THORNEY TECHNOLOGIES LTD — Annual Report 2012

Sep 6, 2012

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ABN 66 096 782 188 Annual financial report for the year ended 30 June 2012

Annual Financial Report 2012 1

Directors’ report

The Directors of Australian Renewable Fuels Limited (ARfuels) present their annual financial report of the Company for the year ended 30 June 2012. The Directors report as follows:

The names and particulars of the Directors of the Company during or since the end of the financial year are:

Name	Particulars
Philip Garling	Mr Garling was appointed as Non-Executive Director on 5 May 2011 and Non-Executive Chairman
	on 30 November 2011. Philip has 25 years experience in Infrastructure Construction,
	Development, Operations and Investment Management, most recently as Global Head of
	Infrastructure at AMP Capital Investors. He has also been Chief Executive Officer of Tenix
	Infrastructure and prior to that he was a long term Senior Executive at Lend Lease Corporation
	culminating in his role as Chief Executive of Lend Lease Capital Services (the Development
	Capital, Infrastructure Development and Project Finance arm of Lend Lease).
	Philip is a former member of the Federal Government Environment Industry Action Agenda, and a
	former Councilor of Environment Business Australia. Philip has a Bachelor of Building from the
	University of NSW. He also completed an Advanced Management Program at the Australian
	Institute of Management and an Advanced Diploma from the Australian Institute of Company
	Directors and is a Fellow of the Australian Institute of Company Directors, Australian Institute of
	Building and Institution of Engineers, Australia.
	Philip was the foundation Chair and remains a Director of the ASX listed DUET Group Limited. He
	is also a Director of Downer EDI Limited.
Andrew White	Mr White was appointed to the Board on 1 July 2011. Andrew was most recently a Director and
	Chief Operating Officer of Infrastructure Capital Group Limited, an investment management
	business with over $1 billion of equity funds under management and invested in infrastructure
	across Australia.
	He led Biodiesel Producers Limited (BPL), an unlisted public Company that manufactures biodiesel
	from tallow and waste cooking oil as the Managing Director. With contracts established with Shell,
	Finemores, Border Express, Greenfreight and other large users of fuels, BPL’s acquisition has
	ensured that ARfuels geographic reach extends into the east-coast of Australia.
	Andrew has sat on the Board and Management Committees for various large energy projects
	including Neerabup Power Station (330mW), Kwinana Power Station (320mW) and the Esperance
	Energy Project (336km Kambalda to Esperance Gas Pipeline and energy station).
	With a chartered accounting background, Mr White also worked for 8 years with Arthur Andersen
	and 9 years in senior executive roles including Finance Director and Strategic Planning Director
	with Mars Inc. in Australia and New Zealand.
Michael Costello AO	Mr Costello was appointed as Non-Executive Director on 5 May 2011. Before his appointment to
	ActewAGL in 2008, Michael was Managing Director of ACTEW Corporation, a member of the
	ACTEW Board and a member of the ActewAGL Joint Venture Partnerships Board from 2003.
	Michael is a member of the Advisory Council of the Australian National University’s Crawford
	School of Economics and Government.
	Michael was previously Deputy-Managing Director of the Australian Stock Exchange. He was Chief
	of Staff to the Hon Kim Beazley AC, the former Labor Opposition Leader and to the Hon Bill
	Hayden AC when he was the Minister for Foreign Affairs. Michael has been the Secretary of the
	Department of Foreign Affairs and Trade and the Department of Industrial Relations. He has held a
	number of diplomatic posts including Ambassador to the United Nations.
	Michael holds degrees in arts and law. He is a Fellow of the Australian Institute of Company
	Directors. He received an Order of Australia in 1996 for international relations.
Deborah Page AM	Ms Page was appointed as Non-Executive Director and Chair of the Company’s Audit Committee
	on 21 March 2012. Deborah has extensive financial experience from a diverse range of Finance
	and Operational Executive roles, as well as external audit and corporate advisory roles.
	Deborah was a partner at Touche Ross/KPMG Peat Marwick until 1992 and subsequently held
	Senior Executive positions with the Lend Lease Group, Allen Allen and Hemsley and the
	Commonwealth Bank. Deborah has considerable corporate governance experience and is
	currently on the Boards of several listed and unlisted companies including Service Stream Limited,
	Investa Listed Funds Management Limited (responsible entity of Investa Office Fund), The
	Colonial Mutual Life Assurance Society Limited and Commonwealth Insurance Limited.
	Deborah is a Fellow of the Institute of Chartered Accountants, a member of the Institute of
	Company Directors and holds a Bachelor of Economics from Sydney University.

2 AUSTRALIAN RENEWABLE FUELS LIMITED

Julien Playoust

Mr. Playoust was appointed as Non-Executive Director on 2 April 2009. Julien is Managing Director of AEH Group. His professional career includes Andersen Consulting and Accenture. He is also a Non-Executive Director of Tatts Group Limited.

Julien is a Director of private equity Company MGB Equity Growth Pty Limited, Trustee of the Art Gallery NSW Foundation, Director of the National Gallery of Australia Foundation and on the Advisory Board of The Nature Conservancy. He is a Fellow of the AICD and a member of the Australian Institute of Management, Royal Australian Institute of Architects and The Executive Connection. He holds a MBA from UNSW, Bachelor of Architecture and Bachelor of Science from Sydney University and a Company Director Course Diploma from the AICD.

Tom Engelsman Mr Engelsman was appointed Managing Director of the Company on 2 April 2009. He is a Bachelor of Aeronautical Engineering RMIT. He has over 30 years experience in the oil and gas industry, power, pulp and paper industry and the renewable energy industry. He has been the CEO of several listed companies. He resigned as Director on 14 December 2011.

Directorships of other listed companies

Directorships of other listed companies held by Directors in the 3 years immediately before the end of the financial year are as follows:

Name	Company	Office(i)
Philip Garling	The DUET Group	Non-Executive Director
	Downer EDI Limited	Non-Executive Director
Andrew White	nil
Michael Costello AO	nil
Deborah Page AM	Service Stream Limited	Non-Executive Director
	Investa Listed Funds Management Limited (responsible entity	Non-Executive Chairman
	of Investa Office Fund)
Julien Playoust	Tatts Group Limited	Non-Executive Director
	MCM Entertainment Group Limited (resigned 19 October	Non-Executive Director
	2011)
Tom Engelsman	nil

[(i)] Current directorship unless otherwise noted

Shareholdings

The following table sets out key management personnel’s relevant interests in shares and options of the Company as at the date of this report.

Each option when exercised entitles the holder to one ordinary share.

date of this report. Each option when exercised entitles the holder to one ordinary share.
	Number of fully
Directors and other key management personnel	paid ordinary shares(i)	Number of Options
Directors
Philip Garling	1,363,636	15,000,000
Andrew White	9,150,000	45,000,000
Michael Costello	3,095,000	15,000,000
Deborah Page	-	-
Julien Playoust	322,000,000	15,000,000
Other key management personnel
Christopher Attwood	-	20,000,000
Michael Burgess	-	15,000,000

(i) Includes all direct, indirect or associated party ownership

Annual Financial Report 2012 3

Directors’ report (continued)

During and since the end of the financial year an aggregate of 120,000,000 share options (2011: 7,500,000) were granted to the following officers of the Company as part of their remuneration:

	Number	Number
Directors and other Key Management personnel	of optionsgranted	of ordinary shares under option
Directors
Philip Garling	15,000,000	15,000,000
Andrew White	45,000,000	45,000,000
Michael Costello	15,000,000	15,000,000
Deborah Page	-	-
Julien Playoust	10,000,000	10,000,000
Other key management personnel
Christopher Attwood	20,000,000	20,000,000
Michael Burgess	15,000,000	15,000,000

Directors’ meetings

The number of Directors’ meetings (including meetings of Board Committees) and the number of meetings attended by each of the Directors of the Company held during the financial year are detailed in the following table:

Name Board of Held	Directors Audit Committee Remuneration Committee Attended Held Attended Held Attended
Philip Garling 12 Andrew White 12 Michael Costello 12 Deborah Page(i) 4 Julien Playoust 12 Tom Engelsman(i) 4	12 3 3 2 2 12 3 3 2 1 11 3 3 2 2 4 - - - - 12 3 3 2 2 4 1 1 2 2

(i)Deborah Page and Tom Engelsman attended all meetings for which they were eligible.

Company secretary

The names and particulars of the Company Secretaries during or since the end of the financial year are:

Name
Andrew Metcalfe	Mr Andrew Metcalfe was appointed as Company Secretary on 11 August 2011
Stephan Scheffer	Mr Stephan Scheffer was appointed as Company Secretary on 15 November 2010 and
	resigned on 11 August 2011

Principal activities

The principal activities of the Company continued to be the production and sale of Biodiesel. The acquisition of Biodiesel Producers Limited (BPL) on 1 November 2011 has enhanced the production capabilities of the Company but has not changed the Principal activities. Since the acquisition of BPL the nameplate production capacity for the Company has grown from 90 million litres per annum to 150 million litres per annum.

Review of operations

The highlight of the year was the completion of the acquisition of BPL. The BPL business became part of the ARfuels Group on 1 November 2011. Alongside this significant event, other material changes that occurred within the Company during the financial year included:

• Appointment of Andrew White as Managing Director and Chief Executive Officer;

• New Management team in place;

• Increase in average monthly biodiesel produced from over 500,000 litres per month for the 10 months preceding the BPL acquisition to an average of over 3.5 million litres per month since the BPL acquisition. This average monthly rate has continued to increase in the new financial year;

• ARfuels annual sales grew to $38,297,052, with BPL contributing $28,089,019 to that amount;

• 4 AUSTRALIAN RENEWABLE FUELS LIMITED

• Successful processing of 15 tonnes of Recycled Mill Oil (RMO) into biodiesel at the Barnawartha Plant;

• Completing over 8 million litres in export sales for the year; and

• The second half of the financial year being cash positive.

• The fire at Largs Bay was a disappointing occurrence but the restitution project is now well underway and the Plant is expected to be back up and running by November 2012.

Financial results

The financial result for the year is disappointing. The Board and management have set clear targets to improve the Group’s financial performance in the year ending 30 June 2013.

The following table provides an overview of the Group’s performance for the two half year periods to 30 June 2012, together with a reconciliation between EBITDA and net loss after tax:

	Year Ended	6 Months to	6 Months to
	30 June 2012	31 December 2011	30 June 2012
	$	$	$
Revenue	38,297,052	13,912,050	24,385,002
EBITDA	(3,536,332)	(3,487,325)	(49,007)
Depreciation and amortisation expenses	(2,355,295)	(927,127)	(1,428,168)
Net finance income/(costs)	(1,344,166)	(339,763)	(1,004,403)
Net Profit/(loss) after tax	(7,235,793)	(4,754,215)	(2,481,578)

The final six months of the financial year has delivered a small EBITDA loss of ($49,007) and net loss of ($2,481,578). This result is a material improvement in comparison to the 6 months to 31 December 2011 and the previous financial performance of ARfuels.

The improved second half trading is also reflected in cash flow. The Net Operating Cash Outflow for 30 June 2011 was $6,844,697, whereas the Net Operating Cash Outflow for the 30 June 2012 financial year was $1,531,809. The material slowdown in operating outflows occurred in the final six months of the financial year where ARfuels earned positive operating cash inflow of $4,330,501. Whilst the levels of cash flow remain inconsistent, the turnaround was a satisfying result.

The average Gross Margin for the year was 11.6%. This was primarily due to low margins achieved by Picton and Largs Bay early in the financial year and the fall in the Oil price (and hence the sales price of biodiesel) late in the financial year. This negative effect of the fall in the Oil price was compounded by a rise in the cost of feedstock at around the same time, thereby further diminishing margins across the April to May period. There has been a correction in both the Oil price and feedstock price which has improved margins since then. Management of gross margin will remain an ongoing challenge for the Company.

Management has worked diligently to limit expenditure. Despite the addition of a new trading business and the subsequent addition of over 20 staff from BPL and their related costs, ARfuels’ total Direct Costs, Staff Costs and Other Expenses have remained at levels similar to that incurred for the year ended 30 June 2011. Cost control will remain a focus for Management.

Sales

Sales and Marketing remain a major priority with progress having been made in the Mining and Fuel distribution areas. The acquisition of BPL has given ARfuels a national footprint which bodes well for the future. Positive Federal Government action on Anti-dumping Legislation, Fuel Tax Legislation and the introduction of the Carbon Reduction Scheme has installed a level of certainty which should benefit the Company going forward.

Sales grew to $38,297,052 for the financial year.

Feedstocks

The Company continues to work to bring Recycled Mill Oil (RMO) into our feedstock mix. For the 30 June 2012 year the average feedstock cost ranged between $750 and $850 per tonne. We are still investigating overseas sources of feedstock that may enhance future margins. Cost of goods sold for the year was $33,872,312. Gross Profit was $4,424,740 or an 11.6% margin.

Financial and capital structure

With the acquisition of BPL and the December 2011 capital raising, the capital profile of ARfuels has changed. The key events contributing to this were:

• $5.1 million raised in December 2011 through a 1 cent share placement of 13,000,000 shares and through the conversion of 494,659,338 options into ordinary shares at 1 cent;

• $13,650,000 in Convertible Notes issued as part of the acquisition of BPL;

• Access to a Bank Overdraft facility with a limit of $10,000,000 through the acquisition of BPL;

• Equity of $2,000,000 at 1 cent per share contributed by Global Biofuels Trading Inc (GBTI). The contribution was made as part of the agreement with GBTI whereby:

• GBTI has committed to supply feedstock in the form of RMO to ARfuels, at a fixed price plus cartage;

• ARfuels has committed to supply a minimum of 30 million litres of biodiesel per annum to GBTI;

• GBTI to assist in funding the capital works to enable the processing of RMO;

• The agreement has a 5 year term with an option to renew for a further 5 years.

Annual Financial Report 2012 5

Directors’ report (continued)

Changes in state of affairs

There have been no significant changes in the state of affairs of the consolidated entity at the date of this report other than as already noted.

Subsequent events

There have been no significant subsequent events in the affairs of the consolidated entity at the date of this report other than as already noted.

Future developments

Disclosure of information regarding likely developments in the operations of the consolidated entity in future years and the expected results of those operations may result in unreasonable prejudice to the consolidated entity and therefore have not been disclosed in this report.

To date, work is progressing on the restitution work at the Largs Bay Plant following the fire in December 2011. This work is being fully funded under the damages claim submitted to Insurers. It is expected that the Plant will be operational by November 2012.

Environmental regulations

The consolidated entity’s operations are subject to environmental regulation under both Commonwealth and State legislation. There have been no significant known breaches of these regulations by the consolidated entity.

Dividends

No dividends have been paid or declared since the start of the year.

Shares under option or issued on exercise of options

Details of unissued shares or interest under option as at the date of this report:

	Number of
	shares under	Class of	Exercise price	Expiry date of
Issuing entity	option	shares	of options	options
Australian Renew able Fuels Limited	4,000,000	Ordinary	3 cents	31 December 2012
Australian Renew able Fuels Limited	150,000	Ordinary	10 cents	26 March 2013
Australian Renew able Fuels Limited	200,000,000	Ordinary	1 cent	15 March 2013
Australian Renew able Fuels Limited	190,000	Ordinary	10 cents	22 September 2013
Australian Renew able Fuels Limited	10,500,000	Ordinary	2 cents	30 September 2014
Australian Renew able Fuels Limited	45,000,000	Ordinary	3 cents	15 December 2014
Australian Renew able Fuels Limited	57,500,000	Ordinary	3 cents	28 February 2015
Australian Renew able Fuels Limited	40,000,000	Ordinary	4 cents	15 March 2015

Details of shares or interests issued during or since the end of the financial year as a result of exercise of options are:

	Number of
	shares under	Class	Amount paid	Amount
Issuing Entity	option	of shares	for shares	unpaid
Australian Renewable Fuels Limited	494,659,338	Ordinary	$4,946,593	Nil

Indemnification of officers and auditors

The Company has entered into agreements to indemnify all the Directors and Officers named in this report against all liabilities to persons (other than the Company), which arise out of the Directors and Officers conduct unless the liability relates to conduct involving a lack of good faith or is otherwise prohibited by law. The Company has agreed to indemnify the Directors and Officers against all costs and expenses incurred in defending an action that falls within the scope of the indemnity and any resulting payments.

In accordance with common commercial practice, the insurance policy prohibits disclosure of the nature of the liability insured against and the amount of the premium.

The Company has not during or since the end of the year indemnified or agreed to indemnify an auditor of the Company against a liability incurred as auditor.

Non-audit services

Details of amounts paid or payable to the auditor for non-audit services provided during the year by the auditor are outlined in note 29 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.

6 AUSTRALIAN RENEWABLE FUELS LIMITED

The Directors are of the opinion that the services as disclosed in note 29 to the financial statements do not compromise the external auditor’s independence, based on advice received from the Audit Committee, for the following reasons:

• i. all non-audit services have been reviewed and approved to ensure that they do not impact the integrity and objectivity of the auditor, and

• ii. 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 and 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.

Auditor’s independence declaration

The Auditor’s independence declaration is included on page 21 of this report.

Annual Financial Report 2012 7

Directors’ report (continued)

Remuneration report – audited

This remuneration report, which forms part of the Directors’ report, sets out information regarding the remuneration of ARfuels Directors and its key management personnel for the financial year ended 30 June 2012. The prescribed details for each person covered by this report are detailed below under the following headings:

• i. key management personnel details;

• ii. principles of remuneration;

• iii. relationship between the remuneration policy and Company performance;

• iv. remuneration of Directors and key management personnel; and

• v. key terms of service agreements.

The terms ’remuneration’ and ‘compensation’ are used interchangeably throughout this report.

i. key management personnel details

The following persons acted as Directors of the Company during or since the end of the financial year:

Non-Executive Directors

• Philip Garling (Non-Executive Chairman - appointed Chairman 30 November 2011)

• Julien Playoust (Non-Executive Director)

• Michael Costello (Non-Executive Director)

• Deborah Page (Non-Executive Director – appointed 21 March 2012)

• Tom Engelsman (Non-Executive Chairman – appointed 29 August 2011, resigned as Non-Executive Chairman 30 November 2011, resigned as Non-Executive Director 14 December 2011)

The term ‘key management’ is used in this remuneration report to refer to the following personnel. Except as noted, the named key management personnel held their current position for the whole of the financial year and since the end of the financial year:

Executive Directors and Key management personnel

• Andrew White (Managing Director – appointed 1 July 2011)

• Tom Engelsman (Executive Chairman – resigned as Executive Chairman 29 August 2011)

Key management personnel

• Christopher Attwood (Chief Operating Officer – appointed 1 November 2011)

• Michael Burgess (Chief Financial Officer – appointed 6 February 2012)

• Stephan Scheffer (Chief Financial Officer – departed 11 January 2012, Company Secretary – appointed 15 November 2010, resigned 11 August 2011)

ii. Principles of remuneration

The Board policy for determining the nature and amount of key management personnel and other remuneration is agreed by the Board of Directors after review, approval and recommendation by the Remuneration Committee. After the acquisition of Biodiesel Producers Limited on 1 November 2011, Key Management remuneration was reviewed by the Board pursuant to recommendations from the Managing Director. Subsequent to the review, Employment Services Agreements were completed and signed with Key Management. The Managing Director’s contract and remuneration is dealt with by the Board.

Key management personnel have authority and responsibility for planning, directing and controlling the activities of the Company.

Compensation levels and structures for Key Management and other employees of the Company are competitively set to attract and retain appropriately qualified and experienced people and to reward the achievement of strategic objectives, and achieve the broader outcome of protecting and enhancing shareholder value. The compensation structures take into account the capability and experience of Key Management and other employees and the ability of Key Management and other employees to control areas of their respective responsibilities.

The Remuneration Committee has access to independent advice and uses market data to assess the appropriateness of compensation packages in the Company given trends in comparative companies, and the objectives of the Company’s compensation strategy.

The principles used to determine the nature and amount of remuneration are as follows:

Alignment to shareholder interests:

• i. level of achieved net profit is a key criteria;

• ii. controllable financial drivers of the businesses including revenues, cash, margin, earnings per share, and capital management improvement are important criteria; and

iii. remuneration is set at a level to attract and retain high calibre executives.

8 AUSTRALIAN RENEWABLE FUELS LIMITED

Alignment to the key management interests:

• i. rewards capability and experience;

• ii. provides a clear structure for earning rewards; and

• iii. provides recognition for contribution.

The framework provides a mix of fixed and variable pay, and a blend of short and long term incentives. In terms of long term incentives, as executives gain seniority they can be rewarded by gaining exposure to growth in the value of the Company through access to the Employee Share Option Plan.

Remuneration committee

The Board has established a Remuneration Committee which provides recommendations to the Board on remuneration and incentive policies and practices. The committee provides specific recommendations on remuneration packages and other terms of employment for Executive Directors, other senior executives and Non-Executive Directors. The Remuneration Committee assesses the appropriateness of the nature and amount of remuneration of Directors and senior executives on a periodic basis by reference to relevant employment market conditions with an overall objective of the retention of a high quality Board and Executive team.

Non-Executive Director remuneration

The Board seeks to set aggregate remuneration at a level that provides the Company with the ability to attract and retain Directors of the appropriate calibre.

The ASX Listing Rules specify that the aggregate remuneration of Non-Executive Directors shall be determined from time to time by a General Meeting. As previously approved by shareholders, the approved maximum aggregate annual remuneration of Non-Executive Directors is currently $300,000. Each Non-Executive Director receives a fee for being a Director of the Company. During the financial year the Board amended the Remuneration Structure for Non-Executive Directors. The Chairman now receives a fee of $110,000 per annum, and all other Non-Executive Directors receive a fee of $60,000 per annum. The Chair of the Audit and Risk Committee receives an additional $15,000 per annum whilst the Chair of the Remuneration Committee receives an extra $10,000 per annum. Also, at the General Meeting on 7 March 2012, Shareholders approved the issue of 40,000,000 options with an exercise price of 4c to three Non-Executive Directors. This option issue is detailed later in this report. Any future issue of new options will be subject to shareholder approval.

The amount of aggregate remuneration sought to be approved by shareholders and the manner in which it is apportioned amongst Directors is reviewed annually. The Board can access independent advice and industry benchmarks on fees paid to Non-Executive Directors of comparable companies when undertaking the annual review process. During the year no independent advice was obtained, however reference was made to public information.

Executive pay

The Executive pay and reward framework has three components: base pay and benefits, including superannuation (which comprise the fixed remuneration); short term at risk variable performance incentives; and long term incentives through participation in the Company’s Employee Share Option Plan. The combination of these comprises an Executive’s total remuneration.

Remuneration is structured as a total employment cost package. Executives are offered a competitive base pay that comprises the fixed component of pay and at risk variable rewards. Base pay is set to reflect the market for a comparable role and is reviewed annually to ensure the Executive’s pay is competitive with the market. An Executive’s pay is also reviewed on promotion.

Fixed remuneration

Fixed remuneration is reviewed annually by the Remuneration Committee. The process consists of a review of relevant comparative remuneration in the market and internally and, where appropriate, external advice on policies and practices. The Committee has access to external, independent advice where necessary.

Variable remuneration

The Company’s variable remuneration comprises short term and long term incentives. The objective of the short term incentive program is to link the achievement of the Company's operational targets with the remuneration received by the executives charged with the responsibility of meeting those targets.

The short term incentives, comprised of annual cash bonuses, are paid if certain Key Performance Indicators (KPI’s) are attained in the relevant period as approved by the Remuneration Committee and the Board. Long term incentives comprise equity instruments where the incentive involves the time-based vesting of options on the basis that the employee continues to be employed by the Company and is eligible under the Company’s Employee Share Option Plan.

Actual payments granted to each senior manager depend on the extent to which specific operating targets or KPI’s set at the beginning of the financial year are met and can also be awarded at the discretion of the Board of Directors.

The aggregate of annual payments available for executives across the Company is subject to the approval of the Remuneration Committee and the Board. Payments made are delivered as a cash bonus in the following reporting period or in the case of an equity component, it is pursuant to the employment contract terms and as approved by shareholders.

The Company rewards its management and executives by way of employee share options, with an exercise price typically greater than the market price of shares at the date of the issue of the options. The issue of options is not linked to performance conditions because by setting the option price at a level above the current share price at the time the options are granted provides incentive for management to improve the Company’s performance.

Annual Financial Report 2012 9

Directors’ report (continued)

Remuneration report – audited (continued)

Performance criteria

Performance criteria are linked to the short term incentive program through the setting of key performance indicators relevant to each management position. The performance criteria are set by the Board and may include, but are not limited to:

• i. Financial and Operational targets linked to achievement of the Company’s annual profit budgets as determined by the Board from time to time;

• ii. Strategic initiatives that provide for specific opportunities to be presented to the board by management from time to time such as mergers and acquisitions that are value-accretive, and the successful implementation of those initiatives;

• iii. Corporate development matters including employment, retention and remuneration of core personnel, leadership and succession, cultural development and communication activities; and

• iv. Risk management, including management and monitoring of material business risks. This includes maintaining a sound framework and controls in regards to safety and environmental issues.

iii. Relationship between the remuneration policy and Company performance

The achievement of Company strategic objectives is the key focus of the efforts of the Company. As indicated above, over the course of each financial year, the Board, through the Remuneration Committee reviews the Company’s Executive remuneration policy to ensure the remuneration framework remains focused on driving and rewarding Executive performance, while being closely aligned to the achievement of Company strategic objectives and the creation of shareholder value.

Total Shareholder Return is normally measured by the movement in share price from the start to the end of each financial year and dividends paid. No dividends have been declared in the past five financial years or for the current financial year. As the Company remains in the growth phase of its life cycle, shareholder returns do not correlate with revenues and losses reported in any of the recent financial years. Shareholder returns are more dependent on the future expectation of Company performance rather than Company earnings.

The table below sets out summary information regarding the consolidated entity’s earnings and movement in shareholder wealth for the five years to 30 June 2012.

	6 Months to	6 Months to	**12 Months to 12 Months to 12 Months to 12 Months to **	**12 Months to 12 Months to 12 Months to 12 Months to **	**12 Months to 12 Months to 12 Months to 12 Months to **	**12 Months to 12 Months to 12 Months to 12 Months to **	12 Months to
	30 June 12 31 December 11		30 June 12	30 June 11	30 June 10	30 June 09	30 June 08
Revenue	24,385,002	13,912,050	38,297,052	6,426,355	2,867,263	2,006,498	5,312,017
Net (loss) before tax	(2,481,578)	(4,754,215)	(7,235,793)	(8,128,336)	(3,356,922)	(6,269,779)	(61,822,762)
Net (loss) after tax	(2,481,578)	(4,754,215)	(7,235,793)	(8,128,336)	(3,356,922)	(6,269,779)	(61,822,762)
Share price at start of year (cents)	-	-	2.2	1.2	1.2	2.6	25.3
Share price at end of year (cents)	-	-	1.1	2.2	1.1	1.2	2.6
Dividends paid (cents)	-	-	-	-	-	-	-
Loss per share from continuing operations		(cents)
Basic	(0.13)	(0.26)	(0.34)	(0.71)	(0.53)	(1.93)	(22.02)
Diluted	(0.13)	(0.26)	(0.34)	(0.71)	(0.53)	(1.93)	(22.02)

10 AUSTRALIAN RENEWABLE FUELS LIMITED

iv. Remuneration of Directors and key management personnel

		Short-term benefits	Short-term benefits			Post Employment	Equity (long term)	Equity (long term)
								Options as
		Short					Options	proportion of
	Salary &	term		Termination		Super-	expensed	total
2012	Fees	incentives Allowance		Payments		annuation	in year(i)	remuneration	Total
	$	$	$		$	$	$	%	$
Executive directors
Andrew White(ii)	300,000	275,000	-	-		27,000	38,387	6.0	640,387
Tom Engelsman(iii)	125,000	50,000	7,500	280,937		11,385	147,878	23.7	622,700
Non-executive directors
Julien Playoust(iv)	55,000	-	-	-		-	5,605	9.2	60,605
Michael Costello	50,000	-	-	-		5,061	8,408	13.2	63,469
Philip Garling	79,425	-	-	-		-	8,408	9.6	87,833
Deborah Page(v)	21,169	-	-	-		1,905	-	-	23,074
Other key management	personnel
Christopher Attw ood(vi)	133,223	50,000	-	-		10,525	15,841	7.6	209,589
Michael Burgess(vii)	78,172	20,125	-	-		6,504	11,881	10.2	116,682
Stephan Scheffer(viii)	87,498	20,000	-	223,091		17,063	-	-	347,652
	929,487	415,125	7,500	504,028		79,443	236,408		2,171,991

(i ) During the 2012 financial year 120,000,000 options were issued to key management personnel.

(i i ) Andrew White was appointed

(i i i ) Tom Engelsman resigned on 14 December 2011.

(i v) Julien Playoust was remunerated via a service company.

(v) Deborah Page was appointed as Non-Executive Director on 21 M arch 2012.

(vi ) Christopher Attwood was appointed as Chief Operating Officer on 1 November 2011.

(vi i ) M ichael Burgess was appointed as Chief Financial Officer on 6 February 2012.

(vi i i ) Stephan Scheffer resigned as Company Secretary on 11 August 2011 and departed as Chief Financial Officer on 11 January 2012.

	Short term	Short term	employee	employee	benefits	benefits		Post Employment	Equity (long term)	Equity (long term)	Equity (long term)
											Options as
		Short							Options	proportion of
	Salary &	term				Termination		Super-	expensed		total
2011	Fees	**incentives **		Allowance		Payments		annuation	in year(i)	remuneration		Total
	$		$		$		$	$	$		%	$
Executive director
Tom Engelsman(ii)	227,084	-		18,000		-		20,573	185,482		41.1	451,138
Non-executive directors
Robert Scott	100,000	-		-		-		-	46,505		31.7	146,505
Julien Playoust	30,000	-		-		-		-	46,505		60.8	76,505
Charles Gullotta	70,000	-		-		-		-	46,505		39.9	116,505
Michael Costello	6,246	-		-		-		-	-		-	6,246
Philip Garling	6,246	-		-		-		-	-		-	6,246
Other key management	personnel
Stephan Scheffer(iii)	155,833	-		-		-		13,125	15,432		8.4	184,390
William Day	98,957	-		-		-		7,554	37,180		25.9	143,691
Emil de Graaf	120,000	-		2,278		-		10,800	-		-	133,078
Lorin Sole	-	-		-		42,250		-	-		-	42,250
	814,366	-		20,278		42,250		52,051	377,609			1,306,554

(i ) During the 2011 financial year 7,500,000 options were issued to key management personnel.

(i i ) Tom Engelsman resigned on 14 December 2011.

(i i i ) Stephan Scheffer resigned as Company Secretary on 11 August 2011 and departed as Chief Financial Officer on 11 January 2012.

Equity instruments - options (note 31)

During the financial year the Board of Directors approved and the Company issued 120,000,000 options to key management personnel. The holders of these options and unallocated shares entitle the holder to acquire one share by way of issue.

Modification of terms of equity-settled share-based payment transactions

No terms of equity-settled share-based payment transactions (including options granted as compensation to key management personnel) have been altered or modified by the issuing entity during the reporting period or prior period.

Annual Financial Report 2012 11

Directors’ report (continued)

Remuneration report – audited (continued)

Analysis of options over equity instruments granted as compensation

Details of vesting profiles of the options granted as remuneration to each key management person of the Company are summarised in the table below.

Name	Number granted Number vested Expensed in year Value of options granted at grant date (i), (ii) Value of options lapsed at the date of lapse(iii) $ $ $ During the financialyear
Directors Andrew White Tom Engelsman(iv) Julien Playoust Michael Costello Philip Garling Other key management personnel Chris Attw ood Michael Burgess Stephan Scheffer	45,000,000 - 38,387 180,109 - - 30,000,000 147,878 441,093 441,093 10,000,000 - 5,605 117,725 - 15,000,000 - 8,408 66,315 - 15,000,000 - 8,408 66,315 - 20,000,000 - 15,841 111,542 - 15,000,000 - 11,881 83,657 - - - - 43,496 43,496

(i ) The value of options granted is recognised in compensation on a straight line basis over the vesting period of the grant, in accordance with Australian accounting standards.

(i i ) The fair value of the options at grant date was based on the market price at grant date.

(i i i ) Value of options lapsing during the period due to the failure to exercise the options before the expiry date.

(i v) Tom Engelsman resigned on 14 December 2011. 30,000,000 options expired on 14 April 2012.

The options were provided during the financial year at no cost to the recipients. In general, upon vesting, the holder will be entitled to exercise their options and acquire one fully paid ordinary share in the Company for each option. 3.0 cents is payable upon exercise of each option by other Key Management personnel and 4.0 cents is payable upon exercise of each option by Non-Executive Directors granted during the financial year. During the year, 47,545,000 options expired or lapsed in accordance with the respective Employee Services Agreements and or the Employee Share Option Plan.

During the year no Key Management personnel or Directors exercised any options that were granted to them as part of their compensation.

Including the share-based payments granted during the year as set out above, the details of all share-based payment arrangements in existence for key management during the current and comparative reporting periods are summarised below.

Option series grant date	Number of options	Expiry date	Exercise price $	Fair value at grant date $
July 2007 45,000 June 2012 0.60 0.03 March 2008 5,360,000 March 2013 0.10 0.03 September 2008 1,500,000 September 2013 0.10 0.03 August 2009 1,750,000 September 2014 0.02 0.01 November 2009 50,000,000 September 2014 0.02 0.01 December 2011 45,000,000 December 2014 0.03 0.01 January 2012 4,000,000 December 2012 0.02 0.01 March 2012 57,500,000 February 2015 0.03 0.01 March 2012 40,000,000 March 2015 0.04 0.01

12 AUSTRALIAN RENEWABLE FUELS LIMITED

v. Key terms of service agreements

The remuneration and other terms of employment for the Managing Director and Key Management are formalised in service agreements. Each of these agreements makes provision for a fixed remuneration component, a short-term cash incentive and options as a long-term incentive. The material terms of the service agreements are set out below.

Term	Position	Conditions
Duration of contract	Managing Director, and key	3 years
	management
Voluntary termination by Executive	Managing Director	6 months’ notice
	Key management	6 months’ notice
Termination by Company w ithout cause	Managing Director	12 months’ notice
	Key management	6 months’ notice
Termination by Company for cause	Managing Director and key	Employment may be terminated
	management	immediately w ithout notice if the
		Executive commits any act or
		omission justifying summary
		dismissal at common law

Signed in accordance with a resolution of the Directors made pursuant to section 298(2) of the Corporations Act 2001. On behalf of the Directors

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Philip Garling

Chairman Melbourne, 6 September 2012

Annual Financial Report 2012 13

Corporate Governance Statement

The Board of Directors of Australian Renewable Fuels Limited is responsible for the corporate governance of the Company. The Board guides and monitors the business and affairs of Australian Renewable Fuels Limited on behalf of the shareholders by whom they are elected and to whom they are accountable.

The table below summarises the Company's compliance with the ASX Corporate Governance Council's Principles and Recommendations.

Principles and Recommendations	Principles and Recommendations	Compliance	Comply
Principle 1 – Lay solid foundations for management and oversight
1.1 1.2 1.3	Establish the functions reserved to the Board of Directors (Board) of Australian Renewable Fuels Limited (Company) and those delegated to manage and disclose those functions. Disclose the process for evaluating the performance of senior executives. Provide the information indicated in_Guide to reporting on Principle_ 1.	The Board is responsible for the overall corporate governance of the Company. The Board has adopted a Board Charter that formalises its roles and responsibilities and defines the matters that are reserved for the Board and specific matters that are delegated to management. The Board has adopted a Delegations of Authority that sets limits of authority for senior executives. On appointment of a Director, the Company issues a letter of appointment setting out the terms and conditions of their appointment to the Board. Senior executives prepare strategic objectives that are reviewed and signed off by the Board. These objectives must then be met by senior executives as part of their key performance targets. The MD then reviews the performance of the senior executives against those objectives. The Board reviews the Managing Director’s (MD’s) compliance against his and the Company’s objectives. These reviews occur annually. A Board Charter has been disclosed on the Company’s website and is summarised in this Corporate Governance Statement. The performance evaluation of the Board is carried out annually by the Chair however is not documented in a policy. The Board conducted a performance evaluation for senior executives in the financial year in accordance with the process above.	Complies. Complies. Complies. Does not Comply. Whilst an evaluation process will be undertaken; details have not yet been documented in a policy. Complies.
Principle 2 – Structure the Board to add value
2.1 2.2 2.3 2.4	A majority of the Board should be independent Directors. The Chair should be an independent Director. The roles of Chair and Managing Director should not be exercised by the same individual. The Board should establish a nomination committee.	The majority of the Board’s Directors are independent. Philip Garling is an independent Non-Executive Director. Andrew White is an Executive Director. Michael Costello is an independent Non- Executive Director. Deborah Page is an independent Non-Executive Director. Julien Playoust is a non-independent Non-Executive Director. Philip Garling is an independent Non-Executive Director of the Board. Philip Garling is the Chairman and Andrew White is the Managing Director. Given the small size of the Board, the full Board serves as the Nomination Committee. The Board has undertaken a review of the mix of skills and experience on the Board in light of the Company’s principal activities and direction, and has considered diversity in succession planning. The Board considers the current mix of skills and experience of members of the Board and its key management is currently appropriate to meet the requirements of the Company.	Complies. Complies. Complies. Complies.

Annual Report 14

Principles and Recommendations	Principles and Recommendations	Compliance	Comply
2.5 2.6	Disclose the process for evaluating the performance of the Board, its committees and individual Directors. Provide the information indicated in the_Guide to reporting on_ Principle 2.	The Board supports the nomination and re-election of the Directors at the Company’s forthcoming Annual General Meeting. The Company conducts the process for evaluating the performance of the Board, its committees and individual Directors as outlined in the Board Charter which is available on the Company’s website. The Board’s induction program provides incoming Directors with information that will enable them to carry out their duties in the best interests of the Company. This includes supporting ongoing education of Directors for the benefit of the Company. This information has been disclosed (where applicable) in the Directors’ Report attached to this Corporate Governance Statement. Philip Garling, Michael Costello and Deborah Page are independent Directors of the Company. A Director is considered independent when he/she substantially satisfies the test for independence as set out in the ASX Corporate Governance Recommendations. The Board has sought external legal opinion of its Independence and the Independence of Directors. In addition, an Independence Policy has been established. Members of the Board are able to take independent professional advice at the expense of the Company. The Company has established a Remuneration Committee. The Board has undertaken a review of the mix of skills and experience on the Board in light of the Company’s principal activities and direction, and has considered diversity in succession planning. The Board considers the current mix of skills and experience of members of the Board and its key management is sufficient to meet the requirements of the Company. In accordance with the information suggested in_Guide to_ Reporting on Principle 2, the Company has disclosed full details of its Directors in the Director’s Report attached to this Corporate Governance Statement. Other disclosure material on the Structure of the Board has been made available on the Company’s website.	Complies. Complies.
Principle 3 – Promote ethical and responsible decision making
3.1 3.2 3.3	Establish a code of conduct and disclose the code or a summary of the code. Companies should establish a policy concerning diversity and disclose the policy or a summary of that policy. The policy should include requirements for the Board to establish measurable objectives for achieving gender diversity and to assess annually both the objectives and progress in achieving them. Provide the information indicated in_Guide to reporting on Principle_ 3.	The Board has adopted a code of conduct. The code establishes a clear set of values that emphasise a culture encompassing strong corporate governance, sound business practices and good ethical conduct. The code is available on the Company’s website. The Board has undertaken a review of the mix of skills and experience on the Board in light of the Company’s principal activities and direction. The Company has adopted a Diversity Policy that considers the benefits of diversity, ways to promote a culture of diversity, factors to be taken into account in the selection process of candidates for Board and key management positions in the Company, education programs to develop skills and experience in preparation for Board and key management positions. The Board has adopted a Diversity Policy The Board supports diversity of employees with differing skills, values and backgrounds and experiences. This Corporate Governance Statement does not include a statement of the measurable objectives for achieving gender diversity. However as a measurement of gender diversity, the proportion of women employees in the consolidated entity as at 30 June 2012 are as follows:	Complies. Complies. Complies. Complies.

Annual Financial Report 2012 15

Corporate governance statement (continued)

Corporate governance statement	Corporate governance statement	(continued)
Principles and Recommendations		Compliance	Comply
		Women on the Board: 20% Women in senior Executive roles: 0% Women in management position: 0% Women in the organisation: 10%	Does not Comply. With respect to a Diversity Policy, the measurable objectives for achieving greater gender diversity have not been established. However the Board is aware of the disclosure requirements and is in the process of establishing these objectives.
Principle 4 – Safeguard integrity in financial reporting
4.1 4.2 4.3 4.4	The Board should establish an audit committee. The audit committee should be structured so that it consists of only Non-Executive Directors, a majority of independent Directors, is chaired by an independent Director who is not chair of the Board and have at least 3 members. The audit committee should have a formal Charter. Provide the information indicated in_Guide to reporting on Principle_ 4.	The Board has established an audit and risk committee which operates under an audit and risk committee Charter to focus on issues relevant to the integrity of the Company’s financial reporting. - The Committee has four members, three of which are Non-Executive independent Directors. - Deborah Page, an independent Non-Executive Director, is the Chair. The Board has adopted an audit and risk Charter. This Charter is available on the Company’s website. In accordance with the information suggested in_Guide to_ _Reporting on Principle 2,_this has been disclosed in the Directors’ Report attached to this Corporate Governance Statement and is summarised in this Corporate Governance Statement. The members of the audit and risk committee are appointed by the Board and recommendations from the committee are presented to the Board for further discussion and resolution. The audit and risk committee held three meetings during the period to the date of the Directors Report and meets at least twice per annum. The audit and risk Charter, and information on procedures for the selection and appointment of the external auditor, and for the rotation of external audit engagement partners (which is determined by the audit committee), is available on the Company’s website.	Complies. Complies. Complies. Complies.
Principle 5 – Make timely and balanced disclosure
5.1 5.2	Establish written policies designed to ensure compliance with ASX Listing Rules disclosure requirements and to ensure accountability at a senior Executive level for that compliance and disclose those policies or a summary of those policies. Provide the information indicated in the_Guide to reporting on_ Principle 5.	The Company has adopted a continuous disclosure policy, to ensure that it complies with the continuous disclosure regime under the ASX Listing Rules and the Corporations Act 2001. This policy is available on the Company’s website. The Company’s continuous disclosure policy is available on the Company’s website.	Complies. Complies.

16 AUSTRALIAN RENEWABLE FUELS LIMITED

Principles and Recommendations	Principles and Recommendations	Compliance	Comply
Principle 6 – Respect the rights of shareholders
6.1 6.2	Design a communications policy for promoting effective communication with shareholders and encouraging their participation at general meetings and disclose that policy or a summary of that policy. Provide the information indicated in the_Guide to reporting on_ Principle 6.	The Company has adopted a Shareholder Communications Policy. The Company uses its website (www.ARfuels.com.au), annual report, market announcements, media disclosures and webcasting to communicate with its shareholders, as well as encourages participation at general meetings. The Company’s Shareholder Communications Policy is available on the Company’s website.	Complies. Complies.
Principle 7 – Recognise and manage risk
7.1 7.2 7.3 7.4	Establish policies for the oversight and management of material business risks and disclose a summary of these policies. The Board should require management to design and implement the risk management and internal control system to manage the Company’s material business risks and report to it on whether those risks are being managed effectively. The Board should disclose that management has reported to it as to the effectiveness of the Company’s management of its material business risks. The Board should disclose whether it has received assurance from the Managing Director and Chief Financial Officer that the declaration provided in accordance with section 295A of the Corporations Act is founded on a sound system of risk management and internal control and that the system is operating efficiently and effectively in all material respects in relation to the financial reporting risks. Provide the information indicated in_Guide to reporting on Principle_ 7.	The Company has adopted a risk management statement within the Audit and Risk Committee Charter. The Audit and Risk Charter is available on the Company’s website and is summarised in this Corporate Governance Statement. The Company has identified key risks within the business. In the ordinary course of business, management monitor and manage these risks. Key operational and financial risks are presented to and reviewed by the Board at each Board meeting. The Board has received a statement from the Managing Director and Chief Financial Officer that the declaration provided in accordance with_section 295A of the_ _Corporations Act 2001_is founded on a sound system of risk management and internal control and that the system is operating efficiently and effectively in all material respects in relation to the financial reporting risks. The Board has adopted an Audit and Risk Charter which includes a statement of the Company’s risk policies. This Charter is available on the Company’s website and is summarised in this Corporate Governance Statement. The Company has identified key risks within the business and has received a statement of assurance from the Managing Director and Chief Financial Officer.	Does Not Comply. A summary statement regarding Risk Management has been published on the website; a full policy will be completed during the year. Risk Management is discussed at each Board Meeting. Complies. Complies. Complies.
Principle 8 – Remunerate fairly and responsibly
8.1 8.2	The Board should establish a remuneration committee. Clearly distinguish the structure of Non-Executive Directors’ remuneration from that of Executive Directors and senior executives.	The Board has established a Remuneration Committee and has adopted a remuneration Charter. The remuneration committee: - consists of a majority of independent Directors; - is chaired by a Non-Executive Director; and - has four members. The Company complies with the guidelines for Executive remuneration packages and Non-Executive Director remuneration. No senior Executive is involved directly in deciding their own remuneration.	Complies. Complies.

Annual Financial Report 2012 17

Corporate governance statement (continued)

Corporate governance statement	Corporate governance statement	(continued)
Principles and Recommendations		Compliance	Comply
8.3	Provide the information indicated in_the Guide to reporting on_ Principle 8.	The Board has adopted a Remuneration Committee Charter.	Complies.
		The Company does not have any schemes for retirement benefits other than statutory superannuation for Directors.

ARfuels’ corporate governance practices were in place for the financial year ended 30 June 2012 and to the date of signing the Directors’ Report.

Various corporate governance practices are discussed within this statement. For further information on corporate governance policies adopted by ARfuels, refer to our website: www.ARfuels.com.au

Board functions

The role of the Board of ARfuels is as follows:

• Representing and serving the interests of shareholders by overseeing and appraising the strategies, policies and performance of the Company. This includes overviewing the financial and human resources the Company has in place to meet its objectives and the review of management performance;

• Protecting and optimising Company performance and building sustainable value for shareholders in accordance with any duties and obligations imposed on the Board by law and the Company’s constitution and within a framework of prudent and effective controls that enable risk to be assessed and managed;

• Responsible for the overall Corporate Governance of ARfuels and its controlled entities, including monitoring the strategic direction of the Company and those entities, formulating goals for management and monitoring the achievement of those goals;

• Setting, reviewing and ensuring compliance with the Company’s values (including the establishment and observance of high ethical standards); and

• Ensuring shareholders are kept informed of the Company’s performance and major developments affecting its state of affairs.

Responsibilities/functions of the Board include:

• selecting, appointing and evaluating from time to time the performance of, determining the remuneration of, and planning for the successor of the Managing Director (MD);

• reviewing procedures in place for appointment of key management and monitoring of its performance, and for succession planning. This includes ratifying the appointment and the removal of the Chief Financial Officer and the Company Secretary;

• input into and final approval of management development of corporate strategy, including setting performance objectives and approving operating budgets;

• reviewing and guiding systems of risk management and internal control and legal compliance. This includes reviewing procedures in place to identify the main risks associated with the Company’s businesses and the implementation of appropriate systems to manage these risks;

• • monitoring corporate performance and implementation of strategy and policy;

• approving major capital expenditure, acquisitions and divestitures, and monitoring capital management;

• monitoring and reviewing management processes in place aimed at ensuring the integrity of financial and other reporting;

• monitoring and reviewing policies and processes in place relating to work health and safety, compliance with laws, and the maintenance of high ethical standards; and

• performing such other functions as are prescribed by law or are assigned to the Board.

In carrying out its responsibilities and functions, the Board may delegate any of its powers to a Board committee, a Director, employee or other person subject to ultimate responsibility of the Directors under the Corporations Act 2001. Matters which are specifically reserved for the Board or its committees include the following:

• appointment of a Chair;

• appointment and removal of the MD;

• appointment of Directors to fill a vacancy or as additional Directors;

• establishment of Board committees, their membership and delegated authorities;

• approval of dividends;

• development and review of corporate governance principles and policies;

• approval of major capital expenditure, acquisitions and divestitures in excess of authority levels delegated to management;

• calling of meetings of shareholders and;

• any other specific matters nominated by the Board from time to time.

18 AUSTRALIAN RENEWABLE FUELS LIMITED

Structure of the Board

The Company’s constitution governs the regulation of meetings and proceedings of the Board.

The Board determines its size and composition, subject to the terms of the constitution. The Board does not believe that it should establish a limit on tenure other than stipulated in the Company constitution.

While tenure limits can help to ensure that there are fresh ideas and viewpoints available to the Board, they hold the disadvantage of losing the contribution of Directors who have been able to develop, over a period of time, increasing insight in the Company and its operation and, therefore, an increasing contribution to the Board as a whole. It is intended that the Board should comprise a majority of independent Non-Executive Directors and comprise Directors with a broad range of skills, expertise and experience from a diverse range of backgrounds. It is also intended that the Chair should be an independent NonExecutive Director. The Board regularly reviews the independence of each Director in light of the interests disclosed to the Board.

The Board only considers Directors to be independent where they are independent of management and free of any business or other relationship that could materially interfere with, or could reasonably be perceived to interfere with, the exercise of their unfettered and independent judgment. The Board has adopted a definition of independence based on that set out in Principle 2 of the ASX Corporate Governance Revised Principles and Recommendations. The Board will review the independence of each Director in light of interests disclosed to the Board from time to time.

In accordance with the definition of independence above, and the materiality thresholds set, the following Directors of ARfuels are considered to be independent:

Name	Position
Philip Garling	Non-Executive Director, Chairman
Michael Costello	Non-Executive Director
Deborah Page	Non-Executive Director

There are procedures in place, agreed by the Board, to enable Directors in furtherance of their duties to seek independent professional advice at the Company's expense.

The appointment date of each Director in office at the date of this report is as follows:

Name	Position	Appointment date
Philip Garling	Non-Executive Director, Chairman	Appointed May 2011 and Chairman November 2011
Andrew White	Managing Director	Appointed July 2011
Michael Costello	Non-Executive Director	Appointed May 2011
Deborah Page	Non-Executive Director	Appointed March 2012
Julien Playoust	Non-Executive Director	Appointed April 2009

Further details on each Director can be found in the Directors’ Report attached to this Corporate Governance Statement.

Trading in Company Securities Policy

Under the Company's Guidelines for Dealing in Securities Policy, Directors, officers and employees of the Company should not trade in the Company’s securities when he or she is in possession of price sensitive information that is not generally available to the market.

Directors and key management are likely to be in possession of unpublished price sensitive information concerning the Company by virtue of their position within the Company. Therefore those persons are restricted from dealing in the Company’s securities whilst in possession of price sensitive information before release to the ASX (Non-Trading Period).

In addition, Directors, officers and employees can only deal in the Company’s securities after having first obtained clearance from the Company , and must notify the Company Secretary when a trade has occurred.

As required by the ASX Listing Rules, the Company notifies the ASX of any transaction conducted by Directors in the securities of the Company within five days of the transaction taking place.

The Company’s Trading in Company Securities Policy has been issued to ASX and can be found on the Company’s website.

Annual Financial Report 2012 19

Corporate governance statement (continued)

Audit and Risk Committee

The Board has established an Audit and Risk Committee which operates under a Charter approved by the Board. It is the Board’s responsibility to ensure that an effective internal control framework exists within the entity. This includes internal controls to deal with both the effectiveness and efficiency of significant business processes, the safeguarding of assets, the maintenance of proper accounting records, and the reliability of financial information as well as non-financial considerations such as the benchmarking of operational key performance indicators. The Board has delegated responsibility for establishing and maintaining a framework of internal control and ethical standards to the Audit and Risk Committee.

The Committee also provides the Board with additional assurance regarding the reliability of financial information for inclusion in the financial reports.

All Non-Executive members of the Board are members of the Audit Committee. The Audit Committee is Chaired by Ms Deborah Page.

Whilst operating as a separate Committee, the Audit and Risk Committee provide the Board with additional assurance regarding the reliability of financial information for inclusion in the financial reports.

For details on the number of meetings of the Audit and Risk Committee held during the year and the attendees at those meetings, refer to the Directors’ Report.

Risk

The responsibility of overseeing risk falls within the Charter of the Audit and Risk Committee. The Company identifies areas of risk within the Company and management and the Board continuously undertake a risk assessment of the Company’s operations, procedures and processes. The risk assessment is aimed at identifying the following:

• a culture of risk control and the minimisation of risk throughout the Company, identified through natural or instinctive process by employees of the Company;

• a culture of risk control that can easily identify risks as they arise and amend practices;

• the installation of practices and procedures in all areas of the business that are designed to minimise an event or incident that could have a financial or other effect on the business and its day to day management; and

• adoption of these practices and procedures to minimise many of the standard commercial risks, i.e. taking out the appropriate insurance policies, or ensuring compliance reporting is up to date.

Managing Director and CFO certification

The Managing Director and Chief Financial Officer have given a written declaration to the Board required by section 295A of the Corporations Act 2001 that in their view:

• the Company’s financial report is founded on a sound system of risk management and internal compliance and control which implements the financial policies adopted by the Board; and

• the Company’s risk management and internal compliance and control system is operating effectively in all material respects.

Performance

The performance of the Board and key Executives is reviewed regularly using both measurable and qualitative indicators, as noted in performance criteria in section (a).

On an annual basis, the Chair undertakes an assessment of the Board in light of their performance and contribution to the Company.

The Board assess the performance of the Managing Director against an agreed set of performance targets.

Remuneration

It is the Company’s objective to provide maximum stakeholder benefit from the retention of a high quality Board and Executive team by remunerating Directors and key Executives fairly and appropriately with reference to relevant employment market conditions. To assist in achieving this objective, the Board, in assuming the responsibilities of assessing remuneration to employees, links the nature and amount of Executive Directors’ and officers’ remuneration to the Company’s financial and operational performance. The expected outcomes of the remuneration structure are:

• retention and motivation of key Executives;

• attraction of high quality management to the Company; and

• performance incentives that allow Executives to share in the success of ARfuels.

For a more comprehensive explanation of the Company’s remuneration framework and the remuneration received by Directors and key Executives in the current period, please refer to the Remuneration Report, which is contained within the Directors’ Report.

There is no scheme to provide retirement benefits to Non-Executive (or Executive) Directors, other than statutory superannuation.

The Remuneration Committee is responsible for determining and reviewing compensation arrangements for the Directors themselves and the Managing Director and Executive team.

20 AUSTRALIAN RENEWABLE FUELS LIMITED

Declaration of Auditor’s independence

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Deloitte Touche Tohmatsu ABN 74 490 121 060

550 Bourke Street Melbourne VIC 3000 GPO Box 78 Melbourne VIC 3001 Australia

DX: 111 Tel: +61 3 9671 7000 Fax: +61 3 9671 7001 www.deloitte.com.au

6 September 2012

The Board of Directors Australian Renewable Fuels Limited Level 5, 409 St Kilda Road MELBOURNE VIC 3000

Dear Board Members

Australian Renewable Fuels 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 Australian Renewable Fuels Limited.

As lead audit partner for the audit of the financial statements of Australian Renewable Fuels Limited for the year ended 30 June 2012, 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

==> picture [165 x 37] intentionally omitted <==

Ian Sanders Partner Chartered Accountant

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

Annual Report 21

Statement of comprehensive income for the financial year ended 30 June 2012

Note	Consolidated
	2012 2011 $ $
Revenue from operations 3 Cost of goods sold Inventory w rite off Gross profit Direct costs Corporate and administration expenses Staff costs Other revenue 3 Finance income 3 Depreciation and amortisation expenses 4 Finance costs 5 Loss before tax Income tax (expense) 6 Loss for the year Attributed to: Owners of the parent Non-controlling interest Other comprehensive income Exchange reserve arising on translation of foreign operations Other comprehensive income for the year net of tax Total comprehensive income for the year Total comprehensive income attributable to: Ow ners of the parent Non-controlling interest 20 Gain/(Loss) per share From continuing and continued operations: Basic (cents per share) 30 Diluted(centsper share) 30	38,297,052 6,426,355 (33,872,312) (4,506,719) - (526,697)
	4,424,740 1,392,939 (3,858,696) (3,810,478) (2,870,083) (2,496,479) (3,013,175) (2,303,879) 1,780,882 141,688 87,211 69,884 (2,355,295) (1,015,948) (1,431,377) (106,063)
	(7,235,793) (8,128,336) - -
	(7,235,793) (8,128,336)
	(7,172,034) (8,063,938) (63,759) (64,398)
	(7,235,793) (8,128,336)
	(810) 2,447
	(810) 2,447
	(7,236,603) (8,125,889)
	(7,172,844) (8,061,491) (63,759) (64,398)
	(7,236,603) (8,125,889)
	(0.34) (0.71) (0.34) (0.71)

The Statement of comprehensive income should be read in conjunction with the accompanying notes.

22 AUSTRALIAN RENEWABLE FUELS LIMITED

Statement of financial position as at 30 June 2012

Note	Consolidated
	2012 2011 $ $
Current assets Cash and cash equivalents 24 Trade and other receivables 7 Inventories 8 Other 9 Total current assets Non-current assets Property, plant and equipment 10 Intangible assets 11 Other 12 Total non-current assets Total assets Current liabilities Bank overdraft 15, 24 Trade and other payables 13 Provisions 14 Amounts payable on acquisition 16 Total current liabilities Non-current liabilities Amounts payable on acquisition 16 Provisions 14 Other 15 Total non-current liabilities Total liabilities Net assets Equity Issued capital 17 Reserves 18 Accumulated losses 19 Equity attributable to ow ners of the company Non-controlling interests 20 Total equity	1,981,163 3,528,363 4,067,325 871,945 3,255,265 1,741,747 2,595,245 436,621
	11,898,998 6,578,676
	33,529,391 5,212,986 - 90 678,901 720,930
	34,208,292 5,934,006
	46,107,290 12,512,682
	5,862,547 - 11,335,568 2,812,832 302,389 182,010 4,142,875 -
	21,643,379 2,994,842
	1,301,000 - 123,860 - 13,650,000 -
	15,074,860 -
	36,718,239 2,994,842
	9,389,051 9,517,840
	124,176,890 114,576,984 1,515,136 4,008,038 (116,101,098) (108,929,064)
	9,590,928 9,655,958 (201,877) (138,118)
	9,389,051 9,517,840

The Statement of financial position should be read in conjunction with the accompanying notes.

Annual Financial Report 2012 23

Statement of changes in equity for the financial year ended 30 June 2012

Balance at 1 July 2010 Movement in foreign exchange values Loss for the year Total comprehensive income for the Period Shares issued during the year Options issued during the year Recognition of share-based payments Advances from GBTI Exercise of options Share issue costs Balance at 30 June 2011 Balance at 1 July 2011 Movement in foreign exchange values Loss for the year Total comprehensive income for the Period Shares issued during the year Options issued during the year Recognition of share-based payments Advances from GBTI Advances from GBTI converted to equity Exercise of options Share issue costs Balance at 30 June 2012	$ $ $ $ $ $ $ $ $ Accumulated losses Attributable to owners of the parent Non- controlling interests Total Issued capital and contributed equity Employee share option reserve Foreign currency translation reserve General options reserve Other reserve
	104,561,260 225,162 (471,008) 1,469,904 - (100,865,126) 4,920,192 (73,720) 4,846,472 - - 2,447 - - - 2,447 - 2,447 - - - - - (8,063,938) (8,063,938) (64,398) (8,128,336)
	- - 2,447 - - (8,063,938) (8,061,491) (64,398) (8,125,889) 5,027,714 - - - - - 5,027,714 - 5,027,714 - - - 4,492,920 - - 4,492,920 - 4,492,920 - 386,266 - - - - 386,266 - 386,266 - - - - 250,000 - 250,000 - 250,000 5,638,193 - - (2,347,653) - - 3,290,540 - 3,290,540 (650,183) - - - - - (650,183) - (650,183)
	114,576,984 611,428 (468,561) 3,615,171 250,000 (108,929,064) 9,655,958 (138,118) 9,517,840
	114,576,984 611,428 (468,561) 3,615,171 250,000 (108,929,064) 9,655,958 (138,118) 9,517,840 - - (810) - - - (810) (810) - - - - - (7,172,034) (7,172,034) (63,759) (7,235,793)
	- - (810) - - (7,172,034) (7,172,844) (63,759) (7,236,603) 272,000 - - - - - 272,000 - 272,000 - - - - - - - - - - 267,373 - - - - 267,373 - 267,373 - - - - 1,750,000 - 1,750,000 - 1,750,000 913,981 - - 1,086,019 (2,000,000) - - - - 8,542,077 - - (3,595,484) - - 4,946,593 - 4,946,593 (128,152) - - - - - (128,152) - (128,152)
	124,176,890 878,801 (469,371) 1,105,706 - (116,101,098) 9,590,928 (201,877) 9,389,051

The Statement of changes in equity should be read in conjunction with the accompanying notes.

24 AUSTRALIAN RENEWABLE FUELS LIMITED

Cash flow statement for the financial year ended 30 June 2012

Cash flows from operating activities Receipts from customers Receipts from R&D grant Payments to suppliers and employees Interest paid Net cash (used in) operating activities Cash flows from investing activities Interest received Payment for plant and equipment Net overdraft acquired on acquisition Net cash provided by / (used) in investing activities Cash flows from financing activities Proceeds from issue of shares Proceeds from borrow ings Advances from GBTI Payment on loans from related parties Payments for share issue costs Finance lease payments Net cash provided by financing activities Net increase / (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the financial year Effect of movement in exchange rates on cash balances Cash and cash equivalents at the end of the financialyear	Note	Consolidated
		2012 2011 $ $
	24 32 24	44,086,649 6,849,863 868,483 357,768 (45,980,721) (13,882,539) (506,220) (169,789)
		(1,531,809) (6,844,697) 91,490 85,604 (3,594,971) (142,640) (9,181,245) -
		(12,684,726) (57,036) 5,133,403 11,405,704 - - 1,685,000 250,000 - (1,350,751) - (650,183) (10,805) (5,910)
		6,807,598 9,648,860 (7,408,937) 2,747,127 3,528,363 778,789 (810) 2,447
		(3,881,384) 3,528,363

The Cash flow statement should be read in conjunction with the accompanying notes.

Annual Financial Report 2012 25

Notes to the financial statements for the financial year ended 30 June 2012

Note	Contents
1	Summary of accounting policies
2	Segment information
3	Revenue
4	Depreciation and amortisation expenses
5	Finance costs
6	Income taxes
7	Trade and other receivables – current
8	Inventories
9	Other current assets
10	Property, plant and equipment
11	Intangibles
12	Other non-current assets
13	Trade and other payables
14	Provisions
15	Borrowings
16	Amounts payable on acquisition
17	Issued capital and contributed equity
18	Reserves
19	Retained earnings
20	Non-controlling interest
21	Commitments
22	Contingent assets and liabilities
23	Subsidiaries
24	Cash flows from operations
25	Non-cash transactions
26	Financial instruments
27	Key management personnel compensation
28	Related party transactions
29	Remuneration of auditors
30	Earnings per share
31	Share-based payments
32	Business combination
33	Subsequent events
34	Parent entity information

26 AUSTRALIAN RENEWABLE FUELS LIMITED

1. Summary of accounting policies

Statement of compliance

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

The financial statements comprise the consolidated financial statements of the Group.

The financial report has been prepared in accordance with Accounting Standards and Interpretations. Accounting Standards include Australian equivalents to International Financial Reporting Standards (‘A-IFRS’). Compliance with A-IFRS ensures that the financial statements and notes of the Group comply with International Financial Reporting Standards (‘IFRS’).

Basis of preparation

The financial report has been prepared on the basis of historical cost, except for the revaluation of certain non-current assets and financial instruments that are measured at revalued amounts or fair values, as explained in the accounting policies below. Historical cost is based on the fair values of the consideration given in exchange for assets. All amounts are presented in Australian dollars, unless otherwise noted.

The Group has retained the presentation and classification of items in the financial statements from one period to the next unless:

• i. it is apparent, following a significant change in the nature of the entity’s operations or a review of its financial statements, that another presentation or classification would be more appropriate having regard to the criteria for the selection and application of accounting policies in AASB 108; or

• ii. an Australian Accounting Standard requires a change in presentation.

The financial statements were authorised for issue by the Directors on 6 September 2012.

Going concern

For the year ended 30 June 2012, the consolidated entity incurred a net loss of $7,235,793 (2011: $8,128,336) and had net cash outflows from operating activities of $1,531,809 (2011: $6,844,697). As at 30 June 2012 current liabilities exceed current assets by $9,744,381. As at 30 June 2012 a breach of one covenant with respect to the Groups banking facility occurred which has been subsequently noted by the bank. It must also be noted however, that for the period 1 January 2012 to 30 June 2012 the Group delivered $4,330,501 in positive operating cash flow which contributed to an overall improvement in the consolidated cash balance by $2,080,849 for that six month period to a consolidated overdraft (net of cash balances) position of $3,881,384 as at 30 June 2012.

Notwithstanding the losses incurred from normal operations, the Directors consider it appropriate to prepare the financial report on a going concern basis, which assumes the continuity of normal business activities and the realisation of assets and settlement of liabilities in the ordinary course of the business, but will be dependent on the following being achieved:

• Securing new and significant sales contracts;

• Finalising access to cheaper feedstock and when combined with planned capital improvements to the Plants, supply biodiesel to the market at materially improved margins; and

• The continued availability of the bank facility as detailed in note 15.

The Company is confident of delivering on these strategies throughout the financial year ending 30 June 2013 due to:

• The recent track record of sales success, and pipeline of tenders and sales enquiries;

• The success to date in executing more key sales contracts and successfully finalising negotiations for additional sales agreements which, when combined with the current strategies to utilise alternative feedstock types, will provide the Company with higher gross margins and therefore deliver improving cash flows;

• The recent improvement in consolidated cash flow; and

• The improved production output and increase in sales activity from the Barnawartha Plant.

At the date of this report and having considered the above factors, the Directors believe that the consolidated entity will be able to continue as a going concern. If the assumptions above are not realised, then there may be material uncertainty whether the consolidated entity will continue as a going concern and, therefore, whether it will realise its assets and discharge its liabilities in the normal course of business.

The financial report does not include adjustments relating to the recoverability and classification of recorded asset amounts nor to the amounts and classification of liabilities that might be necessary should the consolidated entity not continue as a going concern.

Critical accounting estimates and judgements

In the application of the Group’s accounting policies, management is required to make judgments, estimates and assumptions about carrying values of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstance, the results of which form the basis of making the judgments. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.

Annual Financial Report 2012 27

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

Summary of accounting policies (continued)

The key critical accounting estimates and judgments are:

Impairment of tangible assets

At each reporting date, the Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication of impairment exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any).

Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value is use, estimated future cash flows are discounted to 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.

The determination of fair value and value in use requires management to make estimates and assumptions about items such as expected production and sales volumes, prices, capacity, operating costs and discount rates. These estimates are subject to uncertainty and changes to these factors would impact the recoverable amount of the assets.

Useful lives of tangible assets

The Group reviews the useful lives, depreciation method and estimated residual value of all tangible assets at the end of the reporting period.

Share Based Payments

The Group measures the cost of equity settled share-based payments at fair value at the grant date using an appropriate valuation model taking into account the terms and conditions upon which the instruments were granted and expected vesting period.

Employee Entitlements

Management judgement is applied in determining the following key assumptions used in the calculation of long service leave at balance date:

• Future increases in wages and salaries;

• Future on cost rates; and

• Experience of employee departures and period of service

Inventories

The net realisable value of inventories is the estimated selling price in the ordinary course of business less estimated costs to sell which approximates fair value less costs to sell. The key assumptions require the use of management judgement and are reviewed annually. These key assumptions are the variables affecting the estimated costs to sell and the expected selling price. Any reassessment of costs to sell or selling price in a particular year will affect the costs of goods sold.

Adoption of new and revised accounting standards

In the current year, 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 its operations and effective for the current annual reporting period beginning 1 July 2011. Details of the impact of the adoption of these new accounting standards are set out in the individual accounting policy notes set out below.

AASB 124 Related Party Disclosures (2009), AASB 200912Amendments to Australian Accounting Standards

AASB 1054 Australian Additional Disclosures, AASB 20111Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence Project and AASB 20112 Amendments to Australian Accounting Standards arising from the Trans-Tasman Convergence Project – Reduced Disclosure Requirements

AASB 2010-5 Amendments to Australian Accounting Standards

Amends the requirements of the previous version of AASB 124 to: (a) Provide a partial exemption from related party disclosure requirements for governmentrelated entities; (b) Clarify the definition of a related party; (c) Include an explicit requirement to disclose commitments involving related parties.

AASB 1054 sets out the Australian-specific disclosures for entities that have adopted Australian Accounting Standards. This Standard contains disclosure requirements that are additional to IFRSs in areas such as compliance with Australian Accounting Standards, the nature of financial statements (general purpose or special purpose), audit fees, imputation (franking) credits and the reconciliation of net operating cash flow to profit (loss).

AASB 2011-1 makes amendments to a range of Australian Accounting Standards and Interpretations for the purpose of closer alignment to IFRSs and harmonisation between Australian and New Zealand Standards. The Standard deletes various Australian-specific guidance and disclosures from other Standards (Australianspecific disclosures retained are now contained in AASB 1054), and aligns the wording used to that adopted in IFRSs. The 'true and fair override' is introduced into AASB 101 Presentation of Financial Statements, but its application in the Australian context is limited by an additional 'Aus' paragraph.

This Standard makes numerous editorial amendments to a range of Australian Accounting Standards and Interpretations, including amendments to reflect changes made to the text of IFRSs by the IASB.

These amendments have no major impact on the requirements of the amended pronouncements.

28 AUSTRALIAN RENEWABLE FUELS LIMITED

AASB 2010-6 Amendments to Australian Accounting Standards – Disclosures on Transfers of Financial Assets

The amendments introduce additional disclosures, designed to allow users of financial statements to improve their understanding of transfer transactions of financial assets (for example, securitisations), including understanding the possible effects of any risks that may remain with the entity that transferred the assets.

The amendments also require additional disclosures if a disproportionate amount of transfer transactions are undertaken around the end of a reporting period.

Standards and Interpretations adopted with no effect on financial statements

The following new and revised Standards and interpretations have also been adopted in these financial statements. Their adoption has not had any significant impact on the amounts reported in these financial statements but may affect the accounting for future transactions or arrangements.

AASB 2009-12 ‘Amendments to Australian Accounting Standards’

AASB 2010-5 ‘Amendments to Australian Accounting Standards’

The application of AASB 2009-12 makes amendments to AASB 8 ‘Operating Segments’ as a result of the issuance of AASB 124 ‘Related Party Disclosures’ (2009). The amendment to AASB 8 requires an entity to exercise judgement in assessing whether a government and entities known to be under the control of that government are considered a single customer for the purposes of certain operating segment disclosures. The Standard also makes numerous editorial amendments to a range of Australian Accounting Standards and Interpretations. The application of AASB 2009-12 has not had any material effect on amounts reported in the Company’s financial statements.

The Standard makes numerous editorial amendments to a range of Australian Accounting Standards and Interpretations.

The application of AASB 2010-5 has not had any material effect on amounts reported in the Company’s financial statements.

AASB 2010-6 ‘Amendments to The application of AASB 2010-6 makes amendments to AASB 7 ‘Financial Australian Accounting Standards – Instruments – Disclosures’ to introduce additional disclosure requirements for Disclosures on Transfers of Financial transactions involving transfer of financial assets. These amendments are intended Assets’ to provide greater transparency around risk exposures when a financial asset is transferred and derecognised but the transferor retains some level of continuing exposure in the asset.

To date, the Company has not entered into any transfer arrangements of financial assets that are derecognised but with some level of continuing exposure in the asset. Therefore, the application of the amendments has not had any material effect on the disclosures made in the consolidated financial statements.

AASB 1054 Australian Additional AASB 1054 sets out the Australian-specific disclosures for entities that have Disclosures adopted Australian Accounting Standards. This Standard contains disclosure requirements that are additional to IFRSs in areas such as compliance with Australian Accounting Standards, the nature of financial statements (general purpose or special purpose), audit fees, imputation (franking) credits and the reconciliation of net operating cash flow to profit (loss). AASB 2010-4 Further Amendments Amends a number of pronouncements as a result of the IASB's 2008-2010 cycle of to Australian Accounting Standards annual improvements. Key amendments include: arising from the Annual - Financial statement disclosures - clarification of content of statement of Improvements Project changes in equity (AASB 101), financial instrument disclosures (AASB 7) and significant events and transactions in interim reports (AASB 134)

Standards and interpretations issued not yet effective

At the date of authorisation of the financial statement, the Standards and Interpretations listed below were in issue but not yet effective. The impact of the initial application of the following Standards and Interpretations to the financial report of the Group has not been assessed:

Standards/Interpretations	Effective for annual reporting	Expected to be initially applied
	periods beginning on or after	in the financial year ending
AASB 9 ‘Financial Instruments’, AASB 200911	1 January 2013	30 June 2014
‘Amendments to Australian Accounting Standards
arising from AASB 9’ and AASB 2010-7
‘Amendments to Australian Accounting Standards
arising from AASB 9 (December 2010)’
AASB 10 ‘Consolidated Financial Statements’	1 January 2013	30 June 2014

Annual Financial Report 2012 29

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

Summary of accounting policies (continued)

Standards/Interpretations	Effective for annual reporting	Expected to be initially applied
	periods beginning on or after	in the financial year ending
AASB 12 ‘Disclosure of Interests in Other Entities’	1 January 2013	30 June 2014
AASB 127 ‘Separate Financial Statements’ (2011)	1 January 2013	30 June 2014
AASB 13 ‘Fair Value Measurement’ and AASB	1 January 2013	30 June 2014
2011-8 ‘Amendments to Australian
AASB 119 ‘Employee Benefits’ (2011) and AASB	1 January 2013	30 June 2014
2011-10 ‘Amendments to Australian Accounting
Standards arising from AASB 119 (2011)’
AASB 2010-8 ‘Amendments to Australian	1 January 2012	30 June 2013
Accounting Standards – Deferred Tax: Recovery
of Underlying Assets’
AASB 2011-4 ‘Amendments to Australian	1 July 2013	30 June 2014
Accounting Standards to Remove Individual Key
Management Personnel Disclosure Requirements’
AASB 2011-7 ‘Amendments to Australian	1 January 2013	30 June 2014
Accounting Standards arising from the
Consolidation and Joint Arrangements standards’
AASB 2011-9 ‘Amendments to Australian	1 July 2012	30 June 2013
Accounting Standards – Presentation of Items of
Other Comprehensive Income’
AASB 2012-2 Amendments to Australian Accounting Standards – Disclosures – Offsetting	1 January 2013	30 June 2014
Financial Assets and Financial Liabilities
(Amendments to AASB 7)
AASB 2012-3 Amendments to Australian Accounting Standards – Offsetting Financial	1 January 2014	30 June 2015
Assets and Financial Liabilities (Amendments to
AASB 132)
AASB 2012-5 Amendments to Australian	1 January 2013	30 June 2014
Accounting Standards arising from Annual
Improvements 2009–2011 Cycle

The following significant accounting policies have been adopted in the preparation and presentation of the financial report:

(a) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) (referred to as ‘the Group’ in these financial statements). A controlled entity is any Company in which Australian Renewable Fuels Limited has the power to control the financial and operating policies of the entity so as to obtain benefits from its activities.

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.

All inter-Company balances and transactions between entities in the consolidated entity, including any unrealised profits or losses, have been eliminated on consolidation. Accounting policies of subsidiaries have been changed where necessary to ensure consistencies with those policies applied by the Company.

(b) Borrowing costs

All borrowing costs, except to the extent that they are directly attributable to the acquisition, construction or production of qualifying assets, are recognised in profit or loss in the period in which they are incurred.

(c) Cash and cash equivalents

Cash comprises cash on hand, cash at call, short-term deposits and cash in secured fixed term deposits held as security for the provision of bank guarantees. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.

(d) Employee benefits

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

30 AUSTRALIAN RENEWABLE FUELS LIMITED

Liabilities recognised in respect of employee benefits expected to be settled within 12 months, are measured at their nominal values using the remuneration rate expected to apply at the time of settlement.

Liabilities recognised in respect of employee benefits which are not expected to be settled within 12 months 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.

(e) Financial assets

Investments are recognised and derecognised on trade date where the purchase order or sale of an investment is under a contract whose terms require delivery of the investment within the timeframe established by the market concerned, and are initially measured at fair value, net of transaction costs except for those financial assets classified as at fair value through profit or loss which are initially measured at fair value.

Subsequent to initial recognition, investments in subsidiaries are measured at cost in the Company financial statements.

Other financial assets are classified in the following categories: financial assets ‘at fair value through profit or loss’, ‘held-tomaturity investments’, ‘available-for-sale’ financial assets, and ‘loans and receivables’. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition.

Effective interest method

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.

Income is recognised on an effective interest basis for debt instruments other than those financial assets classified as at fair value through profit or loss.

At fair value through profit or loss

An instrument is classified as at fair value through profit or loss if it is held for trading or is designated as such upon initial recognition. Financial Instruments are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company’s investment strategy. Upon initial recognition, the attributable transaction costs are recognised in profit or loss when incurred. Financial instruments that are at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss.

Available-for-sale financial assets

Listed investments in equity securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, and foreign exchange gains and losses are recognised as a separate component of equity. When an investment is derecognised, the cumulative gain or loss in equity is transferred to profit or loss.

Loans and receivables

Trade receivables, loans, and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as ‘loans and receivables’. Loans and receivables are measured at amortised cost using the effective interest rate method less impairment. Interest is recognised by applying the effective interest rate.

Impairment of financial assets

Financial assets, other than those at fair value through profit or loss (FVTPL), are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected.

(f) Financial liabilities and equity instruments issued by the Company

Interest and dividends

Interest and dividends are classified as expenses or as distributions of profit consistent with the balance sheet classification of the related debt or equity instruments. Borrowings are classified as Financial Liabilities measured at amortised cost.

Classification as debt or equity

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangement.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs.

Annual Financial Report 2012 31

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

Summary of accounting policies (continued)

(g) Foreign currency

The individual financial statements of each Group entity are presented in the currency of the primary economic environment in which the entity operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each entity are expressed in Australian dollars, which is the functional currency of Australian Renewable Fuels Limited, and the presentation currency for the consolidated financial statements.

In preparing the financial statements of the individual entities, transactions in currencies other than the entity’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date, monetary items denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Exchange differences are recognised in the foreign exchange reserve in the period in which they arise.

(h) Impairment of tangible and intangible assets

At each reporting date, 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. During the financial year, independent advice was used to assist in this process. If any such indication of impairment exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). When the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where 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.

Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment 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 the 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 in the profit or loss immediately.

Where 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 only to the extent 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 in profit or loss immediately.

(i) Income taxes

Current tax

Current tax is calculated by reference to the amount of income taxes payable or recoverable in respect of the taxable profit or tax loss for the period. It is calculated using tax rates and tax laws that have been enacted or substantively enacted by reporting date. Current tax for current and prior periods is recognised as a liability (or asset) to the extent that it is unpaid (or refundable).

Deferred tax

Deferred tax is accounted for using the statement of financial position liability method. Temporary differences are differences between the tax base of an asset or liability and its carrying amount in the balance sheet. The tax base of an asset or liability is the amount attributed to that asset or liability for tax purposes.

In principle, deferred tax liabilities are recognised for all taxable temporary differences. Deferred tax assets are recognised to the extent that it is probable that sufficient taxable amounts will be available against which deductible temporary differences or unused tax losses and tax offsets can be utilised. However, deferred tax assets and liabilities are not recognised if the temporary differences giving rise to them arise from the initial recognition of assets and liabilities (other than as a result of a business combination) which affects neither taxable income nor accounting profit. Furthermore, a deferred tax liability is not recognised in relation to taxable temporary differences arising from the initial recognition of goodwill.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries, branches and associates, and interests in joint ventures except where the Group is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with these investments and interests are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by reporting date. The measurement of deferred tax liabilities and assets reflects the tax

32 AUSTRALIAN RENEWABLE FUELS LIMITED

consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and the Company/Group intends to settle its current tax assets and liabilities on a net basis.

Current and deferred tax for the period

Current and deferred tax is recognised as an expense or income in the income statement, except when it relates to items credited or debited directly to equity, in which case the deferred tax is also recognised directly in equity, or where it arises from the initial accounting for a business combination, in which case it is taken into account in the determination of goodwill or excess.

Tax consolidation

Australian Renewable Fuels Limited and its 100% owned Australian resident subsidiaries have implemented the tax consolidation legislation. Current and deferred tax amounts are accounted for in each individual entity as if each entity continued to act as a taxpayer in its own right.

(j) Inventories

Inventories of consumable supplies and spare parts are valued at lower of cost and net realisable value. Costs, including an appropriate portion of fixed and variable overhead expenses, are assigned to inventory on hand by the method most appropriate to each particular class of inventory, with the majority being valued on a first in first out basis. Net realisable value represents the estimated selling price less all estimated costs of completion and costs to be incurred in marketing, selling and distribution

(k) Buildings and property, plant and equipment

Buildings and property, plant and equipment

Buildings and property, plant and equipment are stated at cost less accumulated depreciation and impairment. Cost includes expenditure that is directly attributable to the acquisition of the item. In the event that settlement of all or part of the purchase consideration is deferred, cost is determined by discounting the amounts payable in the future to their present value as at the date of acquisition.

Depreciation

Depreciation is provided on property, plant and equipment, including freehold buildings but excluding land. Depreciation is calculated on a straight line basis so as to write off the net cost of each asset over its expected useful life to its estimated residual value. The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period, with the effect of any changes recognised on a prospective basis.

The depreciation rates used for each class of depreciable assets are:

Buildings	40 years
Vehicles	8 years
Furniture, fittings and office equipment	7 years
Computer hardware and manufacturing equipment	4 years
Computer software	2.5 years
Manufacturing plant	13 years
Laboratory equipment	10 years

(l) Intangible assets

Intangible assets are carried at cost less accumulated amortisation and accumulated impairment losses (where applicable). Amortisation is recognised on a straight-line basis over their estimated useful lives. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimates being accounted for on a prospective basis.

(m) Non-current assets held for sale

Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the sale is highly probable and the non-current asset (or disposal Group) is available for immediate sale in its present condition. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification.

(n) Provisions

Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

Annual Financial Report 2012 33

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

Summary of accounting policies (continued)

(o) Revenue

Revenue is measured at the fair value of the consideration received or receivable, and is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured.

Sale of goods

Revenue from the sale of goods is recognised when all the following conditions are satisfied:

• i. the Group has transferred to the buyer the significant risks and rewards of ownership of the goods;

• ii. the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over the goods sold;

• iii. the amount of revenue can be measured reliably;

• iv. it is probable that the economic benefits associated with the transaction will flow to the entity; and

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

The method of recognising revenue has differed from the financial statements as at 31 December 2011. The method adopted for the full year to 30 June 2012 notes the substance of the transaction before it is deemed as Revenue. As a result mineral diesel sales have been offset against the purchase of the same product for the same amount. Mineral diesel is acquired and re-sold as part of the blending process with biodiesel.

Rendering of services

Revenue from a contract to provide services is recognised by reference to the stage of completion of the contract. The stage of completion of the contract is determined as follows;

• i. installation fees are recognised by reference to the stage of completion of the installation, determined as the proportion of the total time expected to install that has elapsed at the end of the reporting period;

• ii. servicing fees included in the price of products sold are recognised by reference to the proportion of the total cost of providing the servicing for the product sold, taking into account historical trends in the number of services actually provided on past goods sold; and

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

Royalties

Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreement (provided that it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably). Royalties determined on a time basis are recognised on a straight-line basis over the period of the agreement. Royalty arrangements that are based on production, sales and other measures are recognised by reference to the underlying arrangement.

Interest revenue

Interest revenue is recognised when it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured reliably. Interest revenue is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount at initial recognition.

Research and development tax concession revenue

The Australian Federal Government provides the Research and Development Tax Concession scheme which is a broadbased tax concession scheme which allows companies to deduct certain levels of qualifying expenditure incurred on research and development activities in the calculation of their tax obligations. For small companies which satisfy certain turnover and expenditure based criteria, a facility is also provided whereby the concession, which would otherwise be included within their carried-forward tax losses, can be paid in a cash refund. The Group had qualified for this treatment and received a payment. The payment was recognised as revenue at that point.

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.

The benefit of a government loan at a below-market rate of interest is treated as a government grant, measured as the difference between proceeds received and the fair value of the loan based on prevailing market interest rates unless there are specific performance conditions which must be met before the loan will convert into a grant, in which case the unconverted portion of the loan will be treated as a loan.

Government grants whose primary condition is that the Group should purchase, construct or otherwise acquire non-current assets are recognised as deferred revenue 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.

Other government grants are recognised as revenue over the periods necessary to match them with the costs for which they are intended to compensate, on a systematic basis. Government grants that are receivable as compensation for expenses

34 AUSTRALIAN RENEWABLE FUELS LIMITED

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.

(p) Goods and services tax

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

• i. where the amount of GST incurred is not recoverable from the Australian Taxation Office, it is recognised as part of the cost of acquisition of an asset or as part of an item of expense; or

• ii. for receivables and payables with are recognised inclusive of GST.

The net amount of GST recoverable from, or payable to, the Australian Taxation Office is included as part of receivables or payables.

Cash flows are included in the cash flow statement on a gross basis. The GST component of cash flows arising from investing and financing activities which is recoverable from, or payable to, the Australian Taxation Authority is classified as operating cash flows.

(q) Investments in associates

An associate is an entity over which the Group has significant influence and that is neither a subsidiary nor an interest in a joint venture. 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.

The results and assets and liabilities of associates are incorporated in these financial statements using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with AASB 5 ‘Non-current Assets Held for Sale and Discontinued Operations’. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Group’s share of the net assets of the associate, less any impairment in the value of individual investments.

Losses of an associate in excess of the Group’s interest in that associate (which includes any long-term interests that, in substance, form part of the Group’s net investment in the associate) are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

Any excess of the cost of acquisition over the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of the acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any excess of the Group’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of the acquisition, after reassessment, is recognised immediately in profit or loss.

Where a Group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group’s interest in the relevant associate.

(r) Share-based payments

Equity-settled share-based payments with employees and others providing similar services are measured at the fair value of the equity instrument at the grant date. Fair value is measured by use of a Black-Scholes pricing model. The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations. Further details on how the fair value of equity-settled share-based transactions has been determined can be found in note 31.

The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of equity instruments that will eventually vest.

At each reporting date, the Group revises its estimate of the number of equity instruments expected to vest. The impact of the revision of the original estimates, if any, is recognised in profit or loss over the remaining vesting period, with corresponding adjustment to the equity-settled employee benefits reserve.

Equity-settled share-based payment transactions with other parties are measured at the fair value of the goods and services received, except where the fair value cannot be estimated reliably, in which case they are measured at the fair value of the equity instruments granted, measured at the date the entity obtains the goods or the counterparty renders the service.

For cash-settled share-based payments, a liability equal to the portion of the goods or services received is recognised at the current fair value determined at each reporting date.

(s) Earnings per share

The Group presents basic and diluted earnings per share (EPS) data for its ordinary shares. Basic EPS is calculated by dividing the profit or loss attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted EPS is determined by adjusting the profit or loss attributable to ordinary shareholders and the weighted average number of ordinary shares outstanding for the effects of all dilutive potential ordinary shares.

(t) Lease payments

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

Annual Financial Report 2012 35

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

Summary of accounting policies (continued)

Lease payments are apportioned between finance expenses and reduction of the lease obligation so as to achieve a constant rate of interest on the remaining balance of the liability. Finance expenses are recognised immediately in profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalised in accordance with the Group’s general policy on borrowing costs. Contingent rentals are recognised as expenses in the periods in which they are incurred.

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

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

36 AUSTRALIAN RENEWABLE FUELS LIMITED

2. Segment information

AASB 8 requires operating segments to be 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.

Information reported to chief operating decision maker for the purposes of resource allocation and assessment of performance is focused on three key reportable segments. The Group’s reportable segments under AASB 8 are therefore:

• i. Western Australia – Biodiesel Plant located at Picton

• ii. South Australia – Biodiesel Plant located at Largs Bay

• iii. Victoria – Biodiesel Plant located at Barnawartha

The accounting policies of the new reportable segments are the same as the Group’s accounting policies.

(i) Revenue and results

The following is an analysis of the Group’s revenue and results from continuing operations by reportable operating segments for the periods under review:

for the periods under review:
Continuing operations Western Australia South Australia Victoria Total of all segments Corporate Interest revenue Finance costs Gain on disposal of land Total loss before tax	2012 2011 $ $ 1,448,994 2,600,106 8,759,039 3,826,249 28,089,019 - 38,297,052 6,426,355 Segment revenue	Segment result
		2012 2011 $ $
		(1,524,802) (1,422,946) (1,505,142) (3,003,620) 1,151,373 -
		(1,878,571) (4,426,566) (4,013,056) (3,665,591) 87,211 69,884 (1,431,377) (106,063) - -
		(7,235,793) (8,128,336)

The revenue reported above represents the revenue generated from external customers. The method of recognising revenue has differed from the financial statements as at 31 December 2011. The method adopted for the full year to 30 June 2012 notes the substance of the transaction before it is deemed as Revenue. As a result $20,175,158 in mineral diesel sales has been offset against the purchase of the same product for the same amount. Mineral diesel is acquired and re-sold as part of the blending process with biodiesel.

Revenue for South Australia was affected by the fire at the Largs Bay Plant. Since the fire on 24 December 2011 there have been no material sales of biodiesel from the Plant. The segment result for South Australia includes an insurance recovery of $876,642.

Included in revenue for 2012 are sales from the Group’s two largest customers of:

• i. Customer 1 $12,420,409 ($5,572,774 South Australia, $6,847,635 Victoria)

• ii. Customer 2 $12,041,432 (Victoria)

Included in revenue for 2011 are sales from the Group’s three largest customers of:

• i. Customer 3 $2,469,353 (South Australia)

• ii. Customer 4 $1,747,023 (South Australia)

• iii. Customer 5 $978,381 (Western Australia)

No other single customer contributed 10% or more to the Group’s revenue for both 2012 and 2011.

Segment result represents the profit or loss incurred by each segment without the allocation of interest revenue, finance costs, income tax expense and inter-segment transactions. This is the measure reported to the chief operating decision maker for the purpose of resource allocation and assessment of segment performance.

Annual Financial Report 2012 37

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

ii Segment assets Western Australia South Australia Victoria Segments Total Unallocated		Consolidated
		2012 2011 $ $
		4,963,371 4,465,067 4,124,127 4,390,255 29,958,269 -
		39,045,767 8,855,322 7,061,523 3,657,360
		46,107,290 12,512,682
iii Segment liabilities Western Australia South Australia Victoria Segments total Unallocated		169,268 343,505 1,339,466 1,297,239 10,932,038 -
		12,440,772 1,640,744 24,277,467 1,354,098
		36,718,239 2,994,842
Western Australia South Australia Victoria Segments Total Unallocated	2012 2011 $ $ 521,382 512,314 371,611 465,936 1,366,802 - 2,259,795 978,250 95,500 37,698 2,355,295 1,015,948 Depreciation & amortisation	2012 2011 $ $ Additions to non-current
		101,791 32,845 2,671,189 70,392 697,838 -
		3,470,818 103,237 103,877 216,010
		3,574,695 319,247
3. Revenue
(a) Revenue from continuing operations		Consolidated
		2012 2011 $ $
		38,297,052 6,426,355

The revenue reported above represents the revenue generated from external customers. The method of recognising revenue has differed from the financial statements as at 31 December 2011. The method adopted for the full year to 30 June 2012 notes the substance of the transaction before it is deemed as Revenue. As a result $20,175,158 in mineral diesel sales has been offset against the purchase of the same product for the same amount. Mineral diesel is acquired and re-sold as part of the blending process w ith biodiesel.

(b) Finance income Bank interest received (c) Other income Grant income Research and development tax credit Business interruption insurance Other
	87,211 69,884
	- 100,000 868,483 - 876,642 - 35,757 41,688
	1,780,882 141,688

38 AUSTRALIAN RENEWABLE FUELS LIMITED

4. Depreciation and amortisation expenses

4. Depreciation and amortisation expenses
Property, plant and equipment Intangible assets Other assets	Consolidated
	2012 2011 $ $
	2,313,176 941,210 90 32,824 42,029 41,914
	2,355,295 1,015,948

5. Finance costs

Interest on w orking capital facility Interest on convertible notes Finance charges payable under finance leases and hire purchase contracts	Consolidated
	2012 2011 $ $
	- 479 525,107 105,584 906,270 -
	1,431,377 106,063

Weighted average interest rate on funds borrowed is 9.5% (2011 – 3.0%)

6. Income taxes

6. Income taxes
	Consolidated
	2012	2011
	$	$
Deferred tax benefit / (expense) relating to the
origination and reversal of temporary timing	-	-
differences and tax losses
Total tax benefit / (expense)	-	-
The prima facie income tax expense on pre-tax accounting profit/(loss) from operations reconciles to the income tax expense in
the financial statements as follow s:
Loss before tax from continuing operations	(7,235,793)	(8,128,336)
Loss before tax from discontinued operations	-	-
Accounting loss before income tax	(7,235,793)	(8,128,336)
Income tax benefit calculated at 30%	(2,170,738)	(2,438,501)
Effect of expenses that are not deductible in determining taxable income	138,234	307,382
Effect of temporary differences not recognised	(443,978)	(513,105)
Effect of tax losses not recognised	2,556,694	2,738,504
Share based payments and impairment charges	(80,212)	(94,280)
Income tax credit recognised in profit or loss	-	-
Unrecognised deferred tax balances
The follow ing deferred tax assets have not been recognised:
- deductible temporary differences	10,446,065	10,114,318
- tax losses	19,413,986	17,874,607
	29,860,051	27,988,925
Recognised deferred assets and tax liabilities
The follow ing deferred tax balances have been recognised:
Deferred tax assets
- Provisions	3,313	1,838
- Other assets	-	-
Deferred tax liabilities
- Accrued income	-	(1,284)
- Prepayments	(3,313)	(554)
	-	-

Annual Financial Report 2012 39

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

Tax consolidation

Australian Renewable Fuels Limited and its 100% owned Australian resident subsidiaries have implemented the tax consolidation legislation. The accounting policy for the implementation of the tax consolidation legislation is set out in Note 1(i).

The entities in the tax consolidated Group entered into a tax sharing agreement on adoption of the tax consolidation legislation which, in the opinion of the Directors, limits the joint and several liability of the controlled entities in the case of a default by the head entity, Australian Renewable Fuels Limited.

The allocation of taxes under the tax funding agreement is recognised as an increase/decrease in the subsidiaries’ interCompany accounts with the tax consolidated Group head Company Australian Renewable Fuels Limited. The difference between the current tax amount that is allocated under the tax funding agreement and the amount that is allocated under an acceptable method is recognised as a contribution/distribution of the subsidiaries’ equity accounts. The Group has applied the Group allocation approach in determining the appropriate distribution of current taxes to allocate to members to the tax consolidation Group.

7. Trade and other receivables: current

	Consolidated
	2012	2011
	$	$
Trade receivables	3,893,907	524,653
Provision for impairment of doubtful debts	(13,168)	(13,168)
GST receivables	169,586	234,756
Other debtors	17,000	125,704
	4,067,325	871,945

Aging of past-due but not impaired receivables

90 -150 days	413,853 20,067
	413,853 20,067

Trade receivables are non-interest bearing and are generally on 7 to 30 day terms. An allowance is made when there is objective evidence that a trade receivable is impaired.

8. Inventories

8. Inventories
Raw materials – at cost Consumables – at cost Finished goods – at net realisable value By products – at cost Spare parts - at cost	Consolidated
	2012 2011 $ $
	846,044 708,206 275,683 21,240 1,668,546 993,654 53,570 18,647 411,422 -
	3,255,265 1,741,747

9. Other current assets

9. Other current assets
Income accrued Prepaid rent Prepaid insurance Prepayment for raw materials Prepaid lease reclassified as current (note 12) Insurance proceeds receivable Other	Consolidated
	2012 2011 $ $
	- 4,279 76,212 - 452,839 239,308 556,164 88,185 41,914 41,914 941,084 - 527,032 62,935
	2,595,245 436,621

40 AUSTRALIAN RENEWABLE FUELS LIMITED

10. Property, plant and equipment

10. Property, plant and equipment
Consolidated Gross carrying amount Balance at 1 July 2010 Additions Balance at 1 July 2011 Additions Disposals Write dow n due to fire damage to Larg's Bay Acquisition of BPL (note 32) Balance at 30 June 2012 Accumulated depreciation Balance at 1 July 2010 Adjustment Depreciation expense (note 4) Balance at 1 July 2011 Depreciation expense (note 4) Disposal Write dow n due to fire damage to Larg's Bay Balance at 30 June 2012 Net book value As at 30 June 2011 As at 30 June 2012	Freehold land and buildings Plant and equipment at cost Total $ $ $
	- 12,088,279 12,088,279 - 319,247 319,247
	- 12,407,526 12,407,526 - 3,574,695 3,574,695 - (2,985) (2,985) - (3,382,000) (3,382,000) 3,899,535 23,346,608 27,246,143
	3,899,535 35,943,844 39,843,379
	- (6,253,114) (6,253,114) - (216) (216) - (941,210) (941,210)
	- (7,194,540) (7,194,540) - (2,313,176) (2,313,176) - 1,728 1,728 - 3,192,000 3,192,000
	- (6,313,988) (6,313,988)
	- 5,212,986 5,212,986
	3,899,535 29,629,856 33,529,391

During the year an independent valuation was conducted on property, plant and equipment at all three operating business sites.

11. Intangible Assets

11. Intangible Assets
Gross carrying amount Balance at 1 July 2010 Additions/disposals Balance at 30 June 2011 Additions/disposals Balance at 30 June 2012 Accumulated amortisation Balance at 1 July 2010 Amortisation expense (note 4) Balance at 30 June 2011 Amortisation expense (note 4) Balance at 30 June 2012 Net book value As at 30 June 2011 As at 30 June 2012	Consolidated
	Manufacturing license Total $ $
	164,119 164,119 - -
	164,119 164,119
	- -
	164,119 164,119
	(131,205) (131,205) (32,824) (32,824)
	(164,029) (164,029)
	(90) (90)
	(164,119) (164,119)
	90 90
	- -

Annual Financial Report 2012 41

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

12. Other non-current assets

Prepaid lease on Picton land(i) Reclassified as current Accumulated amortisation (note 4)	Consolidated
	2012 2011 $ $
	838,290 838,290 (41,914) (41,914) (117,475) (75,446)
	678,901 720,930

(i) In the 2010 financial year, the Group entered into an agreement for the sale of its Picton land to Kingslane Pty Limited for a total consideration of $3,000,000 and agreed to lease back a portion of the land (approximately 25% of the total property) for a fixed fee of $838,290 (included stamp duty of $58,290) paid up front.

13. Trade and other payables

3. Trade and other payables
Current: Trade payables(i) Lease liability(ii) WA Government grant(iii) Insurance premium funding Accrued costs Insurance damages claims received in advance Other payables	Consolidated
	2012 2011 $ $
	7,647,290 2,103,325 - 10,800 300,000 300,000 361,903 - 2,382,082 - 427,143 - 217,150 398,707
	11,335,568 2,812,832

(i ) Trade payables are non-interest bearing and are normally settled on 0-60 day terms.

(ii) In prior years the Company leased a motor vehicle under a finance lease. During the 2012 year it exercised its option to purchase the vehicle at the end of the lease term. No finance lease arrangements were in place at 30 June 2012.

(iii) The WA Government advance is convertible to a grant when certain performance conditions are met. The Government advance was awarded in 2005 with a convertible period of 5 years. The advance is non-interest-bearing and any unconverted and outstanding amounts as at June 2012 are repayable at that time. In the 2011 financial year $100,000 was converted to a grant. The amount to be converted for the 2012 year is currently being determined at which point the final amount repayable (if any) will be calculated.

14. Provisions

Employee leave Current Non –current	Consolidated
	2012 2011 $ $
	302,389 182,010 123,860 -
	426,249 182,010

42 AUSTRALIAN RENEWABLE FUELS LIMITED

15. Borrowings

Convertible notes (note 32) Derivative component Disclosed in the financial statements as: Other non-current liabilities Total facilities: Bank overdraft Guarantee facility Facilities used at reporting date: Bank overdraft Guarantee facility Facilities unused at reporting date: Bank overdraft Guarantee facility Other At reporting date, the Group had the follow ing financing facilities in place w ith HSBC Bank Australia Limited and Suncorp Group Limited:	Consolidated
	2012 2011 $ $
	8,218,661 - 5,431,339 -
	13,650,000 -
	13,650,000 -
	13,650,000 -
	10,000,000 - 581,358 559,900
	10,581,358 559,900
	5,862,547 - 581,358 -
	6,443,905 -
	4,137,453 - - 559,900 - -
	4,137,453 559,900

Attached to the bank overdraft facility are covenants. As at 30 June 2012 a breach of one covenant occurred. The bank has been advised of the breach and has reserved their rights, but taken no action. The debt facility remains in place.

16. Amounts payable on acquisition

Current: Cash fee payable(i) Contingent consideration(ii) Non current: Contingent consideration(ii)	Consolidated
	2012 2011 $ $
	3,443,875 - 699,000 -
	4,142,875 - 1,301,000 -
	5,443,875 -

(i ) The cash fees to be paid have been recognised as current liabilities in the statement of financial position and are due for payment on 31 December 2012.

(i i ) The Contingent consideration is a further payment to holders of the convertible notes that may be triggered subject to certain criteria being achieved. Earn-out payments can be made to the noteholders if the plant at Barnawartha achieves production levels greater than 43.5 million litres per annum in each of the first three years from 1 November 2011. These payments will be 16.33 cents per litre for each litre of production in excess of 43.5 million litres per annum for each year the excess is achieved. Should the average level of production over the first three years from 1 November 2011 exceed 49.3 million litres per annum, the potential earn-out payments period will extend for a further two years, taking the earn out program to five years. M anagement has assessed the likelihood of the earn-out payments and applied discount cashflow rate against the quantum of the payout to determine the Contingent consideration. This amount will be reviewed on an annual basis.

Annual Financial Report 2012 43

for the financial year ended 30 June 2012 (continued)

Notes to the financial statements

17. Issued capital and contributed equity

Fully paid ordinary shares: 30 June 2012: 2,441,300,361 (30 June 2011: 1,732,641,023)	Consolidated
	2012 2011 $ $
	124,176,890 114,576,984

Changes to the then Corporations Law abolished the authorised capital and par value concept 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.

17.1 Ordinary shares

Balance at beginning of year Issue of shares from rights issue Issue of shares from private placements Exercise of options Share issue costs Balance at end of financial year	No. $ 1,732,641,023 114,576,984 - - 214,000,000 1,185,981 494,659,338 8,542,077 - (128,152) 2,441,300,361 124,176,890 2012 Consolidated	Consolidated
		No. $ 2011
		631,523,384 104,561,260 772,063,390 5,027,714 - - 329,054,249 5,638,193 - (650,183)
		1,732,641,023 114,576,984

Ordinary shares carry one vote per share and carry the right to dividends.

17.2 Options

Balance at beginning of the year Issue of options Exercise of options Share based payments Options expired/forfeited Balance at end of financial year	No. $ 565,849,207 4,226,599 200,000,000 1,086,019 (494,659,338) (3,595,484) 146,500,000 267,373 (60,349,869) - 357,340,000 1,984,507 2012 Consolidated	Consolidated
		No. $ 2011
		309,318,675 1,695,066 578,084,781 4,492,920 (329,054,249) (2,347,653) 7,500,000 386,266 - -
		565,849,207 4,226,599

18. Reserves

Foreign currency translation reserve Other reserve General options reserve Employee share options reserve	Consolidated
	2012 2011 $ $
	(469,371) (468,561) 878,801 611,428 1,105,706 3,615,171 - 250,000
	1,515,136 4,008,038

18.1 Foreign currency translation reserve

Balance at end of year Exchange differences arising on translating the net assets of foreign operations Balance at beginning of year	Consolidated
	2012 2011 $ $
	(468,561) (471,008) (810) 2,447
	(469,371) (468,561)

44 AUSTRALIAN RENEWABLE FUELS LIMITED

Exchange differences relating to the translation of the net assets of the Group’s foreign operations from their functional currencies to the Group’s presentation currency (i.e. Australian dollars) are recognised directly in other comprehensive income and accumulated in the foreign currency translation reserve. Exchange differences previously accumulated in the foreign currency translation reserve are reclassified to profit or loss on the disposal or partial disposal of the foreign operation.

18.2 Employee share options reserve

Balance at beginning of year Share based payments Balance at end of year	Consolidated
	2012 2011 $ $
	611,428 225,162 267,373 386,266
	878,801 611,428

The employee share options reserve arises on the grant of options to Directors and employees under the share plan. Amounts are recognised in accordance with note 1 (r). Amounts are transferred out of the reserve and into issued capital when the options are exercised. Further information about share based payment to employees is made in note 31 to the financial statements.

18.3 General options reserve

The general options reserve arose on:

• i. The grant of options to shareholders in November 2010 under the rights issue. Amounts are transferred out of the reserve and into issued capital if the options were exercised by the expiry date. Options were valued at 0.8 cents per option using the Black-Scholes method and all that were not exercised by the expiry date have now expired.

• ii. The grant of options to Global Biofuels Trading Inc (GBTI) on 24 March 2012 under which one option was granted for nil consideration for every share subscribed under the GBTI investment in the Group once the contribution of $2 million to equity was satisfied. Amounts will be transferred out of the reserve and into issued capital if the options are exercised. Options are valued at 0.5 cents using the Black-Scholes method.

Balance at beginning of year Options issued Options exercised Balance at end of year	Consolidated
	2012 2011 $ $
	3,615,171 1,469,904 1,086,019 4,492,920 (3,595,484) (2,347,653)
	1,105,706 3,615,171
18.4 Other reserve

18.4 Other reserve
Balance at beginning of year Advances from GBTI Conversion to equity Balance at end of year	Consolidated
	2012 2011 $ $
	250,000 - 1,750,000 250,000 (2,000,000) -
	- 250,000

The other reserve initially arose in the 2011 year on advances made by Global Biofuels Trading (GBTI) to Besok Fuels Pty Limited under which GBTI would provide $2 million funding with the funds to be used towards capital works. Under the arrangement the complete draw down of the $2 million triggered Australian Renewable Fuels Limited to grant shares and options to GBTI as consideration for this funding. No amounts remain in this reserve.

19. Accumulated losses

19. Accumulated losses
Balance at beginning of year Net (loss) attributable to members of the parent entity Balance at end of year	Consolidated
	2012 2011 $ $
	(108,929,064) (100,865,126) (7,172,034) (8,063,938)
	(116,101,098) (108,929,064)

Annual Financial Report 2012 45

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

20. Non-controlling interest

20. Non-controlling interest
	Consolidated
	2012	2011
	$	$
Balance at beginning of year	(138,118)	(73,720)
Share of loss for the year	(63,759)	(64,398)
Balance at end of year	(201,877)	(138,118)

21. Commitments

The Group has entered into the following lease arrangements:

i. A 20 year lease of the land on which the Largs Bay facility is located which terminates on 31 October 2031; ii. A five year lease on the Group’s corporate headquarters in St Kilda Road, Melbourne which terminates on 31 October 2016;

iii. Various leases of office equipment for terms not exceeding 5 years.

The Group had also previously entered into a commercial lease in relation to the former Perth head office but was terminated during the year.

The following obligations relating to the leases are not provided for in the financial report and are payable.

Not longer than 1 year Longer than 5 years Longer than 1 year and not longer than 5 years	Consolidated
	2012 2011 $ $
	224,972 25,957 862,328 11,947 1,824,633 -
	2,911,933 37,904

22. Contingent assets and liabilities

i. Contingent asset – Picton land sale contingent consideration

In September 2009, the Group sold its land at the Picton site as part of a wider agreement for the development of an industrial development in the area with additional deferred consideration being contingent on the successful sub-division of the land by the purchaser. If formal sub-division of the land is completed, the Group will become the beneficiary of an asset in the form of one of the sub-divided lots or additional proceeds from the sale of the lot. The nature of the deferred consideration is at the option of the purchaser once sub-division has occurred.

ii.

Legal claims

The Group is negotiating with a former Company officer to recover funds paid to him to which the Group considers he was not entitled. This may result in a legal claim being made. There were no other outstanding legal claims at reporting date.

46 AUSTRALIAN RENEWABLE FUELS LIMITED

23. Subsidiaries

23. Subsidiaries
Name of entity	Country of incorporation	Ownership interest
		2012 %	2011 %
Parent entity Australian Renew able Fuels Limited Australia Subsidiaries Biodiesel Producers Limited Australia Australian Renew able Fuels Picton Pty Ltd Australia Australian Renew able Fuels Adelaide Pty Ltd Australia ARF Global Pty Ltd Australia Shelly Nominees Pty Ltd Australia Besok Fuels Pty Ltd Australia ARF Plantations Pty Ltd Australia ASG Analytik Pty Ltd Australia American Renew able Fuels Inc USA		100 - 100 100 100 100 100 100 100 100 100 100 100 100 50 50 63 63

All 100% owned Australian entities are part of the tax consolidated Group.

24. Cash flows from operations reconciliation

Cash and bank balances Bank overdraft	Consolidated
	2012 2011 $ $
	1,981,163 3,528,363 (5,862,547) -
	(3,881,384) 3,528,363

24.1 Cash balances not available for use

Security for bank guarantee	Consolidated
	2012 2011 $ $
	581,358 -
	581,358 -

Annual Financial Report 2012 47

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

24.2 Cash flows from operations reconciliation

Loss for the year: Non cash items: (Gain) / loss on disposal of fixed assets and land Interest expense on equity settled loan (Gain) / loss on derivative liability Interest income Depreciation and amortisation of property, plant and equipment Reclassified borrow ings to grant Share-based payments expense Employee share scheme options forfeited Impairment / (reversal of impairment) of doubtful debts Impairment of non-current assets Inventory w rite off Net foreign exchange loss Changes in net assets and liabilities: (Increase) / decrease in assets: Trade and other receivables Inventories Other assets Increase / (decrease) in liabilities: Trade and other payables Provisions Net cash from operating activities	Consolidated
	2012 2011 $ $
	(7,235,793) (8,128,336) - - - - - - (87,211) (69,884) 2,355,295 1,015,948 - (100,000) 267,373 386,266 - - - - - - - (526,697) - - 1,148,660 (246,173) 1,605,908 (251,933) (1,813,190) 271,371 1,989,325 743,440 237,824 61,301
	(1,531,809) (6,844,697)

25. Non-cash transactions

There were no non-cash transactions during the year ending 30 June 2012.

26. Financial instruments

26.1 Capital risk management

The Group manages its capital to ensure that all entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance. The Group’s overall strategy remains unchanged from 2011. The capital structure of the Group can, at various times, consist of debt, cash and cash equivalents and equity attributable to equity holders, comprising issued capital, reserves and accumulated losses. None of the Group’s entities are subject to externally imposed capital requirements. Operating cash flows are used to maintain and expand operations, as well as to make routine expenditures including tax and general administrative outgoings.

Gearing levels are reviewed by the Board on a regular and ongoing basis after consideration of the cost of capital and the risks associated with each class of capital.

The gearing ratio at year end was as follows:

Debt(i) Net (Cash and cash equivalents)/ Overdraft(ii) Equity(iii) Net debt to equity ratio	Consolidated
	2012 2011 $ $
	13,650,000 - 3,881,384 (3,528,363)
	17,531,384 (3,528,363) 9,389,051 9,517,840 1.86:1 N/A

(i) Debt is defined as current and non-current borrowings as defined in note 15 which represents the convertible notes and derivatives issued as a component of the acquisition of Biodiesel Producers Limited. The convertible notes are subordinated debt.

(ii) Includes bank overdraft facility drawn to $5,862,547 at 30 June 2012.

(iii) Equity includes all capital, reserves and accumulated losses.

48 AUSTRALIAN RENEWABLE FUELS LIMITED

26.2 Significant accounting policies relating to financial instruments

Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income 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.

26.3 Categories of financial instruments

Financial assets Cash and cash equivalents Trade and other receivables Financial liabilities Bank overdraft Trade and other payables Finance lease liabilities Amounts payable on acquisition of BPL Convertible notes Derivative component of convertible note	Consolidated
	2012 2011 $ $
	1,981,163 3,528,363 4,067,325 871,945
	6,048,488 4,400,308
	5,862,547 - 10,908,425 2,802,032 - 10,800 5,443,875 - 8,218,661 - 5,431,339 -
	35,864,847 2,812,832

The carrying amount reflected above represents the Group’s maximum exposure to credit risk on the principle amounts for such credit.

26.4 Financial risk management objectives

The Group is exposed to market risk (including currency risk, fair value interest rate risk and price risk), credit risk, liquidity risk and cash flow interest rate risk.

The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.

26.5 Market risk

The Group’s activities expose it primarily to the financial risks of changes in foreign currency exchange rates, commodity prices and interest rates. The Group manages its exposure to foreign currency on an individual transaction basis and may include entering into contracts in foreign currency when exchange rates are more favourable to the Company.

There has been no change to the nature of the Group’s exposure to market risks or the manner in which it manages and measures the risk from the previous period.

26.6 Foreign currency risk management

The Group undertakes certain transactions denominated in foreign currencies, hence exposures to exchange rate fluctuations arise. At the end of the year the Group was exposed to US Dollar (USD) currency fluctuations. Exchange rate exposures are managed within approved internal policy parameters.

The carrying amount of the Parent’s foreign currency denominated monetary assets and liabilities at the reporting date were:

	Liabilities		Assets
	2012	2011	2012	2011
	$	$	$	$
US dollars (Australian dollars equivalent)	644,139	620,337	-	-

Foreign currency sensitivity analysis

Based on the financial instruments held at 30 June 2012 the Group’s post tax loss and equity would have been $30 higher/lower (2011: $2 higher/lower) with a 10% decrease/increase in the Australian dollar against the US dollar.

10% is the sensitivity rate used when reporting foreign currency risk internally to key management personnel and represents management’s assessment of the possible change in foreign exchange rates in the short term.

The parent entity’s risk exposure to foreign exchange is therefore considered to be immaterial. Notwithstanding this, the Group seeks to mitigate the effect of its foreign currency exposure by limiting the outflow of Group funds for activities outside Australia. It should be noted that activities in the US are currently at minimal levels, as was the case throughout the reporting period.

26.7 Interest rate risk management

The Group may, from time to time, be exposed to interest rate risk as entities in the Group borrow funds or enter into structured debt facilities at both fixed and floating interest rates. The risk is managed by the Group by maintaining an appropriate mix between fixed and floating rate borrowings. At June 2012, all borrowings were on a fixed rate basis and the

Annual Financial Report 2012 49

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

Group’s overdraft facility was on a floating basis. The Group’s exposures to interest rate on financial assets and financial liabilities are detailed in the liquidity risk management section of this note.

Interest rate risk sensitivity analysis

The sensitivity analyses below have been determined based on the exposure to interest rates for derivative and nonderivative instruments at the reporting date and the stipulated change taking place at the beginning of the financial year and held constant throughout the reporting period. A 50 basis point increase or decrease is used when reporting interest rate risk internally to key management personnel and represents management’s assessment of the possible change in interest rates in the short term.

At reporting date, if interest rates had been 50 basis points higher or lower and all other variables were held constant, the Group’s net profit increase/decrease would be $29,313 lower/higher on an annualised basis (30 June 2011: nil) due to the variable nature of the overdraft facility. Being on a fixed rate basis, there would be no impact on the other borrowings. Other equity reserves increase/decrease would be nil (30 June 2011: nil).

The Group’s sensitivity to interest rates has increased during the current period due to the introduction of the overdraft facility.

26.8 Credit risk management

Credit risk refers to the risk that counterparty will default on its contractual obligations resulting in financial loss to the Group. The Group has adopted a policy of only dealing with creditworthy counterparties and obtaining sufficient collateral where appropriate, as a means of mitigating the risk of financial loss from defaults. The Group’s exposure and the credit ratings of its counterparties are continuously monitored and the aggregate value of transactions concluded is spread amongst approved counterparties. Credit exposure is controlled by counterparty limits that are reviewed and approved on an ongoing basis.

The Group does not have any significant credit risk exposure to any single counterparty or any Group of counterparties having similar characteristics. The credit risk on liquid funds is limited because the counterparties are banks with high credit ratings assigned by international credit rating agencies. All non-bank credit is subordinate to bank credit.

The carrying amount of financial assets recorded in the financial statements, net of any allowance for losses, represents the Group’s maximum exposure to credit risk without taking account of the value of any collateral obtained.

26.9 Liquidity risk management

Ultimate responsibility for liquidity risk management rests with the Board, which has built an appropriate liquidity risk management framework for the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages liquidity risk by maintaining adequate reserves, banking facilities and reserve borrowing facilities by continuously monitoring forecast and actual cash flows and matching the maturity profiles of financial assets and liabilities.

The following table details the Group’s contractual maturity for its non-derivative financial assets and liabilities. The table has been drawn up based on the undiscounted cash flows of financial assets and liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows.

50 AUSTRALIAN RENEWABLE FUELS LIMITED

Weighted Average Effective Interest Rate	Less than 1 1 – 3 3 months to 1-3 5+ month months 1 year years years $ $ $ $ $
2012 Financial assets Trade and other - receivables Cash and cash 1.7% equivalents Financial liabilities Overdraft (8.3%) Trade and other payables - Insurance premium financing (4.7%) Amounts payable on acquisition of BPL - Convertible Notes (10.0%) - Derivative component (10.0%) 2011 Financial assets Trade and other - receivables Cash and cash 3.8% equivalents Financial liabilities Trade and other - payables Other -	4,067,325 - - - - 1,981,163 - - - -
	6,048,488 - - - -
	5,862,547 10,546,522 - - - - 361,903 3,443,875 - - 2,000,000 - - - - - 8,218,661 - - - - 5,431,339
	20,214,847 - - 2,000,000 13,650,000
	871,945 - - - - 3,528,363 - - - -
	4,400,308 - - - -
	2,502,032 - 300,000 - - 10,800 - - - -
	2,512,832 - 300,000 - -

26.10 Financial liabilities at fair value through profit and loss

Derivative financial liabilities	Level 1 Level 2 Level 3 $ $ $
	- - 5,431,339

The fair value of derivative instruments are calculated using quoted prices. Where such prices are not available and the derivative contains an option, option pricing models are used.

27. Key management personnel compensation

Details of Key management personnel

Key management is defined as Directors and other key management personnel as referred to in the remuneration report.

Annual Financial Report 2012 51

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

27.1 Key management personnel compensation

The aggregate compensation made to Directors and other members of key management personnel of the Company and the Group is set out below:

Short-term employee benefits Post-employment benefits - superannuation Termination benefits Share-based payments	Consolidated
	2012 2011 $ $
	1,352,112 834,644 79,443 52,051 504,028 42,250 236,408 377,609
	2,171,991 1,306,554

27.2 Key management personnel equity holdings

Fully paid ordinary shares of Australian Renewable Fuels Limited

						Received
			Received	Acquired		through
	Balance at	01	through	through open		exercise of	Balance at 30
2012	July 2011		rights issue	trading		options	June 2012
	Number		Number	Number		Number	Number
Directors
A. White(i)		-	-	9,150,000		-	9,150,000
J. Playoust(i)	203,545,809		-	(7,964,132)		126,418,323	322,000,000
M. Costello(i)		-	-	3,095,000		-	3,095,000
P. Garling(i)	1,363,636		-		-	-	1,363,636
D. Page		-	-		-	-	-
Other key management personnel							-
C. Attw ood		-	-		-	-	-
M. Burgess		-	-		-	-	-
(i )Includes all direct, indirect or associated party ownership.
						Received
			Received	Acquired		through
	Balance at 01		through	through open		exercise of	Balance at 30
2011	July 2010		rights issue	trading		options	June 2011
	Number		Number	Number		Number	Number
Directors
M. Costello		-	-		-	-	-
P. Garling		-	-	1,363,636		-	1,363,636
R. Scott		-	4,134,639		-	-	4,134,639
T. Engelsman		-	-		-	-	-
J. Playoust	120,127,486		42,673,284		-	40,745,039	203,545,809
C. Gullotta	3,400,000		2,266,666		-	-	5,666,666
Other key management personnel
E. de Graaff	680,000		453,333	238,095		-	1,371,428

No other key personnel held or traded ordinary shares during the year.

52 AUSTRALIAN RENEWABLE FUELS LIMITED

Options in Australian Renewable Fuels Limited

2012	Balance at 1 July 2011 Granted as compensation Granted through rights issue or loan conversion Exercised or Expired Bal at 30 June 2012 Bal vested at 30 June 2012 Vested and exercise- able Rights vested during year
	Number Number Number Number Number Number Number Number
Directors A. White - 45,000,000 - - 45,000,000 - - - T. Engelsman 30,000,000 - - 30,000,000 - - - - J. Playoust 131,418,323 10,000,000 - 126,418,323 15,000,000 5,000,000 5,000,000 - M. Costello - 15,000,000 - - 15,000,000 - - - P. Garling - 15,000,000 - - 15,000,000 - - - D. Page - - - - - - - - Other key management personnel C. Attw ood - 20,000,000 - - 20,000,000 - - - M. Burgess - 15,000,000 - - 15,000,000 - - -
2011	Balance at 1 July 2010 Granted as compensation Granted through rights issue or loan conversion Exercised or Expired Bal at 30 June 2011 Bal vested at 30 June 2011 Vested and exercise- able Rights vested during year
	Number Number Number Number Number Number Number Number
Directors M. Costello - - - - - - - - P. Garling - - - - - - - - R. Scott 5,000,000 - 4,134,639 - 9,134,639 9,134,639 9,134,639 2,500,000 T. Engelsman 30,000,000 - - - 30,000,000 15,000,000 15,000,000 7,500,000 J. Playoust 72,745,039 - 99,418,323 40,745,039 131,418,323 131,418,323 131,418,323 2,500,000 C. Gullotta 8,400,000 - 2,266,666 - 10,666,666 10,666,666 10,666,666 2,500,000 Other key management personnel S.Scheffer - 7,500,000 - - 7,500,000 750,000 750,000 750,000 W. Day 5,000,000 - - 1,250,000 3,750,000 3,750,000 3,750,000 2,500,000 E. de Graaff - - 453,333 - 453,333 453,333 453,333 -

During the financial year 126,418,323 options (2011: 40,745,039) were exercised by key management personnel and Directors; no options expired due to termination of senior management (2011: 1,250,000). Further details of the employee share plan and of options granted during the 2012 and 2011 financial years are contained in note 31 to the financial statements.

Annual Financial Report 2012 53

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

28. Related party transactions

(a) Equity interests in related parties

• i. Equity interests in subsidiaries

Details of the percentage of ordinary shares held in subsidiaries are disclosed in note 23 to the financial statements.

(b) Transactions with key management personnel

• i. Key management personnel compensation

• Details of key management personnel compensation are disclosed in note 27 to the financial statements.

• ii. Loans to key management personnel

There were no loans to key management personnel during the financial year.

• iii. Other transactions with key management personnel of the Group

• There were no other transactions with key management personnel of the Group during the financial year or in the prior year.

(c) Transactions between Australian Renewable Fuels Limited and its related parties

• i. Related parties

In the 2012 year the Company transacted with Global Biofuels Trading Inc (GBTI). GBTI are a substantial shareholder in the Company and considered to be a related party.

During the year the following related parties of Directors exercised options:

Michelle Playoust – exercised 4,666,666 options at 1c, converting into 4,666,666 ordinary shares.

The following entities with which the Group transacted throughout the prior financial year are considered to be related parties:

• a. Wasabi Energy Limited – a substantial shareholder of Australian Renewable Fuels Limited which had a common Company secretary (Alwyn Davey – resigned on 15 November 2010).

• b. AGD Mining Pty Limited - which has a Director (Alwyn Davey) who is the Company secretary (resigned 15 November 2010) of Australian Renewable Fuels Limited.

• ii. Trading transactions

During the financial year, Group entities entered into the following transactions with related parties that are not members of the Group. All transactions were conducted on a commercial basis.

Wasabi Energy Limited: - corporate and administrative services - interest expense on loans provided AGD Mining Pty Limited: - corporate and administrative services Global Biofuels Trading Inc - sales - feedstock - throughput and freight costs	Consolidated
	2012 2011 $ $
	- 208,639 - 95,602 - 10,491 10,484,552 - 71,200 217,291 -

54 AUSTRALIAN RENEWABLE FUELS LIMITED

29. Remuneration of auditors

29. Remuneration of auditors
2012 2011 $ $ Audit and review of the financial report 133,975 85,050 Non-audit services: - Due diligence on BPL acquisition - 56,000 - Accounting treatment advice 2,500 - Audit 878 - Non-audit services: - Tax lodgements 5,400 - 142,753 141,050 Consolidated Auditor of the parent entity (Deloitte Touche Tohmatsu): Former auditor of the Biodiesel Producers Limited subsidiary acquired by the Group on 1 November 2011 (WHK Group Limited):	Consolidated
	2012 2011 $ $
	142,753 141,050
30. Earnings per share
Basic earnings (loss) per share(i) Diluted earnings (loss) per share(ii) iBasic earnings per share Net Loss from continued and continuing operations Weighted average number of ordinary shares for the purposes of basic earnings per share	Consolidated
	2012 2011 Cents Cents per share per share
	(0.34) (0.71) (0.34) (0.71) (7,172,034) (8,063,938) 2012 2011 Number Number
	2,088,286,443 1,143,771,562

ii. Diluted earnings/(loss) per share

The options on issue have not been included in the weighted average number of ordinary shares for the purposes of calculating diluted EPS as they do not meet the requirements for inclusion in AASB 133 “Earnings per Share”. The rights are non-dilutive as they do not increase loss per share for continuing operations.

31. Share-based payments

31.1 Employee share option plan

Share options are granted to executives and staff as part of their remuneration package under the Employee Share Option Plan. There are no cash settlement alternatives. The Employee Share Option Plan is designed to provide long term incentives for senior managers and above (including Directors) to deliver long term shareholder returns. Participation in the plan is at the Board’s discretion and there is no individual contractual right to participate in the plan or to receive any guaranteed benefits.

During the financial year the Company issued 146,500,000 options to employees.

Annual Financial Report 2012 55

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

The following share-based payment arrangements were in existence during the current and comparative reporting periods:

Option series grant date	Number of options	Expiry date	Exercise price $	Fair value at grant date $
July 2007 45,000 June 2012 0.60 0.03 March 2008 5,360,000 March 2013 0.10 0.03 September 2008 1,500,000 September 2013 0.10 0.03 August 2009 1,750,000 September 2014 0.02 0.01 November 2009 50,000,000 September 2014 0.02 0.01 December 2011 45,000,000 December 2014 0.03 0.01 January 2012 4,000,000 December 2012 0.02 0.01 March 2012 57,500,000 February 2015 0.03 0.01 March 2012 40,000,000 March 2015 0.04 0.01

31.2 Fair value of share options granted in the year

The weighted average fair value of the options granted during the financial year is 0.47 cents (2011: 0.58 cents). They were priced using a Black-Scholes valuation model. The inputs into this model were:

Option series grant date	Inputs into the model
	Grant date shareprice Exercise price Expected volatility Risk-free interest rate Option life
July 2007 March 2008 September 2008 August 2009 November 2009 December 2011 January 2012 March 2012 March 2012	3.4 cents 60.0 cents 180% 6.00% 60 months 3.2 cents 10.0 cents 180% 6.40% 60 months 2.9 cents 10.0 cents 217% 5.70% 60 months 1.4 cents 2.0 cents 220% 4.90% 61 months 2.0 cents 2.0 cents 208% 4.60% 58 months 1.4 cents 3.0 cents 92% 3.02% 36 months 1.4 cents 2.0 cents 94% 3.14% 12 months 1.6 cents 3.0 cents 93% 3.70% 36 months 1.5 cents 4.0 cents 93% 3.55% 36 months

56 AUSTRALIAN RENEWABLE FUELS LIMITED

31.3 Movements in employee share options during the year

The following reconciles the outstanding options granted under the employee share option plan at the beginning and end of the financial year:

Balance at beginning of the financial year Granted during the financial year Exercised during the financial year(i) Forfeited during the financial year Expired during the financial year Balance at end of the financial year(ii) Exercisable at end of the financial year	Weighted average exercise price cents 58,385,000 2.1 146,500,000 3.2 - - (47,500,000) 2.0 (45,000) 60.0 157,340,000 3.1 10,840,000 7.5 2012 Number of rights	2011
		Weighted average exercise price cents Number of rights
		52,135,000 2.1 7,500,000 2.0 - - (1,250,000) 2.0 - -
		58,385,000 2.1
		34,885,000 2.0

(i) There were no options granted under the employee share option plan that were exercised during the financial year.

(ii) The share options outstanding at the end of the financial year had a weighted average exercise price of 3.1 cents (2011: 2.1 cents), and a weighted average remaining contractual life of 2.5 years (2011: 3.2 years).

32. Business combination

On 1 November 2011, the Group acquired Biodiesel Producers Limited (“BPL”), a biodiesel producer with capacity of approximately 60 million litres per annum. Details of the purchase are as follows:

Subsidiary acquired: Biodiesel Producers Limited

Principal activity: Producer of biodiesel Date of acquisition: 1 November 2011 Proportion of shares acquired: 100%

Consideration transferred Cash fee to be paid(i) Contingent Consideration(ii) Convertible notes issued - including derivative component(iii) Total Consideration	$
	3,443,875 2,000,000 13,650,000
	19,093,875

(i ) The cash fees to be paid have been recognised as current liabilities in the statement of financial position and are due for payment on 31 December 2012. Convertible notes issued by the parent are recognised as non-current liabilities in the statement of financial position. Acquisition-related costs have been excluded from the consideration transferred and have been recognised as an expense in the statement of comprehensive income.

(i i ) The Contingent consideration is a further payment to holders of the convertible notes that may be triggered subject to certain criteria being achieved. Earn-out payments

can be made to the noteholders if the plant at Barnawartha achieves production levels greater than 43.5 million litres per annum in each of the first three years from 1 November 2011. These payments will be 16.33 cents per litre for each litre of production in excess of 43.5 million litres per annum for each year the excess is achieved. Should the average level of production over the first three years from 1 November 2011 exceed 49.3 million litres per annum, the potential earn-out payments period will extend for a further two years, taking the earn out program to five years. M anagement has assessed the likelihood of the earn-out payments and applied discount cashflow rate against the quantum of the payout to determine the Contingent consideration. This amount will be reviewed on an annual basis.

(iii) secured by charges and mortgages over assets and undertakings of BPL, Australian Renewable Fuels Adelaide Pty Limited and Australian Renewable Fuels Limited. These securities are subordinate to the charge against the Group overdraft

Annual Financial Report 2012 57

Notes to the financial statements

for the financial year ended 30 June 2012 (continued)

Assets acquired and liabilities assumed at the date of acquisition

Current assets Trade and other receivables Inventory Other Non-current assets Property, plant and equipment Current liabilities Net Cash Overdraft Trade and other payables Consideration Transferred	$
	4,450,741 2,708,001 235,202
	7,393,944
	27,246,143
	(9,181,245) (6,365,349)
	(15,546,594)
	19,093,493

BPL became a wholly owned subsidiary on acquisition and has joined the Company’s tax-consolidated Group. For tax purposes, the tax values of BPL’s assets are required to be reset based on market values of the assets. At the date of finalisation of these consolidated financial statements, the necessary market valuations and other calculations had not been finalised and the adjustment to deferred taxes, other intangibles and other liabilities has therefore only been provisionally determined based on the Directors’ best estimate of the likely fair values.

Net cash outflow on acquisition of subsidiaries

Consideration paid in cash during the period Less: cash and cash equivalent balances acquired (overdraft)(i)	$
	- (9,181,245) (9,181,245)

(i ) overdraft carries a secured charge over the assets and undertakings of Australian Renewable Fuels Limited, Australian Renewable Fuels Adelaide Pty Limited, Australian Renewable Fuels Picton Pty Limited and Biodiesel Producers Limited)

Impact of acquisitions on the results of the Group

Included in the Group’s loss for the period is $1,151,373 profit attributable to the additional business generated by BPL. Revenue for the year includes an additional $28,089,019 generated by BPL. Had the business combination been effected at 1 July 2011, the revenue of the Group would have been $52,341,561 and the Group’s net loss would have been $6,660,106.

33. Subsequent events

There has not been any matter, or circumstance other than has already been noted, that has arisen since the end of the financial period that has significantly affected, or may significantly affect, the operations of the Group.

58 AUSTRALIAN RENEWABLE FUELS LIMITED

34. Parent entity information

The accounting policies of the parent entity, which have been applied in determining the financial information shown below, are the same as those applied in the consolidated financial statements. Refer to note 1 for a summary of the significant accounting policies relating to the Group.

Financial position Assets Current assets Non-current assets Total assets Liabilities Current liabilities Non-current liabilities Total liabilities Equity Issued capital Retained earnings Reserves Total equity Financial performance Profit/(loss) for the year Other comprehensive income Total comprehensive income	Consolidated
	2012 2011 $ $
	1,382,503 3,198,510 27,735,907 7,193,449
	29,118,410 10,391,959
	7,940,758 1,124,086 13,726,169 -
	21,666,927 1,124,086
	124,176,890 114,576,984 (118,709,914) (109,535,710) 1,984,507 4,226,599
	7,451,483 9,267,873
	Consolidated
	2012 2011 $ $
	(9,174,204) (8,150,383) - -
	(9,174,204) (8,150,383)

Annual Financial Report 2012 59

Directors’ declaration

The Directors declare that:

• i. 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;

• ii. in the Directors’ opinion, the attached financial statements are in compliance with International Financial Reporting Standards as stated in note 1 to the financial statements;

• iii. in the Directors’ opinion, the attached financial statements and notes thereto are in compliance with the Corporations Act 2001 , including compliance with accounting standards and give a true and fair view of the financial position and performance of the Company and the consolidated entity; and

• iv. the Directors have been given the declarations required by section 295A of the Corporations Act 2001.

Signed in accordance with a resolution of the Directors made pursuant to section 295(5) of the Corporations Act 2001 .

On behalf of the Directors,

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Philip Garling Chairman Melbourne, 6 September 2012

60 AUSTRALIAN RENEWABLE FUELS LIMITED

Independent Auditor’s report

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Deloitte Touche Tohmatsu ABN 74 490 121 060 550 Bourke Street Melbourne VIC 3000 GPO Box 78 Melbourne VIC 3001 Australia

DX: 111 Tel: +61 3 9671 7000 Fax: +61 3 9671 7001 www.deloitte.com.au

Independent Auditor’s Report to the members of Australian Renewable Fuels Limited

Report on the Financial Report

We have audited the accompanying financial report of Australian Renewable Fuels Limited, which comprises the statement of financial position as at 30 June 2012, the statement of comprehensive income, the cash flow statement and the 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 22 to 60.

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.

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

Annual Financial Report 2012 61

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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 Australian Renewable Fuels 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 Australian Renewable Fuels 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 30 June 2012 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.

Material Uncertainty Regarding Continuation as a Going Concern

Without qualifying our opinion, we draw attention to Note 1 in the financial report which indicates that the consolidated entity incurred a net loss of $7,235,793 with net cash outflows from operating activities of $1,531,809 for the year ended 30 June 2012. As at that date, the consolidated entity also had a defiency in net current assets of $9,744,381 These conditions, along with other matters as set forth in Note 1, indicate the existence of a material uncertainty which may cast significant doubt about the ability of the company and consolidated entity to continue as going concerns and whether they will realise their assets and extinguish their liabilities in the normal course of business and at the amounts stated in the financial report.

Report on the Remuneration Report

We have audited the Remuneration Report included in pages 8 to 13 of the directors’ report for the year ended 30 June 2012. 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 Australian Renewable Fuels Limited for the year ended 30 June 2012, complies with section 300A of the Corporations Act 2001 .

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DELOITTE TOUCHE TOHMATSU

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Ian Sanders Partner Chartered Accountants Melbourne, 6 September 2012

62 AUSTRALIAN RENEWABLE FUELS LIMITED

Additional shareholder information

Additional information required by the ASX Listing Rules not disclosed elsewhere in the full year report is set out below. The shareholder information set out below was applicable as at 31 August 2012.

1. Distribution of Shareholders

Distribution of ordinary shareholders and shareholdings is set out in the table below.

Voting rights as governed by the Constitution of the Company provide that each ordinary shareholder present in person or by proxy at a meeting shall have:

• i. on a show of hands, one vote only; and

• ii. on a poll, one vote for every fully paid ordinary share held.

2. Largest shareholders

2. Largest shareholders
		% of Issued
Shareholder	Shares Held	Capital
WASABI ENERGY LTD	291,811,381	11.95
UBS NOMINEES PTY LTD	233,670,951	9.57
AUSTRALIAN ENTERPRISE HOLDINGS PTY LTD	200,000,000	8.19
GLOBAL BIOFUELS TRADING (MIDDLEAST) INC	200,000,000	8.19
ABN AMRO CLEARING SYDNEY NOMINEES PTY LTD	58,475,002	2.4
THIRTY-FIFTH CELEBRATION PTY LTD	56,605,217	2.32
SEASPIN PTY LTD	53,811,532	2.2
SWEET WATER PTY LTD	50,000,000	2.05
HARLEY CLARKE ENTERPRISES PTY LTD	48,000,000	1.97
ARCOURT RESOURCES NL	47,644,353	1.95
J & M PLAYOUST SUPERANNUATION PTY LTD	40,000,000	1.64
MINING & RURAL INVESTMENTS LTD	37,383,332	1.53
DIXSON TRUST PTY LTD	34,817,536	1.43
JP MORGAN NOMINEES AUSTRALIA LIMITED	29,551,525	1.21
REEF SECURITIES LIMITED	26,403,917	1.08
DHARMA KARTA PTY LTD	23,037,586	0.94
MR IAN JOHN JAMES	23,034,617	0.94
CVC LIMITED	22,702,161	0.93
HOTLAKE PTY LTD	22,000,000	0.9
MR JOHN JOSEPH FERNAND PLAYOUST + MRS MARIE THERESE PLAYOUST <PLAYOUST SUPERFUND
A/C>	20,745,039	0.85
Total shareholding of the 20 largest shareholders	1,519,694,149	62.24

The names of the twenty largest holders by account holding of ordinary shares are listed below:

3. Option holders

The Company has no listed options.

4. Register of substantial shareholders

The names of substantial shareholders in the Company and the number of fully paid ordinary shares in which each has an interest, as disclosed in substantial shareholder notices to the Company on the respective dates shown, are as follows:

		% of Issued
Shareholder	Shares Held	Capital
WASABI ENERGY LTD	291,811,381	11.95
UBS NOMINEES PTY LTD	233,670,951	9.57
AUSTRALIAN ENTERPRISE HOLDINGS PTY LTD	200,000,000	8.19
GLOBAL BIOFUELS TRADING (MIDDLEAST) INC	200,000,000	8.19

5. Restricted Securities

The Company had no securities subject to escrow arrangement.

Annual Financial Report 2012 63

6. General

Company Secretary:

Andrew Metcalfe (appointed 11 August 2011) Stephan Scheffer (appointed 15 November 2010 and resigned 11 August 2011)

Principal Registered Office:

Level 5, 409 St Kilda Road Melbourne VIC 3004

Postal Address:

Level 5, 409 St Kilda Road Melbourne VIC 3004

Share Registry:

Computershare Investor Services Pty Limited Yarra Falls 452 Johnston Street Abbotsford VIC 3067

ASX Code: ARW

Solicitors:

Gadens Lawyers Level 25, Bourke Place 600 Bourke Street Melbourne VIC 3000

Bankers:

HSBC Bank Australia Limited 188-190 St Georges Terrace Perth WA 6000

National Australia Bank 500 Bourke Street Melbourne VIC 3000

Suncorp Bank Suncorp Centre Corner Albert and Turbot Street Brisbane QLD 4000

Auditors:

Deloitte Touche Tohmatsu 550 Bourke Street Melbourne VIC 3000

64 AUSTRALIAN RENEWABLE FUELS LIMITED