REA Group Ltd Annual Report 2021

Notes to the Consolidated Financial Statements for the year ended 30 June 2021 REA Group Ltd | Annual Report 2021 11. Commissions Accounting policies On initial recognition at settlement, the Group recognises trailing commission revenue and a related commission contract asset representing management’s estimate of the variable consideration to be received from completion of the performance obligation. The Group uses the ‘expected value’ method of estimating variable consideration which requires significant judgement. A significant financing component is also involved when determining this variable consideration. As such, the contract asset is adjusted by recalculating the net present value of estimated future cash flows at the original effective interest rate. The transaction price is a percentage of the expected outstanding balance of the loan. A corresponding expense and payable is also recognised, initially measured at fair value being the net present value of expected future trailing commission payable to brokers. These calculations require the use of assumptions that are unobservable inputs categorised as Level 3 within the fair value hierarchy. The trail commission liabilities that are initially recognised at fair value are subsequently carried at amortised cost using the effective interest rate (“EIR”) method. Any resulting adjustment to the carrying value is recognised as income or expense in the Consolidated Income Statement. Key estimate and judgement The determination of the assumptions used in the valuation of trailing commissions is based primarily on an annual actuarial assessment at year end of the underlying loan portfolio, including historical run-off rate analysis and consideration of current and future economic factors. These factors are complex and the determination of assumptions requires a high degree of judgement. The key assumptions underlying the expected value calculations of the trailing commission contract asset and the corresponding liability due to franchisees at 30 June are detailed below. The assumptions reflect the ‘best estimate’ of COVID-19 on the trailing commission asset and corresponding liability at the time of performing the valuation. Any increase/decrease in the below assumptions would lead to a corresponding increase/decrease in the carrying value of the trailing commissions balance. In June 2021, the Group acquired Mortgage Choice Limited, which contributed significant commission contract assets and commission contract liabilities on acquisition. Refer to Note 19 (a) for further details. 2021 2020 Weighted average loan life 4.2 years 4.3 years Discount rate per annum 4.5 – 6.5% 5.0 – 6.5% Overall average percentage paid to franchisees 75.7% 78.4% Future trail commission contract assets are due from a combination of highly rated major lenders. There have been no historical instances where a loss has been incurred, including through the global financial crisis. ECLs are not considered material and consequently have not been recognised. The carrying amounts of financial assets and financial liabilities recognised as they relate to trailing commissions are detailed below: 2021 $’000 2020 $’000 Future trailing commission contract asset – current 122,375 38,317 Upfront commission contract asset - current 26,317 7,039 Total current commission contract assets 148,692 45,356 Future trailing commission contract asset – non-current 431,342 147,856 Future trailing commission liability - current 92,236 29,988 Upfront commission liability – non-current 21,663 5,615 Total current commission liabilities 113,899 35,603 Future trailing commission liability – non-current 324,990 115,893 94 Financial Statements