors’ Report (continued)

Remuneration Report – Audited (continued)

8. Shareholdings Disclosures

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Options and Shareholding 2014
Share holding Share holding Performance Performance Performance Performance
at start of at end of shares at shares vested shares issued shares held at
2014 [1] 2014 2014 [2, 3] start of 2014 in 2014 [3] in 2014 end of 2014 [3]
Office
Deputy
Greg Chairman,
7,450,000 7,450,000 0 0 0 0
Wilkinson Non-Executive
Director
Clive CEO, Executive
10,508,000 10,758,000 0 0 0 0
Rabie Director
Chairman,
John
Non-Executive 19,000 19,000 0 0 0 0
Thame
Director
General
Myron
Counsel & 133,761 155,548 176,602 21,787 29,555 184,370
Zlotnick
Co Secretary
Ian Non-Executive
0 100,000 0 0 0 0
Ferrier Director
Chris Chief Financial
370,471 453,697 167,636 33,226 42,759 177,169
Hagglund Officer
Pete MD Business
0 0 5,000 – 5,000 10,000
Sanders Group
Sam MD Accountant
16,032 26,926 75,671 10,894 16,216 80,993
Allert Group
President &
Richard
CEO nQueue 0 0 25,000 – – 25,000
Hellers
Billback Division
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No options were issued in 2014.
Shareholdings at the date of the Director’s Report remain unchanged.
This total assumes the performance condition referred to on page 28 has been fulfilled. If it transpires that it is not fulfilled, this will be disclosed in 2015.

continued 8. Shareholdings Disclosures

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Options and Shareholding 2013
Share holding Share holding Performance Performance Performance Performance
at start of at end of shares at shares vested shares issued shares held at
2013 [1] 2013 2013 [2] start of 2013 in 2013 in 2013 end of 2013
Office
Deputy
Greg Chairman,
7,450,000 7,450,000 0 0 0 0
Wilkinson Non-Executive
Director
Clive CEO, Executive
10,508,000 10,508,000 0 0 0 0
Rabie Director
Chairman,
John
Non-Executive 19,000 19,000 0 0 0 0
Thame
Director
General
Myron
Counsel & 123,001 133,761 125,385 21,160 72,377 176,602
Zlotnick
Co Secretary
Ian Non-Executive
0 0 0 0 0 0
Ferrier Director
Chris Chief Financial
296,289 370,471 157,408 74,182 84,410 167,636
Hagglund Officer
Pete MD Business
0 0 0 0 5,000 5,000
Sanders Group
Sam MD Accountant
7,568 16,032 46,474 8,464 39,777 75,671
Allert Group
President &
Richard
CEO nQueue 0 0 0 0 25,000 25,000
Hellers
Billback Division
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No options were issued in 2013.
Since 1 January 2014 Mr Rabie has purchased 250,000 shares and Mr Ferrier has purchased 100,000 shares. Apart from this, shareholdings at the date of the previous year’s Director’s Report remain unchanged.

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Directors’ Report (continued)

Remuneration Report – Audited (continued)

9. Overview of Remuneration Plans 2014

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Fixed Short term New long term Old long term Long term retention
remuneration incentive incentive incentive incentive
Performance shares Performance shares Performance shares
Award Cash Cash
Share appreciation Share appreciation
rights rights
Clawback NA Yes Yes Yes Yes
Deferral NA Yes NA NA NA
Equal weighted Relative TSR. Employment for
targets set in 50% vests if rank 7 years: 25%.
budget: at median of peers. Employment for
Vesting To be determined
NA * Revenue Balance vests on 8 years: 25%.
conditions in 2015
EBITDA sliding scale up to Employment for
EPS 100% at 3rd quartile. 9 years: 50%.
1 year and
Vesting period NA 3 years 3 years 7 – 9 years
2 years
Retesting NA No No No NA
Capped NA 90% – 110% 100% 100% 100%
Vest subject to Vest subject to Vest subject to
Change in
NA NA discretion to the discretion to the discretion to the
control
contrary. contrary. contrary.
Yes, $400,000
Fee cap fixed at 2008
Aggregate for NA NA NA NA
Annual General
NEDs
Meeting.
Dividends NA NA None until vesting. None until vesting. None until vesting.
Payment of unvested Payment of unvested Payment of unvested
entitlements is not entitlements is not entitlements is not
permitted. The permitted. The permitted. The
Remuneration Remuneration Remuneration
Committee retains a Committee retains a Committee retains a
Employment
discretion to permit discretion to permit discretion to permit
termination NA NA
release of a portion of release of a portion of release a portion of
payments
entitlements as reward entitlements as reward entitlements as reward
for a pro rata for a pro rata for a pro rata
performance period performance period and performance period and
and not an employment not an employment not an employment
termination payment. termination payment. termination payment.
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Directors’ Report (continued)

Indemnification of Directors and Officers and Auditors

During the financial year, the company paid a premium in respect of a contract insuring the directors of the company (as named above), the Company Secretary and all executive officers of the company, and of any related body corporate, against a liability incurred as a director, secretary or executive officer to the extent permitted by the Corporations Act 2001. The contract of insurance prohibits disclosure of the nature of the liability and the amount of the premium.

In addition, Rule 12 of the company’s Constitution obliges the company to indemnify on a full indemnity basis and to the full extent permitted by law, every director, officer or former officer for all losses or liabilities incurred by the person as an officer. This obligation continues after the person has ceased to be a director or an officer of the company or a related body corporate, but operates only to the extent that the loss or liability is not covered by insurance.

The company has not otherwise, during or since the financial year, indemnified or agreed to indemnify an officer or auditor of the company, or any related body corporate, against a liability incurred as an officer or auditor.

Directors’ Meetings

The following table sets out the number of directors’ meetings held during the financial year and the number of meetings attended by each director.

Reckon Limited – Attendance Tables	Reckon Limited – Attendance Tables	Reckon Limited – Attendance Tables
Directors		Board	Audit &	Meeting Risk Committee	Remuneration Committee
JM Thame I Ferrier GJ Wilkinson	A 11 11 11	B 11 11 11	A 2 2 2	B 2 2 2	A 3 3 3	B 3 3 3
C Rabie	11	11	n/a	n/a	n/a	n/a

Key:

A - number of meetings eligible to attend
B - number of meetings attended

Non-Audit fees

Details of the non-audit services can be found in note 4 to the financial statements.

The directors are satisfied that the provision of non-audit services, during the year, by the auditor (or by another person or firm on the auditor’s behalf) is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001.

The directors are of the opinion that the services as disclosed in note 4 to the financial statements do not compromise the external auditor’s independence, based on advice received from the Audit & Risk Committee, for the following reasons:

all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor, and
none of the services undermine the general principles relating to auditor independence as set out in Code of Conduct APES 110 Code of Ethics for Professional Accountants issued by the Accounting Professional & Ethical Standards Board, including reviewing or auditing the auditor’s own work, acting in a management or decision-making capacity for the Company, acting as advocate for the company or jointly sharing economic risks and rewards.

On behalf of the directors

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Mr J Thame Chairman Sydney 19 March 2015

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Corporate Governance Statement

The company is committed to a system of relationships, policies and processes which align with ASX Corporate Governance Principles and Recommendations, 3rd Edition (“the ASX Principles and Recommendations”). It is a priority of the board to ensure the company’s governance framework and support processes uphold these principles.

The board is of the opinion that the company’s existing policies and processes effectively achieve the objectives of the relevant recommendations. The intention and spirit of the ASX Principles and Recommendations are integral to the company’s governance framework. They are incorporated into the management and decision-making processes of the company. The few departures from the recommendations in the ASX Principles and Recommendations are primarily only to the extent a governance policy or process was not formalised. This is generally justified on the basis that while the objective of the recommendations has been adopted, the formal requirements of the

recommendations were not considered applicable to the size of the company and the resources available at the time. Where appropriate, the board seeks opportunities to adopt these recommendations to suit the circumstances of the company and continue to improve the company’s governance policies and processes. As part of the board’s ongoing review and assessment of the company’s governance processes most of these policies and processes have been or are in the process of being formalised, where appropriate, as identified in this report.

The company’s governance related policies and documents can be viewed on the company’s website www.reckon.com. The board’s Corporate Governance documents can be viewed in the Shareholder Centre by clicking About Us link from the company’s website www.reckon.com (“website”)

This Corporate Governance Statement (“Statement”) discloses the extent to which the company follows the recommendations as at 31 December 2014 and has been approved by the board on 19 March 2015.

1. Lay Solid Foundations for Management and Oversight

The company is governed on behalf of the shareholders by its Board of Directors who in turn oversee the company’s management team.

The board is of the opinion that its governance practices and policies comply with each of the recommendations relating to Principle 1. This opinion is justified on the basis that the company’s governance practices are based on the different responsibilities and duties of the board and management; processes and documentation relating to the nomination and appointment of directors and senior management and relevant agreements; the accountability and duties of the Company Secretary; recognition that diversity and inclusiveness are important aspects of effective management and contribute to the success of the company; recognition the importance of cultivating diversity and inclusiveness in the company to the effective management of the business and performance evaluation processes for the directors and senior management.

The responsibilities and duties of the board are set out in the Constitution, the company’s Corporate Governance Statement and as formalised in the Board Charter. The Board Charter can be viewed on the website. The Charter outlines the processes, obligations and responsibilities of the board and can be viewed on the website. The board is responsible for ensuring appropriate risk management, accountability and control mechanisms. The board also provides advice and input into development of the businesses generally, overall corporate strategy, performance objectives, and appointment of senior executives. The board monitors and reviews the performance of the company, financial reporting and implementation of strategy. The board approves the annual budget, material capital expenditure and large acquisitions.

Other than matters specifically reserved for the directors in the Constitution and Board Charter, the directors delegate responsibility for implementing the strategic objectives and the day-to-day running of the company to the CEO and management.

The board’s composition and relatively small size and flat structure combined with a small management team, enables ready communication and dynamic engagement within management and with the board. The clear channels of communication between management and the board ensure the board is provided with accurate, timely and clear information to enable the board to perform.

Accordingly there is an understanding of the functions and responsibilities of the board and management as set out in the Board Charter. The board maintains sufficient close oversight of operations and has close input to material decisions to ensure compliance with principles of good corporate governance. The board recognises that with the growth and evolution of the company, it is important to review the division of matters and responsibilities reserved to the board in accordance with the Board’s Charter.

The board is able to efficiently deal with issues which, in other larger enterprises, may normally be delegated to committees not only because of the size of the company and the management team, but also because of the readily accessible channels of communication between board and management. Management communicates with the board through the executive directors and when required managers attend board meetings, and/or meet with directors, to report or address any questions or concerns of the directors directly. The Audit & Risk Committee and Remuneration Committee are the only committees of the board.

The Constitution and Board Charter set out the processes and matters which need to be addressed in relation to the selection, nomination and of candidates for election or re-election as director, including appropriate checks and the information to be made available to shareholders. Information about current directors is available on the website, the Annual Report and in the Notice of Meeting in which directors are to be elected or re-elected. Consistent with the current requirements of the ASX Principles and Recommendations, the company will ensure all relevant details of any new nominations are available on the website and in the relevant Notice of Meeting for consideration by the shareholders as to whether or not to elect or re-elect a director. The Charter also confirms the matters which are to be dealt with in the written agreements and letters of appointment between the company and each director and senior executive.

The Company Secretary’s appointment, responsibilities and accountability to the board through the Chair on all matters to do with the proper functioning of the board are outlined in the Board Charter and also addressed in the Company Secretary’s letter of appointment. There is also direct, regular informal communication between the Chair and the Company Secretary on governance matters.

The company undertakes an annual performance evaluation of key management personnel, heads of divisions and head office management (CFO, General Counsel and Company Secretary), and generally involves a review and assessment of the performance of relevant executives and managers against key performance indicators. This process may also include feedback from peers where relevant and the Division CEOs and the relevant executive or manager. Where applicable, remedial steps and coaching are implemented. There may be further additional reviews undertaken through the year if necessary. The process and outcome of the performance evaluation of senior management and directors undertaken in the reporting period is reported in the Remuneration Report.

The company recognises that diversity and inclusiveness is a critical part of effective management of its people and their contributions to the success of the company. This diversity is reflected in the differences in gender, race, age, culture, education, family or carer status, religion and disability which are found across the company, its employees, consultants and contractors.

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Corporate Governance Statement

(continued)

When considering nominees for any future candidates for the board, the directors will take appropriate steps to ensure that it considers a broad range of candidates to ensure that the company has the benefit of the appropriate mix of experience, skills and diversity in its decision making for the best interests of the company as a whole.

The reporting profiles against which the company is reporting the current status of diversity as to gender have been adapted to comply with the reporting requirements under the Workplace Gender Equality Agency Act (2012) (“the WGEA report”) which were lodged with the WGEA in 2013 and expanded for the report submitted in 2014 for the 2013 to 2014 period. Both of these reports can be viewed on the website.

As reported in 2011, the board set key measurable objectives and KPIs, to promote diversity in the company, particularly as to gender. The company continues to be committed to those objectives, which are:

To achieve greater representation of females in the Reckon Group, particularly in technical and supervisor / manager roles.
To review policies and internal procedures to ensure they provide equitable, fair and flexible work practices, including consistency with the company’s commitment to diversity, particularly gender diversity, in the organisation.
To implement training (in-house or external where relevant) to support a culture of diversity, for example: appropriate behaviour, harassment etc.
Development of a mentoring/succession program for all employees to encourage females to remain in the business.

The Workplace Gender Equality Agency (“WGEA”) report (“WGEA Report”) submitted by the company relating to Reckon employees in Australia for the 2013 to 2014 period can be viewed on its website. It was also published on the company’s intranet site for access by its employees. For consistency, the criteria used to determine the workplace profile of Reckon employees for the WGEA report has also been applied for this report in relation to recommendation 1.5 of the ASX Principles and Recommendations.

Based on the WGEA report, there has been a marginal increase on the numbers reported in 2013: the proportion of women in the workforce increased from 32% to 34% and the percentage of senior executive roles increased from 1% to 1.6%. There has been a slight increase of 0.9% in the representation of women in technical roles, resulting in an overall 1.9% increase since the commitment to the objectives in 2011. There are no female members of the board.

Based on the Gender Equality Benchmarks produced by the Workplace Gender Equality Agency (“WGEA”) the representation of women across the categories are generally consistent with similar sized businesses in the industry. The WGEA Gender Benchmark Studies will be used to assist in the company’s continuing review of strategies and practices to continue to foster diversity in the company, particularly as to gender. The company continues to seek an increase in the representation of women in technical roles. In consideration of the company’s anticipated recruitment needs for technical roles, the company will seek a 5% increase on the 2011 numbers by 2016.

The company’s Diversity & Inclusion Policy Statement as approved by the board on 15 December 2011 is published on the company’s website.

2. Structure the Board to Add Value

At present, the board comprises four members: John Thame, Ian Ferrier, Greg Wilkinson and Clive Rabie. Mr Thame is Chairman of the board and he, together with Mr Ferrier, are independent non-executive directors. Further details of the directors, including a summary of their skills and experience and period of office, are set out in the Directors’ Report and on the website.

In the opinion of the board, the existing structure and processes are appropriate for the company and still meet the objectives of Principal 2 of the ASX Principles and Recommendations although the company has not fully adopted some of the recommendations relating to the appointment of a nomination committee in recommendation 2.1 as described below.

The criteria for directorship and the election process are set out in the company’s constitution and Board Charter. The size of the board and circumstances of the company dictates that there is no efficiency obtained in establishing a separate formal nomination committee. Accordingly, the company departs from this requirement in recommendation 2.1. Instead, the directors periodically review the composition of the board to ensure that members have the desired breadth of experience, skills and expertise to govern the company effectively. Any decision regarding the appointment of new directors is taken cognisant of the need to appoint someone who, taking into account the mix of skills and diversity, experience and perspective of the other directors, is appropriately qualified and as far as possible familiar with the company’s market sector and its opportunities. The independent nonexecutive directors oversee the nomination of any potential director.

In accordance with recommendation 2.2, the board has created a board skills matrix to map the skills which, in the board’s opinion, should be represented on the board to enable it to effectively meet the company’s strategic needs. This matrix was approved by the board on 9 February 2015 and will inform the selection process for nominees for any future candidates for the board and board self-assessment. The board skills matrix summarising the collective skills of the current board can be viewed on the website.

The board recognises the importance of effective, independent judgement being brought to bear in the governance and decision making processes of the company to ensure they are in the best interests of the company. The board considers it is able to provide the necessary independence of judgement to operate in the best interests of the company and its security holders. The board is composed of Mr John Thame, Mr Ian Ferrier and Mr Greg Wilkinson and Mr Clive Rabie. Mr John Thame, Mr Ian Ferrier and Mr Greg Wilkinson are non-executive directors. In the board’s opinion, the non-executive directors, the Chair, Mr Thame and Mr Ferrier are both independent directors.

The Chair, who is independent, complies with recommendation 2.5 and has a casting vote. Accordingly, taking into account the size of the board and the Chair’s casting vote, the board is of the opinion it meets the objectives of recommendation 2.4 as the exercise of its powers is consistent with a board composed of a majority of independent non-executive directors.

In the board’s opinion, the long tenure of the non-executive independent directors does not compromise the independence of judgement and effectiveness of the board. The issue of tenure needs to be considered in the context of the individual circumstances of the company. The board directs a dynamic and competitive business in which there have been significant changes in the market for accounting and business software. These changes include how the products are delivered with online purchasing becoming the norm and the decline in the reliance on retail, the product offering (eg move to hosted and cloud), the business (for example with the termination of the Intuit licence and the move to developing the hosted/cloud business and move to subscription model). This has not been a period when any of the directors could be complacent or in which their length of tenure would compromise their contribution. Rather the company’s governance and decision making was fortified by the continuity of governance and accumulation of experience embodied in the board, particularly when steering the company through these significant changes and important stages in the evolution of the company.

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Corporate Governance Statement

(continued)

Mr Wilkinson has occupied a non-executive position for more than three years since he resigned from the management of the company. As a substantial shareholder and company founder the board acknowledges that Mr Wilkinson does not meet the criteria used by ASX and some other investor organisations to determine the independence of a director. On this basis, although he is a non-executive director Mr Wilkinson is not considered an independent director by the board, for the purposes of the ASX Principles and Recommendations. However, an underlying principle of the ASX Principles and Recommendations is that the recommendations are to be considered in the context of the specific circumstances of the director and the company in each case. Although Mr Wilkinson may not meet the ASX criteria to be described as an independent director, the board considers that Mr Wilkinson’s skills, engagement and experience in other IT, start-up businesses, his depth of knowledge of the customer base, products and services of the company, insights into the relevant markets and experience give depth and objectivity, and inform his contributions to board discussions and decision making, and that this is consistent with the objectives of Principle 2. Further, the board is of the opinion that, his substantial holding in the company does not compromise his judgement or decisions. Nor do they cause any conflict of interest with shareholders’ interests rather they reflect the priority of the board, to make decisions for the overall benefit of the company and its shareholders. As such, the board is confident that Mr Wilkinson’s presence on the board brings an independent and uncompromised perspective to the issues before it for consideration as well as deepening the board’s overall skills and experience.

Directors declare any actual or potential interests or conflicts as and when they arise, and in any case at each board meeting, and where applicable remove themselves and/or abstain from any discussion or resolution of issues which is likely to give rise to a conflict of interest.

The issues that come before the board are considered in an impartial manner and from a variety of perspectives. In the board’s opinion, the size and composition of the board enables it to meet the requirements of independence for the purpose of providing objective, impartial consideration and judgement to the company’s governance processes and decision making.

The independent non-executive directors oversee the nomination of any potential directors.

The Board Charter confirms the entitlement of directors to seek independent professional advice at the company’s expense to assist them in fulfilling their duties in order to comply with all applicable laws and regulations. There is no formal procedure for the board to determine as to when it or any director should take independent advice at the expense of the company, but given the size of the board there is no efficiency to be obtained in formalising this process. The independent non-executive directors exercise their judgment to call for such advice when they deem appropriate. The Chair also has frequent contact with the Company Secretary to confirm or follow up on relevant matters, including assessing the need for external advice.

The board met 11 times during 2014. The details of attendance at these meetings are set out in the Directors’ Report. The independent non-executive directors monitor and review the ongoing performance of the executive directors and key executives. The independent non-executive directors occasionally meet informally without management being present to generally discuss the affairs of the company and the overall performance of key executives.

The independent non-executive directors are subject to the company’s Constitution and their continuity of tenure is dependent on re-election by shareholders in accordance with the constitution.

While there is no formal induction or training process in place, the Chair, Deputy Chair and Group CEO undertake a rigorous process of briefing new board members. The Board Charter outlines the overall approach to nomination, induction, evaluation and training of directors. Additional training for directors will be arranged as required.

3. Ethical and Responsible Decision Making

The company’s governance policies and processes incorporate all the recommendations relating to Principle 3 of the ASX Principles and Recommendations.

The board’s policy is that the company, the directors and employees in addition to their legal obligations must maintain high ethical standards in their dealings with the public and other members of the industry.

The company’s Human Resources Policy and Procedures, binding on all employees, also collectively embraces the substance of the ASX Principles and Recommendations in a Code of Conduct, including expectations regarding behaviour in the workplace, disciplinary processes, grievance processes, discrimination and harassment, occupational health and safety, ethical business practices, conflict of interest and corporate opportunity. The company is committed to training employees and maintaining employees’ relevant technical expertise and understanding of their ethical and legal obligations, for example by way of trade practices training from time to time for relevant staff.

4. Safeguard Integrity in Corporate Reporting

The board is of the opinion that its governance practices meet the requirements of each of the recommendations relating to Principle 4.

The board assumes the responsibility of ensuring the integrity of the company’s financial reporting and has established the Audit & Risk Committee to focus on the issues relating to the integrity of the financial reporting of the company and oversight and review of the company’s risk management. The terms of reference for the Audit & Risk Committee, to review and monitor all financial, risk management and compliance policies, were formalised in a Charter in 2003 to meet the requirements of the ASX Principles and Recommendations.

The Audit & Risk Committee consists or 3 non-executive directors, being John Thame, Ian Ferrier and Greg Wilkinson. Mr Ferrier and Mr Thame are independent directors and form the majority. The Committee is chaired by Mr Ferrier. Details of their experience and qualifications are set out in the Directors’ Report and on the website.

The Audit & Risk Committee also meets informally to discuss matters including risk management and reporting. The board is of the opinion that the structure of the Committee, together with its considerable technical expertise in the market sector of the company and in financial literacy, ensures independent review of the company’s financial reporting over and above formal audit processes, enabling it to discharge its functions effectively.

Deloitte Touche Tohmatsu, the company’s auditors, report directly to the Audit & Risk Committee on the appropriateness of the company’s internal accounting policies and practices. The board reviews the adequacy of existing external audit arrangements each year, with particular emphasis on the scope and quality of the audit. The Audit & Risk Committee reports back to the board after each Audit & Risk Committee meeting. The Audit & Risk Committee provides written advice to the board on the standard of independence of the auditors in light of any non-audit services during 2014 and which is reported in the Directors’ Report. The CEO and CFO also provide the s295A certificate and declaration of the CEO and CFO. This declaration also states that their opinion is based on there being a sound system of risk management and internal controls operating effectively for the relevant financial period.

At each Audit & Risk Committee meeting, the Committee directors meet separately with the auditors without management being present to review any concerns that the auditors may have regarding the financial management of the company.

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Corporate Governance Statement

(continued)

The Audit & Risk Committee met twice during 2014. The details of attendance at these meetings are set out in the Directors’ Report.

The board is aware of its obligations to ensure the appropriate selection and rotation of external auditors and the external audit engagement partners and closely monitors and reviews the engagement of the company’s external auditors. The company’s auditor attends each Annual General Meeting and is available to answer shareholder questions about the conduct of the audit and the preparation and content of the Auditor’s Report at the meeting.

5. Make Timely and Balanced Disclosure

The company has adopted each of the recommendations relating to Principle 5 of the ASX Principles and Recommendations. The board remains conscious of the company’s disclosure obligations under the Corporations Act, the ASX listing rules and the ASIC guidance principles. These obligations are reflected in the Continuous Disclosure Policy. All required disclosures are also made in accordance with the Continuous Disclosure policy which is accessible to the public at the company website. A review of operations and commentary on the financial results is provided in the Directors’ Report and the Financial Report.

6. Respect the Rights of Shareholders

The board is conscious of the requirements of Principle 6 of the ASX Principles and Recommendations takes into account the rights and needs of shareholders to balanced and understandable information about the company in accordance with this Principle.

The board is of the opinion that the company communicates effectively with shareholders through a number of channels: through its ASX disclosures to the market; through the posting of statutory notices to shareholders and at the general and special meetings of the company. The company presents its annual and half yearly results to investors. The company keeps recent announcements and general company information on its website with a dedicated investor relations section which is accessible to the public. The website contains information about the company and general meeting dates, including a link to the ASX website for older announcements. Given the size and circumstances of the company, there is no formally documented communications strategy which embodies the policies and processes in which the company engages to communicate with the investors. It is only in this respect that the company has not adopted recommendation 6.3.

All security holders have the option to receive communications from, and send communications to, the company or the registry, Computershare electronically. The website includes details as to how investors can update their details and instructions regarding the mode in which they want to communicate with us, including a link to the registry, Computershare.

7. Recognise and Manage Risk

As stated above in relation to Principle 1, the board is responsible for ensuring appropriate risk management, accountability, and control mechanisms. It constantly monitors the operational and financial aspects and material risks of the company’s activities and, through the Audit & Risk Committee, which met twice in 2014, considers the recommendations and advice of the auditors and other external advisers on the operational and financial risks that face the company. The Group CEO and Group CFO monitor and review the financial performance of the company and monitor any potential risk essentially on a daily basis. The board has received assurance from the CEO and the

CFO that the s295A Declaration provided in the Financial Report is founded on a sound system of risk management and internal control and that the system is operating effectively for the relevant financial period.

As described above, the size of the company and the management team enables the board to have effective oversight of the overall risk management of the company. In the board’s opinion, especially with the existence of an Audit & Risk Committee, there is no efficiency for the company to establish a separate risk management committee.

The board is regularly informed and in a position to assess and review the company’s exposure to risk and overall investment risk by way of the existing processes and the dynamic communication across management, and also between management and the board. Accordingly, the board is of the opinion that there is substantial compliance with the ASX Principle 7 although it departs from recommendations 7.1, 7.2 and 7.3 to the extent it has not established a formal risk committee, an internal audit function or conducted a formal annual review of its risk management framework.

At present the nature of operations and scope of the business is reasonably well established and understood by management and the board. The company does not have a formal internal audit function. The evaluation and continual improvement of the company’s risk management and internal control processes are incorporated within the existing decision making and review processes. The decision making and reporting processes in the company incorporate an assessment of the relevant material risks, for example in the planning, budget, HR, product development, R&D, legal and compliance activities and, where relevant, any material risk issues are reported to and considered by the board. The planning and budget process involves both the executive and senior management, which means all of these employees have a more than adequate understanding of the issues, activities and opportunities across the company. In turn this enables them to manage operational, planning, strategic and risk issues in the company. In addition, the company regularly conducts reviews of the material risks in the context of the annual insurance renewals and, in relation to acquisitions through due diligence. Relevant risk factors are also included in the various management and financial reports to the board and are then considered by the board. A ISO027001 Information Security Management System (ISMS) is being implemented across the Group as an assurance framework for the company’s information security practices.

The board does not consider the company to have any material exposure to any economic, environmental or social sustainability risk.

Due to the effectiveness of the existing processes and the size of the business, business risk management systems, policies and procedures have been monitored and reviewed as part as part of the overall reporting to the board and oversight by the board of the business, its operations, processes and risks not been comprehensively formalised. The board has access to management and employees to discuss or inform themselves of any aspect of the company’s business and processes or request relevant managers present to the board on these matters, including status reports and updates.

With a view to fully adopting recommendations 7.1 and 7.2, the company’s risk management systems, policies and processes are under consideration to be formalised and documented, where necessary.

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Corporate Governance Report (continued)

8. Remunerate Fairly and Responsibly

The company remunerates directors and key executives in accordance with the aspirations set out in ASX Principle 8 and recommendations 8.1, 8.2 and 8.3.

Accordingly, the board has adopted a remuneration policy designed to attract and maintain talented and motivated directors and senior employees so as to encourage enhanced performance of the company.

There is a clear relationship between performance and remuneration and a desire to strike the correct balance between the various components making up remuneration. The composition, responsibilities and processes of the Remuneration Committee have been formalised in the Remuneration Charter and can be viewed on the website. The Committee consists of three members, composed of the two independent and non-executive directors, John Thame, Ian Ferrier and the non-executive director Greg Wilkinson. The Remuneration Committee is chaired by Mr Ferrier. Details of their experience and qualification are set out in the Directors’ Report and the website. The Remuneration Committee ensures independent review of financial reporting over and above formal audit processes. The Remuneration Committee supervises the development and implementation of the company’s remuneration policy including the operation of option plans, and reviews the performance of the executive directors and senior executives. The Committee fixes policy and reward in accordance with ASX Principle 8. The Remuneration Committee Charter can be viewed on the website. The full details of the policy and remuneration including the disclosures relating to policies and practices regarding the remuneration of directors and senior management required by recommendation 8.2 are set out in the Remuneration Report. The Remuneration Committee met 3 times during 2014. The details of attendance at these meetings are set out in the Directors’ Report. The company does have an equity-based remuneration scheme. The Remuneration Report outlines the policy prohibiting participants in any scheme to hedge their risks of participating in this scheme.

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Deloitte Touche Tohmatsu ABN 74 490 121 060

Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia

DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au

The Board of Directors

Reckon Limited Level 12 65 Berry Street North Sydney NSW 2060

19 March 2015

Dear Board Members

RECKON LIMITED

In accordance with section 307C of the Corporations Act 2001, I am pleased to provide the following declaration of independence to the directors of Reckon Limited.

As lead audit partner for the audit of the financial statements of Reckon Limited for the financial year ended 31 December 2014, I declare that to the best of my knowledge and belief, there have been no contraventions of:

(i) the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and

(ii) any applicable code of professional conduct in relation to the audit.

Yours sincerely

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DELOITTE TOUCHE TOHMATSU

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Alfie Nehama Partner Chartered Accountants

Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited

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Deloitte Touche Tohmatsu ABN 74 490 121 060

Grosvenor Place 225 George Street Sydney NSW 2000 PO Box N250 Grosvenor Place Sydney NSW 1220 Australia

DX 10307SSE Tel: +61 (0) 2 9322 7000 Fax: +61 (0) 2 9322 7001 www.deloitte.com.au

Independent Auditor’s Report to the Members of Reckon Limited

Report on the Financial Report

We have audited the accompanying financial report of Reckon Limited, which comprises the consolidated statement of financial position as at 31 December 2014, the consolidated statement of profit or loss, the consolidated statement of profit or loss and other comprehensive income, the consolidated statement of cash flows and the consolidated statement of changes in equity for the year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the year’s end or from time to time during the financial year as set out on pages 59 to 112.

Directors’ Responsibility for the Financial Report

The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error. In note 1, the directors also state, in accordance with Accounting Standard AASB 101 Presentation of Financial Statements , that the consolidated financial statements comply 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. Those 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 company’s preparation of the financial report that gives a true and fair view, 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 company’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.

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Liability limited by a scheme approved under Professional Standards Legislation. Member of Deloitte Touche Tohmatsu Limited

Auditor’s Report

Auditor’s Independence Declaration

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 , which has been given to the directors of Reckon Limited, would be in the same terms if given to the directors as at the time of this auditor’s report.

Opinion

In our opinion:

(a) the financial report of Reckon Limited is in accordance with the Corporations Act 2001 , including:
(i) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2014 and of its
performance for the year ended on that date; and
(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001 ; and
(b) the consolidated financial statements also comply with International Financial Reporting
Standards as disclosed in Note 1.

Report on the Remuneration Report

We have audited the Remuneration Report included in pages 17 to 42 of the directors’ report for the year ended 31 December 2014. The directors of the company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001 . Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

Opinion

In our opinion, the Remuneration Report of Reckon Limited for the year ended 31 December 2014, complies with section 300A of the Corporations Act 2001 .

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DELOITTE TOUCHE TOHMATSU

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Alfie Nehama Partner Chartered Accountants Sydney, 19 March 2015

Directors’ Declaration

The directors of the company declare that:

the financial statements and notes as set out on pages 60 to 112, are in accordance with the Corporations Act 2001, and:
comply with Accounting Standards; and
comply with International Financial Reporting Standards, as stated in note 1 to the financial statements; and
give a true and fair view of the financial position as at 31 December 2014 and of the performance for the year ended on that date of the consolidated group;
the Chief Executive Officer and the Chief Finance Officer have each declared that:
the financial records of the company for the financial year have been properly maintained in accordance with s 286 of the Corporations Act 2001;
the financial statements and notes for the financial year comply with the Accounting Standards, and
the financial statements and notes for the financial year give a true and fair view;
that this opinion has been formed on the basis of a sound system of risk management and internal
control which are operating effectively;
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 pursuant to Section 295(5) of the Corporations Act 2001.

On behalf of the directors

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Mr J Thame Chairman Sydney, 19 March 2015

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Consolidated Statement of Profit or Loss for the year ended 31 December 2014

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----- Start of picture text -----

Note Consolidated
2014 2013
$’000 $’000
Continuing operations
Revenue 2 100,795 98,125
Product and selling costs (21,072) (17,992)
Royalties (149) (5,202)
Employee benefits expenses (29,740) (29,037)
Share-based payments expenses 2 (471) (405)
Marketing expenses (2,361) (2,695)
Premises and establishment expenses (2,855) (2,803)
Depreciation and amortisation of other non-current assets (12,965) (10,729)
Telecommunications (903) (839)
Legal and professional expenses (797) (694)
Finance costs 2 (1,489) (705)
Other expenses (5,321) (4,549)
Profit on sale of investment in joint venture entity 9 – 1,414
Profit before income tax 22,672 23,889
Income tax expense 3 (5,104) (5,728)
Profit for the year 17,568 18,161
Profit attributable to:
Owners of the parent 23 16,964 17,812
Non-controlling interest 604 349
17,568 18,161
Earnings per share Cents Cents
Basic Earnings per Share 24 14.2 13.9
Diluted Earnings per Share 24 14.1 13.8
Alternative earnings per share (excluding profit on sale of investment
in joint venture entity)
Basic Earnings per Share 24 14.2 12.8
Diluted Earnings per Share 24 14.1 12.7
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The above consolidated statement of profit or loss should be read in conjunction with the accompanying notes.

Consolidated Statement of Profit or Loss and Other Comprehensive Income

for the year ended 31 December 2014

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----- Start of picture text -----

Note Consolidated
2014 2013
$’000 $’000
Profit for the year 17,568 18,161
Other comprehensive income, net of income tax
Items that may be reclassified subsequently to profit or loss:
Exchange difference on translation of foreign operations 22 815 3,883
Fair value movement on interest rate swap 22 (245) –
Total other comprehensive income, net of income tax 570 3,883
Total comprehensive income for the year 18,138 22,044
Total comprehensive income attributable to:
Owners of the parent 17,534 21,695
Non-controlling interest 604 349
18,138 22,044
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The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.

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Consolidated Statement of Financial Position

as at 31 December 2014

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----- Start of picture text -----

Note Consolidated
2014 2013
$’000 $’000
ASSETS
Current Assets
Cash and cash equivalents 29 2,248 2,573
Trade and other receivables 6 9,409 10,998
Inventories 5 2,179 1,746
Current tax receivables 736 –
Other assets 7 2,125 2,291
Total Current Assets 16,697 17,608
Non-Current Assets
Receivables 6 678 1,194
Financial assets 8 56 56
Property, plant and equipment 10 2,787 3,279
Deferred tax assets 11 185 127
Intangible assets 12 82,379 77,848
Other assets 7 1,111 599
Total Non-Current Assets 87,196 83,103
Total Assets 103,893 100,711
LIABILITIES
Current Liabilities
Trade and other payables 13 4,604 4,731
Borrowings 14 76 58
Other financial liabilities 15 6,838 –
–
Current tax payables 1,131
Provisions 16 3,306 3,471
Deferred revenue 9,715 9,285
Total Current Liabilities 24,539 18,676
Non-Current Liabilities
Borrowings 14 43,400 17,433
Other financial liabilities 15 245 11,658
Deferred tax liabilities 18 5,058 4,107
Provisions 16 582 722
Total Non-Current Liabilities 49,285 33,920
Total Liabilities 73,824 52,596
Net Assets 30,069 48,115
Equity
Issued capital 21 17,036 16,818
Reserves 22 (42,154) (17,641)
Retained earnings 23 55,187 48,938
Total Equity 30,069 48,115
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The above consolidated statement of financial position should be read in conjunction with the accompanying notes.

Consolidated Statement of Changes in Equity

for the year ended 31 December 2014

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Acquisition of
Foreign Share- non- Attributable
Share currency based Swap controlling to owners Non-
Issued buyback translation payments hedging Retained interest of the controlling
capital reserve reserve reserve reserve earnings reserve parent interest Total
Consolidated $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000
Balance at
16,818 (14,506) 2,500 484 – 48,938 (6,119) 48,115 – 48,115
1 January 2014
Profit for the year – – – – – 16,964 – 16,964 604 17,568
Other
comprehensive
income:
Exchange
differences on – – 815 – – – – 815 – 815
translation of
foreign operations
Fair value
movement
– – – – – –
(245) (245) (245)
on interest rate
swap
Total
comprehensive – – 815 – (245) 16,964 – 17,534 604 18,138
income
Share based
payments – – – 316 – – – 316 – 316
expense
Share buyback – – – – – – –
(27,512) (27,512) (27,512)
(note 21)
Dividends paid – – – – – – –
(10,715) (10,715) (10,715)
(note 30)
Treasury shares 218 – – (218) – – – – – –
vested/lapsed
Transfer to
acquisition of – – – – – – 604 604 (604) –
non-controlling
interest reserve
Remeasurement
of Linden House
– – – – – – –
1,727 1,727 1,727
option liability
(note 15)
Balance at
31 December 17,036 (42,018) 3,315 582 (245) 55,187 (3,788) 30,069 – 30,069
2014
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Consolidated Statement of Changes in Equity (continued)

for the year ended 31 December 2014

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----- Start of picture text -----

Acquisition
Foreign Share- of non- Attributable
Share currency based controlling to owners Non-
Issued buyback translation payments Retained interest of the controlling
capital reserve reserve reserve earnings reserve parent interest Total
Consolidated $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000 $’000
Balance at
16,878 (8,978) (1,383) 503 42,379 (4,981) 44,418 – 44,418
1 January 2013
Profit for the year – – – – 17,812 – 17,812 349 18,161
Other comprehensive
income:
Exchange differences
on translation of – – 3,883 – – – 3,883 – 3,883
foreign operations
Total comprehensive – – 3,883 – 17,812 – 21,695 349 22,044
income
Share based
– – – 241 – – 241 – 241
payments expense
Share buyback – – – – – –
(5,528) (5,528) (5,528)
(note 21)
Dividends paid – – – – – –
(11,253) (11,253) (11,253)
(note 30)
Treasury shares 260 – – (260) – – – – –
vested/lapsed
Treasury shares – – – – – –
(320) (320) (320)
acquired
Transfer to
acquisition of – – – – – 349 349 (349) –
non-controlling
interest reserve
Remeasurement of
– – – – – –
Linden House option (1,487) (1,487) (1,487)
liability (note 15)
Balance at
16,818 (14,506) 2,500 484 48,938 (6,119) 48,115 – 48,115
31 December 2013
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The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

Consolidated Statement of Cash Flows

for the year ended 31 December 2014

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Consolidated
Note Inflows/(Outflows)
2014 2013
$’000 $’000
Cash Flows From Operating Activities
Receipts from customers 112,816 105,886
Payments to suppliers and employees (73,983) (74,145)
Interest received 21 32
Interest paid (1,489) (705)
Income taxes paid (6,078) (4,543)
Net cash inflow from operating activities 29(b) 31,287 26,525
Cash Flows From Investing Activities
Payment for purchase of business, net of cash acquired 15/29(c) (2,366) (1,750)
Proceeds from sale of investment in joint venture entity 9 – 1,736
Payments for purchase of intellectual property (207) (311)
Payment for capitalised development costs (16,683) (13,126)
–
Proceeds from New Zealand government development grant 1,359
Payment for property, plant and equipment (781) (1,520)
Net cash outflow from investing activities (18,678) (14,971)
Cash Flows From Financing Activities
Proceeds from / (repayment of) borrowings 26,004 6,836
Payment for other financial liabilities 15 (764) (438)
Payment for share buyback 22 (27,512) (5,528)
Payment for treasury shares 21 - (320)
Dividends paid to owners of the parent 30 (10,715) (11,253)
Net cash outflow from financing activities (12,987) (10,703)
Net Increase / (Decrease) in cash and cash equivalents (378) 851
Cash and cash equivalents at the beginning of the financial year 2,554 1,432
Effects of exchange rate changes on cash and cash equivalents 72 271
Cash and cash equivalents at the end of the financial year 29(a) 2,248 2,554
----- End of picture text -----

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

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Notes to the Financial Statements

for the year ended 31 December 2014

1 Summary of Significant Accounting Policies

The principal accounting policies adopted in the preparation of the financial report are set out below. Unless otherwise stated, the accounting policies adopted are consistent with those of the previous year. The financial report includes the consolidated entity consisting of Reckon Limited and its subsidiaries. For the purposes of preparing the consolidated financial statements, the company is a for-profit entity.

Basis of preparation

This general purpose financial report has been prepared in accordance with Australian Accounting Standards and Interpretations and the Corporations Act 2001, and complies with the other requirements of the law.

Australian Accounting Standards include Australian equivalents to International Financial Reporting Standards (AIFRS). Compliance with AIFRS ensures that the consolidated financial statements and notes of Reckon Limited, comply with International Financial Reporting Standards (IFRSs).

The financial statements were authorised for issue by the directors on 19 March 2015.

The financial report has been prepared in accordance with the historical cost convention, except for the revaluation of certain non-current assets and financial instruments. Historical cost is generally based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars unless otherwise noted. The parent entity has applied the relief available to it under ASIC Class Order 98/100, and accordingly, amounts in the financial report have been rounded off to the nearest thousand dollars, except where otherwise indicated.

Adoption of new and revised Accounting Standards

The Group has adopted all of the new and revised Standards and Interpretations issued by the Australian Accounting Standards Board (the AASB) that are relevant to their operations and effective for the current year.

New and revised Standards and amendments thereof and Interpretations effective for the current year that are relevant to the Group include:

AASB 1031 ‘Materiality’ (2013)
AASB 2012-3 ‘Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities’
AASB 2013-3 ‘Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets’
AASB 2013-4 ‘Amendments to Australian Accounting Standards – Novation of Derivatives and Continuation of Hedge Accounting’
AASB 2013-9 ‘Amendments to Australian Accounting Standards – Part B: Materiality’

continued 1 Summary of Significant Accounting Policies

Impact of the application of AASB 1031 ‘Materiality’ (2013)

The revised AASB 1031 is an interim standard that cross-references to other Standards and the Framework for the Preparation and Presentation of Financial Statements (issued December 2013) that contain guidance on materiality. The AASB is progressively removing references to AASB 1031 in all Standards and Interpretations, and once all these references have been removed, AASB 1031 will be withdrawn.

The adoption of AASB 1031 does not have any material impact on the disclosures or the amounts recognised in the Group’s consolidated financial statements.

Impact of the application of AASB 2012-3 ‘Amendments to Australian Accounting Standards – Offsetting Financial Assets and Financial Liabilities’

The Group has applied the amendments to AASB 132 for the first time in the current year. The amendments to AASB 132 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify the meaning of ‘currently has a legally enforceable right of set-off’ and ‘simultaneous realisation and settlement’. The amendments have been applied retrospectively.

As the Group does not have any financial assets and financial liabilities that qualify for offset, the application of the amendments has had no impact on the disclosures or on the amounts recognised in the Group’s consolidated financial statements.

Impact of the application of AASB 2013-3 ‘Amendments to AASB 136 – Recoverable Amount Disclosures for Non-Financial Assets’

The Group has applied the amendments to AASB 136 for the first time in the current year. The amendments to AASB 136 remove the requirement to disclose the recoverable amount of a cash generating unit (CGU) to which goodwill or other intangible assets with indefinite useful lives had been allocated when there has been no impairment or reversal of impairment of the related CGU. Furthermore, the amendments introduce additional disclosure requirements applicable to when the recoverable amount of an asset or a CGU is measured at fair value less costs of disposal. These new disclosures include the fair value hierarchy, key assumptions and valuation techniques used which are in line with the disclosure required by AASB 13 ‘Fair Value Measurements’.

The application of these amendments does not have any material impact on the disclosures in the Group’s consolidated financial statements.

Impact of the application of AASB 2013-9 ‘Amendments to Australian Accounting Standards’ – Part B: ‘Materiality’

This amending standard makes amendments to particular Australian Accounting Standards to delete references to AASB 1031, at the same time it makes various editorial corrections to Australian Accounting Standards as well. The adoption of amending standard does not have any material impact on the disclosures or the amounts recognised in the Group’s consolidated financial statements.

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Notes to the Financial Statements

(continued)

continued 1 Summary of Significant Accounting Policies

Early adoption of Accounting Standards

In prior years the directors elected under s.334(5) of the Corporations Act 2001 to apply Accounting Standard AASB 9 ‘Financial Instruments (2010)’ for the 2012 financial year, even though the Standard is not required to be applied until annual reporting periods beginning on or after 1 January 2015.

Significant Accounting Policies

(a) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities (including special purpose entities) controlled by the Company (its subsidiaries). Control is achieved when the Company:

has power over the investee;
is exposed, or has rights, to variable returns from its involvement with the investee; and
has the ability to use its power to affect its returns.

Income and expense of subsidiaries acquired or disposed of during the year are included in the consolidated statement of comprehensive income from the effective date of acquisition and up to the effective date of disposal, as appropriate. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

All intra-group transactions, balances, income and expenses are eliminated in full on consolidation.

Changes in the Group’s ownership interests in subsidiaries that do not result in the Group losing control are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company.

(b) Business Combinations

Acquisitions of businesses are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value which is calculated as the sum of the acquisition-date fair values of assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity instruments issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value, except that:

deferred tax assets or liabilities and assets or liabilities related to employee benefit arrangements are recognised and measured in accordance with AASB 112 ‘Income Taxes’; and
liabilities or equity instruments related to share-based payment arrangements of the acquiree or sharebased payment arrangements of the Group entered into to replace share-based payment arrangements of the acquiree are measured in accordance with AASB 2 ‘Share-based Payment’ at the acquisition date.

continued 1 Summary of Significant Accounting Policies

Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any noncontrolling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed. If, after reassessment, the net of the acquisition-date amounts of the identifiable assets acquired and liabilities assumed exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.

Non-controlling interests that are present ownership interests and entitle their holders to a proportionate share of the entity’s net assets in the event of liquidation may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the recognised amounts of the acquiree’s identifiable net assets. The choice of measurement basis is made on a transaction-by-transaction basis.

Where the consideration transferred by the Group in a business combination includes assets or liabilities resulting from a contingent consideration arrangement, the contingent consideration is measured at its acquisition-date fair value. Changes in the fair value of the contingent consideration that qualify as measurement period adjustments are adjusted retrospectively, with corresponding adjustments against goodwill. Measurement period adjustments are adjustments that arise from additional information obtained during the ‘measurement period’ (which cannot exceed one year from the acquisition date) about facts and circumstances that existed at the acquisition date.

Where a business combination involves the issuance of a put option granted to the vendor in respect of an equity interest not owned by the parent, the present value of the put exercise price is recognised as a financial liability in the consolidated accounts of the parent entity. The recognition of this liability effectively treats the option as if it has been exercised, constituting a transaction between owners as owners which is recorded in equity. Any subsequent re-measurement is considered to be part of the equity transaction and is recorded in equity via an “acquisition of non-controlling interest reserve”.

If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period (see above), or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date.

(c) Investments in Joint Ventures

An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

A joint venture is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint arrangement. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require unanimous consent of the parties sharing control.

The results and assets and liabilities of associates or joint ventures are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment, or a portion thereof, is classified as held for sale, in which case it is accounted for in accordance with AASB 5.

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Notes to the Financial Statements

(continued)

continued 1 Summary of Significant Accounting Policies

Under the equity method, an investment in an associate or a joint venture is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group’s share of the profit or loss and other comprehensive income of the associate or joint venture. When the Group’s share of losses of an associate or a joint venture exceeds the Group’s interest in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate or joint venture), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture.

An investment in an associate or a joint venture is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. On acquisition of the investment in an associate or a joint venture, any excess of the cost of the investment over the Group’s share of the net fair value of the identifiable assets and liabilities of the investee is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group’s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognised immediately in profit or loss in the period in which the investment is acquired.

The requirements of AASB 139 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group’s investment in an associate or a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with AASB 136 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with AASB 136 to the extent that the recoverable amount of the investment subsequently increases.

The Group discontinues the use of the equity method from the date when the investment ceases to be an associate or a joint venture, or when the investment is classified as held for sale. When the Group retains an interest in the former associate or joint venture and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with AASB 9. The difference between the carrying amount of the associate or joint venture at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture is included in the determination of the gain or loss on disposal of the associate or joint venture. In addition, the Group accounts for all amounts previously recognised in other comprehensive income in relation to that associate or joint venture on the same basis as would be required if that associate or joint venture had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income by that associate or joint venture would be reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued.

When the Group reduces its ownership interest in an associate or a joint venture but the Group continues to use the equity method, the Group reclassifies to profit or loss the proportion of the gain or loss that had previously been recognised in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities.

continued 1 Summary of Significant Accounting Policies

When a group entity transacts with an associate or a joint venture of the Group, profits and losses resulting from the transactions with the associate or joint venture are recognised in the Group’s consolidated financial statements only to the extent of interests in the associate or joint venture that are not related to the Group.

(d) Depreciation and Amortisation

Depreciation is provided on plant and equipment. Depreciation is calculated on a straight-line basis. Leasehold improvements are amortised over the period of the lease or the estimated useful life, whichever is the shorter, using the straight-line method. The following estimated useful lives are used in the calculation of depreciation and amortisation:

Plant and equipment 3 – 5 years Leasehold improvements 3 – 7 years

(e) Trade Payables

These amounts represent liabilities for goods and services provided to the consolidated entity prior to the end of the financial year and which are unpaid. These amounts are unsecured and are usually paid within 30 days of the month of recognition.

(f) Contributed Equity

Transaction Costs on the Issue of Equity Instruments

Transaction costs arising on the issue of equity instruments are recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. Transaction costs are the costs that are incurred directly in connection with the issue of those equity instruments and which would not have been incurred had those instruments not been issued.

(g) Foreign Currency Translation

Functional and presentation currency

Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). The consolidated financial statements are presented in Australian dollars, which is Reckon Limited’s functional and presentation currency.

Transactions and balances

All foreign currency transactions during the financial year have been brought to account in the functional currency using the exchange rate in effect at the date of the transaction. Foreign currency monetary items at reporting date are translated at the exchange rate existing at that date. Exchange differences are brought to account in the profit or loss in the period in which they arise.

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Notes to the Financial Statements

(continued)

continued 1 Summary of Significant Accounting Policies

Group companies

The results and financial position of all the Group entities (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the presentation currency are translated into the presentation currency of the consolidated entity as follows:

Assets and liabilities are translated at the closing rate at the date of the statement of financial position;
Income and expenses are translated at average rates (unless this is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and
All resulting exchange differences are recognised as a separate component of equity.

On consolidation, exchange differences arising from the translation of monetary items forming part of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken directly to reserves. When a foreign operation is sold, a proportionate share of such exchange differences are recognised in profit or loss as part of the gain or loss on sale.

Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity at the closing rate.

(h) Goods and Services Tax

Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except:

where the amount of GST incurred is not recoverable from the taxation authority, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or
for receivables and payables which are recognised inclusive of GST.

The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables.

(i) Intangible assets

Goodwill

Goodwill arising on an acquisition of a business is carried at cost as established at the date of the acquisition of the business less accumulated impairment losses, if any.

For the purposes of impairment testing, goodwill is allocated to each of the Group’s cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination.

A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the cashgenerating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss in the consolidated income statement. An impairment loss recognised for goodwill is not reversed in subsequent periods.

continued 1 Summary of Significant Accounting Policies

On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal.

Intellectual Property

Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost).

Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately.

Customer contracts are amortised on a straight line basis over their useful life to the Group of ten years.

Brand names are not amortised but are subject to annual impairment testing. The Group has committed to continually use, invest in and promote acquired brands, therefore brands have been assessed to have an indefinite life.

Research and development costs

Research expenditure is recognised as an expense when incurred.

An internally-generated intangible asset arising from development is recognised if, and only if, all of the following have been demonstrated:

the technical feasibility of completing the intangible asset so that it will be available for use or sale;
the intention to complete the intangible asset and use or sell it;
the ability to use or sell the intangible asset;
how the intangible asset will generate probable future economic benefits;
the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; and
the ability to measure reliably the expenditure attributable to the intangible asset during its development

Development costs in respect of enhancements on existing suites of software applications are capitalised and written off over a 3 to 4 year period. Development costs on technically and commercially feasible new products are capitalised and written off on a straight line basis over a period of 3 to 4 years commencing at the time of commercial release of the new product.

Development costs include cost of materials, direct labour and appropriate overheads.

At each balance date, a review of the carrying value of the capitalised development costs being carried forward is undertaken to ensure the carrying value is recoverable from future revenue generated by the sale of that software.

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Notes to the Financial Statements

(continued)

continued 1 Summary of Significant Accounting Policies

(j) Income Tax

The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities, and their carrying amounts in the financial statements, and to unused tax losses.

Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability. An exception is made for certain temporary differences arising from the initial recognition of an asset or liability. No deferred tax asset or liability is recognised in relation to those temporary differences if they arose in a transaction, other than a business combination, that at the time of the transaction did not affect either accounting profit or taxable profit or loss.

Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. All deferred tax liabilities are recognised.

Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity.

The company and its wholly-owned Australian resident entities have formed a tax-consolidated group and are therefore taxed as a single entity from that date. The head entity within the tax-consolidated group is Reckon Limited. Tax expense/income, deferred tax liabilities and deferred tax assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate financial statements of the members of the tax-consolidated group using the ‘separate taxpayer within group’ approach by reference to the carrying amounts in the separate financial statements of each entity and the tax values applying under tax consolidation. Current tax liabilities and assets and deferred tax assets arising from unused tax losses and relevant tax credits of the members of the tax-consolidated group are recognised by the company (as head entity in the tax-consolidated group). Due to the existence of a tax funding arrangement between the entities in the tax-consolidated group, amounts are recognised as payable to or receivable by the company and each member of the group in relation to the tax contribution amounts paid or payable between the parent entity and the other members of the tax-consolidated group in accordance with the arrangement.

The tax sharing agreement entered into between members of the tax-consolidated group provides for the determination of the allocation of income tax liabilities between the entities should the head entity default on its tax payment obligations or if an entity should leave the tax-consolidated group. The effect of the tax sharing agreement is that each member’s liability for tax payable by the tax consolidated group is limited to the amount payable to the head entity under the tax funding arrangement.

(k) Inventories

Inventories are stated at the lower of cost and net realisable value. Costs are assigned to inventory on hand on a weighted average cost basis.

continued 1 Summary of Significant Accounting Policies

(l) Leased Assets

A distinction is made between finance leases which effectively transfer from the lessor to the lessee substantially all the risks and benefits incident to ownership of leased assets, and operating leases under which the lessor effectively retains substantially all the risks and benefits.

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

(m) Employee Benefits

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

Liabilities recognised in respect of short-term employee benefits, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement.

Liabilities recognised in respect of long term employee benefits are measured as the present value of the estimated future cash outflows to be made by the Group in respect of services provided by employees up to reporting date.

The Group recognises a liability and an expense for the long-term incentive plan for selected executives based on a formula that takes into consideration the ranking of total shareholder return measured against a comparator group of companies.

Contributions are made by the Group to defined contribution employee superannuation funds and are charged as expenses when incurred.

(n) Receivables

Trade receivables and other receivables are recorded at amortised cost, less impairment.

(o) Impairment of assets

At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

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Notes to the Financial Statements

(continued)

continued 1 Summary of Significant Accounting Policies

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.

Recoverable amount is the higher of fair value less costs to sell and value in use. In 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 for which the estimates of future cash flows have not been adjusted.

If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease.

When an impairment loss subsequently reverses, the carrying amount of the asset (or cash generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.

(p) Revenue Recognition

Sale of Goods and Disposal of Assets

Revenue from the sale of goods and disposal of other assets is recognised when the consolidated entity has passed control of the goods or other assets to the buyer, the fee is fixed or determinable and collectability is probable.

Software licence fee revenue is recognised at the point of “go live” (i.e. when all users can use the system on a functional basis).

Rendering of Services

Revenue from a contract to provide services is recognised by reference to the stage of completion of the contract or on a time and materials basis depending upon the nature of the contract.

Subscription, support and maintenance revenue is recognised on a straight-line basis over the period of the contract.

In multiple element arrangements where goods and services are sold as a bundled product, the fair value of the services component is recognised as revenue over the period during which the service is performed.

Interest and Other Revenue

Interest revenue is recognised on a time proportional basis taking into account the effective interest rates applicable to the financial assets. Other revenue is recognised when the right to receive the revenue has been established.

continued 1 Summary of Significant Accounting Policies

(q) Deferred Revenue

Revenue earned from maintenance and support services provided on sales of certain products by the consolidated entity are deferred and then recognised in profit or loss over the contract period as the services are performed, normally 12 months. Refer note 1(p) for further detail.

(r) Earnings per share

Basic earnings per share is determined by dividing net profit after income tax attributable to members of the Company by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year.

Diluted earnings per share adjusts the figures in the determination of basic earnings per share by taking into account the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares and the weighted average number of dilutive potential ordinary shares.

(s) Cash and cash equivalents

Cash and cash equivalents include cash on hand, deposits held at call with financial institutions and bank overdrafts.

(t) Financial instruments

Financial assets and financial liabilities are recognised when a group entity becomes a party to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

Financial assets are classified into the following specified categories: financial assets at amortised cost (including loans and receivables), financial assets ‘at fair value through profit or loss’ (FVTPL), and financial assets at ‘fair value through other comprehensive income’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if:

it has been acquired principally for the purpose of selling it in the near term; or
on initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or
it is a derivative that is not designated and effective as a hedging instrument.

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Notes to the Financial Statements

(continued)

continued 1 Summary of Significant Accounting Policies

A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the ‘other gains and losses’ line item in the statement of comprehensive income/income statement.

Investments in equity instruments, which were previously classified as available for sale financial assets, are from 1 January 2012 irrevocably classified as equity instruments revalued through other comprehensive income. Quoted shares held by the Group that are traded in an active market are classified as fair value through other comprehensive income and are stated at fair value. Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the asset revaluation reserve. They continue to be valued at fair value with changes to value being recognised in the asset revaluation reserve (previously available for sale asset revaluation reserve). Realised gains/losses are not recycled to net profits as was previously required under AASB 139.

A financial asset is measured at amortised cost if both the business model test and cash flow characteristics test conditions are met i.e. the asset is held with in a business model whose objective is to hold assets in order to collect contractual cash flows; and the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Loans and receivables are measured at amortised cost using the effective interest method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. The effective interest method is a method of calculating the amortised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

Financial liabilities are classified as either financial liabilities ‘at FVTPL’ or ‘other financial liabilities’.

Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL. Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability and is included in the in the statement of comprehensive income/ income statement.

Other financial liabilities, including borrowings and trade and other payables, are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or (where appropriate) a shorter period, to the net carrying amount on initial recognition.

continued 1 Summary of Significant Accounting Policies

(u) Provisions

Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic benefits will result and that the outflow can be reliably measured.

(v) Fair Value estimation

The fair value of financial instruments and share based payments that are not traded in an active market is determined using appropriate valuation techniques. The Group uses a variety of methods and assumptions that are based on existing market conditions. The fair value of financial instruments traded on active markets (quoted shares), are based on balance date bid prices.

The directors consider that the nominal value less estimated credit adjustments of trade receivables and payables approximate their fair values.

(w) Government Grants

Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them and that the grants will be received.

Government grants are recognised in profit or loss on a systematic basis over the periods in which the Group recognises as expenses the related costs for which the grants are intended to compensate. Specifically, government grants whose primary condition is that the Group should continue to develop its range of software products, are offset against development costs in the statement of financial position and transferred to profit or loss on a systematic and rational basis over the useful lives of the related assets.

Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial support to the Group with no future related costs are recognised in profit or loss in the period in which they become receivable.

Government assistance which does not have conditions attached specifically relating to the operating activities of the entity is recognised in accordance with the accounting policies above.

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Notes to the Financial Statements

(continued)

continued 1 Summary of Significant Accounting Policies

(x) Hedge Accounting

The Group enters into derivative financial instruments to manage its exposure to interest rate risk, including interest rate swaps. Further details of derivative financial instruments are disclosed in note 15.

Derivatives are initially recognised at fair value at the date the derivative contract is entered into and are subsequently remeasured to their fair value at the end of each reporting period. The resulting gain or loss is recognised in profit or loss immediately unless the derivative is designated and effective as a hedging instrument, in which event the timing of the recognition in profit or loss depends on the nature of the hedge relationship.

The Group designates certain hedging instruments, as cash flow hedges.

At the inception of the hedge relationship, the entity documents the relationship between the hedging instrument and the hedged item, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents whether the hedging instrument is highly effective in offsetting changes in fair values or cash flows of the hedged item attributable to the hedged risk.

Note 15 sets out details of the fair values of the derivative instruments used for hedging purposes.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income and accumulated under the heading of swap hedging reserve. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, and is included in the ‘other gains and losses’ line item. Amounts previously recognised in other comprehensive income and accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss, in the same line as the recognised hedged item. However, when the hedged forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and losses previously recognised in other comprehensive income and accumulated in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or non-financial liability.

Hedge accounting is discontinued when the Group revokes the hedging relationship, when the hedging instrument expires or is sold, terminated, or exercised, or when it no longer qualifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in profit or loss. When a forecast transaction is no longer expected to occur, the gain or loss accumulated in equity is recognised immediately in profit or loss.

(y) Significant accounting judgments, estimates and assumptions

Significant accounting judgments

In applying the Group’s accounting policies, management has made the following judgments which have the most significant effect on the financial statements:

Capitalisation of development costs – the Group has adopted a policy of capitalising development costs only for products for which an assessment is made that the product is technically feasible and will generate definite economic benefits for the Group going forward. The capitalised costs are subsequently amortised over the expected useful life of the product.

continued 1 Summary of Significant Accounting Policies

Revenue recognition – in multiple element arrangements where goods and services are sold as a bundled product, the fair value of the services component is recognised as revenue over the period during which the service is performed.

Consolidation of Linden House Software Limited – Linden House has been consolidated on the basis of the existence of a substantive call option, which is exercisable at acquisition date, and which enables Reckon Limited to acquire the remaining interest in the company.

Significant accounting estimates and assumptions

The carrying amount of certain assets and liabilities are often determined based on estimates and assumptions of future events. The key estimates and assumptions that have a significant risk of causing material adjustment to the carrying amounts of certain assets and liabilities are:

Impairment of goodwill – the Group determines whether goodwill is impaired on an annual basis. This requires an estimation of the recoverable amount of the cash-generating unit to which the goodwill is allocated. The assumptions used in this estimation, and the effect if these assumptions change, are disclosed in note 12.

Share based payments – the Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date on which they are granted. The fair value has been determined using a model that adopts Monte Carlo simulation approach, and the assumptions related to this can be found in note 20.

Product life and amortisation – the Group amortises capitalized development costs based on a straight line basis over a period of 3-4 years commencing at the time of commercial release of the new product. This is the assessed useful life.

Other financial liabilities – The Group has recognised as a liability the fair value of an option instrument arising in connection with the Linden House acquisition. Fair value determination is based on assumptions relating to future profitability of the acquired business and market discount rates. The chosen valuation techniques and assumptions used are believed to be appropriate in determining the fair value of financial instruments. Further details are set out in note 15.

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Notes to the Financial Statements

(continued)

(z) New accounting standards not yet effective

At the date of authorisation of the financial report, a number of Standards and Interpretations were in issue but not yet effective.

Initial application of the following Standards will not affect any of the amounts recognised in the financial report, but may change the disclosures presently made in relation to the financial report.

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Effective for Expected to be
annual reporting initially applied
Standard/Interpretation
periods beginning in the financial
on or after year ending
AASB 9 ‘Financial Instruments’ (2013, 2014), and the relevant
1 January 2018 31 December 2018
amending standards
AASB 2014-1 ‘Amendments to Australian Accounting Standards’
1 July 2014 31 December 2015
– Part A: ‘Annual Improvements 2010–2012 and 2011–2013 Cycles’
– Part B: ‘Defined Benefit Plans: Employee Contributions
(Amendments to AASB 119)’
– Part C: ‘Materiality’
AASB 2014-3 ‘Amendments to Australian Accounting Standards
1 January 2016 31 December 2016
– Accounting for Acquisitions of Interests in Joint Operations’
AASB 2014-4 ‘Amendments to Australian Accounting Standards –
Clarification of Acceptable Methods of Depreciation and Amortisation’ 1 January 2016 31 December 2016
AASB 15 ‘Revenue from Contracts with Customers’ and AASB
2014-5 ‘Amendments to Australian Accounting Standards arising 1 January 2017 31 December 2017
from AASB 15’
AASB 2014-9 ‘Amendments to Australian Accounting Standards –
1 January 2016 31 December 2016
Equity Method in Separate Financial Statements’
AASB 2014-10 ‘Amendments to Australian Accounting Standards –
Sale or Contribution of Assets between an Investor and its Associate 1 January 2016 31 December 2016
or Joint Venture’
AASB 2015-1 ‘Amendments to Australian Accounting Standards –
Annual Improvements to Australian Accounting Standards 1 January 2016 31 December 2016
2012-2014 Cycle’
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At the date of authorisation of the financial statements, the following IASB Standards and IFRIC Interpretations were also in issue but not yet effective, although Australian equivalent Standards and Interpretations have not yet been issued.

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Effective for Expected to be
annual reporting initially applied
Standard/Interpretation
periods beginning in the financial
on or after year ending
Disclosure Initiative (Amendments to IAS 1) 1 January 2016 31 December 2016
Investment Entities: Applying the Consolidation Exception
1 January 2016 31 December 2016
(Amendments to IFRS 10, IFRS 12 and IAS 28)
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2 Profit for the Year

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Consolidated
2014 2013
$’000 $’000
Profit before income tax includes the following items of revenue and expense:
Revenue
Sales revenue
Sale of goods and rendering of services 100,774 98,093
Other Revenue
Interest revenue – Bank deposits 21 32
100,795 98,125
Expenses
Cost of Sales 21,221 23,194
Bad debt expense:
Other Entities 39 80
Finance costs expensed:
Bank loans and overdraft 1,489 705
Net transfers to/(from) provisions:
Sales returns and rebates (46) 41
Employee benefits 145 94
Allowance for doubtful debts 84 167
Depreciation of non-current assets:
Property, plant and equipment 1,235 1,119
Amortisation of non-current assets:
Leasehold improvements (30) 481
Intellectual property 1,133 752
Development costs 10,627 8,377
Foreign exchange losses/(gains) 151 (672)
Employee benefits expense:
Post employment benefits – defined contribution plans 2,790 2,424
Termination benefits 494 223
Share based payments:
Equity-settled share-based payments 316 241
Cash-settled share-based payments 155 164
471 405
Operating lease rental expenses:
Minimum lease payments 2,151 2,077
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Notes to the Financial Statements

(continued)

3 Income Tax

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Consolidated
2014 2013
$’000 $’000
(a) Income tax expense recognised in profit and loss
Current tax 4,866 4,813
Deferred tax 893 1,172
Under /(over) provided in prior years (655) (257)
5,104 5,728
(b) The prima facie income tax expense on pre-tax accounting profit reconciles to
the income tax expense/(income tax revenue) in the financial statements as follows:
22,672 23,889
Profit before income tax
Income tax expense calculated at 30% of profit 6,802 7,167
Tax Effect of:
Effect of lower tax rates on overseas income (261) (23)
Tax effect of non-deductible/non-taxable items:
Research and development claims (646) (600)
–
Utilisation of capital losses on profit on sale of investment in joint venture entity (424)
Sundry items (136) (135)
5,759 5,985
Under/(over) provision in prior years (655) (257)
Income tax expense attributable to profit 5,104 5,728
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The tax rate used for the 2014 and 2013 reconciliations above is the corporate tax rate of 30% payable by Australian corporate entities on taxable profits under Australian tax law.

(c) Future income tax benefts not brought to account as an asset: not probable of recovery
Tax losses:
Revenue	– –
Capital	2,098 2,098
	2,098 2,098

4 Remuneration of Auditors

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Consolidated
2014 2013
$ $
(a) Deloitte Touche Tohmatsu
During the year, the auditors of the parent entity earned the following remuneration:
Auditing and reviewing of financial reports 233,903 218,268
Tax compliance and consulting services 79,239 78,958
313,142 297,226
(b) Other Auditors
Auditing and reviewing of financial reports 62,810 51,092
Tax compliance services 97,359 38,702
160,169 89,794
473,311 387,020
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5 Inventories

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Consolidated
2014 2013
$’000 $’000
Finished goods:
At lower of cost and net realisable value 2,179 1,746
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Notes to the Financial Statements

(continued)

6 Trade and Other Receivables

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Consolidated
2014 2013
$’000 $’000
Current:
Trade receivables (i) 8,284 10,373
Allowance for doubtful debts (562) (517)
7,722 9,856
Other receivables 1,687 1,142
9,409 10,998
Non current:
Trade receivables 608 1,114
Other receivables 70 80
678 1,194
(i) The ageing of past due receivables at year end is detailed as follows:
Past due 0 – 30 days 1,462 1,388
Past due 31 – 60 days 988 983
Past due 61 [+] days 918 1,556
Total 3,368 3,927
The movement in the allowance for doubtful accounts in respect of trade receivables is
detailed below:
Balance at beginning of the year 517 430
Amounts written off during the year (39) (80)
Increase/(reduction) in allowance recognised in the profit and loss 84 167
Balance at end of year 562 517
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7 Other Assets

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Consolidated
2014 2013
$’000 $’000
Current:
Prepayments 1,646 1,197
Other 479 1,094
2,125 2,291
Non current:
Prepayments 653 599
Other 458 –
1,111 599
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8 Other Financial Assets

Security deposits

9 Investment in Joint Venture Entity

Investment in Connect2Field Holdings Pty Ltd

The investment in Connect2Field Holdings Pty Ltd was sold during 2013 for

$2.1 million, resulting in a profit on sale of $1.4 million. $0.3 million of the proceeds were held in escrow and released in 2014.

56 56

– –

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Notes to the Financial Statements

(continued)

10 Property, Plant and Equipment

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Consolidated
2014 2013
$’000 $’000
Leasehold Improvements
At cost 2,613 3,539
Less: Accumulated amortisation (2,110) (3,104)
Total leasehold improvements 503 435
Plant and equipment
At cost 8,527 7,973
Less: Accumulated depreciation (6, 243) (5,129)
Total plant and equipment 2,284 2,844
2,787 3,279
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Reconciliations

Reconciliations of the carrying amounts of each class of property, plant and equipment at the beginning and end of the financial year are set out below.

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Leasehold Plant and
Improvements Equipment Total
$’000 $’000 $’000
Consolidated
Carrying amount at 1 January 2014 435 2,844 3,279
Additions 38 743 781
Depreciation/amortisation expense 30 (1,303) (1,273)
Balance at 31 December 2014 503 2,284 2,787
Consolidated
Carrying amount at 1 January 2013 696 2,719 3,415
Additions 220 1,300 1,520
Depreciation/amortisation expense (481) (1,175) (1,656)
Balance at 31 December 2013 435 2,844 3,279
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11 Deferred Tax Assets

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Consolidated
2014 2013
$’000 $’000
The balance comprises temporary differences attributable to:
Doubtful debts 8 9
Employee benefits 100 70
Other provisions 77 48
185 127
Details of unrecognised deferred tax assets can be found in note 3(c)
Reconciliation:
Opening balance at 1 January 127 141
Credited/(charged) to profit or loss 58 (14)
Balance at 31 December 185 127
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12 Intangibles

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Intellectual property – at cost (i) 17,251 17,045
Accumulated amortisation (11,889) (10,757)
5,362 6,288
Development costs – at cost 77,901 62,456
Accumulated amortisation (50,386) (39,706)
27, 515 22,750
Goodwill – at cost 49,502 48,810
82,379 77,848
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(i) The intellectual property carrying amount comprises of customer contracts of $3,114 thousand (2013: $3,748 thousand), brand names of $562 thousand (2013: $562 thousand) and other intellectual property of $1,686 thousand (2013: $1,978 thousand).

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Notes to the Financial Statements

(continued)

continued 12 Intangibles

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Consolidated
2014 2013
$’000 $’000
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Impairment test for goodwill

Goodwill is allocated to the Group’s cash generating units (CGUs) identified according to the business entities acquired, as follows:

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Professional Division Australia 10,361 10,361
Professional Division New Zealand 1,742 1,742
nQueue Billback 2,508 2,330
Elite 2,536 2,536
Reckon Docs (formerly Corporate Services) 11,125 11,125
Virtual Cabinet 21,230 20,716
49,502 48,810
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The recoverable amount of a CGU is determined based on value-in-use calculations. Management has based the value in use calculations on the most recently completed board approved budget for the forthcoming one year (2015) period. Subsequent cash flows are projected using constant long term average growth rates of 3% per annum for all CGUs. An average post-tax discount rate of 10.5% (2013: 11.0%) (pre-tax rate: 15%) reflecting assessed risks associated with CGUs has been applied to determine the present value of future cash flow projections for all CGUs. No impairment write-offs have been recognised during the year (2013: nil). Should the projected growth rates reduce to 0%, no material impairment would arise.

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Intellectual Develop-
Consolidated movements in intangibles
Goodwill Property ment Costs Total
$’000 $’000 $’000 $’000
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At 1 January 2014	48,810 6,288 22,750 77,848
Additions	– 207 15,392 15,599
Efect of foreign currency exchange diferences	692 – – 692
Amortisation charge	– (1,133) (10,627) (11,760)
At 31 December 2014	49,502 5,362 27,515 82,379

At 1 January 2013	45,108 4,979 17,945 68,032
Additions	– 311 13,182 13,493
Acquisitions through business combinations (note 29)	– 1,750 – 1,750
Efect of foreign currency exchange diferences	3,702 – – 3,702
Amortisation charge	– (752) (8,377) (9,129)
At 31 December 2013	48,810 6,288 22,750 77, 848

13 Trade and Other Payables

	Consolidated 2014 $’000 2013 $’000	Consolidated 2014 $’000 2013 $’000
Current:
Trade payables and sundry accruals (i)	4,604	4,731

(i) The credit period for the majority of goods purchased is 30 days. No interest is charged. The Group has policies in place to ensure payables are paid within the credit periods.

14 Borrowings

Current:
Bank borrowings (i) Hire purchase liabilities	– 19 76 39
	76 58

Non-current
Bank borrowings (i) Hire purchase liabilities	43,400 17,350 – 83
	43,400 17,433

(i) The consolidated entity has increased its bank facilities to $53.95 million during the year to fund the Intuit share buyback and the Virtual Cabinet acquisition. The facility comprises a variable rate bank overdraft facility, and a multi option facility (which includes a bill facility and bank guarantee/transactional facility). The facility covers a 3 year term expiring on 31 January 2017 in respect of the bill facility and expiring on 30 April 2015 for the other facilities. The bill facility reduces to $48.5 million on 31 March 2016, and then by $1.5 million per quarter thereafter. The facility is secured over the Australian and New Zealand net assets of the Group. Reckon has partially hedged the bank borrowings – refer note 15.

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Bank
Bank guarantee
overdraft Bill facility facility
$’000 $’000 $’000
2014
The available, used and unused components of the facility at year end is as follows:
Available 1,000 50,000 2,950
Used – 43,400 1,841
Unused 1,000 6,600 1,109
The remaining contractual maturity for the facility (including both interest and
principal) is as follows:
0-12 months – – 1,841
– –
2-5 years 43,400
Weighted average interest rate 6.5% 4.6% –
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Notes to the Financial Statements

(continued)

15 Other Financial Liabilities

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Consolidated
2014 2013
$’000 $’000
–
Linden House option liability: current (i) 6,838
–
Linden House option liability: non-current (i) 11,658
Derivative that is designated and effective as a hedging instrument carried at fair value (ii) 245 –
245 11,658
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(i) This balance represents the present value of future payments arising in connection with the acquisition of the noncontrolling interest in Linden House Software Limited (refer note 29 (c)), including future profit entitlements over the next 18 months and the redemption price of put option instruments issued in respect of their remaining equity interest in the company. A discount rate of 12.4% has been applied to future cash flow estimates to derive the outstanding liability. Recognising the present value of the redemption price effectively treats the option as if it has been exercised, which is an equity transaction. Any re-measurement of this liability is therefore treated as an equity transaction processed through an “acquisition of non-controlling interest reserve”. Within the context of AASB 7, this is classified as a level 3 fair value measurement, being derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs). The gross amount of $7.2 million (2012: $13.8 million) is payable within one year after balance date. A further 20% of Linden House Software Limited was acquired effective 2 July 2014 for $2.4 million following the retirement of one of the original owners of the business.

(ii) This balance represents an interest rate swap. To reduce the fair value risk of changing interest rates, the Group has entered into a pay-floating receive-fixed interest rate swap. The swap’s notional principal is $20 million and represents 46% of the bank bill facility outstanding at 31 December 2014. The swap reduces to $15 million on 26 June 2016 and then matures on 31 January 2017. The fixed interest rate is 4.87%, and interest rate swaps are settled monthly. Within the context of AASB 7, this is classified as a level 2 fair value measurement being derived from inputs, other than quoted prices included within level 1, that are observable for the asset or liability, either directly or indirectly.

16 Provisions

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Current: Consolidated
2014 2013
$’000 $’000
Sales returns, volume rebates 56 102
Employee benefits 2,707 2,505
Surplus premises 201 498
Commissions and sundry provisions 342 366
3,306 3,471
Non-current:
Employee benefits 582 639
Surplus premises – 83
582 722
Movement in provisions
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Movements in each class of provision during the financial year, excluding employee benefits, are set out below:

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Sales returns,
Surplus volume Commissions
premises rebates and sundry Total
2014 Consolidated $’000 $’000 $’000 $’000
Carrying amount at the start of the year 581 102 366 1,049
– –
Amounts paid (800) (800)
Additional provisions recognised/(utilised) 420 (46) (24) 350
Carrying amount at the end of the year 201 56 342 599
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The provision for surplus premises represents the present value of the future lease payments on the Pyrmont premises that the Group is presently obligated to make under the operating lease contract, less revenue expected to be earned on the lease, including estimated future sub-lease revenue, where applicable. The estimate may vary as a result of changes in the utilisation of the leased premises and sub-lease arrangements where applicable. The lease expires in February 2015.

17 Working Capital Deficiency

The consolidated statement of financial position indicates an excess of current liabilities over current assets of $7,842 thousand (December 2013: $1,068 thousand). This arises due to the cash management structure adopted by management, whereby surplus funds are used to repay debt and make investments. Net cash inflows from operations for the year were $31,287 thousand (2013: $26,525 thousand). Unused bank facilities at balance date total $8,709 thousand. Also, included in current liabilities is deferred revenue of $9,715 thousand (December 2013: $9,285 thousand), settlement of which will involve substantially lower cash flows.

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Notes to the Financial Statements

(continued)

18 Deferred Tax Liabilities

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Consolidated
2014 2013
$’000 $’000
The temporary differences are attributable to:
Doubtful debts (89) (96)
Employee benefits (1,346) (1,284)
Sales returns and volume rebates (14) (32)
Deferred revenue (596) (605)
Difference between book and tax value of non-current assets 7,971 6,729
Other provisions (868) (605)
5,058 4,107
Details of unrecognised deferred tax assets can be found in note 3(c)
Reconciliation:
Opening balance at 1 January 4,107 2,949
Charged (credited) to profit or loss 951 1,158
Balance at 31 December 5,058 4,107
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19 Parent Entity Disclosures

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Consolidated
2014 2013
$’000 $’000
Financial position
Assets
Current assets 5,298 3,001
Non-current assets 87,460 85,828
92,758 88,829
Liabilities
Current liabilities 57,371 24,278
Non-current liabilities 4,051 15,387
61,422 39,665
Equity
Share capital 17,036 16,818
Share buyback reserve (42,018) (14,506)
–
Swap hedging reserve (245)
Share based payments reserve 582 484
Acquisition of non-controlling interest reserve 708 (1,624)
Foreign currency translation reserve 256 –
Retained earnings 55,017 47,992
31,336 49,164
Financial performance
Profit for the year 17,580 20,288
Other comprehensive income 256 –
Total comprehensive income 17,836 20,288
Capital commitments for the acquisition of property, plant and equipment
– –
Not longer than 1 year
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Other

Reckon Limited assets have been used as security for the bank facilities set out in note 14.

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The parent entity has no contingent liabilities.

Notes to the Financial Statements

(continued)

20 Employee Benefits

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Consolidated
2014 2013
$’000 $’000
The aggregate employee benefit liability recognised and included in the financial statements is
as follows:
Accrued annual leave:
Current (note 16) 1,369 1,296
Long term incentive:
Current (note 16) 185 185
Non-current (note 16) 61 80
Provision for long service leave:
Current (note 16) 1,153 1,024
Non-current (note 16) 521 559
3,289 3,144
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Long-term incentive plan

The long-term incentive plan was approved at the Special General Meeting on 20 December 2005, and comprises three possible methods of participation: an option plan, a performance share plan and a share appreciation plan. The board has discretion to make offers to applicable employees to participate in any of these plans. Options granted and/or performance shares awarded (all in respect of the company’s ordinary shares) and/or share appreciation rights do not vest before three years after their grant date and are conditional on the participant remaining employed at vesting date, subject to board discretion. Vesting is also conditional upon the company achieving defined performance criteria. The performance criteria are based upon a total shareholder return (TSR) target. A TSR is the return to shareholders over a prescribed period, being the growth in the company’s share price plus dividends or returns of capital for that period. The company’s initial TSR target will be the company achieving a median or higher ranking against the TSR position of individual companies within a ‘comparator Group’ of companies (i.e. a group of comparable ASX listed companies pre-selected by the board) over the same period. The initial comparator group was determined by independent advisers and was set out in the Chairman’s speech at the Special General Meeting on 20 December 2005. The board reviews the suitability of the comparator group on an ongoing basis. Only 50% of options or performance shares become exercisable or vest if the initial performance criterion is satisfied. The extent to which the balance of options or performance shares become exercisable or vest will depend on the extent to which the initial performance criterion is exceeded (i.e. the extent to which the company exceeds a median ranking against the TSR position of the comparator group of companies).

From 2011 performance shares were also awarded with longer term vesting periods. The principal vesting condition is that participants must remain employed for the term, in this case, to achieve 100% vesting employees must remain in employment for 10 years from the date of initial offer.

The share appreciation rights plan represents an alternative remuneration element (to offering options or performance shares) under which the board can invite relevant employees to apply for a right to receive a cash payment from the company equal to the amount (if any) by which the market price of the company’s shares at the date of exercise of the right exceeds the market price of the company’s shares at the date of grant of the right. The right may only be

continued 20 Employee Benefits

exercised if performance criteria are met. The performance criteria are fixed by the board in the exercise of its discretion. At present these are the same as the TSR target set for the right to exercise options or for performance shares to vest.

No options were issued during the year (2013: Nil).

590,625 (2013: 549,419) appreciation rights and 202,946 (2013:387,990) performance shares, were issued during the year. The fair value of these rights was 32 cents (2013: 34.4 cents) and the shares were $1.672 (2013: $1.864), using a model that adopts the Monte Carlo simulation approach. The assumptions used in this model are: grant date share price of $2.18; expected volatility of 22.2%; dividend yield of 4%; and a risk free rate of 2.9%. The expense recognised in 2014 for appreciation rights/performance shares was $470,991 (2013: $404,966).

Set out below are summaries of performance shares and appreciation rights granted under the long-term incentive plan:

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Performance Shares
Vesting Shares Shares lapsed Shares vested Shares available at
Grant Date Date Granted during the year during the year the end of the year
2014 2013 2014 [1] 2013 2014 [1] 2013
Jan’11 Dec’13 156,704 – 23,981 – 101,689 – –
Jan’12 Dec’14 150,440 – 1,453 92,050 2,904 – 92,050
Jan’13 Dec’15 91,740 – 4,222 – – 87,518 87,518
Jan’14 Dec’16 101,696 – – – – 101,696 –
Jan’11 Dec’17 112,500 – 10,000 – – 86,250 86,250
Jan’12 Dec’18 127,500 – 10,000 – – 101,250 101,250
Jan’13 Dec’19 296,250 – 20,000 – – 276,250 276,250
Jan’14 Dec’20 101,250 – – – – 101,250 –
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11,500 additional shares have been acquired for future grants.

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Appreciation Rights
Expiry Rights Rights lapsed Rights vested Rights available at
Grant Date Date Granted during the year during the year the end of the year
2014 2013 2014 [1] 2013 2014 [1] 2013
Jan’11 Dec’13 282,258 – – – 282,258 – –
Jan’12 Dec’14 396,825 – – 396,825 – – 396,825
Jan’13 Dec’15 549,419 – – – – 549,419 549,419
Jan’14 Dec’16 590,625 – – – – 590,625 –
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These values assume the performance condition referred to on page 28 has been fulfilled. If it transpires that it is not fulfilled, this will be disclosed in 2015.

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Notes to the Financial Statements

(continued)

continued 20 Employee Benefits

Reckon Limited Employee Option Plans

The company has previously had two ownership-based remuneration schemes:

Executive share option plan

The executive share option plan has been terminated.

Executive share option plan No. 2

The Reckon Limited Executive Share Option Plan No. 2 was established on 19 July 2000. Under the provisions of the plan, the directors may grant options over unissued shares in the company to executives and directors of the company (or their associates) or subsidiaries of the company selected by the directors from time to time, subject to the ASX Listing Rules and the Corporations Act 2001.

Options are granted for a five-year period and 50% of each new tranche becomes exercisable after each of the first two anniversaries of the grant date. The entitlements are vested as soon as they are exercisable (i.e. they are not conditional on future employment). Each option entitles the holder to one ordinary share.

Amounts receivable on exercise of any options are recognised as share capital. No options were exercised during the year (2013: nil), and there are no options outstanding at year end.

Further details in relation to equity remuneration are set out in the Remuneration Report from page 24.

21 Issued Capital

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2014 2013
No. $’000 No. $’000
Fully Paid Ordinary Share Capital
Balance at beginning of financial year 126,913,066 18,842 129,488,015 18,842
– –
Share buyback (14,828,304) (2,574,949)
Balance at end of financial year 112,084,762 18,842 126,913,066 18,842
Less Treasury shares
Balance at beginning of financial year 850,243 2,024 812,077 1,964
Shares purchased in current period – – 134,279 320
– -
Lapsed shares utilised 7,521 8,480
Shares vested (92,050) (218) (104,593) (260)
Balance at end of financial year 765,714 1,806 850,243 2,024
Balance at end of financial year net of treasury shares 111,319,048 17,036 126,062,823 16,818
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Fully paid ordinary shares carry one vote per share and carry the right to dividends.

Changes to the then Corporations Law abolished the authorised capital and par value concepts in relation to share capital from 1 July 1998. Therefore the company does not have a limited amount of authorised capital and issued shares do not have a par value.

A selective off-market buyback of the 14,828,304 shares held by Intuit Inc. at a price of $1.85 per share was concluded during the year.

Apart from the Intuit Inc. buyback during the year, nil shares were bought back (2013: 2,574,949 at an average price of $2.15 per share).

The shares bought back in the current year were cancelled immediately.

No options were exercised during the year.

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Notes to the Financial Statements

(continued)

22 Reserves

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Consolidated
2014 2013
$’000 $’000
Foreign currency translation reserve
Balance at beginning of financial year 2,500 (1,383)
Translation of foreign operations 815 3,883
Balance at end of financial year 3,315 2,500
Swap hedging reserve
– –
Balance at beginning of financial year
–
Revaluation of interest rate swap (245)
–
Balance at end of financial year (245)
Share buyback reserve
Balance at beginning of financial year (14,506) (8,978)
Share buyback (27,512) (5,528)
Balance at end of financial year (42,018) (14,506)
Acquisition of non-controlling interest reserve
Balance at beginning of financial year (6,119) (4,981)
Transfer from non-controlling interest 604 349
Fair value adjustment of Linden House option liability (note 15) 1,727 (1,487)
Balance at end of financial year (3,788) (6,119)
Share-based payments reserve
Balance at beginning of financial year 484 503
Share based payment expense 316 241
Treasury shares vested/lapsed (218) (260)
Balance at end of financial year 582 484
(42,154) (17,641)
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101

22 Reserves continued

Nature and purpose of reserves

(a) Foreign currency translation reserve

Exchange differences arising on translation of the financial reports of foreign subsidiaries are taken to the foreign currency translation reserve, as described in note 1(g).

(b) Swap hedging reserve

The swap hedging reserve represents the cumulative gains or losses arising on changes in the fair value of hedging instruments entered into. These gains or losses will be reclassified to profit or loss only when the hedged transaction affects profit or loss.

The value of shares bought back are allocated to this reserve.

(d) Share-based payments reserve

The share-based payments reserve is for the fair value of options granted and recognised to date but not yet exercised, and treasury shares purchased and recognised to date which have not yet vested.

(e) Acquisition of non-controlling interest reserve

The acquisition of non-controlling interest reserve represents an equity account to record transactions between equity holders.

23 Retained Earnings

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Consolidated
2014 2013
$’000 $’000
Balance at beginning of financial year 48,938 42,379
Net profit 16,964 17,812
Dividends (note 30) (10,715) (11,253)
Balance at end of financial year 55,187 48,938
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Notes to the Financial Statements

(continued)

24 Earnings per Share

	Consolidated
	2014 cents 2013 cents
Basic earnings per share Diluted earnings per share Weighted average number of ordinary shares used in the calculation of basic earnings per share Weighted average number of ordinary shares and potential ordinary shares (in relation to employee performance shares) used in the calculation of diluted earnings per share	14.2 13.9 14.1 13.8
	119,647,274 127,924,992
	120,412,988 128,775,235

Earnings used in the calculation of basic and diluted earnings per share is $16,964 thousand (2013: $17,812 thousand). Alternative earnings per share calculation in 2013 uses earnings of $16,398 thousand, which excludes the profit on sale of investment in joint venture of $1,414 thousand.

25 Contingent Liabilities

There are no material contingent liabilities as at 31 December 2014 (2013: nil).

26 Commitments for Expenditure

(a) Capital Expenditure Commitments

The consolidated entity has capital expenditure commitments of $nil as at 31 December 2014 (2013: $nil).

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Consolidated
2014 2013
$’000 $’000
(b) Lease Commitments
Operating Leases
Within 1 year 2,160 2,784
Later than 1 year and not longer than 5 years 4,840 5,964
7,000 8,748
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Operating leases relate to office and warehouse premises with lease terms of between 1 to 7 years. All operating lease contracts contain market review clauses in the event that the consolidated entity exercises its option to renew. The consolidated entity does not have an option to purchase the leased asset at the expiry of the lease period.

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27 Subsidiaries

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Name of Entity Country of Incorporation Ownership Interest
2014 2013
% %
Parent Entity
Reckon Limited Australia
Subsidiaries
Reckon.com.au Pty Limited Australia 100 100
Reckon Australia Pty Limited Australia 100 100
Reckon Investment Centre Limited Australia 100 100
Reckon Online Holdings Pty Limited Australia 100 100
Reckon Limited Performance Share Plan Trust Australia 100 100
Reckon New Zealand Pty Limited New Zealand 100 100
Reckon Accountants Group Pty Limited Australia 100 100
Reckon Accountants Group Limited New Zealand 100 100
Reckon One Limited United Kingdom 100 100
Reckon Docs Pty Limited Australia 100 100
Quickdocs.com.au Pty Limited Australia 100 100
Reckon Billback Pty Limited Australia 100 100
nQueue Billback Limited United Kingdom 100 100
Billback LLC United States of America 100 100
nQueue Billback LLC United States of America 100 100
Linden House Software Limited United Kingdom 70 50
Reckon Accounts Pte Limited Singapore 100 100
Reckon Sync Technology Pty Ltd Australia 100 100
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All shares held are ordinary shares.

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Notes to the Financial Statements

(continued)

28 Related Party Disclosures

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Consolidated
2014 2013
$ $
(a) Key Management Personnel Remuneration
Short term benefits 3,434,194 3,248,103
Post-employment benefits 181,673 162,326
Share based payments 365,711 330,813
3,981,578 3,741,242
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The names of and positions held by the key management are set out on page 40 of the Remuneration Report. Further details of the remuneration of key management are disclosed in the Directors’ Report.

(b) Other Transactions with Key Management Personnel

There were no transactions with directors and other key management personnel apart from those disclosed in this note.

(c) Other Related Party Transactions

Intuit Ventures Inc

Intuit Ventures Inc, was a significant shareholder (11.7%) in Reckon Limited until 25 July 2014, and previously provided the rights for Reckon to market and distribute Intuit software throughout Australia and New Zealand. In return for this, Intuit received a royalty payment based on sales made throughout the territory until termination of the agreement with Intuit on 10 February 2014. These royalties amounted to $148,468 (2013: $5,202,276) which is expensed in the month that the associated product was sold. The balance due at 31 December 2014 is $nil (2013: $217,537).

(d) Directors’ and Key Management Equity Holdings

Refer to the table on page 40 of the Remuneration Report.

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105

29 Notes to the Statement of Cash Flows

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Consolidated
2014 2013
$’000 $’000
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(a) Reconciliation of Cash

For the purposes of the statement of cash flows, cash includes cash on hand and in banks and investments in money market instruments, net of outstanding bank overdrafts. Cash at the end of the financial year as shown in the statement of cash flows is reconciled to the related items in the statement of financial position as follows:

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Cash (i) 2,248 2,573
Bank overdraft – (19)
2,248 2,554
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(i) Cash balance is predominantly in the form of short-term money market deposits, which can be accessed at call.

(b) Reconciliation of Profit After Income Tax To Net Cash

Flows From Operating Activities

Proft after income tax	17,568 18,161
Depreciation and amortisation of non-current assets	12,965 10,729
Proft on sale of investment in joint venture entity	- (1,414)
Non-cash employee benefts expense – share based payment	316 241
Increase/(decrease) in current tax liability/asset	(1,867) 13
Increase/(decrease) in deferred tax balances	893 1,172
Unrealised foreign currency translation amount	51 (90)
(Increase)/decrease in assets net of acquisitions:
Current receivables	1,589 (1,865)
Current inventories	(433) (502)
Other current assets	166 404
Non-current receivables	516 197
Non-current other	(512) (599)
Increase/(decrease) in liabilities net of acquisitions:
Current trade payables	(90) (191)
Other current liabilities	265 741
Other non-current liabilities	(140) (472)
Net cash infow from operating activities	31,287 26,525

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Notes to the Financial Statements

(continued)

29 Notes to the Statement of Cash Flows continued

(c) Business acquired

Linden House Software Limited

A further 20% of Linden House Software Limited was acquired effective 2 July 2014 for $2.4 million following the retirement of one of the original owners of the business.

Business Driven Systems

Effective from 1 October 2013, 100% of the ordinary shares of Business Driven Systems (Australia) Pty Ltd was acquired for $1,750 thousand. The purchase price represented the IP for a product known as SyncDirect, which allows the transfer of data from a multitude of accounting systems (including cloud products) to enable accountants to seamlessly access client data via their practice management solution.

30 Dividends – Ordinary Shares

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Consolidated
2014 2013
$’000 $’000
Final dividend for the year ended 31 December 2013 of 4.75 cents (2012: 4.75 cents) per
5,988 6,111
share franked to 90% paid on 6 March 2014
Interim dividend for the year ended 31 December 2014 of 4.25 cents per share franked to
4,727 5,142
90% (2012: 4 cents) paid on 10 September 2014
10,715 11,253
Franking credits available for subsequent financial years based on a tax rate of 30%
1,112 699
(2013: 30%)
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Refer to note 33 for details of dividends declared post year end.

31 Financial Instruments

(a) Significant Accounting Policies

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which revenues and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in note 1 to the financial statements.

(b) Financial Risk Management Objectives

The Board of Directors has overall responsibility for the establishment and oversight of the company and Group’s financial management framework.

The Board of Directors oversees how management monitors compliance with risk management policies and procedures and reviews the adequacy of the risk management framework in relation to the risks. The main risk arising from the company and Group’s financial instruments are currency risk, credit risk, equity price risk, liquidity risk and cash flow interest rate risk.

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107

31 Financial Instruments continued

(c) Interest Rate Risk

The Group is exposed to interest rate risk on the cash held in bank deposits and on bank borrowings. Cash deposits of $2,248 thousand were held by the consolidated entity at the reporting date, attracting an average interest rate of 0.7% (2013: 0.6%). Interest bearing borrowings by the consolidated entity at the reporting date were $43,400 thousand (2013:$17,369 thousand). Interest rate risk is managed by maintaining an appropriate mix between fixed and floating rate borrowings, and by the use of interest rate swap contracts. Variable rate borrowings during the year attracted an average interest rate of 6.5% (2013: 6.70%) on overdraft facilities and 4.6% on bank bill facilities (2013: 4.6%). If interest rates had been 50 basis points higher or lower (being the relevant volatility considered relevant by management) and all other variables were held constant, the group’s net profit would increase/decrease by $219 thousand (2013: $88 thousand).

Hedging activities are evaluated to align with interest rate views and defined risk appetite, ensuring the most cost-effective hedging strategies are applied.

The maturity profile for the consolidated entity’s cash ($2,248 thousand) that is exposed to interest rate risk is one year, and interest bearing borrowings ($43,400 thousand) that are exposed to interest rate risk, and the interest rate swap is 3 years and one month. On the assumption that interest bearing borrowings and variable interest rates remain at the current level, the annual interest costs are expected to be $2.1 million.

Further details are set out in note 15.

(d) Credit Risk

Credit risk refers to the risk that a counter party will default on its contractual obligations resulting in financial loss to the consolidated entity. The consolidated entity has adopted the policy of only dealing with creditworthy counterparties and obtaining sufficient collateral or other security where appropriate, as a means of mitigating the risk of financial loss from defaults.

The consolidated entity does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar characteristics.

The carrying amount of financial assets recorded in the financial statements, net of any provisions for losses, represents the consolidated entity’s maximum exposure to credit risk without taking account of the value of any collateral or other security obtained.

The average credit period on sale of goods is 45 days. Interest is generally not charged. The Group recognises an allowance for doubtful debts comprising a specific component for expected irrecoverable amounts, and a general provision calculated as a % of outstanding balances based upon the historical experience.

(e) Foreign Currency Risk

The consolidated entity and company undertakes certain transactions denominated in foreign currencies that are different to the functional currencies of the entities undertaking the transactions, hence exposures to exchange rate fluctuations arise. The Board of Directors monitors these exposures and does not presently hedge against this risk.

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Notes to the Financial Statements

(continued)

31 Financial Instruments continued

The carrying amount of the consolidated entity’s foreign currency denominated monetary assets and liabilities at the reporting date that are denominated in a currency that is different to the functional currency of respective entities undertaking the transactions is as follows:

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Consolidated
Liabilities Assets
2014 2013 2014 2013
$’000 $’000 $’000 $’000
Euro – – 31 136
Pounds 3,590 6,272 – –
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At 31 December 2014, if the Euro weakened against the UK Pound by 10% (being the relevant volatility considered relevant by management), with all other variables held constant the net profit of the consolidated entity would increase by $3 thousand (2013: $14 thousand). At 31 December 2014, if the Pound weakened against the UK Pound by 10% (being the relevant volatility considered relevant by management), with all other variables held constant the net profit of the consolidated entity would increase by $nil (2013: $nil), as fair value adjustments are taken to the acquisition of noncontrolling interest reserve. At 31 December 2014, if the New Zealand Dollar, US Dollar and UK Sterling weakened against the Australian Dollar by 10% (being the relevant volatility considered relevant by management), with all other variables held constant the net profit of the consolidated entity would increase by $775 thousand (2013: $564 thousand). This latter sensitivity relates to inter-group loan balances denominated in Australian Dollars, which are eliminated on consolidation.

In management’s opinion, the sensitivity analysis is not fully representative of the inherent foreign exchange risk as the year-end exposure does not necessarily reflect the exposure during the course of the year. The consolidated entity includes certain subsidiaries whose functional currencies are different to the consolidated entity presentation currency. The main operating entities outside of Australia are based in New Zealand, United States of America and the United Kingdom. These entities transact primarily in their functional currency and, aside from inter-group loan balances, do not have significant foreign currency exposures due to outstanding foreign currency denominated items. As stated in the consolidated entity’s accounting policies per note 1, on consolidation the assets and liabilities of these entities are translated into Australian Dollars at exchange rates prevailing at year end. The income and expenses of these entities is translated at the average exchange rates for the year. Exchange differences arising are classified as equity and are transferred to a foreign exchange translation reserve. The consolidated entity’s future reported profits could therefore be impacted by changes in rates of exchange between the Australian Dollar and the New Zealand Dollar, and the Australian Dollar and the US Dollar and the Australian Dollar and the UK Sterling.

(f) Liquidity

The Group manages liquidity risk by maintaining adequate cash reserves and banking facilities by continuously monitoring forecast and actual cash flows.

Further details are set out in notes 14 and 15.

(g) Capital risk management

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern. The capital structure of the Group consists of cash, other financial assets, debt and equity attributable to equity holders of the parent. The board reviews the capital structure on a regular basis. Based upon this review, the Group balances its overall capital structure through borrowings, the payment of dividends, issues of shares, share buy-backs and returns of capital. This strategy remains unchanged since the prior year.

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109

31 Financial Instruments continued

(h) Fair Value

The fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets, is determined with reference to quoted market prices. The fair value of other financial assets and liabilities is determined in accordance with generally accepted pricing models based on discounted cash flow analysis using prices from observable market transactions. The carrying amount of financial assets and financial liabilities recorded in the financial report approximates their respective fair values, determined in accordance with the accounting policies disclosed in note 1 to the financial statements.

32 Segment Information

Operating segments are identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance.

(a) Business segment information

The consolidated entity is organised into three operating divisions:

Business Group Accountant Group International Group

These divisions are the basis upon which the consolidated entity reports its financial information to the chief operating decision maker, being the Board of Directors.

The principal activities of these divisions are as follows:

Business Group – development, distribution and support of business accounting and personal financial software, as well as related products and services. Products sold in this division include Reckon Accounts (formerly QuickBooks and Quicken) and Reckon One.
Accountant Group – development, distribution and support of practice management, tax, client accounting and related software under the APS brand as well as the Reckon Docs, SyncDirect and Reckon Elite products.
International Group – development , distribution and support of cost recovery, cost management and related software under the nQueue Billback brand and document management and client portal products under the Virtual Cabinet brand.

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2014 2013
Segment revenues and results
$’000 $’000
Operating revenue
Business Group 36,828 37,373
Accountant Group 46,225 44,503
International Group 17,721 16,217
100,774 98,093
Other revenue 21 32
Total revenue 100,795 98,125
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Notes to the Financial Statements

(continued)

continued 32 Segment Information

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2014 2014 2014 2013 2013 2013
$’000 $’000 $’000 $’000 $’000 $’000
EBITDA D&A NPBT EBITDA D&A NPBT
Business Group 19,179 (3,113) 16,066 16,117 (1,454) 14,663
Accountant Group 16,455 (6,717) 9,738 16,262 (6,553) 9,709
International Group 6,106 (3,135) 2,971 5,129 (2,722) 2,407
41,740 (12,965) 28,775 37,508 (10,729) 26,779
Central administration costs (4,635) (3,631)
Profit on sale of investment in –
1,414
joint venture entity
Other revenue 21 32
Finance costs (1,489) (705)
Profit before income tax 22,672 23,889
Income tax expense (5,104) (5,728)
Profit for the year 17,568 18,161
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The revenue reported above represents revenue generated from external customers.

Segment profit represents the profit earned by each segment without allocation of central administration costs, finance costs and income tax expense, all of which are allocated to Corporate head office. This is the measure reported to the chief operating decision maker for the purposes of resource allocation and assessing performance.

The Business Group in the 2013 Annual Report included the Reckon Docs and Elite businesses. These businesses are now included in the Accountant Group and shared costs have been more equitably allocated. The 2013 results have been restated to reflect these changes. The nQueueBillback and Virtual Cabinet divisions have also been combined to form the International Group in 2013.

No single country outside of Australia contributed more than 10% of Group revenue for either 2014 or 2013. No single customer contributed 10% or more of Group revenue for either 2014 or 2013.

EBITDA above means earnings before interest, depreciation and amortisation, D&A means depreciation and amortisation, and NPBT means net profit before tax.

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continued 32 Segment Information

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Additions to
Assets Liabilities non-current assets
Segment assets and liabilities
2014 2013 2014 2013 2014 2013
$’000 $’000 $’000 $’000 $’000 $’000
Business Group 20,631 18,390 10,073 10,336 7,803 6,846
Accountant Group 46,185 44,217 5,452 4,645 5,530 6,649
International Group 44,459 44,741 22,281 26,902 3,047 3,268
– – - -
Corporate Division 43,400 17,350
Total of all segments 111,275 107,348 81,206 59,233 16,380 16,763
Eliminations (7,382) (6,637) (7,382) (6,637) - -
Consolidated 103,893 100,711 73,824 52,596 16,380 16,763
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(b) Geographical information

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Revenues from
external customers Non-current assets
2014 2013 2014 2013
$’000 $’000 $’000 $’000
Australia 76,708 76,931 47,215 44,805
Other countries (i) 24,066 21,162 39,981 38,298
100,774 98,093 87,196 83,103
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(i) No single country outside of Australia is considered to generate revenues which are material to the Group.

(c) Segment revenues

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External sales
2014 2013
$’000 $’000
Business and wealth management products and services 33,296 33,778
Accounting industry products and services 57,032 53,660
Legal industry products and services 10,446 10,655
100,774 98,093
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Notes to the Financial Statements

(continued)

33 Subsequent Events

Subsequent to the end of the financial year:

Dividend

The board has declared a dividend of 4.75 cents per share to shareholders on 10 February 2015. The dividend was 60% franked. The record date for the dividend was 20 February 2015. The aggregate amount of the proposed dividend expected to be paid on 5 March 2015 out of retained profits at 31 December 2014, but not recognised as a liability at the end of the year is $5,292 thousand. The impact on the franking account balance of unrecognised dividends is $1,361 thousand.

34 Company Information

Reckon Limited is a listed public company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is:

Level 12, 65 Berry Street North Sydney Sydney NSW 2060

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

The financial report was authorised for issue by the directors on 19 March 2015.

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Additional Information as at 6 March 2015 (Unaudited)

Twenty Largest Holders of Quoted Equity Securities

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Ordinary Shareholder Number Percentage
HSBC Custody Nominees (Australia) Limited 16,412,325 14.64
National Nominees Limited 15,060,295 13.44
RBC Investor Services Australia Nominees Pty Limited 12,628,344 11.27
G Wilkinson 6,147,800 5.48
JP Morgan Nominees Australia Limited 5,192,410 4.63
Mr & Mrs Rabie 4,735,611 4.23
DJZ Investments Pty Ltd 4,690,000 4.18
Citicorp Nominees Pty Ltd 4,418,044 3.94
RBC Investor Services 3,789,442 3.38
BNP Paribas Noms Pty Ltd 2,117,473 1.89
Mr S Rickwood 1,501,062 1.34
Mr C Rabie 1,332,389 1.19
Rawform Pty Ltd 1,302,200 1.16
Mr P Hayman 869,542 0.78
Reckon Australia Pty Ltd 857,764 0.77
Graymatter Enterprises Pty Ltd 625,001 0.56
RBC Investor Services Australia Nominees Pty Limited 580,935 0.52
Citicorp Nominees Pty Ltd 569,159 0.51
Mr P Hayman 510,049 0.46
Hurstclan Holdings Pty Ltd 500,000 0.45
83,839,845 74.82
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Number of Holders of Equity Securities

Ordinary Share Capital

112,084,762 fully paid ordinary shares are held by 4,116 individual shareholders as at 6 March 2015. All issued ordinary shares carry one vote per share.

Shareholdings less than marketable parcels

The number of shareholdings held in less than marketable parcels is 151.

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Additional Information as at 6 March 2015 (Unaudited) (continued)

Distribution of Holders of Equity Securities

As at 6 March 2015

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Number of
Number of Ordinary Shares Shareholders
1 – 1,000 997
1,001 – 5,000 1,982
5,001 – 10,000 595
10,001 – 100,000 497
100,001 and over 45
Total 4,116
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Substantial Shareholders

As at 6 March 2015

(a) From Twenty Largest holders of Quoted Equity Securities

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Ordinary Ordinary
Shares Shares
(Number) (Percentage)
RBC Investor Services Australia Nominees Pty Limited 16,998,721 15.17
HSBC Custody Nominees (Australia) Limited 16,412,325 14.64
National Nominees Limited 15,060,295 13.44
Mr C Rabie 10,758,000 9.60
Mr G Wilkinson 7,450,000 6.64
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(b) As disclosed to ASX

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Ordinary Ordinary
Shares Shares
(Number) (Percentage)
Perpetual Nominees 17,958,126 16.02
Highclere International Investors 9,401,122 8.39
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Principal Registered Office

Level 12, 65 Berry Street North Sydney NSW 2060 Tel: (02) 9577 5000 www.reckon.com

Principal Administration Office

Level 12, 65 Berry Street North Sydney NSW 2060 Tel: (02) 9577 5000

Share Registry

Computershare Investor Services Pty Limited Level 3, 60 Carrington Street Sydney NSW 2000 Tel: (02) 8234 5000

Stock Exchange Listings

Reckon Limited’s ordinary shares are listed on the Australian Securities Exchange Limited under the symbol ‘RKN’.

Auditors

Deloitte Touche Tohmatsu 225 George Street Sydney NSW 2000

Company Secretary

Mr Myron Zlotnick

Annual General Meeting

The Annual General Meeting for Reckon Limited will be held on Wednesday 20 May 2015 at 10:00am

at level 12, 65 Berry Street, North Sydney, NSW . If you are unable to attend, you are invited to complete the Proxy Form included with your Notice of Meeting. The completed Proxy Form must be received no later than 48 hours before the Annual General Meeting.

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Additional Information as at 6 March 2015 (unaudited) (continued)

Important Information – Corporate Notices

Securityholders will be aware that recent legislative changes have had the effect of giving them options as to how they receive statutory corporate notices and reports. In the interest of cost saving and the environment (every little bit helps), we encourage you to opt in to receive all notices and reports electronically.

Please go to: www.computershare.com.au and follow the prompts to register your request to opt in to receive TO RECEIVE ALL NOTICES AND REPORTS IN ELECTRONIC FORMAT.

To register to be notified by email when the Annual Report and other Announcements are available online:

Visit the share registry at www.computershare.com
Click on “Investor Centre”
Follow the prompts to update your “Communications Options”
After you have updated your email address and selected the publications you wish to receive, a confirmation email will be sent to you

Should you have any further enquiries, contact the Registry on 1300 855 080 or +61 3 9415 4000 (if outside Australia).

Alternatively, email your full name and address of the securityholder to [email protected] to receive the Annual Report, corporate and statutory notices electronically.

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AI assistant

RECKON LIMITED — Annual Report 2014

65708_rns_2015-03-30_1c54fe91-d1ba-4386-9129-4a1ccb01d07c.pdf

2014 | Annual Report

Reckon Limited Annual Report

Contents

Our Results at a Glance

Operating Revenue

EBITDA

EPS

Message to shareholders from the Chairman and Group CEO

Overview

Key performance metrics (Non-IFRS)

Dividend

Message to shareholders from the Chairman and Group CEO (continued)

Reckon has expanded its cloud capability and reach

The strategy to move from an upfront once-off software sales model to a subscription based model is important for the future growth of the business

Future performance

Directors’ Report

The Directors of Reckon Limited submit these financial statements for the financial year ended 31 December 2014

John Thame AAIBF FCPA

Independent Non-Executive Chairman

Ian Ferrier AM FCA

Independent Non-Executive Director

Greg Wilkinson

Clive Rabie

Group Chief Executive Officer

Myron Zlotnick LLM, GCertAppFin

Marianne Kopeinig LLM, GDipApplCorpGov

Legal Counsel and Assistant Company Secretary

Review of Operations and Statement of Principal Activities

Summary

Business Group

Directors’ Report (continued)

Accountant Group

International Group

Development and Software that Connects

Results of Operations

Results Headlines (Non-IFRS)

Directors’ Report (continued)

Business Group Results

Accountant Group Results

International Group Results

Dividends

EBITDA

Cash Flow

Directors’ Report (continued)

NPAT

EPS

Intuit Inc.

Significant Changes in State of Affairs

Future Developments, Business Strategies and Prospects for Future Financial Years

Directors’ Report (continued)

Matters Since the End of the Financial Year

1. Introduction

2. Governance

Directors’ Report (continued)

Remuneration Report – Audited (continued)

3. Policy

4. Remuneration Components or Framework

4.1 Fixed Component

Directors’ Report (continued)

Remuneration Report – Audited (continued)

4.2 Short-Term Incentive Component (STI)

STI Table for 2014

STI Table for 2013

Directors’ Report (continued)

Remuneration Report – Audited (continued)

Performance

Directors’ Report (continued)

Remuneration Report – Audited (continued)

4.3 Long-term Component (LTI)

Background

Vesting Scale

Directors’ Report (continued)

Remuneration Report – Audited (continued)

Discretion

Background

The Intuit Factor

Discretion to pay the LTI – for the performance period 2011 – 2013

RECKON LIMITED Annual Report 2014