Australia and New Zealand Banking Group
Annual Report 2005

Plain-text annual report

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A N Z F i n a n c i a l R e p o r t 2 0 0 5 Australia and New Zealand Banking Group Limited www.anz.com ABN 11 005 357 522 Financial Report 2005 FINANCIAL REPORT CONTENTS Statements of Financial Performance Statements of Financial Position Statements of Changes in Shareholders’ Equity Statements of Cash Flows Notes to the Financial Statements 1 Accounting Policies 2 Income 3 Expenses 4 Equity Instruments Issued to Employees 5 Remuneration of Auditors 6 Income Tax Expense 7 Dividends 8 Earnings per Ordinary Share 9 Liquid Assets 10 Due from Other Financial Institutions 11 Trading Securities 12 Investment Securities 13 Net Loans and Advances 14 Impaired Assets 15 Provisions for Doubtful Debts 16 Customer’s Liabilities for Acceptances 17 Regulatory Deposits 18 Shares in Controlled Entities, page 2 3 4 5 6 10 11 12 12 13 13 15 16 16 16 17 20 23 25 26 26 Associates and Joint Venture Entities 27 27 19 Deferred Tax Assets 28 20 Goodwill 28 21 Other Assets 22 Premises and Equipment 29 23 Due to Other Financial Institutions 31 31 24 Deposits and Other Borrowings 25 Income Tax Liabilities 26 Payables and Other Liabilities 27 Provisions 28 Bonds and Notes 29 Loan Capital 30 Share Capital 31 Outside Equity Interests 32 Capital Adequacy 33 Average Balance Sheet and Related Interest 34 Interest Spreads and Net Interest Average Margins 35 Market Risk 36 Interest Sensitivity Gap 37 Net Fair Value of Financial Instruments 38 Derivative Financial Instruments 39 Securitisation 40 Segment Analysis 41 Notes to the Statements of Cash Flows 42 Controlled Entities 43 Associates 44 Interests in Joint Venture Entities 45 Fiduciary Activities 46 Commitments 47 Contingent Liabilities, Contingent page 32 32 33 34 35 36 39 39 41 44 45 47 49 51 56 57 59 61 62 62 64 64 Asset and Credit Related Commitments 65 48 Superannuation Commitments 69 49 Employee Share and Option Plans 71 50 Directors and Specified Executives Remuneration Disclosures 51 Directors and Specified Executives - Related Party Transactions 76 88 52 Directors of Controlled Entities of the Company - Related Party Transactions 53 Transactions with Associates and Joint Venture Entities - Related Party Disclosures 54 Exchange Rates 55 Impact of adopting Australian equivalents to International Financial Reporting Standards 56 Events Since the End of the Financial Year Directors’ Declaration Auditors’ Report Critical Accounting Policies Risk Management Financial Information 1 Cross Border Outstandings 2 Certificates of Deposit and Term page 98 98 99 99 107 108 109 110 113 114 114 Deposit Maturities 114 3 Volume and Rate Analysis 115 116 4 Concentrations of Credit Risk 5 Doubtful Debts – Industry Analysis 118 119 6 Short Term Borrowings Glossary Alphabetical Index 120 122 anz financial report 2005 1 FINANCIAL REPORT CONTENTS Statements of Financial Performance Statements of Financial Position Statements of Changes in Shareholders’ Equity Statements of Cash Flows Notes to the Financial Statements 1 Accounting Policies 2 Income 3 Expenses 4 Equity Instruments Issued to Employees 5 Remuneration of Auditors 6 Income Tax Expense 7 Dividends 8 Earnings per Ordinary Share 9 Liquid Assets 10 Due from Other Financial Institutions 11 Trading Securities 12 Investment Securities 13 Net Loans and Advances 14 Impaired Assets 15 Provisions for Doubtful Debts 16 Customer’s Liabilities for Acceptances 17 Regulatory Deposits 18 Shares in Controlled Entities, page 2 3 4 5 6 10 11 12 12 13 13 15 16 16 16 17 20 23 25 26 26 Associates and Joint Venture Entities 27 27 19 Deferred Tax Assets 28 20 Goodwill 28 21 Other Assets 22 Premises and Equipment 29 23 Due to Other Financial Institutions 31 31 24 Deposits and Other Borrowings 25 Income Tax Liabilities 26 Payables and Other Liabilities 27 Provisions 28 Bonds and Notes 29 Loan Capital 30 Share Capital 31 Outside Equity Interests 32 Capital Adequacy 33 Average Balance Sheet and Related Interest 34 Interest Spreads and Net Interest Average Margins 35 Market Risk 36 Interest Sensitivity Gap 37 Net Fair Value of Financial Instruments 38 Derivative Financial Instruments 39 Securitisation 40 Segment Analysis 41 Notes to the Statements of Cash Flows 42 Controlled Entities 43 Associates 44 Interests in Joint Venture Entities 45 Fiduciary Activities 46 Commitments 47 Contingent Liabilities, Contingent page 32 32 33 34 35 36 39 39 41 44 45 47 49 51 56 57 59 61 62 62 64 64 Asset and Credit Related Commitments 65 48 Superannuation Commitments 69 49 Employee Share and Option Plans 71 50 Directors and Specified Executives Remuneration Disclosures 51 Directors and Specified Executives - Related Party Transactions 76 88 52 Directors of Controlled Entities of the Company - Related Party Transactions 53 Transactions with Associates and Joint Venture Entities - Related Party Disclosures 54 Exchange Rates 55 Impact of adopting Australian equivalents to International Financial Reporting Standards 56 Events Since the End of the Financial Year Directors’ Declaration Auditors’ Report Critical Accounting Policies Risk Management Financial Information 1 Cross Border Outstandings 2 Certificates of Deposit and Term page 98 98 99 99 107 108 109 110 113 114 114 Deposit Maturities 114 3 Volume and Rate Analysis 115 116 4 Concentrations of Credit Risk 5 Doubtful Debts – Industry Analysis 118 119 6 Short Term Borrowings Glossary Alphabetical Index 120 122 anz financial report 2005 1 STATEMENTS OF FINANCIAL PERFORMANCE FOR THE YEAR ENDED 30 SEPTEMBER 2005 Total Income Interest income Interest expense Net interest income Other operating income Share of joint venture profit from ING Australia Share of associates profit (net of writeoffs) Operating income Operating expenses Profit before doubtful debt provision and income tax Provision for doubtful debts Profit before income tax Income tax expense Profit after income tax Net profit attributable to outside equity interests Net profit attributable to shareholders of the Company1,2 Currency translation adjustments, net of hedges after tax Total adjustments attributable to shareholders of the company recognised directly into equity Total changes in equity other than those resulting from transactions with shareholders as owners Earnings per ordinary share (cents) Basic Diluted The notes appearing on pages 6 to 107 form an integral part of these financial statements 1 The results of 2005 include the impact of this significant item: n Gain on sale of NBNZ Life ($14 million profit after tax) The results of 2004 include the impact of these significant items: n Close out of the TrUEPrS swap ($84 million profit after tax); and n ING Australia completion accounts ($14 million profit after tax) Further details on these transactions are shown in note 2 2 Includes NBNZ incremental integration costs of $52 million (2004: $14 million) after tax Note 2 2 3 2 2 2 3 15 2005 $m Consolidated 2004 $m 2003 $m The Company 2005 $m 2004 $m 20,979 17,508 13,023 14,042 12,081 17,427 (11,629) 14,117 (8,863) 10,215 (5,904) 10,946 (7,646) 9,054 (6,088) 5,798 3,395 107 50 9,350 (4,515) 4,835 (580) 5,254 3,246 97 48 8,645 (4,026) 4,619 (632) 4,311 2,702 55 51 7,119 (3,228) 3,891 (614) 3,300 3,096 – – 6,396 (3,064) 3,332 (388) 2,966 3,027 – – 5,993 (2,878) 3,115 (433) 4,255 3,987 3,277 2,944 2,682 6 (1,234) (1,168) (926) (717) (710) 3,021 (3) 2,819 (4) 2,351 (3) 3,018 2,815 2,348 2,227 – 2,227 (443) (443) 233 233 (356) (213) (356) (213) 1,972 – 1,972 5 5 2,575 3,048 1,992 2,014 1,977 8 8 160.9 157.5 153.1 149.7 142.4 141.7 n/a n/a n/a n/a 2 STATEMENTS OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2005 Assets Liquid assets Due from other financial institutions Trading securities Investment securities Net loans and advances Customer’s liabilities for acceptances Due from controlled entities Regulatory deposits Shares in controlled entities, associates and joint venture entities Deferred tax assets Goodwill1 Other assets2 Premises and equipment Total assets Liabilities Due to other financial institutions Deposits and other borrowings Liability for acceptances Due to controlled entities Income tax liabilities Payables and other liabilities3 Provisions Bonds and notes Loan capital Total liabilities Net assets Shareholders’ equity Ordinary share capital Preference share capital Reserves Retained profits Share capital and reserves attributable to shareholders of the Company Outside equity interests Total shareholders’ equity Derivative financial instruments Commitments Contingent liabilities, contingent assets and credit related commitments The notes appearing on pages 6 to 107 form an integral part of these financial statements Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m Note 11,600 6,348 6,285 6,941 230,952 13,449 – 159 1,872 1,337 2,898 9,903 1,441 6,363 4,781 5,478 7,746 204,962 12,466 – 176 1,960 1,454 3,269 9,158 1,532 7,191 3,452 5,309 5,407 153,461 13,449 8,309 113 12,551 754 66 6,098 849 3,744 2,537 4,783 6,117 133,767 12,466 7,338 144 11,517 737 74 5,751 826 293,185 259,345 217,009 189,801 12,027 185,693 13,449 – 1,797 11,607 914 39,073 9,137 7,349 168,557 12,466 – 1,914 14,212 845 27,602 8,475 9,029 113,089 13,449 11,600 1,487 8,790 650 32,739 8,452 5,860 99,811 12,466 9,544 1,251 10,890 618 25,034 7,680 273,697 241,420 199,285 173,154 19,488 17,925 17,724 16,647 8,074 1,858 136 9,393 8,005 987 579 8,336 8,074 1,858 446 7,346 8,005 987 659 6,996 19,461 27 17,907 18 17,724 – 16,647 – 19,488 17,925 17,724 16,647 9 10 11 12 13 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 30 31 38 46 47 1 Excludes notional goodwill of $711 million (September 2004: $754 million) included in the net carrying value of ING Australia Limited 2 Includes life insurance investment assets held by NBNZ Life Insurance Limited $nil (September 2004: $65 million) 3 Includes life insurance policy liabilities held by NBNZ Life Insurance Limited $nil (September 2004: $30 million) anz financial report 2005 3 STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY FOR THE YEAR ENDED 30 SEPTEMBER 2005 2005 $m Consolidated 2004 $m The Company 2003 $m 2005 $m 2004 $m Note Share capital Ordinary shares Balance at start of year Dividend reinvestment plan Group employee share acquisition scheme Group share option scheme Group share buyback Rights issues Balance at end of year Preference shares Balance at start of year New issues1 Buyback of preference shares Retranslation of preference shares Balance at end of year Total share capital Asset revaluation reserve2 Balance at start of year Revaluation of investment in controlled entities Total asset revaluation reserve Foreign currency translation reserve3 Balance at start of year Currency translation adjustments, net of hedges after tax Transfer from general reserve Total foreign currency translation reserve (FCTR) General reserve4 Balance at start of year TrUEPrS preference share gain on buy back Transfers (to) from retained profits/FCTR Total general reserve Capital reserve4 Total reserves Retained profits Balance at start of year Net profit attributable to shareholders of the Company Total available for appropriation Transfers from (to) reserves Ordinary share dividends provided for or paid Preference share dividends paid Retained profits at end of year 8,005 153 16 104 (204) – 8,074 987 871 – – 1,858 9,932 31 – 31 4,175 135 47 86 – 3,562 8,005 2,212 – (1,225) – 987 8,992 31 – 31 3,939 115 48 73 – – 4,175 1,375 987 – (150) 2,212 6,387 31 – 31 8,005 153 16 104 (204) – 8,074 987 871 – – 1,858 9,932 415 – 415 4,175 135 47 86 – 3,562 8,005 2,212 – (1,225) – 987 8,992 401 14 415 218 (239) 117 233 228 (443) – (225) 181 – – 181 149 136 233 224 218 239 180 (238) 181 149 579 8,336 3,018 11,354 – (1,877) (84) 7,203 2,815 10,018 14 (1,598) (98) 7 7 (356) – (239) 237 – 2 239 149 180 5,600 2,348 7,948 (2) (641) (102) (213) – 20 11 – – 11 – 446 5 – 233 55 180 (224) 11 – 659 6,996 2,227 9,223 – (1,877) – 6,398 1,972 8,370 224 (1,598) – 9,393 8,336 7,203 7,346 6,996 Total shareholders’ equity attributable to shareholders of the Company 19,461 17,907 13,770 17,724 16,647 The notes appearing on pages 6 to 107 form an integral part of these financial statements 1 2005 relates to the issue of 500,000 Euro Trust securities raising $875m net of issue costs of $4m. 2003 relates to the issue of 10 million ANZ Stapled Exchangeable Preferred Securities (ANZ StEPS), raising $1 billion less issue costs of $13 million. Refer note 30 Nature and purpose of reserves 2 Asset revaluation reserve Prior to 1 October 2000, the asset revaluation reserve was used to record certain increments and decrements on the revaluation of non-current assets. As the Group has elected to adopt deemed cost in accordance with AASB 1041, the balance of the reserve is not available for future non-current asset write downs while the Group remains on the deemed cost basis 3 Foreign currency translation reserve Exchange differences arising on translation of foreign self-sustaining operations are taken to the foreign currency translation reserve, as described in accounting policy note 1(v) 4 General reserve and Capital reserve The balance of these reserves have resulted from prior period allocations of retained profits and may be released to retained profits 4 STATEMENTS OF CASH FLOWS FOR THE YEAR ENDED 30 SEPTEMBER 2005 Cash flows from operating activities Interest received Dividends received Fees and other income received Interest paid Personnel expenses paid Premises expenses paid Other operating expenses paid Income taxes paid Net (increase) decrease in trading securities Net cash provided by operating activities Cash flows from investing activities Net (increase) decrease Liquid assets - greater than three months Due from other financial institutions Regulatory deposits Loans and advances Shares in controlled entities, associates, and joint venture entities Investment securities Purchases Proceeds from sale or maturity Controlled entities and associates Purchased (net of cash acquired) Proceeds from sale (net of cash disposed) Premises and equipment Purchases Proceeds from sale Other Net cash (used in) investing activities Cash flows from financing activities Net increase (decrease) Due to other financial institutions Deposits and other borrowings Due from/to controlled entities Payables and other liabilities Bonds and notes Issue proceeds Redemptions Loan capital Issue proceeds Redemptions Decrease (increase) in outside equity interests Dividends paid Share capital issues (ordinary capital) Share capital buyback StEPS preference share issue StEPS issues costs Euro Trust Security issue Euro Trust Security issue costs Preference share buyback (TrUEPrS) Net cash provided by financing activities Net cash provided by operating activities Net cash (used in) investing activities Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Foreign currency translation on opening balances 2005 $m Consolidated 2004 $m 2003 $m The Company 2005 $m 2004 $m Note 17,868 144 3,316 (11,414) (2,498) (367) (2,126) (1,072) (821) 14,515 3 3,257 (8,258) (2,110) (312) (2,122) (247) 514 10,887 7 3,170 (5,724) (1,848) (279) (1,951) (1,312) 1,669 10,926 475 2,857 (7,541) (1,702) (251) (931) (471) (523) 8,744 650 2,008 (5,711) (1,542) (275) (1,089) 107 (1,147) 41 3,030 5,250 4,619 2,839 1,745 (728) (371) 5 (28,788) 157 (325) 522 (76) (22,757) (35) 1,113 (44) 52 (19,944) (2) (631) (180) 22 (20,599) (1,026) (298) (153) (78) (18,869) (5,361) (17,188) 17,856 (14,411) 11,701 (8,211) 6,785 (13,873) 14,421 (5,023) 2,693 (149) 144 (3,224) – – – – – (325) 86 (1,720) (300) 53 1,735 (368) 51 1,401 (277) 1 (1,344) – – (237) 4 999 (31,021) (27,117) (19,167) (23,486) (26,323) 4,972 19,856 – (1,339) (272) 11,216 – (1,061) (2,946) 13,995 – 1,000 3,422 14,085 1,085 (1,375) 427 10,003 630 1,075 17,968 (5,025) 14,181 (4,100) 8,255 (4,095) 13,691 (4,665) 13,233 (4,100) 1,225 (93) 8 (1,808) 120 (204) – – 875 (4) – 2,694 (368) (1) (1,561) 3,695 – – – – – (1,045) 3,380 (437) (1) (1,322) 120 – 1,000 (13) – – – 1,225 – – (1,724) 120 (204) – – 875 (4) – 2,694 (368) – (1,463) 3,695 – – – – – (1,045) 36,551 23,378 18,936 26,531 24,781 3,030 (31,021) 36,551 5,250 (27,117) 23,378 4,619 (19,167) 18,936 2,839 (23,486) 26,531 1,745 (26,323) 24,781 8,560 7,854 (2,712) 1,511 7,315 (972) 4,388 7,925 (4,998) 5,884 4,242 (2,227) 203 4,411 (372) Cash and cash equivalents at end of year 41 13,702 7,854 7,315 7,899 4,242 The notes appearing on pages 6 to 107 form an integral part of these financial statements anz financial report 2005 5 NOTES TO THE FINANCIAL STATEMENTS Our critical accounting policies are described on pages 110 to 113. 1: ACCOUNTING POLICIES i) Basis of preparation This general purpose financial report complies with the accounts provisions of the Banking Act 1959, applicable Australian Accounting Standards, the accounts provisions of the Corporations Act 2001, Urgent Issues Group Consensus Views and other authoritative pronouncements of the Australian Accounting Standards Board. Except as disclosed below, these accounting policies are consistent with those of the previous year. The financial report has been prepared in accordance with the historical cost convention as modified by the revaluation of trading instruments which are recorded at market value with gains and losses on revaluation taken to the statement of financial performance, and the deemed cost of properties (deemed cost being the carrying amount of revalued non-current assets as at the date of reverting to the cost basis per AASB 1041 - Revaluation of Non Current Assets) less any accumulated depreciation. The preparation of the financial report requires the use of management estimates. Such estimates may require review in future periods. The Company is a company of the kind referred to in Australian Securities and Investments Commission class order 98/100, dated 10 July 1998. Consequently, amounts in the financial report have been rounded to the nearest million dollars except where otherwise indicated. All amounts are expressed in Australian dollars, unless otherwise stated. Where necessary, amounts shown for the previous year have been reclassified to facilitate comparison. ii) Changes in Accounting Policies There have been no changes in accounting policies for the year ended 30 September 2005. For reporting periods commencing 1 October 2005, the Group is required to prepare financial statements using Australian equivalents to International Financial Reporting Standards (AIFRS). The move to reporting under AIFRS represents a major change to reporting processes and will result in significant changes to accounting policies. Refer to note 55 for a 6 detailed analysis of the impacts of adopting AIFRS. iii) Consolidation The financial statements consolidate the financial statements of Australia and New Zealand Banking Group Limited (the Company) and its controlled entities. Where controlled entities and associates have been sold or acquired during the year, their operating results have been included to the date of disposal or from the date of acquisition. Control means the capacity of an entity to dominate decision making, directly or indirectly, in relation to the financial and operating policies of another entity so as to enable that other entity to pursue the objectives of the controlling entity. The capacity of an entity to dominate decision making is usually present when that entity has power over more than one- half of the voting rights of the other entity; power to govern the financial and operating policies of the other entity; power to appoint or remove the majority of the members of the board of directors; or power to cast the majority of votes at meetings of the board of directors or equivalent governing body of the entity. However, all the facts of a particular situation are considered when assessing control. The Group adopts the equity method of accounting for associates and the Group’s interest in joint venture entities. The Group’s share of results of associates and joint venture entities is included in the consolidated statement of financial performance. Shares in associates and joint venture entities are stated in the consolidated statement of financial position at cost plus the Group’s share of post acquisition net assets. Interests in associates and joint ventures are reviewed annually for impairment primarily using a discounted cash flow methodology. In the course of completing this valuation other methodologies are considered to determine the reasonableness of the valuation including the multiples of earnings methodology. All significant activities of the Group, with the exception of the ING Australia Joint Venture, are operated through wholly-owned controlled entities. The Group may invest in or establish special purpose vehicles to enable it to undertake specific types of transactions. Where the Group controls such vehicles, they are consolidated into the Group financial results. iv) Goodwill Goodwill, representing the excess of the purchase consideration over the fair value of the identifiable net assets of a controlled entity at the date of gaining control, is recognised as an asset and amortised on a straight line basis over the period during which the benefits are expected to arise, not exceeding 20 years. The unamortised balance of goodwill and the period of amortisation are reviewed annually for impairment using a discounted cash flow or the capitalisation of earnings methodology. Where the balance exceeds the value of expected future benefits, the difference is charged to the statement of financial performance. v) Foreign currency Financial assets and liabilities denominated in foreign currencies are translated into Australian dollars at the rates of exchange ruling at balance date. Revenues and expenses of overseas branches and controlled entities are translated at average exchange rates for the year. Net translation differences arising from the translation of overseas branches and controlled entities considered to be self- sustaining operations are included in the foreign currency translation reserve, after allowing for those positions hedged by foreign exchange contracts and related currency borrowings (net of tax). vi) Fee income Fee and commission income is brought to account on an accruals basis. Certain yield-related front-end application fees received are deferred and accrued to income as an adjustment to yield over the period of the loan. Non yield-related application and activation lending fees received are recognised as income no later than when the loan is disbursed or the commitment to lend expires. Fees and commissions that relate to the execution of a significant act (for example, advisory services, placement fees and underwriting fees) are taken to income when the fees are receivable. Fees charged for providing ongoing services that represent the recoupment of the costs of providing service (for example, maintaining and administering existing facilities) are recognised as revenue in the period in which the service is provided. NOTES TO THE FINANCIAL STATEMENTS 1: ACCOUNTING POLICIES (CONTINUED) vii) Net loans and advances Net loans and advances include direct finance provided to customers such as bank overdrafts, credit cards, term loans, lease finance, hire purchase finance and commercial bills. Overdrafts, credit cards and term loans are carried at principal balances outstanding. Interest on amounts outstanding is accounted for on an accruals basis. Finance leases, including hire purchase contracts, are accounted for using the finance method whereby income is taken to account progressively over the life of the lease or the contract in proportion to the outstanding investment balance. The finance receivable component of operating leases is accounted for using the finance method and operating lease residual value retained is recorded as other assets. At finalisation, goods are disposed of and proceeds received are applied against the residual value. Any resulting gains or losses are recognised through income. The operating lease residual value is reflected at estimated future realisable value. The residual value is reviewed semi-annually and compared to estimated future market values. Any impairment on these residual value assets is recognised in the statement of financial performance for the period. A hire purchase is a contract where Esanda or UDC (the 'owner') allows the customer (the 'hirer') the right to possess and use goods in return for regular payments. When all payments are made the title to the goods will pass to the hirer. The gross amount of contractual payments for finance leases to business customers that have a fixed rate and a fixed term are recorded as gross lease receivables and the unearned interest component is recognised as income yet to mature. Customer financing through redeemable preference shares is included within net loans and advances. Dividends received on redeemable preference shares are taken to the statement of financial performance as part of interest income. All loans are subject to regular scrutiny and graded according to the level of credit risk. Loans are classified as either productive or non-accrual. The Group has adopted the Australian Prudential Regulation Authority Impaired Assets Guidelines in assessing non-accrual loans. Non-accrual loans include loans where the accrual of interest and fees has ceased due to doubt as to full recovery, and loans that have been restructured with an effective yield below the Group’s average cost of funds at the date of restructuring. A specific provision is raised to cover the expected loss, where full recovery of principal is doubtful. Restructured loans are loans with an effective yield above the Group’s cost of funds and below the yield applicable to a customer of equal credit standing. Cash receipts on non-accrual loans are, in the absence of a contrary agreement with the customer, applied as income or fees in priority to being applied as a reduction in principal, except where the cash receipt relates to proceeds from the sale of security. viii) Bad and doubtful debts and other loss contingencies Bad and doubtful debts: The Group recognises an expense for credit losses based on the expected long term loss ratio for each part of the loan portfolio. The charge is booked to the General Provision which is maintained to cover losses inherent within the Group’s existing loan portfolio. The method used by the Group for determining this expense charge is referred to as ‘economic loss provisioning’ (ELP). The Group uses ELP models to calculate the expected loss by considering: n the history of credit loss for each type and risk grade of lending; and n the size, composition and risk profile of the current loan portfolio. The Group regularly reviews the assumptions used in the ELP models. These reviews are conducted in recognition of the subjective nature of ELP methodology. Methodologies are updated as improved analysis becomes available. In addition, the robustness of outcomes is reviewed considering the Group’s actual loss experience and losses sustained by other banks operating in similar markets. To the extent that credit losses are not consistent with previous loss patterns used to develop the assumptions within the ELP methodology, the existing General Provision may be determined to be either in excess of or insufficient to cover credit losses not yet specifically identified. As a result of the reassessments, ELP charge levels may be periodically increased or decreased. Specific provisions are maintained to cover identified doubtful debts. All known bad debts are written off in the year in which they are identified. The specific provision requirement (representing new and increased specific provisions less specific provision releases) is transferred from the General Provision to the Specific Provision. Recoveries, representing excess transfers to the Specific Provision, are credited to the General Provision. Provisions for doubtful debts are deducted from loans and advances in the statement of financial position. Other loss contingencies: These items are recorded as liabilities on the balance sheet when the following requirements are met: n the transaction is probable in that the contingency is likely to occur; and n can be reasonably estimated. Further disclosure is made within note 47, where the above requirements are not met but the contingency falls within the category of “reasonably possible”. Specific details are provided together with an estimate of the range or a statement that such an estimate is not possible. ix) Acceptances Commercial bills accepted but not held in portfolio are accounted for and disclosed as a liability with a corresponding contra asset. The Group’s own acceptances discounted are held as part of either the trading securities portfolio or the loan portfolio, depending on whether, at the time of such discount, the intention was to hold the acceptances for resale or until maturity. x) Trading securities Securities held for trading purposes are recorded at market value. Unrealised gains and losses on revaluation are taken to the statement of financial performance. Market value for listed and unlisted securities is determined by the price displayed by a willing buyer in a liquid market at the reporting date, adjusted for liquidity issues around the size of the parcel of securities held by the Group as compared to the normal daily trading volumes in the securities. Where a market price in a liquid market is not readily available, the market value is determined by reference to the market price available for a security with similar credit, maturity and yield characteristics or by using industry standard pricing models. anz financial report 2005 7 NOTES TO THE FINANCIAL STATEMENTS 1: ACCOUNTING POLICIES (CONTINUED) xi) Investment securities Investment securities are those which the Group intends and has the ability to hold until maturity. Such securities are recorded at cost or at cost adjusted for amortisation of premiums or discounts. Premiums and discounts are capitalised and amortised from the date of purchase to maturity. Interest and dividend income is accrued. Changes in market values of securities are not taken into account unless there is considered to be an other than temporary diminution in value. The market value of listed and unlisted investment securities used for considering other than temporary impairment and fair market value disclosures is determined using quoted market prices for securities with the same or similar credit, maturity and yield characteristics. Market value, used for impairment issues, is determined in accordance with the methodology discussed under Trading Securities. xii) Repurchase agreements Securities sold under repurchase agreements are retained in the financial statements and a counterparty liability is disclosed under the classifications of Due to other financial institutions or Deposits and other borrowings. The difference between the sale price and the repurchase price is amortised over the life of the repurchase agreement and charged to interest expense in the statement of financial performance. Securities purchased under agreements to resell are recorded as Liquid assets, Net loans and advances, or Due from other financial institutions, depending on the term of the agreement and the counterparty. xiii) Derivative financial instruments Derivative financial instruments (derivatives) are contracts whose value is derived from one or more underlying financial instruments or indices. They include swaps, forward rate agreements, futures, options and combinations of these instruments. Trading derivatives, comprising derivatives entered into for customer-related or proprietary reasons or for hedging the trading portfolio, are measured at fair value and all gains and losses are taken to other operating income in the statement of financial performance. 8 Fair value losses arising from trading derivatives are not offset against fair value gains on the statement of financial position unless a legal right of set-off exists. For contracts subject to master netting agreements that create a legal right of set- off for which only the net revaluation amount is recognised in the statement of financial performance, unrealised gains on derivatives are recognised as part of other assets and unrealised losses are recognised as part of other liabilities in a category described as “treasury instrument revaluations”. Derivatives designated as hedges of underlying non-trading exposures are accounted for on the same basis as the underlying exposures. To be designated as a hedge, the fair value of the hedge must move inversely with changes in the fair value of the underlying exposure. Gains and losses resulting from the termination of a derivative that was designated as a hedge of non-trading exposures are deferred and amortised over the remaining period of the original term covered by the terminated instrument where the underlying exposure still exists. The gains or losses are recorded in the income or expense line in which the underlying exposure movements are recorded. Where the underlying exposure no longer exists, the gains and losses are recognised in the statement of financial performance in the other operating income line. Gains and losses on derivatives related to hedging exposures arising from anticipated transactions are deferred and recognised in the financial statements when the anticipated transaction occurs. These gains and losses are deferred only to the extent that there is an offsetting unrecognised (unrealised) gain or loss on the exposures being hedged. Deferred gains and losses are amortised over the expected term of the hedged exposure and are recorded in the results of operations in the same line as the underlying exposure. For hedging instruments designed as hedging interest rate risk, the amortised deferred gain or loss is posted to the net interest line; for items designated as hedging foreign currency exposures, the amortised deferred gain or loss is recorded in the other operating income line. The impact of hedges of foreign currency revenue is recorded in interest income. The deferred gain or loss is recorded in other liability or other assets in the statement of financial position. Gains and losses that arise prior to and upon the maturity of transactions entered into under hedge rollover strategies are deferred and included in the measurement of the hedged anticipated transaction if the transaction is still expected to occur. If the forecasted transaction is no longer expected to occur, the gains and losses are recognised immediately in the statement of financial performance in other income. Movements in the derivative financial position are recorded in the cashflow statement when they are settled on the other financing and investing lines. xiv) Premises and equipment Premises and equipment are carried at cost less depreciation or amortisation. Profit or loss on the disposal of premises and equipment is determined as the difference between the carrying amount of the assets at the time of disposal and the proceeds of disposal, and is included in the results in the year of disposal. Assets other than freehold land are depreciated at rates based upon their expected useful lives to the Group, using the straight line method. The depreciation rates used for each class of asset are: Buildings Building integrals Furniture & equipment Computer & office equipment Software 1% 10% 10% 12.5% to 33% 14% to 33% Leasehold improvements are amortised on a straight line basis over the shorter of the useful lives or remaining terms of the lease. Costs incurred in acquiring and building software and computer systems are capitalised as fixed assets and expensed as amortisation over periods of between 3 and 5 years except for the branch front end applications where 7 years is used. Costs incurred in planning or evaluating software proposals, or in maintaining systems after implementation, are not capitalised. The carrying values of all non-current assets, including premises and equipment, have been assessed annually, and have not been found to be in excess of their recoverable amounts. Recoverable amounts are determined through a combination of comparisons with market values and cash flows. If the carrying value of a non-current asset exceeds its recoverable amount, the asset is written down to the lower value. Where assets working together as a group support the generation of cash flows, the recoverable amount is assessed in relation to the group of assets. defined benefit schemes have been provided for in the financial statements, where a legal or constructive obligation exists. The assets and liabilities of the schemes have not been consolidated as the Company does not have direct or indirect control of the schemes. xix) Leasing Leases entered into by the Group as lessee are predominantly operating leases, and the operating lease payments are included in the statement of financial performance in equal installments over the lease term. xx) Goods and services tax Revenues, expenses and assets are recognised net of the amount of goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Tax Office (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of the expense. Receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from or payable to the ATO is included as an other asset or liability in the statement of financial position. Cash flows are included in the statement of cash flows on a gross basis. The GST components of cash flows arising from investing and financing activities which are recoverable from or payable to the ATO are classified as operating cash flows. xxi) Capitalised expenses Direct external expenses related to the acquisition of interest earning assets, including structured institutional lending, mortgages and finance leases, are initially recognised as part of the cost of acquiring the asset and written-off as an adjustment to its expected yield over its expected life. For assets subject to prepayment, expected life is determined on the basis of the historical behaviour of the particular asset portfolio, taking into account contractual obligations and prepayment experience assessed on a regular basis. Impairment of capitalised expenses is assessed through comparing the actual behaviour of the portfolio against initial expected life assumptions. NOTES TO THE FINANCIAL STATEMENTS 1: ACCOUNTING POLICIES (CONTINUED) xv) Income tax The Group adopts the liability method of tax effect accounting whereby income tax expense is calculated based on accounting profit adjusted for permanent differences. Permanent differences are items of revenue and expense which are recognised in the statement of financial performance but are not part of taxable income or vice versa. Future tax benefits and deferred tax liabilities relating to timing differences and tax losses are carried forward at tax rates applicable to future periods. These future tax benefits are not brought to account unless realisation of the asset is assured beyond reasonable doubt. Future tax benefits relating to tax losses are only carried forward where realisation of the benefit is considered virtually certain. Provision for Australian income tax is made where the earnings of overseas controlled entities are subjected to Australian tax under the attribution rules for the taxation of foreign sourced income. Otherwise, no provision is made for overseas withholding tax or Australian income tax which may arise on repatriation of earnings from overseas controlled entities, where it is expected these earnings will be retained by those entities to finance their ongoing business. For details of the impact of Tax Consolidation, refer note 6. xvi) Employee entitlements The amounts expected to be paid in respect of employees’ entitlements to annual leave are accrued at expected salary rates including on-costs. Liability for long service leave is accrued in respect of all applicable employees at the present value of future amounts expected to be paid. xvii) Provisions Refer to note 27 for the accounting policies covering various provisions, excluding ELP which is detailed in note 1(viii) above. xviii) Superannuation commitments Contributions, which are determined on an actuarial basis, to superannuation schemes are charged to personnel expenses in the statement of financial performance. Any aggregate deficiencies arising from the actuarial valuations of the Group’s anz financial report 2005 9 NOTES TO THE FINANCIAL STATEMENTS 2: INCOME Interest income From other financial institutions On trading securities On investment securities On loans and advances Other From controlled entities Total interest income Other operating income i) Fee income Lending Other, commissions From controlled entities Total fee income ii) Other income Foreign exchange earnings Profit on trading instruments Significant item: Net profit before tax from the sale of NBNZ Life Significant item: Net profit before tax from sale of business to INGA joint venture Significant item: Net profit before tax from the close out of the TrUEPrS swap Hedge of TrUEPrS cash flows1 Life insurance margin on services operating income Profit (loss) on sale of premises2 Rental income Other3 Total other income3 Total other operating income Share of joint venture profit from ING Australia4 (refer note 44) Share of associates profit (net of writeoffs) Total share of joint venture and associates profit Total income5 The Company 2005 $m 2004 $m 127 254 255 9,829 286 2005 $m Consolidated 2004 $m 258 302 363 16,111 393 17,427 – 187 359 275 12,984 312 14,117 – 2003 $m 92 272 180 9,380 291 10,215 – 10,751 195 17,427 14,117 10,215 10,946 1,043 1,573 2,616 – 2,616 454 134 14 – – – 18 6 2 151 779 1,002 1,419 2,421 – 2,421 411 151 – 14 108 2 15 (7) 2 129 825 933 1,115 2,048 – 2,048 348 110 – – – 71 – 6 3 116 654 856 1,023 1,879 219 2,098 351 117 – – – – – (3) 2 531 998 68 245 210 8,194 200 8,917 137 9,054 822 947 1,769 260 2,029 232 158 – 14 108 2 – – 2 482 998 3,395 3,246 2,702 3,096 3,027 107 50 157 97 48 145 55 51 106 – – – – – – 20,979 17,508 13,023 14,042 12,081 1 In prior years, preference shares were issued via the TrUEPrS structure. This income was earned on a fixed receive/floating pay swap of the fixed dividend commitments. The TrUEPrS securities were bought back on 12 December 2003. $2 million in 2004 treated as significant item 2 Consolidated gross proceeds on sale of premises is $9 million (2004: $34 million, 2003: $33 million) 3 The Company’s ‘other income’ include dividends received from controlled entities of $468 million (2004: $648 million) 4 Net of notional goodwill amortisation 5 Includes external dividend income of $106 million (2004: $41 million, 2003: $10 million) for the Group and $7 million (2004: $2 million) for the Company 10 NOTES TO THE FINANCIAL STATEMENTS 3: EXPENSES Interest expense To other financial institutions On deposits On borrowing corporations’ debt On commercial paper On loan capital, bonds and notes Other To controlled entities Total interest expense Operating expenses i) Personnel Pension fund Employee entitlements and taxes Salaries and wages Temporary staff Other Total personnel expenses ii) Premises Amortisation of leasehold improvements Depreciation of buildings and integrals Rent Utilities and other outgoings Other To controlled entities Total premises expenses iii) Computer Computer contractors Data communication Depreciation and amortisation Rentals and repairs Software purchased Other Total computer expenses iv) Other Advertising and public relations Amortisation of goodwill1 Audit fees (refer note 5) Depreciation of furniture and equipment Freight and cartage Loss on sale of equipment Non-lending losses, frauds and forgeries Postage and stationery Professional fees Telephone Travel Other Total other expenses v) Restructuring Total operating expenses Total expenses 2005 $m Consolidated 2004 $m 345 6,670 528 980 2,483 623 11,629 – 11,629 161 190 1,625 111 362 2,449 16 11 213 122 32 394 – 394 53 60 235 58 115 37 558 161 179 7 43 45 9 62 113 123 55 124 141 1,062 52 238 5,037 481 770 1,699 638 8,863 – 8,863 145 149 1,425 92 320 2,131 13 11 197 109 23 353 – 353 25 69 242 59 115 43 553 130 146 5 43 41 6 49 111 112 57 100 129 929 60 2003 $m 183 3,502 445 310 1,052 412 5,904 – 5,904 109 122 1,177 81 261 1,750 15 16 154 88 22 295 – 295 18 61 183 70 103 30 465 91 18 4 33 35 7 48 92 101 49 78 102 658 60 The Company 2005 $m 2004 $m 251 4,337 – 133 2,076 454 7,251 395 7,646 115 130 1,071 66 275 1,657 9 2 146 91 23 271 (9) 262 49 34 182 48 84 14 411 92 8 4 29 36 4 45 67 93 29 76 204 687 47 161 3,403 – 201 1,515 529 5,809 279 6,088 108 108 975 65 238 1,494 7 2 139 81 17 246 46 292 23 48 178 62 90 17 418 72 8 3 27 32 5 30 66 83 30 65 189 610 64 4,515 4,026 3,228 3,064 16,144 12,889 9,132 10,710 2,878 8,966 1 In addition, there is a notional goodwill amortisation charge of $43 million (2004: $41 million; 2003: $44 million) included in the calculation of the share of income from the ING Australia joint venture anz financial report 2005 11 NOTES TO THE FINANCIAL STATEMENTS 4: EQUITY INSTRUMENTS ISSUED TO EMPLOYEES Under existing Australian Accounting Standards, equity instruments issued to employees are not required to be expensed. The impact of expensing options1, and shares issued under the $1,000 employee share plan, has been calculated and is disclosed below. Net profit attributable to shareholders of the Company Expenses attributable to: Options issued to Group Heads1 Options issued to general management1 Shares issued under $1,000 employee share plan Total 2005 $m Consolidated 2004 $m 2003 $m 3,018 2,815 2,348 (5) (20) (23) (8) (23) (22) (8) (24) (18) 2,970 2,762 2,298 1 Based on fair values estimated at grant date determined in accordance with the fair value measurement provisions of AASB 1046. Value of options are amortised on a straight-line basis over the vesting period. 5: REMUNERATION OF AUDITORS KPMG Australia Audit or review of financial reports of the Company or any entity in the Group1 Other audit-related services2 Other assurance services3 Taxation Total Overseas Related practices of KPMG Australia Audit or review of financial reports of Group entities Other audit-related services2 Other assurance services3 Taxation Total Total remuneration of auditors 2005 $’000 Consolidated 2004 $’000 4,981 1,060 927 6,968 – 2,981 567 2,934 6,482 563 2003 $’000 2,640 2,083 3,891 8,614 775 The Company 2005 $’000 2004 $’000 3,732 630 927 5,289 – 2,357 492 2,899 5,748 443 6,968 7,045 9,389 5,289 6,191 1,977 1,475 188 3,640 4 1,834 1,494 77 3,405 65 1,293 1,503 1,473 4,269 83 3,644 3,470 4,352 10,612 10,515 13,741 351 791 8 1,150 – 1,150 6,439 346 556 32 934 31 965 7,156 It is Group policy that KPMG Australia or any of its related practices may provide assurance and other audit-related services that, while outside the scope of the statutory audit, are consistent with the role of auditor. These include regulatory and prudential reviews requested by the Company’s regulators such as the Australian Prudential Regulation Authority. KPMG Australia or any of its related practices may not provide services that are perceived to be materially in conflict with the role of auditor. These include consulting advice and subcontracting of operational activities normally undertaken by management, and engagements where the auditor may ultimately be required to express an opinion on its own work. However, non-audit services that are not perceived to be materially in conflict with the role of auditor may be provided by KPMG Australia or any of its related practices subject to the approval of the Audit Committee. KPMG has confirmed to ANZ that it has policies in place on loans from audit clients that are in accordance with Rule 2-01 of Regulation S-X and that neither KPMG nor any covered person or immediate family member have any loans outstanding from the Company and its related parties, that are part of the audit client, that are not in compliance with that rule. 1 2005 includes services in relation to the transition to Australian equivalents to International Financial Reporting Standards 2 Includes services for the audit or review of financial information other than financial reports, including prudential supervision reviews for central banks, prospectus reviews, trust audits and other audits required for local statutory purposes 3 2004 includes due diligence oversight review of The National Bank of New Zealand and markets co-sourcing internal audit work which ceased in April 2004. 2003 includes assessing the Group’s compliance with the requirements of the US Patriot Act. 12 NOTES TO THE FINANCIAL STATEMENTS 6: INCOME TAX EXPENSE Reconciliation of the prima facie income tax payable on profit with the income tax expense charged in the statement of financial performance Profit before income tax Prima facie income tax at 30% Tax effect of permanent differences Overseas tax rate differential Other non-assessable income Rebateable and non-assessable dividends Life insurance accounting Goodwill amortisation Profit from associated and joint venture entities Sale of businesses to ING joint ventures Other Income tax (over) provided in prior years Total income tax expense Australia Overseas 2005 $m Consolidated 2004 $m 2003 $m The Company 2005 $m 2004 $m 4,255 1,277 3,987 1,196 3,277 2,944 2,682 983 883 804 17 (26) (23) (5) 56 (45) (6) (9) 20 (32) (20) (4) 46 (43) (4) 11 1,236 (2) 1,170 (2) 1,234 1,168 816 418 802 366 1,234 1,168 15 (31) (16) – 5 (32) – 5 929 (3) 926 672 254 926 (3) (3) (141) – 1 – – (19) 718 (1) 717 642 75 717 2 (1) (194) – 1 – (4) 104 712 (2) 710 641 69 710 Tax Consolidation Legislation has been enacted to allow Australian resident entities to elect to consolidate and be treated as a single entity for Australian taxation purposes. The Company has elected for all Australian wholly owned subsidiaries, trusts and partnerships to be taxed as a single entity with effect from 1 October 2003. 7: DIVIDENDS Ordinary dividends Interim dividend Final dividend Bonus option plan adjustment Dividends on ordinary shares 2005 $m 930 9831 (36) Consolidated 2004 $m 850 7771 (29) 1,877 1,598 2003 $m 666 –1 (25) 641 The Company 2005 $m 2004 $m 930 9831 (36) 850 7771 (29) 1,877 1,598 1 Following a change in accounting standards in 2003 dividends are no longer accrued and are recorded when declared. Final dividend of $1,077 million for 2005 not included in above table A final dividend of 59 cents, fully franked, is proposed to be paid on each fully paid ordinary share on 16 December 2005 (2004: final dividend of 54 cents, paid 17 December 2004, fully franked, 2003: final dividend of 51 cents, paid 19 December 2003, fully franked). The 2005 interim dividend of 51 cents, paid 1 July 2005, was fully franked (2004: interim dividend of 47 cents, paid 1 July 2004, fully franked, 2003: interim dividend of 44 cents, paid 1 July 2003, fully franked). The tax rate applicable to the franking credits attached to the interim dividend and to be attached to the proposed final dividend is 30% (2004: 30%, 2003: 30%). Preference dividends Trust Securities Issues ANZ Stapled Exchangeable Preferred Securities (ANZ StEPS) Euro Trust Securities Dividends on preference shares 2005 $m Consolidated 2004 $m – 66 18 84 36 62 – 98 2003 $m 102 – – 102 The Company 2005 $m 2004 $m – – – – – – – – anz financial report 2005 13 NOTES TO THE FINANCIAL STATEMENTS 7: DIVIDENDS (CONTINUED) Trust Securities Issues (ANZ TrUEPrS) In 1998 ANZ TrUEPrS issued 124,032,000 preference shares, raising USD 775 million via Trust Securities issues. The Trust Securities carried an entitlement to a distribution of 8% (USD 400 million) or 8.08% (USD 375 million). The amounts were payable quarterly in arrears. Payment dates were the fifteenth day of January, April, July and October in each year. The preference shares were bought back on 12 December 2003. ANZ Stapled Exchangeable Preferred Securities (ANZ StEPS) On 23 September 2003, the Group issued 10 million ANZ StEPS at $100 each raising $1 billion ($987 million net of issue costs of $13 million). ANZ StEPS comprise 2 fully paid securities - an interest paying unsecured note issued by a New Zealand subsidiary (ANZ Holdings (New Zealand) Limited) which is stapled to a fully paid preference share issued by the Company. Distributions on ANZ StEPS are non-cumulative and are payable quarterly in arrears (on 15 March, 15 June, 15 September, 15 December of each year) based upon a floating distribution rate equal to the 90 day bank bill rate plus a 100 basis point margin. At each payment date the 90 day bank bill rate is reset for the next quarter. Dividends are not payable on the preference share while it is stapled to the note. If distributions are not paid on ANZ StEPS, the Company may not pay dividends or return capital on its ordinary shares or any other share capital or security ranking equal or below the preference share component. Euro Trust Securities On 13 December 2004, the Group issued 500,000 Euro Floating Rate Non-cumulative Trust Securities (“Euro Trust Securities”) at €1,000 each into the European market, raising €500 million (A$871 million at the spot rate at the date of issue, net of issue costs). The Euro Trust Securities are similar in structure to ANZ StEPS and US Trust Security issuances, in that they comprise 2 fully paid securities – an interest paying unsecured note issued by a United Kingdom subsidiary (ANZ Jackson Funding PLC) stapled to a fully paid €1,000 preference share issued by the Company, which are stapled together and issued as a Euro Trust Security by ANZ Capital Trust III. Distributions on Euro Trust Securities are non-cumulative and are payable quarterly in arrears (on 15 March, 15 June, 15 September, 15 December of each year) based upon a floating distribution rate equal to 3 month EURIBOR rate plus a 66 basis point margin. At each payment date the 3 month EURIBOR rate is reset for the next quarter. Dividends are not payable on the preference share while it is stapled to the note. If distributions are not paid on Euro Trust Securities, the Company may not pay dividends or return capital on its ordinary shares or any other share capital or security ranking equal or below the preference share component. Dividend Franking Account The amount of franking credits available to the Company for the subsequent financial year is $78 million (2004: $111 million and 2003: nil), after adjusting for franking credits that will arise from the payment of tax on Australian profits for the 2005 financial year, $462 million of franking credits which will be utilised in franking the proposed final dividend and franking credits that may not be accessible by the Company at present. Restrictions which Limit the Payment of Dividends There are presently no significant restrictions on the payment of dividends from controlled entities to the Company. Various capital adequacy, liquidity, statutory reserve and other prudential requirements must be observed by certain controlled entities and the impact on these requirements caused by the payment of cash dividends is monitored. Payments of dividends from overseas controlled entities may attract withholding taxes which have not been provided for in these financial statements. There are presently no restrictions on payment of dividends by the Company. Reductions of shareholders’ equity through payment of cash dividends is monitored having regard to the regulatory requirements to maintain a specified capital adequacy ratio. In particular, the Australian Prudential Regulation Authority has advised Australian banks that a bank under its supervision must consult with it before declaring a coupon payment on a Tier 1 instrument, including a dividend if the bank has incurred a loss, or proposes to pay coupon payments on Tier 1 instruments (including dividends), which exceed the level of current year profits. Dividend Reinvestment Plan During the year, 3,900,116 ordinary shares were issued at $19.95 per share, and 3,406,775 ordinary shares at $21.85 per share, under the Dividend Reinvestment Plan (2004: 3,909,659 ordinary shares at $16.61 per share, and 3,906,171 ordinary shares at $17.84 per share) 14 NOTES TO THE FINANCIAL STATEMENTS 7: DIVIDENDS (CONTINUED) Bonus Option Plan Dividends paid during the year have been reduced by way of certain shareholders participating in the Bonus Option Plan and forgoing all or part of their right to dividends in return for the receipt of bonus shares. During the year, 1,749,584 ordinary shares were issued under the Bonus Option Plan (2004: 1,771,864 ordinary shares). Final dividend 2004 Interim dividend 2005 8: EARNINGS PER ORDINARY SHARE Basic earnings per share (cents)1 Earnings reconciliation Profit after income tax Less: net profit attributable to outside equity interests Less: preference share dividend paid Earnings used in calculating basic earnings per share Weighted average number of ordinary shares (millions)1 Used in calculating basic earnings per share Diluted earnings per share (cents)1 Earnings reconciliation Profit after income tax Less: net profit attributable to outside equity interests Less: preference share dividend paid Add: US Trust Securities interest expense Earnings used in calculating diluted earnings per share Weighted average number of ordinary shares (millions)1 Used in calculating basic earnings per share Add: potential conversion of options to ordinary shares1 potential conversion of US Trust Securities to ordinary shares Used in calculating diluted earnings per share 1 Discounted for rights issue Declared Bonus options exercised dividend $m $m 983 930 1,913 (19) (17) (36) Amount paid $m 964 913 1,877 2005 $m Consolidated 2004 $m 2003 $m 160.9 153.1 142.4 3,021 3 84 2,934 2,819 4 98 2,717 2,351 3 102 2,246 1,823.7 1,774.1 1,577.8 157.5 149.7 141.7 3,021 3 84 48 2,982 2,819 4 98 44 2,761 2,351 3 102 – 2,246 1,823.7 9.7 60.1 1,893.5 1,774.1 6.2 64.5 1,844.8 1,577.8 7.2 – 1,585.0 The weighted average number of converted and lapsed options, weighted with reference to the date of conversion or lapse, and included in the calculation of diluted earnings per share is approximately 1.0 million. ANZ StEPS and Euro Trust Securities have not been included in the calculation of diluted EPS as they are not dilutive. Refer to note 30. anz financial report 2005 15 NOTES TO THE FINANCIAL STATEMENTS 9: LIQUID ASSETS Australia Coins, notes and cash at bankers Money at call, bills receivable and remittances in transit Securities purchased under agreement to resell less than 90 days Overseas Coins, notes and cash at bankers Money at call, bills receivable and remittances in transit Other banks’ certificates of deposit Securities purchased under agreement to resell less than 90 days Total liquid assets Maturity analysis based on original term to maturity at 30 September Less than 90 days More than 90 days Total liquid assets 10: DUE FROM OTHER FINANCIAL INSTITUTIONS Australia Overseas Total due from other financial institutions Maturity analysis based on remaining term to maturity at 30 September Overdraft Less than 3 months Between 3 months and 12 months Between 1 year and 5 years After 5 years Total due from other financial institutions 11: TRADING SECURITIES Trading securities are allocated between Australia and Overseas based on the domicile of the issuer Unlisted – Australia Commonwealth securities Local, semi-government and other government securities ANZ accepted bills Other securities and equity securities Unlisted – Overseas Other government securities Other securities and equity securities Total unlisted Total trading securities 16 Consolidated The Company 2005 $m 887 1,013 1,405 3,305 474 3,707 3,865 249 8,295 11,600 9,600 2,000 11,600 2004 $m 696 157 568 1,421 418 2,289 2,080 155 4,942 6,363 4,999 1,364 6,363 2005 $m 865 958 1,394 3,217 119 1,980 1,875 – 3,974 7,191 5,315 1,876 7,191 2004 $m 678 121 552 1,351 103 1,087 1,203 – 2,393 3,744 2,408 1,336 3,744 Consolidated The Company 2005 $m 917 5,431 6,348 802 3,591 424 393 1,138 6,348 2004 $m 498 4,283 4,781 370 2,692 824 790 105 4,781 2005 $m 899 2,553 3,452 741 2,158 359 58 136 3,452 2004 $m 488 2,049 2,537 299 1,729 349 58 102 2,537 Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 551 1,646 1,182 1,364 4,743 370 1,172 1,542 6,285 6,285 164 1,693 1,875 627 4,359 631 488 1,119 5,478 5,478 551 1,646 1,182 1,260 4,639 27 643 670 5,309 5,309 164 1,693 1,875 568 4,300 241 242 483 4,783 4,783 NOTES TO THE FINANCIAL STATEMENTS 12: INVESTMENT SECURITIES Investment securities are allocated between Australia and Overseas based on the domicile of the issuer Listed – Australia Other securities and equity investments Listed – Overseas Other government securities Other securities and equity investments Total listed Unlisted – Australia Local and semi-government securities Other securities and equity investments Unlisted – Overseas New Zealand government securities Other government securities Other securities and equity investments Total unlisted Total investment securities Market value information Listed – Australia Other securities and equity investments Listed – Overseas Other government securities Other securities and equity investments Total market value of listed investment securities Unlisted – Australia Local and semi-government securities Other securities and equity investments Unlisted – Overseas New Zealand government securities Other government securities Other securities and equity investments Total market value of unlisted investment securities Total market value of investment securities Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m – – 196 1,411 1,607 1,607 1,412 2,344 3,756 1,096 431 51 1,578 5,334 6,941 – 197 1,409 1,606 1,606 1,412 2,344 3,756 1,096 433 52 1,581 5,337 6,943 4 4 1,070 1,354 2,424 2,428 895 2,786 3,681 914 357 366 1,637 5,318 7,746 12 12 1,072 1,358 2,430 2,442 895 2,785 3,680 913 361 366 1,640 5,320 7,762 – – 196 1,410 1,606 1,606 1,412 2,274 3,686 – 108 7 115 3,801 5,407 – – 197 1,409 1,606 1,606 1,412 2,274 3,686 – 110 7 117 3,803 5,409 – – 1,070 1,354 2,424 2,424 895 2,660 3,555 – 133 5 138 3,693 6,117 – – 1,072 1,358 2,430 2,430 895 2,659 3,554 – 137 5 142 3,696 6,126 anz financial report 2005 17 NOTES TO THE FINANCIAL STATEMENTS 12: INVESTMENT SECURITIES (CONTINUED) Investment Securities by Maturities and Yields Based on remaining term to maturity at 30 September 2005 At book value Australia Local and semi-government securities Other securities and equity investments Overseas New Zealand government securities Other government securities Other securities and equity investments Total book value Total market value Weighted average yields1 Australia Local and semi-government securities Other securities and equity investments Overseas New Zealand government securities Other government securities Other securities and equity investments Between 3 Less than months and 3 months 12 months $m $m Between 1 year and 5 years $m Between 5 years and 10 years $m After 10 years $m No maturity specified $m 972 2,085 3,057 760 452 42 1,254 4,311 4,313 440 250 690 333 100 370 803 1,493 1,490 – – – – 75 1,043 1,118 1,118 1,121 – – – 3 – 3 6 6 5 – – – – – 4 4 4 5 – 9 9 – – – – 9 9 Total $m 1,412 2,344 3,756 1,096 627 1,462 3,185 6,941 Market Value $m 1,412 2,344 3,756 1,096 630 1,461 3,187 n/a n/a 6,943 Less than 1 year % Between 1 year and 5 years % Between 5 years and 10 years % After 10 years % 5.55 5.69 6.51 3.98 3.90 – – – 6.78 3.54 – – 7.20 – 2.00 – – – 3.00 2.68 1 Based on effective yields for fixed interest and discounted securities and dividend yield for equity investments at 30 September 2005 18 NOTES TO THE FINANCIAL STATEMENTS 12: INVESTMENT SECURITIES (CONTINUED) Investment Securities by Maturities and Yields Based on remaining term to maturity at 30 September 2004 At book value Australia Local and semi-government securities Other securities and equity investments Overseas New Zealand government securities Other government securities Other securities and equity investments Total book value Total market value Weighted average yields1 Australia Local and semi-government securities Other securities and equity investments Overseas New Zealand government securities Other government securities Other securities and equity investments Between 3 Less than months and 3 months 12 months $m $m Between 1 year and 5 years $m Between 5 years and 10 years $m After 10 years $m No maturity specified $m 695 2,480 3,175 589 861 194 1,644 4,819 4,784 200 50 250 325 491 442 1,258 1,508 1,508 – 51 51 – 75 1,077 1,152 1,203 1,251 – 162 162 – – 1 1 163 165 – – – – – 6 6 6 6 – 47 47 – – – – 47 48 Total $m 895 2,790 3,685 914 1,427 1,720 4,061 7,746 Market Value $m 895 2,797 3,692 913 1,433 1,724 4,070 n/a n/a 7,762 Less than 1 year % Between 1 year and 5 years % Between 5 years and 10 years % After 10 years % 5.37 5.33 6.08 4.37 3.00 – 6.49 – 7.89 2.71 – 6.56 – – 2.84 – – – – 2.18 1 Based on effective yields for fixed interest and discounted securities and dividend yield for equity investments at 30 September 2004 anz financial report 2005 19 NOTES TO THE FINANCIAL STATEMENTS 13: NET LOANS AND ADVANCES Loans and advances are classified between Australia, New Zealand and Overseas markets based on the domicile of the lending point Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 5,276 5,434 89,558 48,993 2,855 8,060 1,575 4,390 4,523 78,660 42,056 2,667 7,093 1,091 5,276 5,434 89,558 44,187 1,222 641 1,575 4,390 4,523 78,660 36,937 1,061 497 1,066 161,751 140,480 147,893 127,134 1,647 1,026 34,860 25,012 639 347 859 1,604 1,032 31,519 22,472 493 517 584 64,390 58,221 303 134 592 7,511 217 61 7 558 128 464 8,730 111 78 44 8,825 10,113 – – – – – – – – 214 6 467 6,428 97 61 5 7,278 – – – – – – – – 408 7 363 7,314 79 78 40 8,289 234,966 208,814 155,171 135,423 (2,440) (2,376) (1,709) (1,655) (1,574) (1,476) (1) (1) (4,014) (3,852) (1,710) (1,656) 230,952 204,962 153,461 133,767 653 3,058 3,711 555 2,716 3,271 206 1,113 1,319 102 1,038 1,140 Australia Overdrafts Credit card outstandings Term loans – housing Term loans – non-housing Lease finance (refer below) Hire purchase Other New Zealand Overdrafts Credit card outstandings Term loans – housing Term loans – non-housing Lease finance (refer below) Hire purchase Other Overseas markets Overdrafts Credit card outstandings Term loans – housing Term loans – non-housing Lease finance (refer below) Commercial bills Other Total gross loans and advances Provisions for doubtful debts (refer note 15) Income yet to mature Total net loans and advances Lease finance consists of gross lease receivables Current Non-current 20 NOTES TO THE FINANCIAL STATEMENTS 13: NET LOANS AND ADVANCES (CONTINUED) Maturity Distribution and Concentrations of Credit Risk Based on remaining term to maturity at 30 September 2005 Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate – construction Real estate – mortgage3 Retail and wholesale trade Other New Zealand Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate – construction Real estate – mortgage3 Retail and wholesale trade Other Overseas Markets Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate – construction Real estate – mortgage3 Retail and wholesale trade Other Gross loans and advances Specific provision for doubtful debts Income yet to mature Overdraft1 $m Between Less than 3 months and 3 months 12 months $m $m Between 1 year and 5 years $m 478 177 58 388 – – 258 8,477 156 110 457 151 427 28 37 83 13 23 93 1,548 26 185 65 145 12 5 3 3 22 58 118 9 10 13 69 115 1,072 491 690 1,657 19 79 2,039 1,283 532 3,107 2,423 1,182 625 36 26 444 111 116 382 73 84 2,411 300 250 337 22 10 179 13 26 893 64 37 183 469 455 447 415 521 1,150 5 289 705 145 165 3,208 673 880 591 94 59 50 4 59 159 269 132 2,488 142 589 99 4 30 33 24 3 169 44 10 40 140 189 1,530 1,440 1,128 969 14 1,992 1,750 5,837 1,385 3,362 1,846 3,122 6,045 269 510 1,302 131 254 1,279 648 274 4,954 578 1,782 388 3 78 146 40 106 934 96 118 107 241 1,036 After 5 years $m 1,776 1,389 1,241 476 23 495 984 7,511 844 83,488 3,152 2,110 2,620 235 246 132 61 187 310 89 109 29,011 492 705 133 7 37 4 4 24 160 182 4 242 37 788 Total $m 5,303 3,912 3,638 4,640 61 2,855 5,736 23,253 3,082 93,275 8,551 7,445 10,308 662 878 2,011 320 639 2,223 2,627 625 39,049 1,577 3,471 969 41 158 365 103 217 2,274 395 179 585 956 2,583 13,820 22,120 14,024 45,694 139,308 234,966 (273) – (273) – (316) (316) – (297) (297) – (952) (952) – (9) (9) (273) (1,574) (1,847) Loans and advances net of specific provision and income yet to mature 13,547 21,804 13,727 44,742 139,299 233,119 General provision Net loans and advances Interest rate sensitivity Fixed interest rates4 Variable interest rates – – – – (2,167) (2,167) 13,547 21,804 13,727 44,742 137,132 230,952 197 13,623 9,317 12,803 9,495 4,529 23,066 22,628 55,139 84,169 97,214 137,752 13,820 22,120 14,024 45,694 139,308 234,966 1 Overdraft includes credit cards and unsecured lending 2 Personal includes non-business loans to individuals through overdrafts, personal loans, credit cards and fully drawn advances 3 Real estate-mortgage includes residential and commercial property exposure. Loans within this category are for the purchase of such properties and must be secured by property 4 Housing loans and other loans that are capped for an initial period are fixed interest rate loans and their maturities based on the principal repayments due over the term of the loan anz financial report 2005 21 NOTES TO THE FINANCIAL STATEMENTS 13: NET LOANS AND ADVANCES (CONTINUED) Maturity Distribution and Concentrations of Credit Risk Based on remaining term to maturity at 30 September 2004 Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate – construction Real estate – mortgage3 Retail and wholesale trade Other New Zealand Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate – construction Real estate – mortgage3 Retail and wholesale trade Other Overseas Markets Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate – construction Real estate – mortgage3 Retail and wholesale trade Other Gross loans and advances Specific provision for doubtful debts Income yet to mature Overdraft1 $m Between Less than 3 months and 3 months 12 months $m $m Between 1 year and 5 years $m 378 150 53 254 1 – 215 7,068 144 95 415 140 113 242 75 75 7 15 186 867 98 620 189 149 13 10 4 14 26 73 59 6 12 10 216 243 957 625 837 966 87 90 1,527 1,129 248 2,928 2,142 2,502 792 52 25 316 106 2 342 82 130 2,776 249 349 120 7 14 88 4 – 878 46 6 40 243 380 583 358 850 1,297 2 238 613 143 192 2,406 510 925 512 100 198 98 24 137 143 234 91 2,147 158 336 230 5 7 47 11 – 312 53 34 18 95 268 1,156 1,025 820 625 15 1,820 1,507 10,656 1,100 2,382 1,822 1,662 5,388 285 415 2,175 129 333 972 792 216 4,554 634 1,168 446 54 32 294 69 15 1,110 73 39 374 93 1,105 After 5 years $m 1,518 1,188 1,100 406 21 519 872 495 684 73,959 2,737 1,323 2,613 167 178 69 71 6 326 180 89 24,628 314 484 324 9 20 112 14 23 354 164 6 233 42 1,516 Total $m 4,592 3,346 3,660 3,548 126 2,667 4,734 19,491 2,368 81,770 7,626 6,552 9,418 846 891 2,733 337 493 1,969 2,155 624 34,725 1,544 2,486 1,133 85 77 555 124 111 2,713 342 97 675 689 3,512 12,235 21,085 13,375 45,355 116,764 208,814 (384) (12) (396) – (355) (355) – (287) (287) – (816) (816) – (6) (6) (384) (1,476) (1,860) Loans and advances net of specific provision and income yet to mature 11,839 20,730 13,088 44,539 116,758 206,954 General provision Net loans and advances Interest rate sensitivity Fixed interest rates4 Variable interest rates – – – – (1,992) (1,992) 11,839 20,730 13,088 44,539 114,766 204,962 278 11,957 8,568 12,517 8,060 5,315 21,213 24,142 45,325 71,439 83,444 125,370 12,235 21,085 13,375 45,335 116,764 208,814 1 Overdraft includes credit cards and unsecured lending 2 Personal includes non-business loans to individuals through overdrafts, personal loans, credit cards and fully drawn advances 3 Real estate-mortgage includes residential and commercial property exposure. Loans within this category are for the purchase of such properties and must be secured by property 4 Housing loans and other loans that are capped for an initial period are fixed interest rate loans and their maturities based on the principal repayments due over the term of the loan 22 NOTES TO THE FINANCIAL STATEMENTS 14: IMPAIRED ASSETS Summary of impaired assets Non-accrual loans Restructured loans Unproductive facilities Gross impaired assets Specific provisions Non-accrual loans Unproductive facilities Net impaired assets Non-accrual loans Non-accrual loans Specific provisions Total net non-accrual loans Restructured loans For these loans interest and fees are recognised as income on an accrual basis Other real estate owned In the event of customer default, any loan security is held as mortgagee in possession and therefore the Group does not hold any other real estate owned assets Unproductive facilities Unproductive facilities Specific provisions Net unproductive facilities Accruing loans past due 90 days or more These amounts, comprising loans less than $100,000 or fully secured, are not classified as impaired assets and therefore are not included within the above summary Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 642 28 43 713 (256) (17) 440 642 (256) 386 829 32 29 890 (378) (6) 506 829 (378) 451 380 28 36 444 (135) (10) 299 380 (135) 245 644 32 29 705 (268) (6) 431 644 (268) 376 28 32 28 32 – 43 (17) 26 – 29 (6) 23 – 36 (10) 26 – 29 (6) 23 381 293 267 175 Consolidated average non-accrual loans: September 2005 $705 million; September 2004 $912 million; September 2003 $1,103 million Further analysis of impaired assets at 30 September 2005 and interest and/or other income received during the year under Australian Prudential Regulation Authority guidelines is as follows: Non-accrual loans Without provisions Australia New Zealand Overseas markets With provisions and no, or partial, performance1 Australia New Zealand Overseas markets With provisions and full performance1 Australia New Zealand Overseas markets Total non-accrual loans Restructured loans Unproductive facilities Total impaired assets 1 A loan’s performance is assessed against its contractual repayment schedule Consolidated The Company Gross balance outstanding $m Interest and/or Specific other income received $m provision $m Gross balance outstanding $m Interest and/or Specific other income received $m provision $m 82 3 46 131 264 130 44 438 9 61 3 73 642 28 43 713 – – – – 152 68 18 238 1 15 2 18 256 – 17 273 1 – 1 2 5 1 7 13 3 4 2 9 24 1 – 25 82 – 43 125 213 – 31 244 9 – 2 11 380 28 36 444 – – – – 123 – 10 133 1 – 1 2 135 – 10 145 1 – 1 2 5 – 6 11 3 – 1 4 17 1 – 18 anz financial report 2005 23 NOTES TO THE FINANCIAL STATEMENTS 14: IMPAIRED ASSETS (CONTINUED) Interest and other income forgone on impaired assets The following table shows the estimated amount of interest and other income that would have been recorded had interest and other income on non-accrual loans and unproductive facilities been accrued to income (or, in the case of restructured loans, had interest and other income been accrued at the original contract rate), and the amount of interest and other income received with respect to such loans. Gross interest and other income receivable on non-accrual loans, restructured loans and unproductive facilities Australia New Zealand Overseas markets Total gross interest and other income receivable on non-accrual loans, restructured loans and unproductive facilities Interest and other income received Australia New Zealand Overseas markets Total interest and other income received Net interest and other income forgone Australia New Zealand Overseas markets Total net interest and other income forgone Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 26 9 16 51 (10) (5) (10) (25) 16 4 6 26 29 8 25 62 (6) (1) (12) (19) 23 7 13 43 21 – 11 32 (10) – (8) (18) 11 – 3 14 24 – 15 39 (4) – (11) (15) 20 – 4 24 24 NOTES TO THE FINANCIAL STATEMENTS 15: PROVISIONS FOR DOUBTFUL DEBTS General provision Balance at start of year Acquisition (disposal) of provisions Adjustment for exchange rate fluctuations Charge to statement of financial performance Transfer to specific provision Recoveries Total general provision Specific provision Balance at start of year Acquisition of provisions Adjustment for exchange rate fluctuations Bad debts written off Transfer from general provision Total specific provision Total provisions for doubtful debts Provision movement analysis New and increased provisions Australia New Zealand Other overseas markets Provision releases Recoveries of amounts previously written off Net specific provision Net credit to general provision Charge to statement of financial performance Ratios Provisions1 as a % of total advances2 Specific General Provisions1 as a % of risk weighted assets Specific General Bad debts written off as a % of total advances2 Net specific provision as a % of total advances2 1 Excludes provisions for unproductive facilities 2 See Glossary on page 120 2005 $m Consolidated 2004 $m 2003 $m The Company 2005 $m 2004 $m 1,992 (13) (35) 580 (471) 114 1,534 216 53 632 (525) 82 1,496 – (49) 614 (588) 61 1,381 (13) (24) 388 (250) 82 1,283 – 16 433 (399) 48 2,167 1,992 1,534 1,564 1,381 384 – (11) (571) 471 273 484 57 (2) (680) 525 384 585 – (49) (640) 588 484 274 – (3) (376) 250 145 429 – (7) (547) 399 274 2,440 2,376 2,018 1,709 1,655 378 146 80 604 (133) 471 (114) 357 223 580 % 0.1 0.9 0.1 1.0 0.2 0.1 459 80 86 625 (100) 525 (82) 443 189 632 % 0.2 1.0 0.2 1.0 0.3 0.2 418 45 212 675 (87) 588 (61) 527 87 614 % 0.3 0.9 0.3 1.0 0.4 0.3 312 – 33 345 (95) 250 (82) 168 220 388 % 0.1 0.9 0.1 1.0 0.2 0.1 404 – 60 464 (65) 399 (48) 351 82 433 % 0.2 0.9 0.2 1.0 0.4 0.2 anz financial report 2005 25 NOTES TO THE FINANCIAL STATEMENTS 16: CUSTOMER’S LIABILITIES FOR ACCEPTANCES Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Manufacturing Personal1 Real estate – construction Real estate – mortgage2 Retail and wholesale trade Other Overseas Financial, investment and insurance Manufacturing Retail and wholesale trade Other Total customer’s liabilities for acceptances Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 900 596 539 1,192 1,647 5 145 5,551 1,701 1,045 813 572 502 1,081 1,710 5 132 5,073 1,524 994 900 596 539 1,192 1,647 5 145 5,551 1,701 1,045 813 572 502 1,081 1,710 5 132 5,073 1,524 994 13,321 12,406 13,321 12,406 16 37 68 7 128 6 44 10 – 60 16 37 68 7 128 6 44 10 – 60 13,449 12,466 13,449 12,466 1 Personal includes non-business acceptances to individuals 2 Real estate mortgage includes residential and commercial property exposure. Acceptances within this category are for the purchase of such properties and must be secured by property 17: REGULATORY DEPOSITS Overseas central banks Consolidated The Company 2005 $m 159 2004 $m 176 2005 $m 113 2004 $m 144 26 NOTES TO THE FINANCIAL STATEMENTS 18: SHARES IN CONTROLLED ENTITIES, ASSOCIATES AND JOINT VENTURE ENTITIES Refer notes 42 to 44 for details. Total shares in controlled entities Total shares in associates Total shares in joint venture entities Total shares in controlled entities, associates and joint venture entities ACQUISITIONS OF CONTROLLED ENTITIES There were no material controlled entities acquired during the year ended 30 September 2005. During the year ended 30 September 2004 the following material controlled entities were acquired: Consolidated The Company 2005 $m – 262 1,610 1,872 2004 $m – 263 1,697 2005 $m 12,455 96 – 2004 $m 11,472 45 – 1,960 12,551 11,517 On 1 December 2003, the Company acquired NBNZ Holdings Ltd and its controlled entities (NBNZ). Details of the acquisition are disclosed in note 41. The operating results of these acquired entities have been included in consolidated operating profit since acquisition. A restructuring provision of $25 million was established for restructuring the operations of the acquired entities. A balance of $12 million remains in the provision at 30 September 2005. On 26 June 2004, NBNZ was amalgamated into ANZ Banking Group (New Zealand) Limited. ANZ Banking Group (New Zealand) Limited changed its name to ANZ National Bank Limited on 28 June 2004. DISPOSALS OF CONTROLLED ENTITIES In September 2005 ANZ National Bank Limited entered into a joint venture with ING Insurance International Limited (INGII). The joint venture, ING (NZ) Holdings Ltd (INGNZ), is 49% owned by ANZ National Bank Ltd and 51% owned by INGII. On 30 September 2005: n ANZ National Bank Limited and INGII invested NZD163 million and NZD170 million respectively into INGNZ. n ANZ National Bank Limited sold NBNZ Life Insurance Limited and NBNZ Investment Services Limited to INGNZ for NZD158 million resulting in the following impact on the Group’s financial statements: - - - reduction in unamortised goodwill of NZD114 million; recognition of approximately NZD16 million ($14 million) profit on sale of 51% of the NBNZ Life and Funds Management businesses; an investment in INGNZ of NZD145 million (being initial investment adjusted for unrecognised profit on ANZ National Bank’s; and 49% share of the profit on sale of the NBNZ Life and Funds Management businesses joint venture and costs). n INGNZ acquired at market value the New Zealand-based businesses previously owned by INGA. The profit on sale of the New Zealand- based businesses of approximately $40 million is recognised in INGA, however, ANZ’s share of this profit is eliminated on consolidation. There were no material controlled entities disposed of during the year ended 30 September 2004. 19: DEFERRED TAX ASSETS Future income tax assets comprises General provision for doubtful debts Other provisions Other Total deferred tax assets Future income tax assets Australia Overseas Total deferred tax assets Consolidated The Company 2005 $m 719 335 283 2004 $m 650 340 464 1,337 1,454 862 475 959 495 1,337 1,454 2005 $m 505 218 31 754 674 80 754 2004 $m 442 238 57 737 636 101 737 Certain potential future income tax assets within the Group have not been recognised as assets because recovery cannot be regarded as virtually certain. These potential benefits arise from tax losses and timing differences (benefits could amount to $23 million, 2004: nil), and from realised capital losses (benefits could amount to $66 million, 2004: $67 million). These benefits will only be obtained if: i) the relevant entities derive future assessable income of a nature and amount sufficient to enable the benefit of the taxation deductions to be realised; ii) the relevant entities continue to comply with the conditions for deductibility imposed by law; and iii) there are no changes in taxation legislation adversely affecting the benefit of the taxation deductions. anz financial report 2005 27 NOTES TO THE FINANCIAL STATEMENTS 20: GOODWILL Goodwill – at cost Accumulated amortisation Total goodwill1 Consolidated The Company 2005 $m 3,298 (400) 2004 $m 3,509 (240) 2,898 3,269 2005 $m 123 (57) 66 2004 $m 123 (49) 74 1 Excludes notional goodwill related to the ING Australia joint venture of $711 million (September 2004: $754 million) and the ING New Zealand joint venture of $82 million (September 2004: nil) 21: OTHER ASSETS Accrued interest/prepaid discounts Accrued commission Prepaid expenses Treasury instruments revaluations Security settlements Operating leases residual value Life insurance business investments Capitalised Expenses Other Total other assets Consolidated The Company 2005 $m 1,441 78 153 3,750 2,144 712 – 524 1,101 9,903 2004 $m 1,568 82 71 4,456 952 535 65 463 966 9,158 2005 $m 1,165 47 46 3,267 785 2 – 176 610 6,098 2004 $m 1,181 55 10 3,738 10 – – 165 592 5,751 28 NOTES TO THE FINANCIAL STATEMENTS 22: PREMISES AND EQUIPMENT Freehold and leasehold land and buildings At cost1 Provision for depreciation Leasehold improvements At cost Provision for amortisation Furniture and equipment At cost Provision for depreciation Computer and office equipment At cost Provision for depreciation Software At cost Provision for amortisation Capital works in progress At cost Total premises and equipment Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 639 (201) 438 239 (149) 90 691 (445) 246 947 (717) 230 776 (395) 381 680 (182) 498 209 (148) 61 694 (443) 251 983 (726) 257 728 (298) 430 56 35 1,441 1,532 83 (40) 43 147 (84) 63 499 (308) 191 646 (470) 176 676 (327) 349 27 849 80 (40) 40 117 (78) 39 451 (290) 161 665 (475) 190 614 (239) 375 21 826 1 In accordance with AASB 1041 this represents deemed cost From 1 October 2000 as allowed by AASB 1041 ‘Revaluation of Non-Current Assets’ the Group elected to revert to the cost basis for measuring the class of assets ‘land and buildings’. As all properties are carried at deemed cost subject to individually meeting a recoverable amount test, valuations are carried out on all properties with a carrying value in excess of $2 million every three years. Properties carrying values are not increased to market values if valuations exceed carrying amounts. However, if the valuation of an individual property is determined to be less than its carrying amount, it will be written down to the lower amount, where considered appropriate. The properties are subject to external valuation by independent valuers. Valuations are based on the estimated open market value and assume that the properties concerned continue to be used in their existing manner by the Group. The last independent valuation of the Group’s freehold land and buildings was carried out for 30 September 2002 purposes. For 30 September 2005, the valuations were carried out by Jones Lang La Salle Advisory for Australia. New Zealand property values were assessed based on valuations by Telfer Young. This resulted in a valuation of $466 million and $25 million for the Group and Company respectively (excludes leasehold land and buildings). As land and buildings are recorded at deemed cost, the valuation was not brought to account. Further, a recoverable amount review of all properties at 30 September 2005 was completed. This involved properties being reviewed for the existence of impairment indicators that might provide evidence that the property’s recoverable amount exceeded its carrying value (also using the independent valuations performed), and hence a writedown being required. As a result of this review, some properties were identified as impaired and a loss of $3m was recorded (2004: $2 million). Group accounting policy covering the amortisation of software costs capitalised is detailed in note 1(xiv). As at 30 September 2005 the weighted average amortization period is 5 years. anz financial report 2005 29 NOTES TO THE FINANCIAL STATEMENTS 22: PREMISES AND EQUIPMENT (CONTINUED) Reconciliations of the carrying amounts for each class of premises and equipment are set out below: Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m Freehold and leasehold land and buildings1 Carrying amount at beginning of year Additions Acquisitions2 Disposals3 Depreciation Net foreign currency exchange difference Carrying amount at end of year Leasehold improvements Carrying amount at beginning of year Additions Acquisitions2 Disposals Amortisation Net foreign currency exchange difference Carrying amount at end of year Furniture and equipment Carrying amount at beginning of year Additions Acquisitions2 Disposals Depreciation Net foreign currency exchange difference Carrying amount at end of year Computer and office equipment Carrying amount at beginning of year Additions Acquisitions2 Disposals Depreciation Net foreign currency exchange difference Carrying amount at end of year Software Carrying amount at beginning of year Additions Acquisitions2 Writeoffs4 Amortisation Carrying amount at end of year Capital works in progress Carrying amount at beginning of year Net additions Acquisitions2 Carrying amount at end of year Total premises and equipment 1 Includes integrals 2 Relates to NBNZ acquisition at 1 December 2003. Additions after this date are included in the “Additions” lines 3 Includes $2 million writedown in carrying value of one property in 2004 4 Software writeoffs arose where projects were terminated and the software no longer utilised 30 498 22 – (68) (11) (3) 438 61 46 – – (16) (1) 90 251 81 – (41) (43) (2) 246 257 92 – (3) (114) (2) 230 430 96 – (24) (121) 381 35 21 – 56 463 26 67 (46) (11) (1) 498 52 17 10 (6) (13) 1 61 182 84 64 (35) (43) (1) 251 302 96 17 (47) (113) 2 257 465 114 17 (37) (129) 430 24 8 3 35 40 6 – – (2) (1) 43 39 33 – – (9) – 63 161 64 – (5) (29) – 191 190 69 – (3) (80) – 176 375 94 – (18) (102) 349 21 6 – 27 29 15 – (1) (2) (1) 40 37 9 – – (7) – 39 156 39 – (6) (27) (1) 161 239 81 – (58) (74) 2 190 421 92 – (34) (104) 375 18 3 – 21 1,441 1,532 849 826 NOTES TO THE FINANCIAL STATEMENTS 23: DUE TO OTHER FINANCIAL INSTITUTIONS Australia Overseas Total due to other financial institutions Maturity analysis based on remaining term to maturity at 30 September At call Less than 3 months Between 3 months and 12 months Between 1 year and 5 years After 5 years Total due to other financial institutions Consolidated The Company 2005 $m 3,396 8,631 12,027 4,381 5,632 1,029 123 862 12,027 2004 $m 1,346 6,003 7,349 2,255 4,152 662 280 – 7,349 2005 $m 3,394 5,635 9,029 3,711 4,367 930 21 – 9,029 2004 $m 1,345 4,515 5,860 1,853 3,346 661 – – 5,860 24: DEPOSITS AND OTHER BORROWINGS Deposits and other borrowings are classified between Australia and Overseas based on the location of the deposit taking point Australia Certificates of deposit Term deposits Other deposits bearing interest Deposits not bearing interest Commercial paper Borrowing corporations’ debt 1 Securities sold under agreement to repurchase Other borrowings Overseas Certificates of deposit Term deposits Other deposits bearing interest Deposits not bearing interest Commercial paper Borrowing corporations’ debt 2 Other borrowings Total deposits and other borrowings Maturity analysis based on remaining term to maturity at 30 September At call Less than 3 months Between 3 months and 12 months Between 1 year and 5 years After 5 years Total deposits and other borrowings Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 17,512 25,829 50,707 4,310 6,199 7,700 – 308 12,221 22,615 45,155 4,005 4,708 7,214 78 509 17,512 26,642 50,707 4,310 2,929 – – 308 12,221 23,273 45,155 4,005 2,099 – 78 509 112,565 96,505 102,408 87,340 5,112 30,003 16,102 5,085 14,808 1,938 80 4,844 30,941 15,891 4,207 14,072 2,034 63 845 8,198 806 752 – – 80 1,365 9,629 782 632 – – 63 73,128 72,052 10,681 12,471 185,693 168,557 113,089 99,811 77,999 75,452 22,432 9,682 128 71,037 71,570 17,923 7,923 104 57,610 39,616 8,707 7,139 17 52,629 35,167 7,337 4,662 16 185,693 168,557 113,089 99,811 1 Included in this balance is debenture stock of controlled entities. $7.7 billion of debenture stock of the consolidated subsidiary company Esanda together with accrued interest thereon, is secured by a trust deed and collateral debentures, giving floating charges upon the undertaking and all the assets of the entity other than land and buildings ($13,244 million). All controlled entities of Esanda (except for some controlled entities which have been placed or are expected to be placed in voluntary deregistration and have minimal book value) have guaranteed the payment of principal, interest and other monies in relation to all debenture stock and unsecured notes issued by Esanda. The only loans pledged as collateral are those in Esanda and its subsidiaries 2 This balance represents NZ$2.1 billion of secured debenture stock of the consolidated subsidiary UDC Finance Limited and the accrued interest thereon are secured by a floating charge over all assets of UDC Finance Limited and its subsidiaries (NZ$2,470 million) anz financial report 2005 31 NOTES TO THE FINANCIAL STATEMENTS 25: INCOME TAX LIABILITIES Australia Provision for income tax Provision for deferred income tax Overseas Provision for income tax Provision for deferred income tax Total income tax liabilities Provision for deferred income tax comprises Lease finance Treasury instruments Capitalised expenses Other 26: PAYABLES AND OTHER LIABILITIES Australia Payables Accrued interest and unearned discounts Treasury instruments revaluations Accrued charges Security settlements Other liabilities Overseas Payables Accrued interest and unearned discounts Treasury instruments revaluations1 Accrued charges Security settlements Life insurance policy liabilities Other liabilities Consolidated The Company 2005 $m 2004 $m 2005 $m 289 1,346 1,635 (93) 255 162 242 1,354 1,596 93 225 318 269 1,094 1,363 12 112 124 2004 $m 203 921 1,124 18 109 127 1,797 1,914 1,487 1,251 229 687 131 554 166 497 118 798 89 687 47 383 79 497 43 411 1,601 1,579 1,206 1,030 Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 2,797 1,266 3,853 350 – 838 9,104 207 732 374 228 317 – 645 2,503 4,746 1,169 3,274 297 1 438 9,925 145 647 2,382 237 378 30 468 4,287 2,770 1,141 4,376 320 – 584 4,700 1,051 3,781 255 1 291 9,191 10,079 5 256 (833)1 57 – – 114 (401) 1 259 143 43 – – 365 811 Total payables and other liabilities 11,607 14,212 8,790 10,890 1 Overseas Treasury instruments revaluations includes cash collateral paid under credit support agreements in ANZ’s London branch, an offsetting mark to market loss is recorded in Australia 32 NOTES TO THE FINANCIAL STATEMENTS 27: PROVISIONS Employee entitlements1 Restructuring costs and surplus leased space Non-lending losses, frauds and forgeries Other Total provisions Consolidated The Company 2005 $m 360 77 184 293 914 2004 $m 333 106 171 235 845 2005 $m 260 57 136 197 650 2004 $m 248 66 125 179 618 1 The aggregate liability for employee benefits largely comprise employee entitlements provisions plus liability for payroll tax and fringe benefits tax. The aggregate liability as at 30 September 2005 was $468 million for the Group and $288 million for the Company (30 September 2004: was $456 million for the Group and $284 million for the Company) Reconciliations of the carrying amounts of each class of provisions, except for employee entitlements, are set out below: Restructuring costs and surplus leased space1 Carrying amount at beginning of the year Acquisition provision (NBNZ) Provision made during the year Payments made during the year Release of provisions Adjustment for exchange rate fluctuations Carrying amount at the end of the year Non-lending losses frauds and forgeries2 Carrying amount at beginning of the year Provision made during the year Payments made during the year Release of provisions Carrying amount at the end of the year Other provisions3 Carrying amount at beginning of the year Provision made during the year Payments made during the year Release of provisions Adjustment for exchange rate fluctuations Carrying amount at the end of the year Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 106 – 57 (47) (38) (1) 77 171 37 (8) (16) 184 235 222 (132) (31) (1) 293 92 27 69 (68) (15) 1 106 164 18 (7) (4) 171 244 209 (173) (46) 1 235 66 – 52 (34) (27) – 57 125 23 (2) (10) 136 179 142 (93) (31) – 197 68 – 63 (50) (15) – 66 128 4 (3) (4) 125 181 165 (127) (40) – 179 1 Restructuring costs and surplus leased space provisions arise from exit activities related to material changes in the scope of business undertaken by the Group or the manner in which that business is undertaken, and includes termination benefits. Costs related to on-going activities are not provided for. Provision is made when the Group is demonstrably committed, it is probable that the costs will be incurred, though its timing is uncertain, and the costs can be reliably estimated 2 Non-lending losses, frauds and forgeries provisions arise from inadequate or failed internal processes and systems, or from external events 3 Other provisions comprise various other provisions including fringe benefits tax, fleet maintenance, workers’ compensation and other non-employee entitlement provisions anz financial report 2005 33 NOTES TO THE FINANCIAL STATEMENTS 28: BONDS AND NOTES Bonds and notes by currency USD GBP AUD NZD JPY EUR HKD CHF CAD NOK SGD CZK United States dollars Great British pounds Australian dollars New Zealand dollars Japanese yen Euro Hong Kong dollars Swiss francs Canadian dollars Norwegian krone Singapore dollars Czech koruna Total bonds and notes Bonds and notes by maturity Maturity analysis based on remaining term to maturity at 30 September Less than 3 months Between 3 months and 12 months Between 1 year and 5 years After 5 years Total bonds and notes Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 11,401 5,268 1,138 1,140 1,173 11,138 3,381 1,929 2,284 81 71 69 4,718 3,896 979 667 1,433 10,863 2,805 831 1,258 82 70 – 8,598 4,343 1,133 323 1,173 9,794 2,941 1,929 2,284 81 71 69 4,262 3,896 979 33 1,433 9,571 2,619 831 1,258 82 70 – 39,073 27,602 32,739 25,034 1,823 6,463 29,249 1,538 419 4,238 22,870 75 1,818 5,906 23,533 1,482 419 4,145 20,395 75 39,073 27,602 32,739 25,034 34 NOTES TO THE FINANCIAL STATEMENTS 29: LOAN CAPITAL Hybrid loan capital (subordinated) US Stapled Trust Security issue USD 350m non-cumulative trust securities due 2053 USD 750m non-cumulative trust securities due 2053 Perpetual subordinated notes USD 300m floating rate notes Subordinated notes USD 500m fixed notes due 2006 JPY 482m floating rate notes due 2007 USD 7.9m floating rate notes due 2007 JPY 568.8m floating rate notes due 2008 floating rate notes due 2008 USD 9m USD 79m floating rate notes due 2008 AUD 400m floating rate notes due 2010 NZD 100m fixed notes due 2010 (called April 2005) NZD 100m fixed notes due 20111 AUD 400m fixed notes due 20122 AUD 100m floating rate notes due 20121 NZD 125m fixed notes due 20121 NZD 125m fixed notes due 20121 NZD 300m fixed notes due 20121 NZD 100m fixed notes due 20131 USD 550m floating rate notes due 20131 EUR 300m floating rate notes due 20131 AUD 350m fixed notes due 20142 AUD 380m floating rate notes due 20141 EUR 500m fixed notes due 20152 USD 400m floating rate notes due 2015 AUD 300m fixed notes due 20152 GBP 200m fixed notes due 20151 GBP 400m fixed notes due 20182 Total loan capital Loan capital by currency AUD Australian dollars NZD New Zealand dollars USD United States dollars GBP Great British pounds EUR Euro JPY Japanese yen Loan capital by maturity Maturity analysis based on remaining term to maturity at 30 September Between 3 months and 12 months Between 1 year and 5 years After 5 years Perpetual Interest Rate % 4.484 5.36 LIBOR + 0.15 7.55 LIBOR + 0.50 LIBOR + 0.50 LIBOR + 0.55 LIBOR + 0.50 LIBOR + 0.53 BBSW + 0.29 8.36 6.87 6.75 BBSW + 0.57 7.40 7.61 7.04 6.46 LIBOR + 0.55 EURIBOR + 0.375 6.50 BBSW + 0.41 4.45 LIBOR + 0.20 6.00 5.625 4.75 Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 459 984 1,443 394 394 654 6 10 6 11 103 400 – 91 400 100 115 115 273 91 722 474 350 380 791 525 300 462 921 7,300 9,137 1,930 685 3,862 1,383 1,265 12 9,137 654 536 7,553 394 488 1,047 1,535 419 419 698 6 11 7 14 110 – 93 93 400 100 118 118 280 93 768 516 350 380 860 – – 502 1,004 6,521 8,475 1,230 795 3,555 1,506 1,376 13 8,475 – 846 7,210 419 459 984 1,443 394 394 654 6 10 6 11 103 400 – – 400 100 – – – – 722 474 350 380 791 525 300 462 921 6,615 8,452 1,930 – 3,862 1,383 1,265 12 8,452 654 536 6,868 394 488 1,047 1,535 419 419 698 6 11 7 14 110 – – – 400 100 – – – – 768 516 350 380 860 – – 502 1,004 5,726 7,680 1,230 – 3,555 1,506 1,376 13 7,680 – 846 6,415 419 1 Callable five years prior to maturity 2 Callable five years prior to maturity and reverts to floating rate notes Loan capital is subordinated in right of payment to the claims of depositors and all other creditors of the Company and its controlled entities which have issued the notes. The loan capital, except for the US Trust Security Issue, constitutes tier 2 capital as defined by the Australian Prudential Regulation Authority (APRA) for capital adequacy purposes. The US Trust Security Issue constitutes tier 1 capital, as defined by APRA, for capital adequacy purposes 9,137 8,475 8,452 7,680 anz financial report 2005 35 NOTES TO THE FINANCIAL STATEMENTS 29: LOAN CAPITAL (CONTINUED) US TRUST SECURITIES On 27 November 2003, the Company issued 1.1 million USD non-cumulative Trust Securities (“US Trust Securities”) at USD1000 each pursuant to offering memorandum dated 19 November 2003 raising USD1.1 billion. US Trust Securities comprise two fully paid securities – an interest paying unsecured note (issued by Samson Funding Limited, a wholly owned NZ subsidiary of the Company) and a fully paid USD1,000 preference share (issued by the Company), which are stapled together and issued as a US Trust Security by ANZ Capital Trust I or ANZ Capital Trust II (the “Trusts”). Investors have the option to redeem the US Trust Security from the Trusts and hold the underlying staped security. The issue was made in two tranches: n USD350 million tranche with a coupon of 4.484% and was issued through ANZ Capital Trust I. After 15 January 2010 and at any coupon date thereafter, ANZ has the discretion to redeem the US Trust Security for cash. If it does not exercise this discretion, the investor is entitled to require ANZ to exchange the US Trust Security into a number of ordinary shares based on the formula in the offering memorandum. n USD750 million tranche with a coupon of 5.36% and was issued through ANZ Capital Trust II. It has the same conversion features as the USD350 million tranche but from 15 December 2013. Distributions on US Trust Securities are non-cumulative and are payable half yearly in arrears and are funded by payments received by the respective Trusts on the underlying note. Distributions are subject to certain payment tests (eg. APRA requirements and distributable profits being available). Distributions are expected to be payable on 15 June and 15 December of each year. Dividends are not payable on the preference share while it is stapled to the note. If distributions are not paid on the US Trust Securities, the Company may not pay dividends or return capital on its ordinary shares or any other share capital or security ranking equal or junior to the preference share component. At any time in the Company’s discretion or upon the occurrence of certain other “conversion events”, such as the failure of the respective Trust to pay in full a distribution within seven business days of the relevant distribution payment date, the notes that are represented by the relevant US Trust Securities will be automatically assigned to a subsidiary of the Company and the preference shares that are represented by the relevant US Trust Securities will be distributed to investor in redemption of such US Trust Securities. The distributed preference shares will immediately become dividend paying and holders will receive non-cumulative dividends equivalent to the scheduled payments in respect of the US Trust Securities for which the preference shares were distributed. If the US Trust Securities are not redeemed or bought back prior to the 15 December 2053, they will be converted into preference shares, which in turn will be mandatorily convert into a number of ordinary shares based upon the formula in the offering memorandum. The preference shares forming part of the US Trust Securities rank equal to the preference shares issued in connection with the ANZ StEPS and Euro Trust Securities in all respects. Except in limited circumstances, holders of US Trust Securities do not have any right to vote in general meetings of the company. On winding up of the Company, the rights of US Trust Security holders will be determined by the preference share component of US Trust Security. These preference shares rank behind all depositors and creditors, but ahead of ordinary shareholders. The US Trust Securities qualify as Tier 1 capital as defined by the Australian Prudential Regulation Authority, however, the US Trust Securities are reported as debt under Australian, International and US Accounting Standards with the coupon payment classified as interest expense. 30: SHARE CAPITAL Number of issued shares Ordinary shares each fully paid Preference shares each fully paid Total number of issued shares 2005 The Company 2004 2003 1,826,449,480 10,500,000 1,818,401,807 10,000,000 1,521,686,560 134,032,000 1,836,949,480 1,828,401,807 1,655,718,560 36 NOTES TO THE FINANCIAL STATEMENTS 30: SHARE CAPITAL (CONTINUED) ORDINARY SHARES Ordinary shares entitle the holder to participate in dividends and the proceeds on winding up of the company in proportion to the number of and amounts paid on the shares held. On a show of hands every holder of ordinary shares present at a meeting in person or by proxy, is entitled to one vote, and upon a poll each share is entitled to one vote. Number of issued shares Balance at start of year Bonus option plan Dividend reinvestment plan ANZ employee share acquisition plan ANZ share option plan Share capital buyback ANZ share purchase scheme ANZ rights issue Balance at end of year 2005 1,818,401,807 1,749,584 7,306,891 1,979,649 6,642,326 (9,630,777) – The Company 2004 1,521,686,560 1,771,864 7,815,830 3,891,978 6,387,809 – 276,847,766 2003 1,503,886,082 1,534,987 6,223,866 3,615,714 6,425,911 – – 1,826,449,480 1,818,401,807 1,521,686,560 For a reconciliation of the movement in ordinary share capital refer to Statement of Changes in Shareholders’ Equity on page 4 PREFERENCE SHARES a) Trust Securities Issues (ANZ TrUEPrS) ANZ TrUEPrS were 124,032,000 fully paid non-converting non-cumulative preference shares issued for USD6.25 per share via Trust Securities Issues in 1998. The Trust Securities were mandatorily exchangeable for the preference shares issued by the Company, and carried an entitlement to a non-cumulative trust distribution of 8.00% or 8.08% per annum payable quarterly in arrears. The Trust Securities were issued by a non diversified closed end management investment company registered under the US Investment Company Act of 1940. The preference shares themselves carried no present entitlement to dividends. Distributions to investors in the Trust Securities were funded by income distributions made by the Group. Upon maturity of the Trust Securities in 2048, investors would have mandatorily exchanged the Trust Securities for the preference shares and thereupon the preference shares would have carried an entitlement to non-cumulative dividends of 8.00% or 8.08% per annum payable quarterly in arrears. The mandatory exchange of the Trust Securities for the preference shares could have occurred earlier at the Company’s option or in specified circumstances. With the prior consent of the Australian Prudential Regulation Authority, the preference shares were redeemable at the Company’s option after 5 years, or within 5 years in limited circumstances. The entitlement of investors to distributions on the Trust Securities would have ceased on redemption of the preference shares. The transaction costs arising on the issue of these instruments were recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs related. On 12 December 2003, the Group bought back its 124,032,000 preference shares issued via Trust Securities Issues for $1,045 million. b) ANZ Stapled Exchangeable Preferred Securities (ANZ StEPS) On 23 September 2003, the Company issued 10 million ANZ StEPS at $100 each pursuant to a prospectus dated 14 August 2003 raising $1 billion (excluding issue costs of $13 million: net raising $987 million). ANZ StEPS comprise two fully paid securities - an interest paying unsecured note (issued by ANZ Holdings (New Zealand) Limited, a New Zealand subsidiary of the Company) stapled to a fully paid $100 preference share (issued by the Company). Distributions on ANZ StEPS are non- cumulative and are payable quarterly in arrears based upon a floating distribution rate equal to the 90 day bank bill rate plus a 100 basis point margin. At each payment date the 90 day bank bill rate is reset for the next quarter. Distributions are subject to certain payment tests (ie APRA requirements and distributable profits being available) and the basis for their calculation may change on any reset date. Distributions are expected to be payable on 15 March, 15 June, 15 September and 15 December of each year. Dividends are not payable on the preference share while it is stapled to the note. If distributions are not paid on ANZ StEPS, the Company may not pay dividends or return capital on its ordinary shares or any other share capital or security ranking equal or junior to the preference share component. On any reset date, ANZ may change certain terms (subject to certain restrictions) including the next reset date, market reset (from floating rate to a fixed rate, or vice versa), margin and the frequency and timing of the distribution payment dates. The first reset date is 15 September 2008. Holders of ANZ StEPS can require exchange on any reset date or earlier if certain specified events occur. On exchange, a holder will receive (at the Company’s discretion) either $100 cash for each ANZ StEPS exchanged or a number of ordinary shares calculated in accordance with a conversion ratio based on $100 divided by the market price of ordinary shares at the date of conversion less 2.5%. In certain circumstances, the Company may also require exchange other than on a reset date. Upon the occurrence of an assignment event, ANZ StEPS become unstapled. In this case, the note will be assigned to a subsidiary of the company, however, the holder will retain the preference share and the rights to exchange the preference share. The preference shares forming part of ANZ StEPS rank equally with the preference shares issued in connection with US Trust Securities and Euro Trust Securities in all respects. Except in anz financial report 2005 37 NOTES TO THE FINANCIAL STATEMENTS 30: SHARE CAPITAL (CONTINUED) PREFERENCE SHARES (CONTINUED) b) ANZ Stapled Exchangeable Preferred Securities (ANZ StEPS) (continued) certain limited circumstances, holders of ANZ StEPS do not have any right to vote in general meetings of the Company. On a winding up of the Company, the rights of ANZ StEPS holders will be determined by the preference share component of ANZ StEPS. Those preference shares rank behind all depositors and creditors, but ahead of ordinary shareholders. The transactions costs arising on the issue of these instruments were recognised directly in equity as a reduction of the proceeds of the equity instruments to which the costs relate. c) Euro Trust Securities On 13 December 2004, the Company issued 500,000 Euro Floating Rate Non- cumulative Trust Securities (“Euro Trust Securities”) at €1000 each pursuant to the offering circular dated 9 December 2004, raising $871 million (at the spot rate at the date of issue, net of issue costs). Euro Trust Securities comprise two fully paid securities – an interest paying unsecured note (issued by ANZ Jackson Funding PLC, a United Kingdom subsidiary of the Company) and a fully paid, €1000 preference share (issued by the Company), which are stapled together and issued as a Euro Trust Security by ANZ Capital Trust III (the “Trust”). Investors have the option to redeem the Euro Trust Security from the Trust and hold the underlying stapled security. Distributions on Euro Trust Securities are non-cumulative and are payable quarterly in arrears and are funded by payments received by the Trust on the underlying note and or preference share. The distribution is based upon a floating distribution rate equal to the 3 month EURIBOR rate plus a 66 basis point margin up until 15 December 2014, after which date the distribution rate is the 3 month EURIBOR rate plus a 166 basis point margin. At each payment date the 3 month EURIBOR rate is reset for the next quarter. Distributions are subject to certain payment tests (eg APRA requirements and distributable profits being available). Distributions are expected to be payable on 15 March, 15 June, 15 September and 15 December of each year. Dividends are not payable on the preference shares while they are stapled to the note, except for the period after 15 December 2014 when the preference share will pay 100bpts to fund the increase in the margin. If distributions are not paid on Euro Trust Securities, the Company may not pay dividends or return capital on its ordinary shares or any other share capital or security ranking equal or junior to the preference share component. At any time at ANZ’s discretion or upon the occurrence of certain other “conversion events”, such as the failure of the Trust to pay in full a distribution within seven business days of the relevant distribution payment date or the business day prior to 15 December, 2053, the notes that are represented by the relevant Euro Preference share balance at start of year - ANZ TrUEPrS (USD748 million)1 - ANZ StEPS1 Buyback of ANZ TrUEPrS2 Preference share net proceeds from new issues during the year - Euro Trust Securities1 Preference share balance at end of year - Euro Trust Securities1 - ANZ StEPS1 Balance at end of year 1 Net of issue costs 2 ANZ TrUEPrS bought back on 12 December 2003 for $1,045 million 38 Trust Securities will be automatically assigned to a Branch of the Company and the preference shares that are represented by the relevant Euro Trust Securities will be distributed to investor in redemption of such Euro Trust Securities. The distributed preference shares will immediately become dividend paying and holders will receive non-cumulative dividends equivalent to the scheduled payments in respect of the Euro Trust Securities for which the preference shares were distributed. The preference shares forming part of the Euro Trust Security rank equal to the preference shares issued in connection with the ANZ StEPS and US Trust Securities in all respects. Except in limited circumstances, holders of Euro Trust Securities do not have any right to vote in general meetings of the company. On winding up of the Company, the rights of Euro Trust Security holders will be determined by the preference share component of the Euro Trust Security. These preference shares rank behind all depositors and creditors, but ahead of ordinary shareholders. The transaction costs arising on the issue of these instruments were recognised directly in equity as a reduction to the proceeds of the equity instruments to which the costs relate. Consolidated The Company 2005 $m – 987 987 – 987 871 1,858 871 987 1,858 2004 $m 1,225 987 2,212 (1,225) 987 – 987 – 987 987 2005 $m – 987 987 – 987 871 1,858 871 987 1,858 2004 $m 1,225 987 2,212 (1,225) 987 – 987 – 987 987 NOTES TO THE FINANCIAL STATEMENTS 31: OUTSIDE EQUITY INTERESTS Share capital Retained Profits Total outside equity interests 32: CAPITAL ADEQUACY Consolidated 2005 $m 11 16 27 2004 $m 1 17 18 The Australian Prudential Regulation Authority (APRA) adopts a risk-based capital assessment framework for Australian banks based on internationally accepted capital measurement standards. This risk-based approach requires eligible capital to be divided by total risk weighted assets, with the resultant ratio being used as a measure of a bank’s capital adequacy. Capital is divided into tier 1, or ‘core’ capital, and tier 2, or ‘supplementary’ capital. For capital adequacy purposes, eligible tier 2 capital cannot exceed the level of tier 1 capital. Banks are required to deduct from total capital any strategic holdings of other banks’ capital instruments and investments in entities engaged in life insurance, funds management and securitisation activities. Under APRA guidelines, banks must maintain a ratio of qualifying capital to risk weighted assets of at least 8 per cent. The measurement of risk weighted assets is based on: a) a credit risk-based approach wherein risk weightings are applied to statement of financial position assets and to credit converted off balance sheet exposures. Categories of risk weights are assigned based upon the nature of the counterparty and the relative liquidity of the assets concerned; and b) the recognition of risk weighted assets attributable to market risk arising from trading and commodity positions. Trading and commodity balance sheet positions do not attract a risk weighting under the credit risk-based approach. Consolidated 2005 $m 2004 $m Qualifying capital Tier 1 Total shareholders’ equity and outside equity interests Hybrid loan capital1 Asset revaluation reserve Dividend2 Accumulated retained profits and reserves of insurance, funds management and securitisation entities Unamortised goodwill and other intangibles Capitalised expenses3 Investment in ANZ Lenders Mortgage Insurance Tier 1 capital Tier 2 Asset revaluation reserve Perpetual subordinated notes General provision for doubtful debts4 Subordinated notes5 Tier 2 capital Deductions Investment in Funds Management and securitisation entities Investment in joint ventures with ING6 Other Total qualifying capital Adjusted common equity7 Total risk weighted assets Capital adequacy ratios Tier 1 Tier 2 Deductions Total Adjusted common equity7 19,488 1,443 (31) (1,077) (213) (3,902) (524) (27) 17,925 1,535 (31) (983) (218) (4,170) (465) (27) 15,157 13,566 31 394 1,448 1,873 6,701 8,574 31 419 1,342 1,792 6,052 7,844 (84) (528) (172) (784) (107) (708) (204) (1,019) 22,947 20,391 11,140 10,012 219,573 196,664 % 6.9 3.9 (0.3) 10.5 5.1 % 6.9 4.0 (0.5) 10.4 5.1 1 Represents the US Trust Securities Issue approved by APRA as qualifying for Tier 1 status. Refer note 29 2 Relates to final dividend not provided for 3 Comprises loan and lease origination fees, capitalised securitisation establishment costs and costs associated with debt raisings 4 Net of attributable future income tax benefit 5 For capital adequacy calculation purposes, subordinated note issues are reduced by 20% of the original amount during each of the last five years to maturity 6 Joint ventures with ING in Australia and New Zealand 7 Tier 1 capital, less preference share capital (converted at 30 September 2005 rates), less deductions anz financial report 2005 39 NOTES TO THE FINANCIAL STATEMENTS 32: CAPITAL ADEQUACY (CONTINUED) Statement of financial position Cash, claims on Australian Commonwealth, State Governments, Territory Governments, claims on OECD Central Governments, local currency claims on non-OECD Governments and other zero weighted assets Claims on approved banks and local Governments Advances secured by residential mortgages Other assets – credit risk Total statement of financial position assets – credit risk Trading assets – market risk Assets 2005 $m 2004 $m Risk weighted assets 2004 2005 $m $m 23,160 16,054 118,895 127,204 285,313 7,872 24,467 12,593 106,013 113,218 256,291 3,054 – 3,211 59,448 127,204 189,863 n/a – 2,519 53,007 113,218 168,744 n/a Total statement of financial position assets 293,185 259,345 189,863 168,744 Off balance sheet exposures Direct credit substitutes Contract/ notional amount 2004 $m 2005 $m Credit equivalent 2004 $m 2005 $m Risk weighted assets 2004 $m 2005 $m 9,657 10,262 9,657 10,262 7,337 8,173 Trade and performance related items Commitments Foreign exchange, interest rate and other market related transactions 13,175 87,319 782,380 11,887 78,914 672,500 5,683 14,017 12,309 5,265 12,385 11,692 4,953 12,249 3,681 4,728 10,239 3,790 Total off balance sheet exposures – credit risk 892,531 773,563 41,666 39,604 28,220 26,930 Total risk weighted assets – credit risk Risk weighted assets – market risk Total risk weighted assets 218,083 195,674 1,490 990 219,573 196,664 40 NOTES TO THE FINANCIAL STATEMENTS 33: AVERAGE BALANCE SHEET AND RELATED INTEREST Averages used in the following table are predominantly daily averages. Interest income figures are presented on a tax-equivalent basis. Non-accrual loans are included under the interest earning asset category ‘Loans, advances and bills discounted’. Intragroup interest earning assets and interest bearing liabilities are treated as external assets and liabilities for the geographic segments. 2005 Interest $m Average rate % Average balance $m 2004 Interest $m Average rate % Average balance $m 2003 Interest $m Average rate % Interest earning assets Due from other financial institutions Australia New Zealand Overseas markets Investments in public securities Australia New Zealand Overseas markets Loans, advances and bills discounted Australia New Zealand Overseas markets Other assets Australia New Zealand Overseas markets Intragroup assets Overseas markets Average balance $m 807 2,242 2,664 8,202 2,226 2,647 42 126 90 444 133 88 151,066 61,035 9,060 10,543 5,132 461 2,124 2,912 3,319 9,473 101 101 191 330 5.2 5.6 3.4 5.4 6.0 3.3 7.0 8.4 5.1 4.8 3.5 5.8 578 2,284 2,322 7,231 3,038 3,175 29 115 43 389 150 95 129,658 48,346 9,810 8,893 3,701 421 1,524 2,252 1,935 3.5 10,670 127 58 127 225 5.0 5.0 1.9 5.4 4.9 3.0 6.9 7.7 4.3 8.3 2.6 6.6 2.1 432 582 2,046 6,390 1,642 1,870 21 23 48 301 73 78 110,260 20,365 12,213 7,263 1,637 503 1,606 1,353 3,395 9,858 105 46 140 200 4.9 4.0 2.3 4.7 4.4 4.2 6.6 8.0 4.1 6.5 3.4 4.1 2.0 Intragroup elimination 257,777 (9,473) 17,782 (330) 222,823 (10,670) 14,373 (225) 172,012 (9,858) 10,438 (200) 248,304 17,452 7.0 212,153 14,148 6.7 162,154 10,238 6.3 Non-interest earning assets Acceptances Australia Overseas markets Premises and equipment Other assets Provisions for doubtful debts Australia New Zealand Overseas markets Total assets Total average assets Australia New Zealand Overseas markets Intragroup elimination % of total average assets attributable to overseas activities 13,166 74 1,507 18,784 (1,823) (608) (15) 31,085 279,389 185,990 74,374 28,498 288,862 (9,473) 279,389 33.4% 13,398 54 1,460 18,224 (1,762) (481) (66) 30,827 242,980 162,944 61,027 29,679 253,650 (10,670) 242,980 32.9% 13,492 88 1,436 15,781 (1,838) (211) (75) 28,673 190,827 142,491 25,333 32,861 200,685 (9,858) 190,827 25.3% anz financial report 2005 41 NOTES TO THE FINANCIAL STATEMENTS 33: AVERAGE BALANCE SHEET AND RELATED INTEREST (CONTINUED) Average balance $m 39,388 25,582 11,075 13,896 7,210 417 33,950 7,992 794 1,456 1,680 4,642 5,355 7,717 5,915 7,344 1,954 2005 Interest $m 2,126 1,597 383 413 291 3 1,432 412 13 86 93 166 299 521 160 403 125 38,305 4,757 137 2,144 335 4 4,593 106 90 3,648 5,825 443 163 17 (13) 343 Average rate % Average balance $m 5.4 6.2 3.5 3.0 4.0 0.7 4.2 5.2 1.6 5.9 5.5 3.6 5.6 6.8 2.7 5.5 6.4 5.6 7.0 2.9 n/a n/a n/a -0.4 5.9 30,839 20,910 12,772 13,017 6,463 386 29,737 6,428 662 1,452 1,608 3,736 5,824 6,764 6,485 7,092 1,925 29,631 2,009 150 4,232 40 82 5,644 5,026 233,828 (9,473) 11,959 (330) 202,914 (10,670) 2004 Interest $m 1,589 1,138 296 352 212 3 1,182 256 9 85 76 77 313 383 74 371 110 1,575 121 3 538 83 17 (19) 244 9,088 (225) Average rate % Average balance $m 2003 Interest $m 1,165 570 336 279 79 3 963 98 9 49 23 111 252 – 58 337 108 25,171 10,666 14,738 11,959 3,285 405 26,718 2,108 642 957 631 6,446 5,216 – 4,740 6,626 1,824 19,783 521 184 1,011 37 4 2,714 96 33 7,926 1,932 292 97 23 134 66 155,321 (9,858) 6,104 (200) 5.2 5.4 2.3 2.7 3.3 0.8 4.0 4.0 1.4 5.9 4.7 2.1 5.4 5.7 1.1 5.2 5.7 5.3 6.0 2.0 n/a n/a n/a -0.3 4.9 Average rate % 4.6 5.3 2.3 2.3 2.4 0.7 3.6 4.6 1.4 5.1 3.6 1.7 4.8 – 1.2 5.1 5.9 5.1 7.1 2.2 n/a n/a n/a 1.7 3.4 224,355 11,629 5.2 192,244 8,863 4.6 145,463 5,904 4.1 Interest bearing liabilities Time deposits Australia New Zealand Overseas markets Savings deposits Australia New Zealand Overseas markets Other demand deposits Australia New Zealand Overseas markets Due to other financial institutions Australia New Zealand Overseas markets Commercial paper Australia New Zealand Overseas markets Borrowing corporations’ debt Australia New Zealand Loan capital, bonds and notes Australia New Zealand Overseas markets Other liabilities1 Australia New Zealand Overseas markets Intragroup Liabilities Australia New Zealand Intragroup elimination 1 Includes foreign exchange swap costs 42 NOTES TO THE FINANCIAL STATEMENTS 33: AVERAGE BALANCE SHEET AND RELATED INTEREST (CONTINUED) Non-interest bearing liabilities Deposits Australia New Zealand Overseas markets Acceptances Australia Overseas markets Other liabilities Total liabilities Total average liabilities Australia New Zealand Overseas markets Intragroup elimination Total average shareholders’ equity Ordinary share capital1 Preference share capital Total average liabilities and shareholders’ equity % of total average liabilities attributable to overseas activities 1 Includes reserves and retained profits 2005 Average balance $m 2004 Average balance $m 2003 Average balance $m 4,147 3,535 976 3,958 2,619 867 3,656 1,159 683 13,166 74 14,452 13,398 54 13,611 13,492 88 14,113 36,350 34,507 33,191 260,705 226,751 178,654 175,691 70,037 24,450 153,927 57,550 25,944 134,462 24,071 29,979 270,178 (9,473) 237,421 (10,670) 188,512 (9,858) 260,705 226,751 178,654 17,000 1,684 15,000 1,229 10,929 1,244 18,684 16,229 12,173 279,389 242,980 190,827 34.0% 34.6% 29.2% anz financial report 2005 43 NOTES TO THE FINANCIAL STATEMENTS 34: INTEREST SPREADS AND NET INTEREST AVERAGE MARGINS Net interest income1 Australia New Zealand Overseas markets Average interest earning assets Australia New Zealand Overseas markets Intragroup elimination Gross earnings rate2 Australia New Zealand Overseas markets Group Interest spreads and net interest average margins may be analysed as follows Australia Gross interest spread Interest forgone on impaired assets3 Net interest spread Interest attributable to net non-interest bearing items Net interest average margin – Australia New Zealand Gross interest spread Interest forgone on impaired assets3 Net interest spread Interest attributable to net non-interest bearing items Net interest average margin – New Zealand Overseas markets Gross interest spread Interest forgone on impaired assets3 Net interest spread Interest attributable to net non-interest bearing items Net interest average margin – Overseas markets Group Gross interest spread Interest forgone on impaired assets3 Net interest spread Interest attributable to net non-interest bearing items Net interest average margin – Group 1 On a tax equivalent basis 2 Average interest rate received on interest earning assets. Overseas markets includes intragroup assets 3 Refer note 14 44 2005 $m 2004 $m 2003 $m 3,797 1,612 414 5,823 3,450 1,400 433 5,283 3,210 699 425 4,334 162,199 68,415 27,163 (9,473) 138,991 55,920 27,912 (10,670) 118,688 23,942 29,382 (9,858) 248,304 212,153 162,154 % % % 6.86 8.03 4.27 7.03 1.92 (0.01) 1.91 0.43 2.34 1.86 (0.01) 1.85 0.51 2.36 1.05 (0.02) 1.03 0.49 1.52 1.86 (0.01) 1.85 0.50 2.35 6.79 7.20 3.27 6.67 2.11 (0.02) 2.09 0.39 2.48 2.08 (0.01) 2.07 0.43 2.50 1.34 (0.04) 1.30 0.25 1.55 2.08 (0.02) 2.06 0.43 2.49 6.48 7.43 3.30 6.31 2.31 (0.02) 2.29 0.41 2.70 2.30 – 2.30 0.62 2.92 1.37 (0.07) 1.30 0.15 1.45 2.28 (0.03) 2.25 0.42 2.67 NOTES TO THE FINANCIAL STATEMENTS 35: MARKET RISK Market risk is the risk to earnings arising from changes in interest rates, currency exchange rates, or from fluctuations in bond, commodity or equity prices. The Board of Directors through the Risk Management Committee, a Committee of the Board, has responsibility for oversight of market risk within the Group. Routine management of market risk is delegated to two senior management committees. The Credit and Trading Risk Committee, chaired by the Chief Risk Officer, is responsible for traded market risk, while the Group Asset and Liability Committee, chaired by the Chief Financial Officer, is responsible for non-traded market risk (or balance sheet risk). The Credit and Trading Risk Committee monitors traded market risk exposures (including Value at Risk and Stress Testing) and is responsible for authorising the trading risk limit framework. The Group Asset and Liability Committee reviews balance sheet based risk measures and strategies on a monthly basis. The Value at Risk (VaR) Measure A key measure of market risk is Value at Risk (VaR). VaR is a statistical estimate of the likely daily loss and is based on historical market movements. The confidence level is such that there is 97.5% or 99% probability that the loss will not exceed the VaR estimate on any given day. The 99% confidence level encompasses a wider range of potential outcomes. The Group's standard VaR approach for both traded and non-traded risk is historical simulation. The Group calculates VaR using historical changes in market rates and prices over the previous 500 business days. It should be noted that because VaR is driven by actual historical observations, and as such is not an estimate of the maximum loss that the Group could experience from an extreme market event. As a result of this limitation, the Group utilises a number of other risk measures (eg. stress testing) and associated detailed control limits to measure and manage traded market risk. Traded and non-traded market risks have been considered separately below. Traded Market Risks Trading activities are focused on customer trading, distribution and underwriting of a range of securities and derivative instruments. The principal activities include foreign exchange, interest rate and debt markets. These activities are managed on a global product basis. Below are aggregate VaR exposures covering both derivative and non-derivative trading positions for the Group's principal trading centres. Value at risk at 97.5% confidence Foreign exchange Interest rate Credit spread Diversification benefit Total VaR Value at risk at 99% confidence Foreign exchange Interest rate Credit spread Diversification benefit Total VaR As at Sep 05 $m High for period Sep 05 $m Low for period Sep 05 $m Average for period Sep 05 $m As at Sep 04 $m High for period Sep 04 $m Low for period Sep 04 $m Average period Sep 04 $m 0.8 1.3 0.8 (1.2) 1.7 0.9 1.7 1.4 (1.8) 2.2 1.7 2.2 1.5 n/a 3.0 2.1 2.8 2.4 n/a 4.0 0.3 0.2 0.2 n/a 0.8 0.4 0.2 0.4 n/a 1.0 0.8 0.9 0.8 (0.9) 1.6 1.1 1.2 1.2 (1.3) 2.2 0.5 1.0 0.5 (0.7) 1.3 0.9 0.8 1.0 (0.9) 1.8 1.9 1.6 1.0 n/a 2.5 2.8 2.0 1.5 n/a 3.4 0.3 0.2 0.3 n/a 0.8 0.4 0.1 0.5 n/a 1.0 0.7 0.6 0.6 (0.5) 1.4 1.0 0.7 0.8 (0.6) 1.9 VaR is calculated separately for Foreign Exchange/Commodities and for Interest Rate/Debt Markets businesses as well as Total Group. The diversification benefit reflects the correlation implied by historical rates between Foreign Exchange/Commodities and Interest Rate/Debt Markets. anz financial report 2005 45 NOTES TO THE FINANCIAL STATEMENTS 35: MARKET RISK (CONTINUED) Non-Traded Market Risks (Balance Sheet Risk) The principal objectives of balance sheet management are to manage interest income sensitivity while maintaining acceptable levels of interest rate and liquidity risk and to hedge the market value of the Group's capital. Interest Rate Risk The objective of balance sheet interest rate risk management is to secure stable and optimal net interest income over both the short (next 12 months) and long term. Non-traded interest rate risk relates to the potential adverse impact of changes in market interest rates on the Group's future net interest income. This risk arises from two principal sources: mismatches between the repricing dates of interest bearing assets and liabilities; and the investment of capital and other non-interest bearing liabilities in interest bearing assets. Interest rate risk is reported as follows using three measures: VaR, scenario analysis (to a 1% shock) and disclosure of the interest rate sensitivity gap (refer note 36). a) VaR Interest Rate Risk Below are aggregate VaR figures covering non-traded interest rate risk. Value at risk at 97.5% confidence Group As at Sep 05 $m High for period Sep 05 $m Low for period Sep 05 $m Average for period Sep 05 $m As at Sep 04 $m High for period Sep 04 $m 14.2 24.0 13.7 18.1 21.0 37.2 b) Scenario Analysis - A 1% Shock on the Next 12 Months' Net Interest Income A 1% overnight parallel positive shift in the yield curve is modelled to determine the potential impact on net interest income over the immediate forward period of 12 months. This is a standard risk quantification tool. The figures in the table below indicate the outcome of this risk measure for the current and previous financial years - expressed as a percentage of reported net interest income. The sign indicates the nature of the rate sensitivity with a positive number signifying that a rate increase is positive for net interest income over the next 12 months. Conversely, a negative number signifies that a rate increase is negative for the next 12 months' net interest income. Impact of 1% Rate Shock As at 30 September Maximum exposure Minimum exposure Average exposure (in absolute terms) Consolidated 2005 2004 1.48% 1.73% 1.87% 1.53% 0.25% (0.07)% 0.71% 1.21% The extent of mismatching between the repricing characteristics and timing of interest bearing assets and liabilities at any point has implications for future net interest income. On a global basis, the Group quantifies the potential variation in future net interest income as a result of these repricing mismatches each month using a static gap model. The repricing gaps themselves are constructed based on contractual repricing information. However, for those assets and liabilities where the contractual term to repricing is not considered to be reflective of the actual interest rate sensitivity (for example, products priced at the Group's discretion), a profile based on historically observed and/or anticipated rate sensitivity is used. This treatment excludes the effect of basis risk between customer pricing and wholesale market pricing. For example, when wholesale market rates are anticipating an official rate increase the Group does not reprice certain customer business until the first repricing date after the official rate rise. The majority of the Group's non-traded interest exposure exists in Australia and New Zealand. In these centres, a separate balance sheet simulation process supplements this static gap information. This allows the net interest income outcomes of a number of different scenarios - with different market interest rate environments and future balance sheet structures - to be identified. This better enables the Group to accurately quantify the interest rate risks associated with the balance sheet, and to formulate strategies to manage current and future risk profiles. 46 NOTES TO THE FINANCIAL STATEMENTS 35: MARKET RISK (CONTINUED) Foreign Currency Related Risks The Group's investment of capital in non-Australian operations generates an exposure to changes in the relative value of individual currencies against the Australian Dollar. Variations in the value of these foreign currency investments are reflected in the Foreign Currency Translation Reserve. The Group incurs some non-traded foreign currency risk related to the potential repatriation of profits from non-Australian business units. This risk is routinely monitored and hedging is conducted where it is likely to add shareholder value. NZD revenue related hedge contracts outstanding at 30 September 2005 were AUD 3,957 million. The risk relating to mismatching of non-traded foreign currency assets and liabilities has not been presented, as this type of risk is minimal for the Group. 36: INTEREST SENSITIVITY GAP The following table represents the interest rate sensitivity as at 30 September 2005 of the Group’s assets, liabilities and off balance sheet instruments repricing (that is, when interest rates applicable to each asset or liability can be changed) in the periods shown. Repricing gaps are based upon contractual repricing information except where the contractual terms are not considered to be reflective of actual interest rate sensitivity, for example, those assets and liabilities priced at the Group’s discretion. In such cases, the rate sensitivity is based upon historically observed and/or anticipated rate sensitivity. Sensitivity to interest rates arises from mismatches in the period to repricing of assets and that of the corresponding liability funding. These mismatches are managed within policy guidelines for mismatch positions. At 30 September 2005 Liquid assets and due from other financial institutions Trading and investment securities Net loans and advances Other assets Between Between Less than 3 months and 6 months and 12 months 6 months 3 months $m $m $m Between 1 year and 5 years $m 13,510 8,050 164,347 318 984 1,263 8,698 55 286 627 14,061 112 259 2,489 44,391 570 After 5 years $m 1,082 700 1,032 77 Not bearing interest $m Total $m 1,827 97 (1,577) 29,927 17,948 13,226 230,952 31,059 Total assets 186,225 11,000 15,086 47,709 2,891 30,274 293,185 Certificates of deposit and term deposits Other deposits Other borrowings and due to other financial institutions Other liabilities Bonds, notes and loan capital 58,515 58,497 31,381 169 28,207 10,176 898 4,055 1 2,585 5,190 1,771 3,007 14 1,235 4,565 4,614 1,596 479 11,830 10 45 1,023 286 4,353 – 10,378 1,998 26,819 – 78,456 76,203 43,060 27,768 48,210 Total liabilities 176,769 17,715 11,217 23,084 5,717 39,195 273,697 Shareholders’ equity and outside equity interests Off balance sheet items affecting interest rate sensitivity 2,013 9,271 (2,879) (11,737) 3,332 19,488 – 19,488 – Interest sensitivity gap – net – cumulative 11,469 11,469 2,556 14,025 990 15,015 12,888 27,903 506 28,409 (28,409) – – – The bulk of the Group’s loan/deposit business is conducted in the domestic balance sheets of Australia and New Zealand and is priced on a floating rate basis. The mix of repricing maturities in these books is influenced by the underlying financial needs of customers. Offshore operations, which are generally wholesale in nature, are able to minimise interest rate sensitivity through closely matching the maturity of loans and deposits. Given both the size and nature of their business, the interest rate sensitivities of these balance sheets contribute little to the aggregate risk exposure, which is primarily a reflection of the positions in Australia and New Zealand. In Australia and New Zealand, a combination of pricing initiatives and off-balance sheet instruments is used in the management of interest rate risk. For example, where a strong medium to long term rate view is held, hedging and pricing strategies are used to modify the profile’s rate sensitivity so that it is positioned to take advantage of the expected movement in interest rates. However, such positions are taken within the overall risk limits specified by policy. anz financial report 2005 47 NOTES TO THE FINANCIAL STATEMENTS 36: INTEREST SENSITIVITY GAP (CONTINUED) The following table represents the interest rate sensitivity as at 30 September 2004 of the Group’s assets, liabilities and off balance sheet instruments repricing (that is, when interest rates applicable to each asset or liability can be changed) in the periods shown. At 30 September 2004 Liquid assets and due from other financial institutions Trading and investment securities Net loans and advances Other assets Total assets Certificates of deposit and term deposits Other deposits Other borrowings and due to other financial institutions Other liabilities Bonds, notes and loan capital Between Between Less than 3 months and 6 months and 12 months 6 months 3 months $m $m $m Between 1 year and 5 years $m 8,030 8,326 147,883 383 788 1,261 8,415 134 508 1,538 12,914 127 823 1,667 36,740 607 164,622 10,598 15,087 39,837 54,245 53,843 27,733 127 18,738 7,596 843 2,784 151 2,474 4,574 1,648 2,844 186 962 4,199 4,997 1,805 749 9,955 After 5 years $m 6 293 673 5 977 7 – 7 166 3,948 Not bearing interest $m Total $m 989 139 (1,663) 28,759 11,144 13,224 204,962 30,015 28,224 259,345 – 7,927 854 28,058 – 70,621 69,258 36,027 29,437 36,077 Total liabilities 154,686 13,848 10,214 21,705 4,128 36,839 241,420 Shareholders’ equity and outside equity interests Off balance sheet items affecting interest rate sensitivity – 6,655 – 3,114 – (8,887) – (4,777) – 3,895 17,925 – 17,925 – Interest sensitivity gap – net – cumulative 16,591 16,591 (136) 16,455 (4,014) 12,441 13,355 25,796 744 26,540 (26,540) – – – 48 NOTES TO THE FINANCIAL STATEMENTS 37: NET FAIR VALUE OF FINANCIAL INSTRUMENTS Australian Accounting Standard AASB 1033: Presentation and Disclosure of Financial Instruments (AASB 1033) requires disclosure of the net fair value of on and off balance sheet financial instruments. The disclosures exclude all non-financial instruments, such as income taxes and regulatory deposits, and specified financial instruments, such as interests in controlled entities. The aggregate net fair value amounts do not represent the underlying value of the Group. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Net fair value is the fair value adjusted for transaction costs. Quoted market prices, where available, are adjusted for material transaction costs and used as the measure of net fair value. In cases where quoted market values are not available, net fair values are based on present value estimates or other valuation techniques. For the majority of short-term financial instruments, defined as those which reprice or mature in 90 days or less, with no significant change in credit risk, the net fair value was assumed to equate to the carrying amount in the Group’s statement of financial position. The fair values are based on relevant information available as at 30 September 2005. While judgement is used in obtaining the net fair value of financial instruments, there are inherent weaknesses in any estimation technique. Many of the estimates involve uncertainties and matters of significant judgement, and changes in underlying assumptions could significantly affect these estimates. Furthermore, market prices or rates of discount are not available for many of the financial instruments valued and surrogates have been used which may not reflect the price that would apply in an actual sale. The net fair value amounts have not been updated for the purposes of these financial statements since 30 September 2005, and therefore the net fair value of the financial instruments subsequent to 30 September 2005 may be different from the amounts reported. Financial Assets Liquid assets Due from other financial institutions Trading securities Investment securities, shares in associates and joint venture entities Loans and advances Customer’s liabilities for acceptances Other financial assets Net fair value Carrying value 2005 $m 2004 $m 2005 $m 2004 $m 11,600 6,348 6,285 9,252 232,724 13,449 9,866 6,363 4,781 5,478 9,878 206,788 12,466 9,458 11,600 6,348 6,285 8,813 230,952 13,449 9,751 6,363 4,781 5,478 9,706 204,962 12,466 9,088 LIQUID ASSETS AND DUE FROM OTHER FINANCIAL INSTITUTIONS The carrying values of these financial instruments are considered to approximate their net fair values as they are short-term in nature or are receivable on demand. TRADING SECURITIES Trading securities are carried at market value. Market value is generally based on quoted market prices, broker or dealer price quotations, or prices for securities with similar credit risk, maturity and yield characteristics. INVESTMENT SECURITIES Net fair value is based on quoted market prices or broker or dealer price quotations. If this information is not available, net fair value has been estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. SHARES IN ASSOCIATES AND JOINT VENTURE ENTITIES Net fair value is based on quoted market prices or broker or dealer price quotations. If this information is not available, net fair value has been estimated using quoted market prices for securities with similar credit, maturity and yield characteristics, independent valuation, or by reference to the net tangible asset backing of the investee. anz financial report 2005 49 NOTES TO THE FINANCIAL STATEMENTS 37: NET FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) LOANS, ADVANCES AND CUSTOMERS’ LIABILITIES FOR ACCEPTANCES The carrying value of loans, advances and acceptances is net of specific and general provisions for doubtful debts and income yet to mature. The estimated net fair value of loans, advances and acceptances is based on the discounted amount of estimated future cash flows and accordingly has not been adjusted for either specific or general provisions for doubtful debts. Estimated contractual cash flows for performing loans are discounted at estimated current bank credit spreads to determine fair value. For loans with doubt as to collection, expected cash flows (inclusive of the value of security) are discounted using a rate which includes a premium for the uncertainty of the flows. The difference between estimated net fair values of loans, advances and acceptances and carrying value reflects changes in interest rates and the credit worthiness of borrowers since loan origination. Net lease receivables, with a carrying value of $3,523 million (2004: $3,079 million) and a net fair value of $3,523 million (2004: $3,080 million), are included in loans and advances. OTHER FINANCIAL ASSETS Included in this category are accrued interest, fees receivable and derivative financial instruments. The carrying values of accrued interest and fees receivable are considered to approximate their net fair values as they are short term in nature or are receivable on demand. The fair values of derivative financial instruments such as interest rate swaps and currency swaps were calculated using discounted cash flow models based on current market yields for similar types of instruments and the maturity of each instrument. Foreign exchange contracts and interest rate option contracts were valued using market prices and option valuation models as appropriate. Properties held for resale, deferred tax assets and prepaid expenses are not considered financial assets. Financial Liabilities Due to other financial institutions Deposits and other borrowings Liability for acceptances Bonds and notes Loan capital Other financial liabilities Net fair value Carrying value 2005 $m 2004 $m 2005 $m 2004 $m 12,027 185,645 13,449 39,137 9,215 10,939 7,349 168,542 12,466 27,747 8,540 13,665 12,027 185,693 13,449 39,073 9,137 10,921 7,349 168,557 12,466 27,602 8,475 13,525 DUE TO OTHER FINANCIAL INSTITUTIONS The carrying value of amounts due to other financial institutions is considered to approximate the net fair value. DEPOSITS AND OTHER BORROWINGS The net fair value of a deposit liability without a specified maturity or at call is deemed by AASB 1033 to be the amount payable on demand at the reporting date. The fair value is not adjusted for any value expected to be derived from retaining the deposit for a future period of time. For interest bearing fixed maturity deposits and other borrowings and acceptances without quoted market prices, market borrowing rates of interest for debt with a similar maturity are used to discount contractual cash flows. BONDS AND NOTES AND LOAN CAPITAL The aggregate net fair value of bonds and notes and loan capital at 30 September 2005 was calculated based on quoted market prices. For those debt issues where quoted market prices were not available, a discounted cash flow model using a yield curve appropriate for the remaining term to maturity of the instrument was used. OTHER FINANCIAL LIABILITIES This category includes accrued interest and fees payable for which the carrying amount is considered to approximate the fair value. Also included are derivative financial instruments, where fair value is determined on the basis described under ‘Other financial assets’. Income tax liabilities, other provisions and accrued charges are not considered financial liabilities. 50 NOTES TO THE FINANCIAL STATEMENTS 37: NET FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) COMMITMENTS AND CONTINGENCIES As outlined in note 47, the Group has various credit related commitments. Based upon the level of fees currently charged for granting such commitments, taking into account maturity and interest rates, together with any changes in the creditworthiness of counterparties since origination of the commitments, their estimated replacement or net fair value is not material. TRANSACTION COSTS The fair value of financial instruments required to be disclosed under US accounting standard, Statement of Financial Accounting Standards No. 107 ‘Disclosures about Fair Value of Financial Instruments’ (SFAS 107) is calculated without regard to estimated transaction costs. Such transaction costs are not material, and accordingly the fair values shown above would not differ materially from fair values calculated in accordance with SFAS 107. 38: DERIVATIVE FINANCIAL INSTRUMENTS Derivative instruments are contracts whose value is derived from one or more underlying financial instruments or indices. They include swaps, forward rate agreements, futures, options and combinations of these instruments. The use of derivatives and their sale to customers as risk management products is an integral part of the Group’s trading activities. Derivatives are also used to manage the Group’s own exposure to fluctuations in exchange and interest rates as part of its asset and liability management activities and are classified as other than trading. Derivatives are subject to the same types of credit and market risk as other financial instruments, and the Group manages these risks in a consistent manner. The principal exchange rate contracts used by the Group are forward foreign exchange contracts, currency swaps and currency options. Forward foreign exchange contracts are agreements to buy or sell a specified quantity of foreign currency on a specified future date at an agreed rate. A currency swap generally involves the exchange, or notional exchange, of equivalent amounts of two currencies and a commitment to exchange interest periodically until the principal amounts are re-exchanged on a future date. Currency options provide the buyer with the right, but not the obligation, either to purchase or sell a fixed amount of a currency at a specified rate on or before a future date. As compensation for assuming the option risk, the option writer generally receives a premium at the start of the option period. The principal interest rate contracts used by the Group are forward rate agreements, interest rate futures, interest rate swaps and options. Forward rate agreements are contracts for the payment of the difference between a specified interest rate and a reference rate on a notional deposit at a future settlement date. There is no exchange of principal. An interest rate future is an exchange traded contract for the delivery of a standardised amount of a fixed income security or time deposit at a future date. Interest rate swap transactions generally involve the exchange of fixed and floating interest payment obligations without the exchange of the underlying principal amounts. Derivative transactions generate income for the Group from buy/sell spreads and from trading positions taken by the Group. Income from these transactions is taken to net interest income, foreign exchange earnings or profit on trading instruments. Income or expense on derivatives entered into for balance sheet and revenue hedging purposes is accrued and recorded as an adjustment to the interest income or expense of the related hedged item. CREDIT RISK The credit risk of derivative financial instruments arises from the potential for a counterparty to default on its contractual obligation. Credit risk arises when market movements are such that the derivative has a positive value to the Group. It is the cost of replacing the contract in the event of counterparty default. The Group limits its credit risk within a conservative framework by dealing with creditworthy counterparties, setting credit limits on exposures to counterparties, and obtaining collateral where appropriate. The following table provides an overview of the Group’s exchange rate, credit, commodity and interest rate derivatives. It includes all trading and other than trading contracts. Notional principal amounts measure the amount of the underlying physical or financial commodity and represent the volume of outstanding transactions. They are not a measure of the risk associated with a derivative. The credit equivalent amount is calculated in accordance with the Australian Prudential Regulation Authority’s Capital Adequacy guidelines. It combines the aggregate gross replacement cost with an allowance for the potential increase in value over the remaining term of the transaction should market conditions change. The fair value of a derivative represents the aggregate net present value of the cash inflows and outflows required to extinguish the rights and obligations arising from the derivative in an orderly market as at the reporting date. Fair value does not indicate future gains or losses, but rather the unrealised gains and losses from marking to market all derivatives at a particular point in time. anz financial report 2005 51 NOTES TO THE FINANCIAL STATEMENTS 38: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Consolidated Foreign exchange contracts1 Spot and forward contracts Swap agreements Futures contracts2 Options purchased Options sold3 Other contracts Interest rate contracts Forward rate agreements Swap agreements Futures contracts2 Options purchased Options sold3 Credit contracts Credit default swaps4 Notional principal amount 2005 $m Credit equivalent amount 2005 $m Fair value 2005 $m Notional principal amount 2004 $m Credit equivalent amount 2004 $m 184,958 68,892 256 9,340 14,925 4,963 283,334 47,734 405,152 35,111 12,810 16,715 517,522 3,082 3,638 n/a 315 n/a 573 7,608 8 3,443 n/a 96 n/a 3,547 (178) (561) 4 186 (174) (2) 183,825 51,437 251 13,288 18,852 2,686 (725) 270,339 1 431 8 62 (42) 39,572 321,585 38,270 12,810 15,214 460 427,451 3,216 3,095 n/a 398 n/a 436 7,145 9 3,682 n/a 111 n/a 3,802 Fair value 2004 $m (1,411) (25) 2 224 (226) 115 (1,321) 5 424 4 64 (35) 462 15,437 2,929 (1) 11,743 3,381 31 816,293 14,084 (266) 709,533 14,328 (828) 1 The fair value of foreign exchange contracts includes a net additional $586 million (September 2004: net $(519) million) in respect of cash collateral paid/(received) under credit support agreements 2 Credit equivalent amounts have not been included as there is minimal credit risk associated with exchange traded futures where the clearing house is the counterparty 3 Options sold have no credit exposure, as they represent obligations rather than assets 4 Credit default swaps include structured financing transactions that expose the Group to the performance of certain assets. The total investment of the Group in these transactions is USD 500 million (2004: USD 750 million) The maturity structure of derivative activity is a primary component of potential credit exposure. The table below shows the remaining maturity profile by class of derivatives, based on notional principal amounts. The table also shows the notional principal amounts of the derivatives held for trading and other than trading purposes. Less than 1 year $m Remaining life 1 to 5 years $m Greater than 5 years $m Total $m Trading $m Other than Trading $m 178,705 17,148 254 8,536 14,167 2,439 6,107 40,788 2 692 696 2,339 146 10,956 – 112 62 185 184,958 68,892 256 9,340 14,925 4,963 165,781 15,906 256 9,340 14,925 4,961 19,177 52,986 – – – 2 221,249 50,624 11,461 283,334 211,169 72,165 47,168 145,049 30,909 7,694 9,725 566 198,495 4,202 4,552 6,447 – 61,608 – 564 543 47,734 405,152 35,111 12,810 16,715 45,961 305,862 27,589 12,774 16,715 1,773 99,290 7,522 36 – 240,545 214,262 62,715 517,522 408,901 108,621 2,666 12,041 730 15,437 13,159 2,278 464,460 276,927 74,906 816,293 633,229 183,064 Consolidated At 30 September 2005 Foreign exchange contracts Spot and forward contracts Swap agreements Futures contracts Options purchased Options sold Other contracts Interest rate contracts Forward rate agreements Swap agreements Futures contracts Options purchased Options sold Credit contracts Credit default swaps Total 52 NOTES TO THE FINANCIAL STATEMENTS 38: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) Consolidated At 30 September 2004 Foreign exchange contracts Spot and forward contracts Swap agreements Futures contracts Options purchased Options sold Other contracts Interest rate contracts Forward rate agreements Swap agreements Futures contracts Options purchased Options sold Credit contracts Credit default swaps Total Less than 1 year $m Remaining life 1 to 5 years $m Greater than 5 years $m Total $m Trading $m Other than Trading $m 178,501 9,945 243 12,361 18,001 1,015 5,033 33,631 8 863 789 1,436 291 7,861 – 64 62 235 183,825 51,437 251 13,288 18,852 2,686 162,072 13,670 251 13,288 18,852 2,681 21,753 37,767 – – – 5 220,066 41,760 8,513 270,339 210,814 59,525 39,514 121,594 35,759 4,546 7,506 58 153,556 2,511 7,680 7,267 – 46,435 – 584 441 39,572 321,585 38,270 12,810 15,214 31,437 248,186 32,498 12,773 15,214 8,135 73,399 5,772 37 – 208,919 171,072 47,460 427,451 340,108 87,343 1,310 9,472 961 11,743 8,775 2,968 430,295 222,304 56,934 709,533 559,697 149,836 Concentrations of credit risk exist for groups of counterparties when they have similar economic characteristics. Major concentrations of credit risk arise by location and type of customer. The following table shows the concentrations of credit risk, by class of counterparty and by geographic location, measured by credit equivalent amount. Approximately 57% (2004: 47%) of the Group’s exposures are with counterparties which are either Australian banks or banks based in other OECD countries. Consolidated At 30 September 2005 Australia New Zealand Overseas markets Consolidated At 30 September 2004 Australia New Zealand Overseas markets OECD governments $m Australian and OECD banks $m Corporations, non-OECD banks and others $m 140 55 31 226 6,185 1,610 236 8,031 4,997 606 224 5,827 14,084 OECD governments $m Australian and OECD banks $m Corporations, non-OECD banks and others $m Total $m 11,322 2,271 491 Total $m 11,939 2,079 310 147 12 2 161 5,258 1,228 212 6,698 6,534 839 96 7,469 14,328 anz financial report 2005 53 NOTES TO THE FINANCIAL STATEMENTS 38: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) The next table shows the fair values of the Group’s derivatives by product type, disaggregated into gross unrealised gains and gross unrealised losses. The fair value of a derivative represents the aggregate net present value of the cash inflows and outflows required to extinguish the rights and obligations arising from the derivative in an orderly market as at the reporting date. Fair value does not indicate future gains or losses, but rather the unrealised gains and losses from marking to market all derivatives at a particular point in time. Consolidated Foreign exchange contracts Spot and forward contracts Gross unrealised gains Gross unrealised losses Swap agreements Gross unrealised gains Gross unrealised losses Futures contracts Gross unrealised gains Gross unrealised losses Options purchased Options sold Other contracts Gross unrealised gains Gross unrealised losses Interest rate contracts Forward rate agreements Gross unrealised gains Gross unrealised losses Swap agreements Gross unrealised gains Gross unrealised losses Futures contracts Gross unrealised gains Gross unrealised losses Options purchased Options sold Other contracts Gross unrealised gains Gross unrealised losses Credit contracts Credit default swaps Gross unrealised gains Gross unrealised losses Total Other than Trading Trading Fair value1 as at 2005 $m Fair value1 as at 2004 $m Fair value1 as at 2005 $m Fair value1 as at 2004 $m Fair value Average 2005 $m Total Fair value Average 2004 $m 552 (3,233) 875 (2,392) 6642 1,8392 447 (629) 532 (430) – – – – – – – – – – – – (48)2 (331)2 18 (14) 186 (174) 377 (379) 6872 (581)2 1102 (237)2 8 (6) 224 (226) 298 (183) 1,729 (2,670) 558 (1,011) 6 (3) 214 (190) 313 (249) 1,719 (927) 498 (254) – – 352 (337) 247 (111) (2,863) (1,415) 2,138 94 (1,303) 1,187 – – – – 5 (4) 8 (3) 3 (4) 6 (4) 512 (256) 467 (181) 1,112 (937) 1,825 (1,687) 1,569 (1,271) 2,127 (1,790) 11 (6) 11 – – – 6 (4) 8 – – – 141 (138) 51 (42) – – 54 (52) 56 (35) – – 114 (111) 58 (47) – – 52 (43) 65 (36) – – 272 296 188 166 311 377 6 (3) 3 42 (6) 36 111 (115) (4) 44 (49) (5) 92 (99) (7) 37 (42) (5) (2,588) (1,083) 2,322 255 (999) 1,559 1 The fair values of derivatives vary over time depending on movements in interest and exchange rates and the trading or hedging strategies used 2 The fair value of foreign exchange contracts trading is impacted by netting arrangements and timing of collateral paid under credit support agreements 54 NOTES TO THE FINANCIAL STATEMENTS 38: DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) The Group classifies derivatives into two types according to the purpose they are entered into: trading or hedging. In addition to customer and trading activities, the Group uses, inter alia, derivatives to manage the risk associated with its balance sheet and future revenue streams. The principal objectives of asset and liability management are to hedge the market value of the Group’s capital and to manage and control the sensitivity of the Group’s income while maintaining acceptable levels of interest rate and liquidity risk. The Group also uses a variety of foreign exchange derivatives to hedge against adverse movements in the value of foreign currency denominated assets and liabilities and future revenue streams. Income and loss relating to trading derivatives is reported in the statement of financial performance as other operating income. The fair value of trading derivatives is recorded on a gross basis as other assets or other liabilities as appropriate unless there is a legal right of set off. The fair value of a derivative financial instrument is the net present value of future expected cash flows arising from that instrument. In order to be classified as a hedging derivative the hedging relationship must be expected to be effective. An effective hedging relationship is one where there is expected to be a high degree of negative correlation between changes in the fair value of the financial asset being hedged and the derivative nominated as the hedging instrument. This effectiveness is assessed on initial classification of the hedging relationship. A hedging relationship is either effective or non-effective in its entirety, no accounting adjustment is made for an assessed percentage of ineffectiveness. Where a hedging relationship is deemed effective it is accounted for in the same manner as the underlying asset or liability it is hedging. During the year NZD0.7 billion hedge of NZD revenue were put in place to lock in historically high NZD exchange rates. Hedge contracts outstanding at 30 September 2005 totalled NZD4.4 billion (AUD 4.0 billion). The table below shows the notional principal amount, credit equivalent amount and fair value of derivatives held by the Group, split between those entered into for customer-related and trading purposes, and those entered into for balance sheet hedging and revenue related hedging. Consolidated Foreign exchange and commodity contracts Customer-related and trading purposes Balance sheet hedging purposes Revenue related hedging Interest rate contracts Customer-related and trading purposes Balance sheet hedging purposes Credit contracts Customer-related and trading purposes Balance sheet hedging purposes Notional principal amount 2005 $m Credit equivalent amount 2005 $m Fair value 2005 $m Notional principal amount 2004 $m Credit equivalent amount 2004 $m 211,169 68,208 3,957 283,334 408,901 108,621 517,522 13,159 2,278 15,437 4,676 2,852 80 7,608 2,902 645 3,547 1,154 1,775 2,929 2,138 (2,904) 41 210,814 56,039 3,486 (725) 270,339 188 272 460 340,108 87,343 427,451 (4) 3 (1) 8,775 2,968 11,743 4,511 2,585 49 7,145 3,163 639 3,802 745 2,636 3,381 Fair value 2004 $m 94 (1,371) (44) (1,321) 166 296 462 (5) 36 31 Total 816,293 14,084 (266) 709,533 14,328 (828) Detailed below are the net deferred realised and unrealised gains and losses arising from other than trading contracts used to hedge interest rate exposure or to hedge anticipated transactions. These gains and losses are deferred only to the extent that there is an offsetting unrecognised gain or loss on the exposure being hedged. Deferred gains or losses are generally amortised over the expected term of the hedged exposure. Consolidated Expected recognition in income Within one year One to two years Two to five years Greater than five years Foreign Exchange Contracts 2004 $m 2005 $m Interest Rate and Credit Contracts 2004 $m 2005 $m 7 14 20 – 41 (37) (14) – – (51) 45 60 (5) (23) 77 71 127 40 (3) 235 Total 2005 $m 52 74 15 (23) 118 Total 2004 $m 34 113 40 (3) 184 anz financial report 2005 55 NOTES TO THE FINANCIAL STATEMENTS 39: SECURITISATION During the year ended 30 September 2005, the Group did not securitise any residential mortgage loans (2004: $1,481 million). All securitised loans have been removed from the Group’s balance sheet and transferred to third party special purpose entities (SPEs). The Group retains servicing and (for some loans) custodian responsibilities for the loans sold. Following a securitisation, the Group receives fees for servicing the loans, custodian fees, fees for facilities provided and any excess income derived by the SPE after interest has been paid to investors and net credit losses and expenses absorbed. The Group does not hold any material retained interest in the loans that have been sold. There is no recourse against the Group if cash flows from the securitised loans are inadequate to service the obligations of the SPE except to the limited extent provided in the transaction documents through the provision of arm’s length services and facilities. The securities issued by the SPEs do not represent deposits or other liabilities of the Company or the Group. Neither the Company nor the Group in any way stands behind the capital value or performance of the securities or the assets of the SPEs except to the limited extent provided in the transaction documents through the provision of arm’s length services and facilities. The Group may also provide liquidity facilities and other forms of credit enhancement to ensure adequate funds are available to the SPEs. The facilities are undrawn. The Group also provides hedging facilities to the SPEs to mitigate interest rate and currency risks. All these transactions are completed on an arm’s length basis. The following table summarises the cash flows from the SPEs to the Group in respect of assets securitised by the Group. Proceeds from securitising loans Servicing fees received Other cash inflows 2005 $m – 6 11 2004 $m 1,481 4 7 56 NOTES TO THE FINANCIAL STATEMENTS 40: SEGMENT ANALYSIS For management purposes the Group is organised into six major business segments including Personal, Institutional, New Zealand Business, Corporate, Esanda and UDC and Asia Pacific. An expanded description of the principal activities for each of the business segments is contained in the Glossary on pages 120 to 121. A summarised description of each business segment is shown below: Personal Institutional Comprises the activities of Regional Commercial and Agribusiness Products, Banking Products, Consumer Finance, Wealth Management, Mortgages and other (including the branch network) Comprises businesses that provide a full range of financial services to the Group’s largest corporate and institutional customers including Corporate and Structured Financing, Client Relationship Group, Markets and Trade and Transaction Services New Zealand Business Provides a full range of banking services for personal, small business and corporate customers in New Zealand and comprises ANZ Retail, NBNZ Retail, Corporate Banking, Rural Banking and Central Support Corporate Esanda and UDC Asia Pacific Comprises Corporate Banking, Business Banking and Small Business banking in Australia Provides vehicle and equipment finance, rental services and fixed and at call investments. Operates in Australia as Esanda and Esanda FleetPartners and in New Zealand as UDC and Esanda FleetPartners Provides retail banking services in the Pacific region and Asia, including ANZ’s share of PT Panin Bank in Indonesia. This business excludes Institutional businesses in the Asia Pacific region that are included in the Institutional division. As the composition of segments has changed over time, September 2004 comparatives have been adjusted to be consistent with the 2005 segment definitions. Comparatives for the year ended 30 September 2003 have not been provided because the data could not reasonably be disaggregated into the amended segments. BUSINESS SEGMENT ANALYSIS1, 2 Consolidated 30 September 2005 External interest income External interest expense Net intersegment interest Net interest income Other external operating income Share of net profit/loss of equity accounted investments Net intersegment income Operating income Other external expenses Net intersegment expenses Operating expenses Charge for doubtful debts Income tax expense Outside equity interests Profit after income tax Non-Cash Expenses Depreciation Amortisation of goodwill Financial Position Total external assets Associate investments Total external liabilities Personal $m Institutional $m 6,817 (1,585) (3,128) 2,104 919 94 125 3,169 (2,581) 174 762 1,429 4 (30) New Zealand Business $m 4,581 (2,932) (215) 1,434 513 – 6 3,242 2,165 1,953 (1,363) (276) (1,639) (198) (392) – 1,013 (119) – (623) (143) (766) (139) (336) (1) 923 (18) – (950) (5) (955) (92) (292) – 614 (49) – Corporate $m 1,078 (623) 242 Esanda and UDC $m 1,143 (695) (79) 697 293 1 (94) 897 (232) (62) (294) (66) (161) – 376 (6) – 369 121 – (9) 481 (162) (26) (188) (62) (72) – 159 (16) – Asia Pacific $m 172 (163) 154 163 108 41 – 312 (172) 1 (171) (23) (22) (1) 95 (10) – Other3 $m Consolidated Total $m 467 (3,050) 2,852 17,427 (11,629) – 269 12 17 2 5,798 3,395 157 – 300 9,350 (1,013) 511 (4,515) – (502) (4,515) – 41 (1) (580) (1,234) (3) (162) 3,018 (87) (179) (305) (179) 106,043 15 44,340 70,901 52 53,350 60,157 151 53,426 21,263 40 24,110 15,405 – 13,306 2,890 152 5,811 16,526 1,462 79,354 293,185 1,872 273,697 1 Results are equity standardised 2 3 Intersegment transfers are accounted for and determined on an arm’s length or cost recovery basis Includes Treasury, Operations, Technology & Shared Services, Corporate Centre, Risk Management, Group Financial Management and significant items anz financial report 2005 57 NOTES TO THE FINANCIAL STATEMENTS 40: SEGMENT ANALYSIS (CONTINUED) The following analysis details financial information by business segment. BUSINESS SEGMENT ANALYSIS1, 2 Consolidated 30 September 2004 External interest income External interest expense Net intersegment interest Net interest income Other external operating income Share of net profit/loss of equity accounted investments Net intersegment income Operating income Other external expenses Net intersegment expenses Operating expenses Charge for doubtful debts Income tax expense Outside equity interests Profit after income tax Non-Cash Expenses Depreciation Amortisation of goodwill Financial Position Total external assets Associate investments Acquisition of NBNZ assets including goodwill Total external liabilities Corporate $m 919 (529) 250 640 274 1 (86) 829 (214) (66) (280) (61) (147) – 341 (6) – Esanda and UDC $m 1,060 (593) (107) 360 103 1 (8) 456 (159) (27) (186) (67) (60) – 143 (25) – Asia Pacific $m 167 (123) 109 153 102 45 – 300 (145) 2 (143) (23) (20) (3) 111 (10) – Other3 $m Consolidated Total $m 403 (2,014) 1,881 270 131 13 (7) 407 (868) 522 (346) (41) (53) – (33) (85) (146) 14,117 (8,863) – 5,254 3,246 145 – 8,645 (4,026) – (4,026) (632) (1,168) (4) 2,815 (309) (146) Personal $m Institutional $m 5,784 (1,334) (2,538) 1,912 828 84 118 2,782 (2,647) 573 708 1,355 1 (23) New Zealand Business $m 3,002 (1,623) (168) 1,211 453 – 6 2,942 2,041 1,670 (576) (144) (720) (160) (303) (1) 857 (19) – (801) (17) (818) (97) (242) – 513 (52) – (1,263) (270) (1,533) (183) (343) – 883 (112) – 93,232 14 – 40,454 60,144 55 11,225 48,747 53,434 2 28,521 47,247 19,098 14 – 21,836 14,524 1 – 12,261 2,446 176 – 5,298 16,467 1,698 259,345 1,960 3,265 65,577 43,011 241,420 1 Results are equity standardised 2 3 Intersegment transfers are accounted for and determined on an arm’s length or cost recovery basis Includes Treasury, Operations, Technology & Shared Services, Corporate Centre, Risk Management and Group Financial Management The following analysis details financial information by geographic location. GEOGRAPHIC SEGMENT ANALYSIS4, 5 Consolidated Income Australia New Zealand Overseas markets Total assets Australia New Zealand6 Overseas markets Net profit before tax7 Australia New Zealand Overseas markets 4 Intersegment transfers are accounted for and determined on an arm’s length or cost recovery basis 5 The geographic segments represent the locations in which the transaction was booked 6 2004 amount includes NBNZ assets, including goodwill acquired of $3.1 billion 7 Includes outside equity interests 58 $m 13,496 6,211 1,272 20,979 195,500 78,474 19,211 293,185 2,975 832 448 4,255 2005 % 64 30 6 $m 11,767 4,632 1,109 2004 % 67 27 6 $m 9,508 2,149 1,366 100 17,508 100 13,023 67 27 6 170,455 69,801 19,089 66 27 7 151,538 25,696 18,357 100 259,345 100 195,591 70 20 10 100 2,785 763 439 3,987 70 19 11 100 2,371 495 411 3,277 2003 % 73 17 10 100 77 13 10 100 72 15 13 100 NOTES TO THE FINANCIAL STATEMENTS 41: NOTES TO THE STATEMENTS OF CASH FLOWS a) Reconciliation of net profit after income tax to net cash provided by operating activities 2005 $m Consolidated 2004 $m 2003 $m The Company 2005 $m 2004 $m Inflows (Outflows) Inflows (Outflows) Net profit after income tax 3,018 2,815 2,348 2,227 1,972 Adjustments to reconcile net profit after income tax to net cash provided by operating activities Provision for doubtful debts Depreciation and amortisation Provision for employee entitlements, restructuring and other provisions Payments from provisions (Profit) loss on sale of premises and equipment Provision for surplus lease space Unrealised (gain) loss on revaluation of treasury instruments Net decrease (increase) Trading securities Interest receivable Accrued income Tax balances Amortisation of discounts/premiums included in interest income Net increase (decrease) Interest payable Accrued expenses Other Total adjustments Net cash provided by operating activities 580 484 556 (498) 22 – (723) (821) 88 4 162 (93) 214 52 (15) 12 3,030 632 455 429 (395) 5 7 (169) 514 (478) – 921 (27) 605 75 (139) 2,435 5,250 614 265 219 (349) 5 (11) 262 1,669 (189) 51 (386) (19) 180 69 (109) 2,271 4,619 388 230 363 (334) 25 – 51 (523) (8) 8 246 (12) 105 82 (9) 612 433 220 352 (390) 5 7 (535) (1,147) (326) – 817 16 377 (49) (7) (227) 2,839 1,745 b) Reconciliation of cash and cash equivalents Cash and cash equivalents include liquid assets and amounts due from other financial institutions with an original term to maturity of less than 90 days. Cash and cash equivalents at the end of the financial year as shown in the statements of cash flows are reconciled to the related items in the statements of financial position as follows Liquid assets – less than 90 days Due from other financial institutions – less than 90 days 2005 $m 9,600 4,102 13,702 Consolidated 2004 $m 4,998 2,856 7,854 2003 $m 5,509 1,806 7,315 The Company 2005 $m 5,315 2,584 7,899 2004 $m 2,408 1,834 4,242 anz financial report 2005 59 NOTES TO THE FINANCIAL STATEMENTS 41: NOTES TO THE STATEMENTS OF CASH FLOWS (CONTINUED) c) Acquisitions Details of aggregate assets and liabilities of controlled entities and branches acquired by the Group are as follows: Fair value of net assets acquired Liquid assets Due from other financial institutions Net loans and advances Trading securities Investment securities Other assets Premises and equipment Due to other financial institutions Payables and other liabilities Deposits and other borrowings Provisions Unsubordinated debt Loan capital Fair value of net assets acquired Goodwill on acquisition Consideration paid Cash consideration paid Foreign currency translation d) Non-cash financing and investing activities Share capital issues Dividend reinvestment plan e) Financing arrangements Financing arrangements which are available under normal financial arrangements Credit standby arrangements Standby lines Other financing arrangements Overdrafts and other financing arrangements Total finance available 2005 $m Consolidated 2004 $m 2003 $m – – – – – – – – – – – – – – – – – – 842 2,737 32,215 1,742 225 1,815 169 (1,151) (2,588) (32,352) (115) (1,179) (514) 1,846 3,266 5,112 4,842 270 – – – – – – – – – – – – – – – – – – 2005 $m Consolidated 2004 $m 2003 $m The Company 2005 $m 2004 $m 153 135 115 153 135 Consolidated 2005 2004 Available $m Unused $m Available $m Unused $m 865 3,694 4,559 851 890 1,741 889 4,115 5,004 884 433 1,317 60 NOTES TO THE FINANCIAL STATEMENTS 42: CONTROLLED ENTITIES All controlled entities are 100% owned unless otherwise noted. The material controlled entities of the Group are: Amerika Samoa Bank ANZ Capel Court Limited ANZ Capital Funding Pty Ltd ANZ Capital Hedging Pty Ltd ANZcover Insurance Pty Ltd ANZ (Delaware) Inc ANZ Executors & Trustee Company Limited ANZ Financial Products Pty Ltd ANZ Funds Pty Ltd ANZ Bank (Europe) Limited* ANZ Bank (Samoa) Limited* ANZ Holdings (New Zealand) Limited* ANZ National Bank Limited* ANZ National (Int’l) Limited* Arawata Finance Limited* Arawata Capital Limited* APAC Investments Limited*1 Burnley Investments Limited* Cortland Finance Limited* Arawata Holdings Limited* Harcourt Corporation Limited* Airlie Investments Limited* Nerine Finance No. 21 Endeavour Finance Limited* Tui Endeavour Limited* National Bank of New Zealand Custodians Limited* Alos Holdings Limited* NBNZ Holdings Ltd* Tui Securities Limited* UDC Finance Limited* Truck Leasing Limited* ANZ International (Hong Kong) Limited* ANZ Asia Limited* ANZ Bank (Vanuatu) Limited* ANZ International Private Limited* ANZ Singapore Limited* ANZ Royal Bank (Cambodia) Limited*1 Bank of Kiribati Ltd*1 LFD Limited Minerva Holdings Limited* ANZEF Limited* Votraint No. 1103 Pty Limited ANZ Investment Holdings Pty Ltd 530 Collins Street Property Trust ANZ Lenders Mortgage Insurance Pty Limited ANZ Orchard Investments Pty Ltd ANZ Rural Products Pty Ltd Australia and New Zealand Banking Group (PNG) Limited* Esanda Finance Corporation Limited Fleet Partners Pty Limited NMRSB Pty Ltd PT ANZ Panin Bank*1 Upspring Limited* Incorporated in Nature of Business America Samoa Australia Australia Australia Australia USA Australia Australia Australia England Samoa New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand Hong Kong Hong Kong Vanuatu Singapore Singapore Cambodia Kiribati Australia England England Australia Australia Australia Australia Australia Australia Papua New Guinea Australia Australia Australia Indonesia England Banking Investment Banking Funding Hedging Self-Insurance Finance Trustee/Nominee Investment Holding Company Banking Banking Holding Company Banking Finance Finance Investment Finance Investment Investment Holding Company Investment Investment Finance Finance Finance Custodians Investment Holding Company Investment Finance Leasing Holding Company Banking Banking Holding Company Merchant Banking Banking Banking Holding Company Holding Company Finance Investment Investment Investment Mortgage Insurance Holding Company Investment Banking General Finance Finance Investment Banking Investment * Audited by overseas KPMG firms 1 Outside equity interests hold ordinary shares or units in the controlled entities listed above as follows: Bank of Kiribati - 150,000 $1 ordinary shares (25%) (2004 : 150,000 $1 ordinary shares 25%); PT ANZ Panin Bank – 7,500 IDR 1M shares (15%) (2004: 7,500 IDR 1M shares 15%); Nerine Finance No. 2 - 3,650 NZ$100,000 redeemable preference shares (42%) (2004: 3,650 NZ$100,000 redeemable preference shares 42%); ANZ Royal Bank (Cambodia) Limited – 8,100,000 $1 ordinary shares (45%); APAC Investments Limited – 3,500 $1 ordinary shares (35%) anz financial report 2005 61 NOTES TO THE FINANCIAL STATEMENTS 43: ASSOCIATES Significant associates of the Group are as follows: PT Panin Indonesia Bank1 Bush’s International Pty Ltd2 Metrobank Card Corporation Inc3 ETrade Australia Limited4 Sleepmaster Pty Ltd5 Other associates Total shares in associates Ownership Interest held 29% 15% 40% 34% 70% Voting Interest Incorporated Carrying Value6 $m in Reporting date Principal activity 29% 15% 40% 34% 49% Indonesia Australia Philippines Australia Australia 133 22 17 15 11 64 262 31 December 30 June 31 December 30 June 30 June Banking Manufacturing Cards Issuing Online Stockbroking Manufacturing 1 An associate from 1 April 2001. In 2004 the Group exercised options over a further 18% of PT Panin Indonesia Bank 2 An associate from 21 June 2005 3 An associate from 9 October 2003 4 An associate from 1 October 2002 5 An associate from 10 December 2004 6 2004 carrying values as follows: PT Panin Indonesia Bank $160 million, Metrobank Card Corporation Inc $16 million, ETrade $14 million, and Other associates $73 million. Total $263 million 44: INTERESTS IN JOINT VENTURE ENTITIES The Group has interests in joint venture entities as follows: ING Australia Limited1 Interest held 49%2 Voting Interest 49%2 Incorporated Carrying Value $m in Reporting date Australia 1,479 31 December ING (NZ) Holdings Limited3 49%4 50%4 New Zealand 131 31 December Principal activity Funds Management and Insurance Funds Management and Insurance Total interests in Joint Venture entities 1,610 1 A joint venture entity from 1 May 2002 2 This represents the Group's 49% share of the assets and liabilities of ING Australia Limited. The Group has joint control of the joint venture, and accordingly the entity is not consolidated. Key details of the joint venture are: n ING Australia Limited is owned 51% by ING Group and 49% by ANZ. n Both shareholders have an equal say in strategic decisions with a number of matters requiring the approval of both Shareholders (ie require unanimous approval). These include major items of capital expenditure, acquisitions or disposals in excess of $20 million and changes to the Board structure. n Equal board representation with four Group nominees and four ING Group nominees. All key issues (including business plans, major capital expenditure, acquisitions etc) require unanimous Board approval. n Refer to Critical Accounting Policies item f) for details regarding valuation of investment in ING Australia Limited. The Joint Venture includes the majority of the Group's and ING's funds management and insurance activities in Australia. 3 A joint venture entity from 30 September 2005 4 This represents the Group’s 49% share of assets and liabilities of ING (NZ) Holdings Limited. The Group has joint control of the joint venture, and accordingly the entity is not consolidated. Key details of the joint venture are: n ING (NZ) Holdings Limited is owned 51% by ING Group and 49% by ANZ. n Both shareholders have an equal say in strategic decisions with a number of matters requiring the approval of both shareholders (ie require unanimous approval). These include major items of capital expenditure, acquisitions or disposals in excess of $20 million and changes to the Board structure. n Equal board representation with four Group nominees and four ING Group nominees. All key decisions (including business plans, major capital expenditure, acquisitions etc) require unanimous Board approval. The joint venture includes the majority of the Group’s and ING’s funds management and insurance activities in New Zealand. 62 NOTES TO THE FINANCIAL STATEMENTS 44: INTERESTS IN JOINT VENTURE ENTITIES (CONTINUED) Retained profits attributable to the joint venture entity At the beginning of the year At the end of the year Movement in the carrying amount of the joint venture entity Carrying amount at the commencement of the year/from acquisition Carrying amount at the commencement of the joint venture entity Share of net profit Completion accounts adjustment Dividend received Capital return Foreign currency translation adjustment Carrying amount at the end of the year Share of assets and liabilities1 Investments Other assets Total assets Policy holder liabilities Other liabilities Total liabilities Net assets Share of revenues, expenses and results Revenues Expenses Profit from ordinary activities before income tax Income tax expense Profit from ordinary activities after income tax Amortisation of notional goodwill Net equity accounted profit Share of commitments Lease commitments Other commitments Total expenditure commitments Share of contingent liabilities2 ING Australia Limited 2005 2004 $m $m 116 141 57 116 1,697 1,648 n/a 107 – (82) (245) 2 n/a 97 (10) (38) – – 1,479 1,697 11,424 904 10,301 768 12,328 11,069 10,710 720 11,430 898 9,565 375 9,940 1,129 430 (239) 191 (41) 150 (43) 107 163 9 172 80 386 (220) 166 (28) 138 (41) 97 173 16 189 73 ING (NZ) Holdings Limited Total 2005 $m 2004 $m – _ _ 131 – – – – – 131 98 133 231 60 23 83 148 – – – – – – – 3 – 3 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 2005 $m 116 141 2004 $m 57 116 1,697 1,648 131 107 – (82) (245) 2 – 97 (10) (38) – – 1,610 1,697 11,522 1,037 10,301 768 12,559 11,069 10,770 743 11,513 1,046 9,565 375 9,940 1,129 430 (239) 191 (41) 150 (43) 107 166 9 175 80 386 (220) 166 (28) 138 (41) 97 173 16 189 73 1 This represents the Group’s share of the assets and liabilities of ING Australia Limited and ING (NZ) Holdings Limited, less outside equity interests and including goodwill on acquisition of ANZ Funds Management entities 2 This represents Deeds of Subordination with ASIC and buyer of last resort anz financial report 2005 63 NOTES TO THE FINANCIAL STATEMENTS 45: FIDUCIARY ACTIVITIES The Group conducts investment fiduciary activities for trusts, including deceased estates. These trusts have not been consolidated as the Company does not have direct or indirect control. Where the Company or its controlled entities incur liabilities in respect of these operations as trustee, where the primary obligation is incurred in an agency capacity as trustee of the trust rather than on the Group's own account, a right of indemnity exists against the assets of the applicable funds or trusts. As these assets are sufficient to cover the liabilities and it is therefore not probable that the Company or its controlled entities will be required to settle the liabilities, the liabilities are not included in the financial statements. The aggregate amounts of funds concerned are as follows: Trusteeships 2005 $m 2004 $m 1,927 1,632 Funds management activities are conducted through the ING Australia Joint Venture and certain subsidiaries of ANZ National Bank Limited. During the period, ANZ National Bank Limited and ING in New Zealand established the ING NZ Joint Venture. In doing so, ANZ National Bank Limited transferred some of its managed funds activities into the new joint venture and INGA transferred its NZ business. As at 30 September 2005, the ANZ/ING Australia Joint Venture had funds under management of $34,569 million (30 September 2004: $35,780 million), the ING NZ Joint Venture had funds under management of $6,839 million (30 September 2004: $nil) and certain subsidiaries of ANZ National Bank Limited had funds under management of $3,371 million (30 September 2004: $3,764 million). Custodian services are conducted through ANZ Custodian Services. As at 30 September 2005, ANZ Custodian Services had funds under custody of $98.3 billion (30 September 2004: $59.8 billion). 46: COMMITMENTS Capital expenditure Contracts for outstanding capital expenditure Not later than 1 year Later than 1 year but not later than 5 years Total capital expenditure commitments Lease rentals Future rentals in respect of leases Land and buildings Not later than 1 year Later than 1 year but not later than 5 years Later than 5 years Furniture and equipment Not later than 1 year Later than 1 year but not later than 5 years Total lease rental commitments Total commitments Consolidated The Company 2005 $m 2004 $m 2005 $m 2004 $m 80 – 80 205 547 431 60 – 60 201 495 442 1,183 1,138 21 21 42 13 19 32 1,225 1,305 1,170 1,230 26 – 26 136 390 405 931 13 13 26 957 983 20 – 20 135 336 405 876 7 12 19 895 915 The Group leases land and buildings under operating leases expiring from one to five years. Leases generally provide the Group with a right of renewal at which time all terms are renegotiated. Lease payments comprise a base amount plus an incremental contingent rental. Contingent rentals are based on either movements in the Consumer Price Index or operating criteria. Contingent rentals are not included in lease rental commitments, are not provisioned for due to their immateriality, therefore are expensed as incurred. 64 NOTES TO THE FINANCIAL STATEMENTS 47: CONTINGENT LIABILITIES, CONTINGENT ASSET AND CREDIT RELATED COMMITMENTS CREDIT RELATED COMMITMENTS The credit risk of the following facilities may be less than the contract amount, but as it cannot be accurately determined, the credit risk has been taken to be the contract amount. The majority of undrawn facilities are subject to customers maintaining specific credit standards. The amount does not necessarily represent future cash requirements as many of these facilities are expected to be partially used or to expire unused. Consolidated The Company 2005 Contract amount $m 87,319 – 2004 Contract amount $m 78,851 63 2005 Contract amount $m 68,491 – 2004 Contract amount $m 62,118 – Controlled Entities 2004 Contract amount $m 2005 Contract amount $m 18,828 – 16,733 63 87,319 78,914 68,491 62,118 18,828 16,796 Undrawn facilities Underwriting facilities CONTINGENT LIABILITIES The qualitative details of the estimated maximum amount of contingent liabilities that may become payable relate to non-customer contingent liabilities. These contingent liabilities relate to transactions that the Group has entered into as principal. By contrast, the quantitative tabular presentation relates to customer contingent liabilities, ie direct credit substitutes and trade and performance related items. Hence, as the contingent liabilities refer to different aspects of Group operations, there are no reconciling items. Guarantees, Credit derivatives – sold, Standby letters of credit, Bill endorsements and Other are classified by APRA as direct credit substitutes and exhibit the same credit risk characteristics as a direct extension of credit. The maximum potential amount of future payments represents the contract amount that could be lost if the counterparty fails to meet its financial obligations. Documentary letters of credit involve the issue of letters of credit guaranteeing payment in favour of an exporter secured against an underlying shipment of goods or backed by a confirmatory letter of credit from another bank. Performance related contingents are liabilities that oblige the Group to make payments to a third party should the customer fail to fulfil the non-monetary terms of the contract. The Group guarantees the performance of customers by issuing standby letters of credit and guarantees to third parties. The risk involved is essentially the same as the credit risk involved in extending loan facilities to customers, therefore these transactions are subjected to the same credit origination, portfolio management and collateral requirements for customers applying for loans. As the facilities may expire without being drawn upon, the notional amounts do not necessarily reflect future cash requirements. The credit risk of these facilities may be less than the contract amount, but as it cannot be accurately determined, the credit risk has been taken to be the contract amount. Guarantees Credit derivatives – sold Standby letters of credit Bill endorsements Documentary letters of credit Performance related contingents Other Consolidated The Company 2005 Contract amount $m 4,878 1,775 1,446 125 3,015 10,160 1,433 2004 Contract amount $m 5,065 2,636 1,057 168 2,262 9,625 1,336 2005 Contract amount $m 4,744 1,775 1,277 125 2,763 9,864 1,128 2004 Contract amount $m 4,923 2,636 1,036 168 2,045 9,352 931 Controlled Entities 2004 Contract amount $m 2005 Contract amount $m 134 – 169 – 252 296 305 142 – 21 – 217 273 405 Total contingent liabilities 22,832 22,149 21,676 21,091 1,156 1,058 anz financial report 2005 65 v) Sale of Grindlays businesses On July 31 2000, ANZ completed the sale to Standard Chartered Bank (“SCB”) of ANZ Grindlays Bank Limited and the private banking business of ANZ in the United Kingdom and Jersey, together with ANZ Grindlays (Jersey) Holdings Limited and its subsidiaries, for USD1.3 billion in cash. ANZ provided warranties and certain indemnities relating to those businesses and, where it anticipated that payments would be likely under the warranties or indemnities, made provisions to cover the anticipated liability. The issues below have not impacted the reported results. All settlements and costs have been covered within the provisions established at the time. ANZ remains liable in relation to the Foreign Exchange Regulation Act (FERA) and differential cheques matters described below. FERA In 1991, amounts of INR 689m (AUD 21m) were transferred from non-convertible Indian Rupee accounts maintained with Grindlays in India, mainly to the convertible vostro account at Girobank, maintained at Bombay. These transactions may not have complied with the provisions of the Foreign Exchange Regulation Act, 1973. Grindlays, on its own initiative, brought these transactions to the attention of the Reserve Bank of India. The Indian authorities have served notices on Grindlays and certain of its officers in India that could lead to possible penalties. Grindlays has commenced proceedings in the courts contesting the validity of these notices. In November 1998 the Bombay High Court dismissed the writ petitions. In March 1999 the Supreme Court granted leave to appeal and ordered that, pending the disposal of the appeals, the prosecutions and adjudications against the officers shall not be proceeded with further. Final hearing of the appeals before the Supreme Court of India is expected in late 2005. Some matters have been listed by the ATO for further investigation. The ATO is also reviewing the taxation treatment of certain other transactions undertaken by the Group in the course of normal business activities. In addition, at the Company’s request the ATO is reviewing the taxation treatment of the sale of Grindlays in 2000. It is also reviewing the transfer of the life and funds management businesses into the joint venture with ING in 2002. During the year the Company and the ATO settled the remaining outstanding issues from the large case tax audit which commenced in 1995. The settlement was within existing provisions. The Group in New Zealand is being audited by the Inland Revenue Department (IRD) as part of normal revenue authority procedures, with a particular focus on certain kinds of structured finance transactions. The IRD has issued Notices of Proposed Adjustment (the ‘Notices’) in respect of some of those structured finance transactions. The Notices are not tax assessments and do not establish a tax liability, but are the first step in a formal disputes process. In addition, some tax assessments have been received. Should the same position be adopted by the IRD on the remaining transactions of that kind as reflected in the Notices and tax assessments received, the maximum potential tax liability would be approximately NZD432 million (including interest tax effected) for the period to 30 September 2005. Of that maximum potential liability, approximately NZD124 million is subject to tax indemnities provided by Lloyds TSB Bank PLC under the agreement by which ANZ acquired the National Bank of New Zealand and which relate to transactions undertaken by the National Bank of New Zealand before December 2003. General or issue-specific audits and other investigations are being undertaken by revenue authorities in the United States, the United Kingdom and in other jurisdictions as part of normal revenue authority activity in those countries. The Company has assessed these and other taxation claims arising in Australia, New Zealand and elsewhere, including seeking independent advice where appropriate, and believes that it holds appropriate provisions. NOTES TO THE FINANCIAL STATEMENTS 47: CONTINGENT LIABILITIES, CONTINGENT ASSET AND CREDIT RELATED COMMITMENTS (CONTINUED) The details and estimated maximum amount of contingent liabilities that may become payable are set out below. i) Clearing and Settlement Obligations In accordance with the clearing and settlement arrangements set out: n in the Australian Payments Clearing Association Limited (APCA) Regulations for the Australian Paper Clearing System, the Bulk Electronic Clearing System, the Consumer Electronic Clearing System and the High Value Clearing System (HVCS), the Company has a commitment to rules which could result in a bilateral exposure and loss in the event of a failure to settle by a member institution; and n in the Austraclear System Regulations, the Company has a commitment to participate in loss-sharing arrangements in the event of a failure to settle by a member institution. For both the APCA HVCS and Austraclear, the obligation arises only in limited circumstances. ii) Nominee Activities The Group will indemnify each customer of controlled entities engaged in nominee activities against loss suffered by reason of such entities failing to perform any obligation undertaken by them to a customer. iii) Interbank Deposit Agreement ANZ has entered into an Interbank Deposit Agreement with the major banks in the payments system. This agreement is a payment system support facility certified by the Australian Prudential Regulation Authority, where the terms are such that if any bank is experiencing liquidity problems, the other participants are required to deposit equal amounts of up to $2 billion for a period of 30 days. At the end of 30 days the deposit holder has the option to repay the deposit in cash or by way of assignment of mortgages to the value of the deposit. iv) Contingent Tax Liability The Group in Australia was during the year subjected to client risk reviews by the Australian Taxation Office (ATO) across a broad spectrum of matters, as part of normal ATO procedures. The reviews mainly covered years up to 2003. 66 NOTES TO THE FINANCIAL STATEMENTS 47: CONTINGENT LIABILITIES, CONTINGENT ASSET AND CREDIT RELATED COMMITMENTS (CONTINUED) Differential Cheques In June 2003, Grindlays was successful in its appeal against orders to repay, with interest, two payments it received from a stockbroker in 1991 in connection with securities transactions Grindlays had entered into with counterparty banks. These orders, requiring Grindlays to show cause why the payments made by the stockbroker should not be set aside on the grounds that they were not made in the ordinary course of business and were not genuine, had directed repayment of Indian Rupees 24 million (AUD 0.7m), plus interest accruing at 24% since 1991. The Custodian has yet to file an appeal against this judgment. Grindlays is awaiting the outcome of proceedings in relation to a further ten payments received by it in 1991 in similar circumstances totalling Indian Rupees 202 million (AUD 6.0m), including interest at 24% this is approximately Indian Rupees 884 million (AUD 26.4 m). In addition, ANZ provided an indemnity relating to tax liabilities of Grindlays (and its subsidiaries) and the Jersey Sub-Group to the extent to which such liabilities were not provided for in the Grindlays accounts as at 31 July 2000. Claims have been made under this indemnity also, with no material impact on the Group expected. vi) Pursuant to class order 98/1418 (as amended) dated 13 August 1998, relief was granted to a number of wholly owned controlled entities from the Corporations Act 2001 requirements for preparation, audit, and publication of individual financial statements. The results of these companies are included in the consolidated Group results. The entities to which relief was granted are: n ANZ Properties (Australia) Pty Ltd1 n ANZ Capital Hedging Pty Ltd1 n ANZ Nominees Ltd1 n ANZ Infrastructure Investments Limited3 n Alliance Holdings Pty Ltd1 n Jikk Pty Ltd1 n ANZ Orchard Investments Pty Ltd2 n ANZ Securities (Holdings) Limited3 n E S & A Holdings Pty Ltd1 n ANZ Funds Pty Ltd1 n Votraint No. 1103 Pty Ltd2 1 Relief granted on 21 August 2001 2 Relief granted on 13 August 2002 3 Relief granted on 9 September 2003 It is the condition of the class order that the Company and each of the above controlled entities enter into a Deed of Cross Guarantee. A Deed of Cross Guarantee under the class order was lodged and approved by the Australian Securities and Investments Commission. The effect of the Deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up any of the controlled entities under certain provisions of the Corporations Act 2001. The Company will only be liable in the event that after six months any creditor has not been paid in full. The controlled entities have also given similar guarantees in the event that the Company is wound up. The consolidated statement of financial performance and consolidated statement of financial position of the Company and its wholly owned controlled entities which have entered into the Deed of Cross Guarantee are: Profit before tax Income tax expense Profit after income tax Retained profits at start of year 1 Total available for appropriation Ordinary share dividends provided for or paid Transfer from reserves Retained profits at end of year Assets Liquid assets Investment securities Net loans and advances Other assets Premises and equipment Total assets Liabilities Deposits and other borrowings Income tax liability Payables and other liabilities Provisions Total liabilities Net assets Shareholders’ equity2 1 The Companies included in the class order changed in 2005, accordingly retained profits did not carry forward in 2005 2 Shareholders' equity excludes retained profits and reserves of controlled entities within the class order Consolidated 2005 $m 3,107 (754) 2,353 6,825 9,178 (1,877) – 2004 $m 3,017 (771) 2,246 6,100 8,346 (1,598) 224 7,301 6,972 7,193 5,398 153,461 40,591 1,132 3,747 6,107 134,566 35,806 1,114 207,775 181,340 113,089 1,566 74,746 650 99,811 1,551 62,713 618 190,051 164,693 17,724 16,647 17,724 16,647 anz financial report 2005 67 NOTES TO THE FINANCIAL STATEMENTS 47: CONTINGENT LIABILITIES, CONTINGENT ASSET AND CREDIT RELATED COMMITMENTS (CONTINUED) vii) The Company has guaranteed payment on maturity of the principal and accrued interest of commercial paper notes issued by ANZ (Delaware) Inc. of $6,400 million as at 30 September 2005 (2004: $7,081 million). viii) The Company is party to an underpinning agreement with ANZ National Bank Limited whereby the Company undertakes to assume risk in relation to credit facilities extended by ANZ National Bank Limited to individual customers which exceed 35% of ANZ National Bank Limited’s capital base. ix) The Company is party to an underpinning agreement with Australia and New Zealand Banking Group (PNG) Limited whereby the Company undertakes to assume risk in relation to credit facilities extended by Australia and New Zealand Banking Group (PNG) Limited to individual customers which exceed 25% of Australia and New Zealand Banking Group (PNG) Limited’s capital base. x) On 10 March 2005, leave was given by the High Court in London to certain parties to make a claim against ANZ over its role in 1996 as arranger and escrow agent in respect of a buyback of Nigerian Government bills of exchange (“the Noga claim”). The claim was disclosed by ANZ in view of its potential size (DEM 973 million [$833 million at 31 March 2005 exchange rates] plus interest). ANZ considered the Noga claim to be opportunistic and that the chances of it being successful were very remote. ANZ took the opportunity to settle the proceedings at an early stage at a level which is not material to the bank. GENERAL There are outstanding court proceedings, claims and possible claims against the Group, the aggregate amount of which cannot readily be quantified. Appropriate legal advice has been obtained and, in the light of such advice, provisions as deemed necessary have been made. The gross amounts of accruals made for material litigation contingencies is $233 million (2004: $168 million). Contingent Asset National Housing Bank In 1992, Grindlays received a claim aggregating approximately Indian Rupees 5.06 billion from the National Housing Bank (NHB) in India. The claim arose out of cheques drawn by NHB in favour of Grindlays, the proceeds of which were credited to the account of a Grindlays customer. Grindlays won an arbitration award in March 1997, under which NHB paid Grindlays an award of Indian Rupees 9.12 billion. NHB subsequently won an appeal to the Special Court of Mumbai, after which Grindlays filed an appeal with the Supreme Court of India. Grindlays paid the disputed money including interest into court. Ultimately, the parties settled the matter and agreed to share the moneys paid into court which by then totalled Indian Rupees 16.45 billion (AUD 661 million at 19 January 2002 exchange rates), with Grindlays receiving Indian Rupees 6.20 billion (AUD 248 million at 19 January 2002 exchange rates) of the disputed monies. ANZ in turn received a payment of USD124 million (USD equivalent of the Indian Rupees received by Grindlays) from Standard Chartered Bank under the terms of an indemnity given in connection with the sale of Grindlays to Standard Chartered Bank. ANZ Claims ANZ is pursuing two separate actions arising from the above. (a) A $130 million plus compound interest claim against its insurers. $130 million is the balance of the limit of indemnity under ANZ’s insurance arrangements for the 1991–92 policy year. The proceedings, in the Supreme Court of Victoria, are against ANZ’s captive insurance company ANZcover Insurance Pty Ltd (ANZcover). ANZcover is an authorised general insurer restricted to insuring the interests of ANZ and its subsidiaries. ANZcover in turn purchases reinsurance from global reinsurers, primarily in the London reinsurance market. ANZcover has no retained exposure to the NHB claim, which is fully reinsured, save for a small exposure arising from the insolvency of some reinsurers in the London market. The insurers contest liability and the proceedings remain on foot. The trial before the Supreme Court of Victoria is scheduled to be heard in early 2006. (b) ANZ is entitled to share with NHB in the proceeds of any recovery from the estate of the customer whose account was credited with the cheques drawn by NHB. However, the Indian Taxation Department is claiming a statutory priority to all of the funds available for distribution to creditors of that customer. No amounts receivable under either of these actions have been recognised in these accounts, except for $0.9 million which has been received from insurers, by way of settlement or distributions from schemes of arrangement, representing, in aggregate, $1.1 million of indemnity. 68 NOTES TO THE FINANCIAL STATEMENTS 48: SUPERANNUATION COMMITMENTS A number of pension and superannuation schemes have been established by the Group worldwide. The Group may be obliged to contribute to the schemes as a consequence of legislation and provisions of trust deeds. Legal enforceability is dependent on the terms of the legislation and trust deeds. The major schemes with assets in excess of $25 million are: Country Australia Scheme Scheme type ANZ Australian Staff Superannuation Scheme1,2 Defined Contribution Scheme Section C3 or Defined Contribution Scheme Section A or Defined Benefit Scheme Pension Section4 Defined Benefit Scheme5 or Defined Contribution Scheme Defined Benefit Scheme6 or Defined Contribution Scheme Contribution levels Employee Employer optional7 Balance of cost9 optional 9% of salary10 nil nil Balance of cost11 Balance of cost12 minimum of 2.5% of salary 5.0% of salary 7.5% of salary13 Balance of cost14 minimum of 2.0% of salary 11.2% of salary15 New Zealand ANZGROUP (New Zealand) Staff Superannuation Scheme1,2 National Bank Staff Superannuation Fund1,2 England ANZ UK Staff Pension Scheme1 Defined Benefit Scheme 5.0% of salary8 Balance of cost16 Balance of cost: the Group’s contribution is assessed by the actuary after taking account of members’ contributions and the value of the schemes’ assets 1 These schemes provide for pension benefits 2 These schemes provide for lump sum benefits 3 Closed to new members in 1997 4 Closed to new members. Operates to make pension payments to retired members or their dependents 5 Closed to new members on 31 March 1990. Operates to make pension payments to retired members of that section of the scheme or their dependents 6 Closed to new members on 1 October 1991 7 Optional but with minimum of 1% of salary 8 From 1 October 2003, members of the Senior Management section commenced contributions at the rate of 5% of salary, and all new members at the rate of 5% of salary 9 As determined by the Trustee on the recommendation of the actuary – currently 9% (2004: 9%) of members’ salaries 10 2004: 9% of salary 11 As determined by the Trustee on the recommendation of the actuary – currently nil (2004: nil) 12 As recommended by the actuary – currently nil (2004: nil) 13 2004: 7.5% of salary 14 As recommended by the actuary – currently 22.3% (2004: 22.3%) of members’ salaries 15 2004: 11.2% of salary 16 The Group recommenced contributions to the Scheme, effective from 1 October 2003. Contributions are currently 25% of pensionable salaries. Additional half yearly contributions of GBP 500,000 for 15 years have commenced, with the first payment made in November 2004 The details of defined benefit sections of the schemes are as follows: 2005 Schemes ANZ Australian Staff Superannuation Scheme Pension Section1 ANZ UK Staff Pension Scheme1 ANZ Group (New Zealand) Staff Superannuation Scheme1 National Bank Staff Superannuation Fund2 Other 3,4 Totals 1 Amounts were measured at 31 December 2004 2 Amounts were measured at 31 March 2005 3 Amounts were measured at 30 September 2005 4 Other includes the defined benefit arrangements in Japan, Philippines and Taiwan Employer’s contribution $m Accrued benefits $m Net market Excess of net market value of value of assets assets held over accrued benefits by scheme $m $m – 11 – 7 1 19 40 855 6 173 6 35 811 6 165 5 1,080 1,022 (5) (44) – (8) (1) (58) Vested benefits $m 40 835 6 176 7 1,064 anz financial report 2005 69 NOTES TO THE FINANCIAL STATEMENTS 48: SUPERANNUATION COMMITMENTS (CONTINUED) 2004 Schemes ANZ Australian Staff Superannuation Scheme Pension Section1 ANZ UK Staff Pension Scheme1 ANZ Group (New Zealand) Staff Superannuation Scheme2 National Bank Staff Superannuation Fund3 Other 4 Totals 1 Amounts were measured at 31 December 2003 2 Amounts were measured at 30 June 2004 3 Amounts were measured at 30 September 2004 4 Other includes the defined benefit arrangements in Japan, Philippines and Taiwan Employer’s contribution $m Accrued benefits $m Net market Excess of net market value of value of assets assets held over accrued benefits by scheme $m $m – 8 – 3 1 41 869 6 175 3 35 844 6 164 4 12 1,094 1,053 (6) (25) – (11) 1 (41) Vested benefits $m 41 844 6 179 7 1,077 ANZ Australian Staff Superannuation Scheme Pension Section The Pension Section of the ANZ Australian Staff Superannuation Scheme is closed to new members. A full actuarial valuation, conducted by the Scheme Actuary, Russell Employee Benefits, as at 31 December 2004 showed a deficit of $5 million and the expectation is that this deficit has remained materially unchanged since that date. The Group has no present liability under the Scheme's Trust Deed to commence contributions or fund the deficit. An interim actuarial valuation will be conducted as at 31 December 2005, at which time the funding position will be reassessed. The next full actuarial valuation is due to be conducted as at 31 December 2007. ANZ UK Staff Pension Scheme The deficit disclosed above for the UK Staff Pension Scheme has been determined for the purpose of AASB1028 “Employee Benefits”. Consulting actuaries Watson Wyatt LLP have advised that as at 31 December 2003 the Scheme would have met the minimum funding requirement (MFR) test as defined in UK legislation, being 115% funded on that basis. Following an interim actuarial valuation of the Scheme at 31 December 2004, the actuary expects the Scheme’s funding level to be comfortably within the MFR and statutory surplus limits. The Group has no present liability under the Scheme’s Trust Deed to fund the deficit, but it does have a contingent liability if the Scheme was wound up. If this were to happen, the Trustee would be able to pursue the Bank for additional contributions under the UK Employer Debt Regulations. This is calculated based on an insurance buy-out of the Scheme. This is considered unlikely, given the Group intends to continue the Scheme on an on-going basis and the financial strength of the Group. From 1 October 2003, the Group recommenced contributions at the rate of 25% of pensionable salaries. These contributions are sufficient to cover the cost of accruing benefits. In order to address the deficit, the Group has agreed to pay half yearly additional contributions of GBP 500,000 for a period of 15 years, commencing for the year beginning 1 October 2004, with the first payment made in November 2004. National Bank Staff Superannuation Fund The last full actuarial valuation of the pension section of the National Bank Staff Superannuation Fund was conducted by Aon Consulting NZ as at 31 March 2004, and showed a deficit of NZD6 million ($6 million). Based on an interim actuarial valuation, a deficit of NZD12 million ($11 million) was disclosed as at 30 September 2004. An actuarial valuation conducted as at 31 March 2005 showed a deficit of NZD8.6 million ($8 million). The Group has no present liability under the Scheme’s Trust Deed to fund the deficit, but it does have a contingent liability if the Scheme was wound up. Under the Scheme’s Trust Deed, if the Scheme were wound up, the Group is required to pay the Trustees of the Scheme an amount sufficient to ensure members do not suffer a reduction in benefits to which they would otherwise be entitled. 70 NOTES TO THE FINANCIAL STATEMENTS 49: EMPLOYEE SHARE AND OPTION PLANS The Company has three share purchase and option incentive plans available for employees and directors of the Group: the ANZ Employee Share Acquisition Plan1; the ANZ Share Option Plan; and the ANZ Directors' Share Plan. Shareholders of the Company have approved the implementation of each of the current plans. Fully paid ordinary shares issued under these plans are held in trust on behalf of participants and generally rank equally with other existing fully paid ordinary shares, other than in respect of voting rights while the shares remain in trust. However, Performance Shares issued to the ANZ CEO on 31 December 2004, do not attract a dividend. Each option granted under the ANZ Share Option Plan entitles a holder to purchase one ordinary share subject to any terms and conditions imposed on issue. The exercise price of the options, determined in accordance with the rules of the plan, is based on the weighted average price of the Company's shares traded during the five business days preceding the date of granting the options. An offer to employees and directors cannot be made under any of the plans if an issue pursuant to that offer will result in the aggregate of shares issued and options granted over unissued shares held for employees under various employee share and option incentive schemes exceeding 7% of the issued capital (and unexercised options) of the Company. The closing market price of one ordinary share at 30 September 2005 was $24.00. 1 The ANZ Employee Share Acquisition Plan includes the $1,000 Share Plan, the Deferred Share Plan and the Employee Share Save Scheme ANZ EMPLOYEE SHARE ACQUISITION PLAN $1,000 Share Plan Subject to Board approval this plan allows for the issue of up to $1,000 of shares to all eligible employees each financial year. The shares are generally issued for no consideration, except in New Zealand where employees are required to pay NZD 1 cent per share at the time the shares are transferred to them. During the financial year, 1,151,157 shares with an average issue price of $20.03 were issued under the $1,000 Share Plan (2004: 1,244,654 shares with an average issue price of $18.04 were issued). These shares are issued from the Share Capital account, hence only an increase in the number of shares on issue results. Details of the movement in employee shares under the $1,000 Share Plan are as follows: Number of shares at beginning of the year Number of shares issued to the trust Number of shares distributed to employees Number of shares forfeited Number of shares at end of the year1 1 Includes shares issued under the bonus option plan and the dividend reinvestment plan The Company 2005 2004 5,229,252 1,394,587 (946,224) (71,997) 5,605,618 4,537,676 1,512,886 (787,873) (33,437) 5,229,252 The Company 2005 2004 Number of shares acquired since commencement of the $1,000 Share Plan1 9,409,732 8,258,575 1 Excludes shares issued under the bonus option plan and the dividend reinvestment plan Deferred Share Plan Selected employees may also be issued deferred shares, which vest in the employee up to three years from the date of issue. Ordinary shares issued under this plan may be held in trust for up to 10 years, and may be required to meet performance hurdles before being able to be traded after the restriction period has expired. The issue price is based on the volume weighted average price of the shares traded on the ASX in the 5 trading days leading up to and including the date of issue. Unvested shares are forfeited on resignation, dismissal, or termination on notice (LTI deferred shares only), or if a performance condition has not been met. During the financial year, 655,261 (2004: 2,750,277) deferred shares were issued under this Plan. Details of the movement in employee shares under the Deferred Share Plan are as follows: Number of shares at beginning of the year Number of shares issued to the trust Number of shares distributed to employees Number of shares forfeited Number of shares at end of the year1 1 Includes shares issued under the bonus option plan and the dividend reinvestment plan The Company 2005 2004 8,715,896 732,032 (1,766,494) (228,116) 7,453,318 8,020,848 2,851,886 (2,034,234) (122,604) 8,715,896 The Company 2005 2004 Number of shares acquired since commencement of the Deferred Share Plan1 17,283,723 16,628,462 1 Excludes shares issued under the bonus option plan and the dividend reinvestment plan anz financial report 2005 71 NOTES TO THE FINANCIAL STATEMENTS 49: EMPLOYEE SHARE AND OPTION PLANS (CONTINUED) ANZ EMPLOYEE SHARE SAVE SCHEME Eligible employees have the opportunity to request that a proportion of their income be directed to the purchase of ANZ shares. The amount they elect to contribute is deducted fortnightly and shares are purchased on market quarterly in arrears by the trust. The Company contributes 5% of the purchase price and pays for brokers fees and stamp duty. Senior executives may participate but are not eligible to receive the 5% discount. Employees are eligible to participate in the Scheme if they are permanent full-time or part-time employees of the Company and have been employed since 1 October immediately prior to the invitation being made by the Company. Employees nominate a restriction period between 1 to 10 years during which period the shares are held in trust. Dividends are paid to the employees. Details of the movement in employee shares under the ANZ Employee Share Save Scheme are as follows: Number of shares at beginning of the year Number of shares purchased Number of shares issued to the trust Number of shares distributed to employees Number of shares at end of the year 2005 452,130 306,377 23,789 (268,184) 514,112 The Company 2004 394,405 279,723 24,243 (246,241) 452,130 The Company 2005 2004 Number of shares acquired since commencement of the ANZ Employee Share Save Scheme 1,349,752 1,043,375 Costs associated with the ANZ Employee Share Save Scheme were recognised in Personnel Expenses and Liquid Assets (amounts were less than $500,000). ANZ SHARE PURCHASE SCHEME The ANZ Share Purchase Scheme is a closed scheme. Shares have been progressively paid up by eligible officers, with the last remaining shares held under the scheme fully paid up and redeemed during the 2004 financial year. No fully paid ordinary shares have been issued under this Scheme since 1996. Details of the movement in employee shares under the ANZ Share Purchase Scheme are as follows: Number of shares at beginning of the year Number of shares redeemed by employees1 Number of shares at end of the year 1 Redeemed once paid out by employee 2005 – – – The Company 2004 229,500 (229,500) – 72 NOTES TO THE FINANCIAL STATEMENTS 49: EMPLOYEE SHARE AND OPTION PLANS (CONTINUED) ANZ SHARE OPTION PLAN Selected employees may be granted options, which entitle them to purchase ordinary fully paid shares in the Company at or greater than a price fixed at the time when the options are issued (depending on whether the exercise price is indexed or not). Voting and dividend rights will be attached to the unissued ordinary shares when the options have been exercised. Details of the options over unissued ordinary shares as at the beginning and end of the financial year and movements during the year are set out below. Exercise price $ Earliest exercise date 9.39 11.09 12.03 13.62 13.91 13.91 14.20 14.75 12.98 12.98 12.98 14.61 15.77 16.09 16.33 16.33 16.33 16.48 16.80 17.49 18.03 18.03 18.03 18.55 18.55 17.18 17.34 17.34 17.56 16.69 17.60 17.60 18.12 17.55 17.55 17.48 18.22 18.22 20.68 20.68 0.00 0.00 20.49 0.00 23/02/2003 23/05/2003 26/09/2003 22/11/2003 25/10/2003 07/02/2004 21/02/2004 27/02/2004 25/04/2004 25/04/2004 07/05/2004 01/06/2004 21/08/2004 27/08/2004 24/10/2004 25/10/2004 25/10/2004 31/12/2004 31/12/2003 26/02/2005 24/04/2005 24/04/2005 24/04/2005 14/05/2005 28/06/2005 22/07/2005 23/10/2005 23/10/2005 20/11/2005 31/12/2004 20/05/2006 20/05/2006 09/06/2006 05/11/2006 05/11/2006 31/12/2005 11/05/2007 11/05/2007 05/11/2007 05/11/2007 05/11/2004 08/12/2007 31/12/2006 13/05/2005 Grant date 23/02/2000 23/05/2000 26/09/2000 21/11/2000 27/12/2000 27/01/2001 21/02/2001 27/02/2001 24/04/2001 24/04/2001 07/05/2001 01/06/2001 23/08/2001 27/08/2001 24/10/2001 24/10/2001 24/10/2001 31/12/2001 31/12/2001 28/02/2002 24/04/2002 24/04/2002 24/04/2002 31/05/2002 27/06/2002 21/07/2002 23/10/2002 23/10/2002 20/11/2002 31/12/2002 20/05/2003 20/05/2003 09/06/2003 05/11/2003 05/11/2003 31/12/2003 11/05/2004 11/05/2004 05/11/2004 05/11/2004 05/11/2004 08/12/2004 31/12/2004 13/05/2005 Totals Expiry date 22/02/2007 23/05/2007 25/09/2007 21/11/2007 07/02/2008 07/02/2008 20/02/2008 26/02/2008 24/04/2008 24/04/2008 06/05/2008 31/05/2008 20/08/2008 26/08/2008 23/10/2008 24/10/2008 24/10/2008 31/12/2005 31/12/2007 25/02/2009 24/04/2009 24/04/2009 24/04/2009 13/05/2009 27/06/2009 21/07/2009 22/10/2009 22/10/2009 19/11/2009 31/12/2007 19/05/2010 19/05/2010 08/06/2010 04/11/2010 04/11/2010 31/12/2008 10/05/2011 10/05/2011 04/11/2011 04/11/2011 04/11/2006 08/12/2011 31/12/2008 12/05/2007 No. options at beginning of the year 147,000 163,750 30,000 705,219 994,722 671,800 2,971,568 25,000 531,300 1,668,527 104,100 310,000 76,000 63,000 50,000 753,300 2,811,600 500,000 500,000 20,000 380,000 760,501 2,880,641 145,000 261,810 17,000 2,120,765 2,288,527 40,000 1,000,000 2,027,696 2,597,240 10,000 1,195,665 2,658,242 1,000,000 1,630,235 2,690,420 – _ – – – – Options granted – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,486,617 3,048,066 11,699 42,435 500,000 10,671 Options lapsed and surrendered – – – – 9,000 12,750 21,000 – – 14,175 1,100 3,000 – 3,000 – 3,600 50,650 – – – 1,112 10,119 128,856 – 15,947 – 167,399 141,111 – – 145,398 246,741 – 92,648 190,959 – 97,318 205,886 78,788 169,455 – – – – No. options outstanding at 30 September 2005 On issue Vested Hurdle 122,000 85,500 22,500 452,804 678,750 464,800 1,972,092 – 169,700 1,070,414 40,800 170,250 76,000 45,000 50,000 288,400 1,753,170 – 500,000 – 345,000 436,100 2,161,878 125,000 194,835 17,000 1,894,885 2,003,222 40,000 1,000,000 1,844,639 2,214,860 10,000 1,033,804 2,425,186 1,000,000 1,470,155 2,458,971 1,406,481 2,861,147 – 42,435 500,000 – Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes 50% No No No 50% No No No No No No No No No No Yes No No Yes B N N B N N N B B N N N B N B B N E F B C C N N N C N D D F N D N C N F C N G N N DSR F N Options exercised 25,000 78,250 7,500 252,415 306,972 194,250 978,476 25,000 361,600 583,938 62,200 136,750 – 15,000 – 461,300 1,007,780 500,000 – 20,000 33,888 314,282 589,907 20,000 51,028 – 58,481 144,194 – – 37,659 135,639 – 69,213 42,097 – 62,762 25,563 1,348 17,464 11,699 – – 10,671 36,800,628 5,099,488 1,810,012 6,642,326 33,447,778 The aggregate fair value of shares issued as a result of the exercise of options during the 2005 financial year was $141 million. anz financial report 2005 73 NOTES TO THE FINANCIAL STATEMENTS 49: EMPLOYEE SHARE AND OPTION PLANS (CONTINUED) On 24 October 2003 the Company issued a prospectus to invite shareholders to participate in a pro-rata renounceable rights issue. In accordance with the rules set out in the ANZ Share Option Plan in the event of a rights issue, the exercise price of options granted under the plan is to be reduced in accordance with ASX Listing Rule 6.22. As as result, the exercise price of each option issued under the ANZ Share Option Plan is reduced by 72 cents from the amount previously disclosed. Details of performance hurdles applicable to options are as follows: A The percentage change of the ANZ Total Shareholder Return (ANZ TSR) to exceed the percentage change of the S&P/ASX 200 Banks (Industry Group) Accumulation Index from date of issue to any time from the third anniversary date up to and including the proposed exercise date. B & C During the four-year period commencing three years, and ending seven years, after the issue date of the options: n 50% of the options allocated may be exercised by the option holder subject to the ANZ TSR exceeding the percentage change in the S&P/ASX 200 Banks (Industry Group) Accumulation Index measured over the same period and calculated as at the last trading day of any month; and n 50% of the options allocated may be exercised by the option holder subject to the ANZ TSR exceeding the percentage change in the S&P/ASX 100 Accumulation Index measured over the same period and calculated as at the last trading day of any month. D Options may be exercised at month’s end during the four-year period commencing three years, and ending seven years, after the issue date of the options. The exercise price will be set according to the movement in the S&P/ASX 200 Banks (Industry Group) Accumulation Index (excluding ANZ) since issue date, and can be no lower than the base issue price. DSR No performance hurdles apply. Deferred Share Rights may only be exercised between the third and seventh anniversary of their issue. E The options may be exercised only if the ANZ Accumulation Index over the period from the date on which the options are granted to the last trading day of any month occurring during the relevant exercise period, equals or exceeds the S&P/ASX 100 Accumulation Index calculated over the same period (applicable to the CEO only). F One half of the options may be exercised only if the ANZ TSR calculated over the period commencing on the date of grant and ending on the last day of any month after the second anniversary of their date of grant exceeds the percentage change in the S&P/ASX 200 Banks (Industry Group) Accumulation Index over that same period; and the other half of the options may be exercised only if the ANZ TSR calculated over the relevant period exceeds the percentage change in the S&P/ASX 100 Accumulation Index over that same period (applicable to the CEO only). G Exercise of options is subject to the satisfaction of time and performance based hurdles. Options may be exercised during the four year period commencing three years, and ending seven years, after the issue date of the Options subject to meeting the following performance hurdle. The performance hurdle will be measured during the exercise period by comparing ANZ’s Total Shareholder Return (ANZ’s TSR) against a comparator group of major financial services companies in the ASX Top 50, excluding the ANZ, as determined by the Board Compensation and Human Resources Committee. The options become exercisable depending on ANZ’s ranking within the comparator group. ANZ must rank at the 50th percentile for 50% of the options to become exercisable. For each 1% increase above the 50th percentile an additional 2% of options will become exercisable, with 100% being exercisable where ANZ ranks at or above the 75th percentile. This will be calculated as at the last trading day of any month (once the exercise period has commenced). N No performance hurdles apply. Once the exercise period has been reached, the options may be exercised. As their purpose is predominately retention and to share in any growth in the share price, additional hurdles are not applied. These options will expire immediately on termination of employment, except in the event of retirement, retrenchment, death or disablement or where agreed by the directors of the Company, in which case the exercise of the options may be allowed. In the event of a takeover offer or takeover announcement, the directors of the Company may allow the options to be exercised. If there is a bonus issue prior to the expiry or exercise of the options, then upon exercise of the options, option holders are entitled to those shares as if the options had been exercised prior to that issue. Those shares will be allotted to the option holder when the options are exercised. 74 NOTES TO THE FINANCIAL STATEMENTS 49: EMPLOYEE SHARE AND OPTION PLANS (CONTINUED) The following options were exercised by employees and former employees during the financial year: Exercise price $ No. of shares issued Proceeds received $ Exercise price $ No. of shares issued Proceeds received $ 0.00 0.00 9.39 11.09 12.03 12.98 12.98 12.98 13.62 13.91 13.91 14.20 14.61 14.75 16.09 16.33 16.33 16.48 17.34 17.49 17.55 17.55 17.60 10,671 11,699 25,000 78,250 7,500 62,200 361,600 583,938 252,415 194,250 306,972 978,476 136,750 25,000 15,000 461,300 1,007,780 500,000 58,481 20,000 42,097 69,213 37,659 0.00 0.00 234,750 867,793 90,225 807,356 4,693,568 7,579,515 3,437,892 2,702,018 4,269,981 13,894,359 1,997,918 368,750 241,350 7,533,029 16,457,047 8,240,000 1,014,061 349,800 738,802 1,214,688 662,798 18.03 18.03 18.03 18.22 18.22 18.55 18.55 18.94 19.30 20.05 20.20 20.43 20.58 20.68 20.68 21.21 21.21 21.61 23.57 24.01 33,888 314,282 589,907 25,563 62,762 20,000 51,028 6,183 8,458 597 8,044 827 6,909 1,348 17,464 26,583 4,232 42,000 90,000 86,000 611,001 5,666,504 10,636,023 465,758 1,143,524 371,000 946,569 117,106 163,239 11,970 162,489 16,896 142,187 27,877 361,156 563,825 89,761 907,620 2,121,300 2,064,860 For those options exercised by employees and former employees during the financial year, the market price of the Company’s shares during the year were as follows: High Low As at 30 September 2005 $24.45 $19.02 $24.00 As at the date of the Financial Report, unexercised options over ordinary shares are as per the table on page 73, adjusted for the exercise of the following options which were exercised by employees and former employees since the end of the financial year. Exercise price $ No. of shares issued Proceeds received $ Exercise price $ No. of shares issued Proceeds received $ 13.91 13.91 14.20 12.98 12.98 16.09 16.33 18.03 18.03 17,575 13,500 53,350 26,406 1,850 1,500 43,749 63,350 34,000 244,468 187,785 757,570 342,750 24,013 24,135 714,421 1,142,201 613,020 18.55 18.55 17.34 17.60 17.55 18.22 18.22 20.68 15,000 11,125 114,245 5,499 6,347 260 5,221 1,605 278,250 206,369 1,981,008 96,782 111,390 4,737 95,127 33,191 Amounts received from exercising options under the ANZ Share Option Plan during the financial year were recognised as follows: Share capital Liquid assets ANZ DIRECTORS' SHARE PLAN The Company 2005 $m 104 104 2004 $m 86 86 Directors may elect to forgo remuneration to which they may have otherwise become entitled and receive shares to the value of the remuneration forgone. Participation in the Plan is voluntary. Details of the movement in shares under this Scheme are as follows: Number of shares at beginning of the year Number of shares purchased Number of shares sold Number of shares forfeited Number of shares at end of the year1 1 Include shares issued under the dividend reinvestment plan The Company 2005 2004 662,122 175,356 (6,563) – 464,467 197,655 – – 830,915 662,122 anz financial report 2005 75 NOTES TO THE FINANCIAL STATEMENTS 50: DIRECTORS AND SPECIFIED EXECUTIVES REMUNERATION DISCLOSURES The remuneration details concerning the Directors of the Company (Table 1) and the Corporations Act 2001 and AASB 1046 “Director and Executive Disclosures by Disclosing Entities” Specified Executives of the Group and Company (Table 2) are detailed as follows. SECTION A: REMUNERATION TABLES TABLE 1: DIRECTOR REMUNERATION For the year ended 30 September 2005 details of the remuneration of the directors are set out below: Non-executive Directors CB Goode (Appointed director July 1991; appointed Chairman August 1995) Independent Non Executive Director, Chairman GJ Clark (Appointed February 2004) Independent Non Executive Director JC Dahlsen (Appointed May 1985; retired February 2005) Independent Non Executive Director RS Deane (Appointed September 1994) Independent Non Executive Director JK Ellis (Appointed October 1995) Independent Non Executive Director DM Gonski (Appointed February 2002) Independent Non Executive Director MA Jackson (Appointed March 1994) Independent Non Executive Director DE Meiklejohn (Appointed October 2004) Independent Non Executive Director JP Morschel (Appointed October 2004) Independent Non Executive Director BW Scott (Appointed August 1985; retired April 2005) Independent Non Executive Director TOTAL OF NON-EXECUTIVE DIRECTORS Executive Director J McFarlane (Appointed October 1997)8 Chief Executive Officer TOTAL OF ALL DIRECTORS 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 200413 2005 2004 2005 200413 Cash salary/fees $ Long service leave accrued during the year $ PRIMARY1 Value of shares acquired in lieu of cash salary/fees2 $ 420,585 338,000 – – – – – – 27,000 27,000 41,030 – – – – – 30,000 – – – 518,615 365,000 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 31,242 78,211 31,242 78,211 1,882,896 1,882,831 2,401,511 2,247,831 79,415 91,000 130,000 86,667 44,417 130,000 130,000 130,000 103,000 103,000 88,970 130,000 130,000 130,000 130,000 – 100,000 – 72,857 130,000 1,008,659 930,667 44 43 1,008,703 930,710 $ $ $ $ $ $ $ $ Associated entity Board fees (cash) C f $ – – – – – – 122,3849 117,9589 – – 22,150 50,150 – – – – – – 28,516 24,389 173,050 192,497 – – 173,050 192,497 $ – – – – – – COMMENTARY ON CHANGES BETWEEN 2004 AND 2005 Non-Executive Directors (NEDs) Primary Total Remuneration has increased by $212,114. This increase is as a result of: i) Timing differences between the appointment of DE Meiklejohn and JP Morschel, and the retirement of BW Scott and JC Dahlsen. ii) Increase in Chairman’s fees of $71,000 in recognition of increased demands of the role, relativity to peers, and to maintain equitable relativity with other NEDs. iii) The full year effect of the addition of GJ Clark to the Board. 76 The Post-Employment Retirement Benefit accrued during the year has increased by $511,120 from the previous period due to the following: i) $95,286 resulting from fee increases over the last 3 years being taken into account for the purpose of the directors’ retirement benefits. ii) $415,634 of this is due to amendments made during the year to the individual agreements with NEDs to make the formula for calculating the amount payable under them consistent for all NEDs. In some instances this has resulted in the amount accrued during the year being increased to take account of the impact of the change to the formula on previous years’ accrued benefits. In each case under the relevant agreement, the maximum amount that may be paid to a NED as a retirement benefit is subject to the limits in the Corporations Act. Executive Director (Chief Executive Officer) There was no change to J McFarlane’s fixed remuneration which remained at $2,000,000, including superannuation contributions. His short-term incentive target for 2005 was increased to $2,000,000 (100% of his fixed remuneration) in accordance with his contract extension announced on 26 October 2004. His actual payment was $2,100,000 (compared to $1,850,000 in 2004) reflecting the Board’s assessment of his performance against agreed balanced scorecard objectives which include ANZ’s financial performance and its performance against specified measures for shareholders, customers, staff and the community. Committee fees (cash) Value of shares acquired in lieu of cash incentive2,3 Primary total Super contributions Retirement benefit accrued during the year4 Total amortisation of LTI shares Total amortisation of LTI options $ $ $ $ $ $ POST EMPLOYMENT EQUITY5 OTHER $ – – 25,440 10,834 18,809 65,050 17,618 19,500 42,250 52,250 22,512 16,050 42,250 42,250 31,027 – 19,500 – 17,234 30,750 236,640 236,684 – – 236,640 236,684 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 500,000 429,000 155,440 97,501 63,226 195,050 270,002 267,458 172,250 182,250 174,662 196,200 172,250 172,250 161,027 – 149,500 – 118,607 185,139 11,723 11,297 11,723 7,597 4,423 11,296 11,723 10,321 11,723 11,297 11,723 11,297 11,723 10,899 11,723 – 11,723 – 6,803 11,297 1,936,964 1,724,848 105,010 85,301 2,100,004 1,850,006 2,100,004 1,850,006 4,014,186 3,811,091 5,951,150 5,535,939 417,00010 417,00010 522,010 502,301 243,284 99,586 50,189 33,008 111,303 74,356 49,169 70,998 110,981 65,780 104,001 67,227 122,008 56,352 64,781 – 60,459 – 127,089 64,839 1,043,264 532,146 – – 1,043,264 532,146 Total7 $ 755,007 539,883 217,352 138,106 178,952 280,702 330,894 348,777 294,954 259,327 290,386 274,724 305,981 239,501 237,531 – 221,682 – 252,499 261,275 3,085,238 2,342,295 $ – – – – – – – – – – – – – – – – – – – – – – n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 982,987 – 982,987 – 1,791,7186 2,584,880 1,791,718 2,584,880 4,03112 90,61911 7,209,922 6,903,590 4,031 90,619 10,295,160 9,245,885 1 Non-monetary benefits for all directors are nil. 2 Shares acquired through participation in Directors’ Share Plan (relates to CEO only in relation to cash incentive, as NEDs do not participate in Short-Term Incentive arrangements). Value reflects the price at which the shares were purchased on market (amortisation not applicable). 3 100% of the CEO’s cash incentive vested during the financial year. 4 Accrual relates to Directors’ Retirement Scheme. The following benefits were paid under the Directors’ Retirement Scheme to the following former directors: JC Dahlsen (retired 3 February 2005) – $513,668; BW Scott (retired 23 April 2005)– $516,214. If each of the current NEDs had ceased to be a director as at 30 September 2005, the following benefits would have been payable under the Directors’ Retirement Scheme: CB Goode – $1,312,539; GJ Clark – $83,197; RS Deane – $693,285; JK Ellis – $523,039; DM Gonski – $249,445; MA Jackson – $487,022; DE Meiklejohn – $64,781; JP Morschel – $60,459. The Directors’ Retirement Scheme will be discontinued effective 30 September 2005. Refer to section B2 for more information pertaining to the Directors’ Retirement Scheme. 5 In accordance with the requirements of AASB1046A, the amortisation value includes a proportion of the fair value (taking into account market-related vesting conditions) of all equity that had not yet fully vested as at the commencement of the financial year. It is assumed that 100% of the options will vest at the commencement of their exercise period (i.e. the shortest possible vesting period is assumed). The fair value is determined at grant date and is allocated on a straight-line basis over the expected vesting period. The fair value is determined using a binomial option-pricing model that is explained in Note 51 Equity Instruments Transactions section I. The amount included as remuneration is not related to nor indicative of the benefit (if any) that may ultimately be realised should the options become exercisable. For deferred shares, the fair value is the weighted average price of the Company’s shares traded on the ASX on the day the shares were granted. 6 Amortisation value of options as a percentage of his total remuneration (as shown in the Total column above) was 25% in 2005 (37% in 2004). 7 Amounts disclosed for remuneration of directors exclude insurance premiums paid by the consolidated entity in respect of directors’ and officers’ liability insurance contracts which cover current and former directors and officers, including executive officers of the entity and directors, executive officers and secretaries of the controlled entities. The total premium, which cannot be disclosed because of confidentiality requirements, has not been allocated to the individuals covered by the insurance policy as, based on all available information, the directors believe that no reasonable basis for such allocation exists. 8 J McFarlane elected to use almost all his cash salary and incentive to purchase on market deferred shares under the Directors’ Share Plan. 9 Amounts paid in NZD are converted to AUD at an average rate for the year of 1.0847 (1.1254 in 2004). 10 Includes $300,000 additional employer contribution, agreed as part of contract extension announced 26 October 2004. Refer section D2 11 Relates to reimbursement to J McFarlane for the additional tax liability on his UK Pension Plan holdings, arising as a result of Australian Foreign Investment Fund rules, and J McFarlane’s continuing Australian residency (in accordance with the contractual arrangements detailed in section D2. 12 Relates to professional services rendered in respect of taxation matters. 13 2004 aggregate amounts relate to those directors reported in 2004. anz financial report 2005 77 NOTES TO THE FINANCIAL STATEMENTS 50: DIRECTORS AND SPECIFIED EXECUTIVES REMUNERATION AND SHARE AND OPTION DISCLOSURES (CONTINUED) TABLE 2: SPECIFIED EXECUTIVES REMUNERATION For the year ended 30 September 2005 details of the remuneration of the top seven executives (Specified Executives), other than the Chief Executive Officer, are set out below and include the five most highly remunerated executives in the Company and the Group (as required under the Corporations Act 2001) and the top executives in the Group by authority (as required by AASB1046): S c Cash salary/fees $ 838,110 672,792 727,696 723,651 654,550 654,550 694,435 543,062 648,556 510,081 748,700 728,451 748,700 305,407 Long service leave accrued during the year $ – – 13,928 56,212 10,860 10,846 19,469 15,694 46,140 39,006 12,422 29,098 12,497 5,101 PRIMARY Non monetary benefits1 $ – – 28,281 31,552 7,277 7,277 61,542 57,091 11,465 17,357 7,277 7,277 7,277 2,934 Total cash short term Incentive2,3 $ Primary total $ 460,960 449,618 1,299,070 1,122,410 800,000 393,000 770,000 385,500 1,080,000 424,000 863,000 343,000 920,000 482,000 880,000 267,000 1,569,905 1,204,415 1,442,687 1,058,173 1,855,446 1,039,847 1,569,161 909,444 1,688,399 1,246,826 1,648,474 580,442 5,060,747 4,179,538 115,316 128,629 123,119 113,408 5,773,960 2,726,118 11,073,142 7,147,693 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004 iii) With the exception of Sir J Anderson, change in STI delivery to 100% cash in 2005 versus 75% cash and 25% deferred shares (amortised over 3 years) for 2004. iv) Sir J Anderson and S Targett commenced part way through 2004, being 1 December 2003 and 5 May 2004 respectively. v) Two of S Targett’s deferred share grants fell into the 2005 financial year (refer to footnote 6). vi) 2004 aggregate amounts relate to those Specified Executives reported in 2004. Specified Executives Sir J Anderson8,9 Chief Executive & Director, ANZ National Bank Ltd New Zealand Dr RJ Edgar Chief Operating Officer E Funke Kupper Group Managing Director Asia-Pacific BC Hartzer Group Managing Director Personal Banking GK Hodges Group Managing Director Corporate PR Marriott Chief Financial Officer S Targett9 Group Managing Director Institutional TOTAL COMMENTARY ON CHANGES BETWEEN 2004 AND 2005 Specified Executives The differences in Total Remuneration between 2004 and 2005 for Specified Executives are as a result of the following: i) Total Employment Costs (TEC) or fixed remuneration increases between 2004 and 2005 are in line with ANZ’s guiding principles (refer to sections C1 and C3), and to reflect role changes for BC Hartzer; increased responsibility for GK Hodges and market pressures. ii) Increase in target short term incentive (STI) amounts (for all Specified Executives except for Sir J Anderson), from 67% of TEC to 100% of TEC in order to meet competitive pressures. 78 Super contributions $ 83,811 67,279 46,800 46,752 40,950 40,950 46,800 37,224 40,838 32,600 46,800 45,542 46,800 18,976 POST EMPLOYMENT EQUITY5 Retirement benefit accrued during year4 $ Annual remuneration (Primary plus Post Employment) $ Total amortisation value of STI shares $ Total amortisation value of LTI shares $ Total amortisation value of LTI options $ Total amortisation of other equity allocations6 $ Total 7,10 $ 33,367 32,160 1,672 7,163 – – – – 1,635 2,919 – – – – 1,416,248 1,221,849 1,618,377 1,258,330 1,483,637 1,099,123 1,902,246 1,077,071 1,611,634 944,963 1,735,199 1,292,368 1,695,274 599,418 – – 173,907 197,681 184,924 232,208 149,259 201,364 131,825 147,516 208,525 243,435 – – – – 555,470 342,662 221,068 232,024 237,943 192,239 186,089 127,584 295,175 276,714 40,544 – – – 477,452 219,168 1,893,700 1,441,017 264,095 256,110 239,523 333,500 282,929 298,814 218,920 195,847 317,175 369,376 39,059 – – – – – – – – – – – 789,238 188,081 1,266,690 407,249 2,611,849 2,054,783 2,129,152 1,896,855 2,572,377 1,769,488 2,148,468 1,415,910 2,556,074 2,181,893 2,564,115 787,499 16,475,735 11,789,784 352,799 300,598 36,674 42,270 11,462,615 7,490,561 848,440 1,089,594 1,536,289 1,250,614 1,361,701 1,551,766 1 Non monetary benefits provided to Specified Executives consist of salary packaged items such as car parking and novated lease motor vehicles. 2 Total cash incentive relates to the full incentive amount for the financial year ended 30 September 2005. A portion of the STI was delivered as deferred shares in 2004. 3 100% of the Specified Executives’ cash incentive vested to the person in the financial year. 4 Accrual relates to Retirement Allowance. As a result of being employed with ANZ prior to November 1992, RJ Edgar and GK Hodges are eligible to receive a Retirement Allowance on retirement, 5 retrenchment, death, or resignation for illness, incapacity or domestic reasons. The Retirement Allowance is calculated as follows: 3 months of notional salary (which is 65% of fixed remuneration) plus an additional 3% of notional salary for each year of full-time service above 10 years, less the total accrual value of long service leave (including taken and untaken). In accordance with the requirements of AASB1046A, the amortisation value includes a proportion of the fair value (taking into account market-related vesting conditions) of all equity that had not yet fully vested as at the commencement of the financial year. It is assumed that 100% of the options will vest at the commencement of their exercise period (i.e. the shortest possible vesting period is assumed) and that deferred shares will vest after 3 years. The fair value is determined at grant date and is allocated on a straight-line basis over the 3-year vesting period. For options, the fair value is determined using a Binomial Option Pricing model that is explained in Note 51 section I. The amount included as remuneration is not related to nor indicative of the benefit (if any) that may ultimately be realised should the options become exercisable. For deferred shares, the fair value is the weighted average price of the Company’s shares traded on the ASX on the day the shares were granted. 6 Amortisation of other equity allocations for Sir J Anderson relates to the granting of zero priced options (ZPO). ZPOs are granted as part of his employment contract. Refer to section E2 for further details. Amortisation of other equity allocations for S Targett relates to the grant of deferred shares beginning on 11 May 2004 (four tranches to the value of $700,000 each to be issued at 6 month intervals in May and November in 2004 and 2005, subject to Board approval and continued employment) and hurdled A options (refer to Note 51 Equity Instruments Transactions section K for performance hurdle details) to compensate S Targett for the loss of access to equity as a result of his resignation from his previous employer. 7 Amounts disclosed for remuneration of Specified Executives exclude insurance premiums paid by the consolidated entity in respect of directors’ and officers’ liability insurance contracts which cover current and former directors and officers, including executive officers of the entity and directors, executive officers and secretaries of the controlled entities. The total premium, which cannot be disclosed because of confidentiality requirements, has not been allocated to the individuals covered by the insurance policy as, based on all available information, the directors believe that no reasonable basis for such allocation exists. 8 Amounts paid in NZD are converted to AUD at an average rate for the year of 1.0847 (1.1254 in 2004). 9 Sir J Anderson was appointed 1 December 2003 (i.e. 2 months after the start of the 2004 financial year) and S Targett was appointed 5 May 2004 (i.e. 7 months after the start of the 2004 financial year) 10 Amortisation value of options as a % of total remuneration for the 2005 financial year was as follows; Sir J Anderson - 25% (15% in 2004); Dr R J Edgar - 10% (12% in 2004); E Funke Kupper - 11% (18% in 2004); B C Hartzer - 11% (17% in 2004); G K Hodges - 10% (14% in 2004); P R Marriott - 12% (17% in 2004); S Targett - 11% (12% in 2004) anz financial report 2005 79 SECTION B. NON-EXECUTIVE DIRECTORS’ REMUNERATION B1. NON-EXECUTIVE DIRECTORS’ REMUNERATION POLICY Non-executive Directors’ (NEDs) fees are reviewed annually and are determined by the Board of Directors based on advice from external advisors and with reference to fees paid to other NEDs of comparable companies. NEDs’ fees are within the maximum aggregate limit agreed to by shareholders at the Annual General Meeting held on 13 December 2002 ($2.5 million, excluding retirement allowances and superannuation), and are set at levels that fairly represent the responsibilities of, and the time spent by, the NEDs on Group matters. NEDs receive a fee for being a director of the Board, and additional fees for either chairing or being a member of a committee. Work on special committees may attract additional fees of an amount considered appropriate in the circumstances. An additional fee is also paid if a NED serves as a director of ANZ National Bank Limited, ING Australia Ltd or Metrobank Card Corporation. NEDs do not receive any performance/incentive payments and are not eligible to participate in any of the Group’s incentive arrangements. The Chairman Fee was increased to $500,000 effective 1 October 2004 in recognition of the demands of the role, market practice and in order to maintain desired relativity with other directors. No other adjustments were made to NED fees for the year ending 30 September 2005. The fee structure is illustrated in Table 3 below: TABLE 3 Role Chairman Non-Executive Director Committee Chair1 Committee Member1 2004 Fee 2005 Fee $429,000 $500,000 $130,000 $32,500 $9,750 $130,000 $32,500 $9,750 1 Except Nominations & Corporate Governance Committee and Technology Committee, where the current Chair and Member Fees are $21,000 and $6,300 respectively. For details of remuneration paid to directors for the year ended 30 September 2005, refer to Table 1 in section A. NED Shareholding Guidelines NEDs have agreed to accumulate ANZ shares, over a five-year period, to the value of 100% (200% for Chairman) of the base annual NED Fee and to maintain this shareholding while a director of ANZ. NEDs have agreed to apply up to 25% of 80 their base fee annually via the Director’s Share Plan or other means, towards the purchase of ANZ shares in order to achieve/ maintain the desired holding level. This is a new guideline which was approved by the Board in September 2005. B2. NON-EXECUTIVE DIRECTORS’ RETIREMENT POLICY All NEDs participated in the ANZ Directors’ Retirement Scheme up to the year ended 30 September 2005. Under this scheme, a lump-sum retirement benefit was payable to NEDs upon their ceasing to be a director. The lump-sum retirement benefit payable where the NED held office for 8 years or more was equal to the total remuneration (excluding retirement benefit accrual) of the NED in respect of the 3 years immediately preceding the NED ceasing to be a NED. For periods of less than 8 years, a proportionate part of such remuneration was payable. The NEDs are not entitled to the statutory entitlements of long service leave and annual leave. Consistent with Principle 9.3 of the Australian Stock Exchange (ASX) Corporate Governance Rules, which states that NEDs should not be provided with retirement benefits other than statutory superannuation, the ANZ Directors’ Retirement Scheme was closed effective 30 September 2005. Accrued entitlements were fixed at 30 September 2005 and will be carried forward to retirement, and collected by the NED when they retire. The entitlements may be carried forward as: n Cash Alternative: A cash payment, being the entitlement accrued to 30 September 2005, plus escalation based on the 30 day bank bill rate until retirement date; and/or n Shares Alternative: A number of ANZ shares purchased on market on 27 October 2005 to the value of the accrued entitlement, plus escalation based on the 30-day bank bill rate for the period 1 October 2005 to 26 October 2005 (subject to Shareholder approval at the 2005 Annual General Meeting). Shares will then be held in ANZ Employee Share Trust for the benefit of the Director until retirement. NEDs have been asked to nominate the proportion of their accrued entitlement to be directed towards each alternative, subject to shareholder approval. Fees for NEDs will be increased by 27.5% effective 1 October 2005 to compensate for the removal of this contractual benefit. This amount was determined based on an independent actuarial valuation of the scheme by Mercer Finance & Risk Consulting and advice from expert remuneration consultants PricewaterhouseCoopers. This increase is also in line with market practice in relation to fee increases due to the removal of the Directors’ Retirement Scheme, where increases have typically ranged from 25% to 30%. NED Fee Cap There has been no increase in the NED fee pool since 2002. Shareholder approval will be sought at the 2005 Annual General Meeting for an increase to the NED Fee Cap by $500,000. This proposed increase would take the maximum aggregate amount from $2.5m to $3.0m – an amount which is considered necessary in order to: n accommodate the fee adjustment to compensate for the removal of the Directors’ Retirement Scheme (27.5%) – while the discontinued retirement benefits under the Constitution are outside the maximum aggregate limit, the compensating increase to fees will be within the limit; n allow for annual adjustments in line with market NED movements; and n allow for the addition of another NED in either 2006 or early 2007. It is critical that the Company has the capacity to pay adequate fees to NEDs in order to attract and retain directors of the highest calibre. B3. DIRECTORS’ SHARE PLAN The Directors’ Share Plan is available to both non-executive and executive directors. Directors may elect to forgo remuneration to which they may have otherwise become entitled and receive shares to the value of the remuneration forgone. Participation in the plan is voluntary, except to the extent that the NED Shareholding Guidelines must be met and therefore the shares acquired are not subject to performance conditions. Shares acquired under the plan are purchased on market and are held in trust for up to 10 years. Shares are subject to a minimum 1 year restriction, during which the shares cannot be traded, and are subject to forfeiture for serious misconduct. All costs associated with the plan are met by the Company. SECTION C. EXECUTIVE REMUNERATION STRUCTURE C1. REMUNERATION GUIDING PRINCIPLES ANZ’s reward policy guides the Compensation & Human Resources Committee and management in shaping remuneration strategies and initiatives. The following principles underpin ANZ’s reward policy: 1. Focus on creating and enhancing value for ANZ’s shareholders; 2. Differentiation of individual rewards commensurate with contribution to overall results and according to individual accountability, performance and potential; 3. Significant emphasis on “at risk” components of total rewards linked to the enhancement of shareholder value through improvements in Economic Value Added™ (EVA™); and 4. The provision of a competitive reward proposition to successfully attract, motivate and retain the highest quality individuals required to deliver ANZ’s business and growth strategies. During 2005 a comprehensive review of reward structures has been conducted against the backdrop of these principles and against the Company’s growth strategy and corporate governance principles. As a result, a number of changes have been made. These changes are detailed in section C4. Shareholding Guidelines Direct Reports to the CEO are expected to accumulate ANZ shares, over a five year period, to the value of 200% of their Total Employment Cost (TEC) and to maintain this shareholding while an executive of ANZ. Our next most senior executives are expected to accumulate ANZ shares to the value of 100% of their TEC and to maintain this shareholding while an executive of ANZ. This guideline was introduced in June 2005. New executives will be expected to accumulate the required holdings within five years of appointment. C2. REMUNERATION STRUCTURE OVERVIEW ANZ’s reward structures are designed to meet the needs of ANZ’s specialised business units as well as the markets in which they operate. As a result, the mix of remuneration components can vary across the organisation although, where practicable, ANZ applies structures and opportunities on a consistent basis for similar roles and levels. There is a strong emphasis on variable remuneration opportunities with total employee remuneration differentiated significantly on the basis of performance. The executive remuneration program (which includes the remuneration of senior managers and the company secretaries) is designed to support the reward principles detailed in section C1, and to underpin the Company’s growth strategy. This program aims to differentiate remuneration on the basis of achievement against group, business unit and individual performance targets which are aligned to sustained growth in shareholder value using a balanced scorecard approach. The program comprises the following components: n fixed remuneration component (TEC): salary, non-monetary benefits and superannuation contributions (Refer to C3). n variable or “at risk” component (Refer to C4): - Short-Term Incentive (STI); and - Long-Term Incentive (LTI). The relative weighting of fixed and variable components, for target performance, is set according to the size of the role and competitive market in which the role operates, with the proportion of remuneration “at risk” increasing for the most senior or complex roles, or for those roles where there is strong market pressure to provide greater levels of remuneration. Figure 1 below shows the relative mix of Fixed, STI and LTI at target payment levels. Fixed remuneration is set around the median of the market. STI and LTI payments for on target performance are also set at market median, however the plan design allows for the opportunity to earn upper quartile total remuneration for significant out performance, and significantly reduced payment for underperformance. In this way the remuneration structure is heavily weighted towards “reward for performance”. C3. FIXED REMUNERATION For most executives, fixed remuneration consists of what is referred to as Total Employment Cost (TEC). TEC comprises cash salary, a superannuation contribution, and the remainder as nominated benefits. The types of benefits that can be packaged by executives include novated car leases, additional superannuation contributions, car parking, child care, laptops and contributions towards the Employee Share Save Scheme (see note 49 of the 2005 Financial Report for details of the Employee Share Save Scheme). To ensure fixed remuneration remains competitive, the TEC component of executive remuneration is reviewed annually based on individual performance and market data. ANZ operates with a midpoint targeted to the market median being paid in the finance industry in the relevant global markets in which ANZ operates, and a range around this midpoint. International remuneration levels are considered in assessing market competitiveness where an executive’s primary place of residence is outside of Australia or New Zealand, in which case the local market is considered. Specified Executives1 Larger Senior Exec. Roles2 Smaller Senior Exec. Roles2 1 Specified Executives’ reward mix pertains to Dr R J Edgar, E Funke Kupper, B C Hartzer, G K Hodges, P R Marriott and S Targett. Refer to E2 for composition of Sir J Anderson’s remuneration 2 The reward mix for larger senior executive roles and smaller senior executive roles is based on average data anz financial report 2005 81 Each executive has a target STI which is determined according to seniority and market relativities. The size of the actual STI payment made at the end of each financial year to individuals may be at, above or below the target and this will be determined according to ANZ Group, Division and Individual Performance. Performance objectives are set at the start of each financial year according to a balanced scorecard of measures at the Group, Division and Individual level. These measures are aligned with the achievement of ANZ’s business plan, and are the most appropriate indicators of performance. Division and Individual objectives are a subset of the Group objectives, which ensures there is alignment of objectives through the executive population. Performance objectives under ANZ’s balanced scorecard include a number of qualitative and quantitative measures which include, but are not limited to: n Financial Measures including: Economic Value Added (EVATM); Revenue and Net Profit After Tax n Customer Measures including: Customer Satisfaction and Market Share n Employee Engagement, Risk Management and Compliance Measures n Environment, Health & Safety and Community Measures. The STI is payable 100% in cash (except where specific business plans require otherwise). Executives are able to elect to sacrifice part or all of their incentive towards the purchase of ANZ shares which are restricted from sale for 12 months, or towards additional superannuation contributions. The target STI award level for Specified Executives is 100% of TEC in 2005 (increasing from 67% of TEC), with a maximum STI award of 150% of TEC. For larger senior executive roles in the general ANZ STI plan, the target STI is 67% of TEC, with a maximum of 100% of TEC, and for smaller senior executive roles the target is 43% of TEC and the maximum 65% of TEC. Note, the target and maximum STI amounts for larger and smaller senior executive roles may vary for customised incentive schemes. C4.2 Long-Term Incentives Long-term incentives (LTIs) are used as a mechanism to link a significant portion of executives’ remuneration to the attainment of sustained growth in shareholder value. A comprehensive review of ANZ’s Long-Term Incentive Program was conducted in 2005 which resulted in a number of changes. The annual LTI allocation to be made in November 2005 will now be delivered as 100% Performance Rights. It was previously delivered as Hurdled Options (50% of grant LTI value) and Deferred Shares (50% of grant LTI value). It was decided that the entire LTI allocation should be linked to a single long-term performance measure. The size of individual LTI grants is determined by an individual’s level of responsibility, performance and the assessed potential of the executive. Typically at the most senior levels the Target LTI value will range from around 10% to 24% of the individual’s target reward mix, as shown in Figure 1 in Section C2. Executives are advised of their LTI dollar value, which is then converted into a number of Performance Rights based on an audited valuation. ANZ engages external experts (PricewaterhouseCoopers and Mercer Finance & Risk Consulting) to independently value the Performance Right, taking into account factors including the performance conditions, life of instrument, share price at grant date etc. These valuations are then audited by KPMG. The Board then approves use of the highest value. The LTI dollar value is then divided by the approved value of the Performance Right to determine the number of rights to be allocated. EXAMPLE n Executive granted LTI value of $60,000 n Approved Performance Right Valuation is $10.85 per Performance Right n $60,000 / $10.85 = 5,530 Performance Rights allocated to executive LTI allocations are made annually in or around November. C4. VARIABLE REMUNERATION Variable remuneration forms a significant part of executives’ potential remuneration, providing an at-risk component that is designed to drive performance in both the short-term (annually) and in the medium and long-term (over 3 years or more). The opportunities available to executives under ANZ’s variable reward programs are calibrated to reflect executives’ potential impact on the business, to manage internal relativities, and to ensure competitiveness in the relevant markets in which they operate. Most executives participate in the short-term incentive (STI) plan detailed in section C4.1 and the long-term incentive (LTI) plan detailed in section C4.2, subject to individual performance thresholds. In some instances, customised STI plans will exist for executives to ensure closer alignment of their rewards with business objectives and market practice. For example, staff in ANZ’s Institutional Division participate in a customised incentive plan more closely aligned with that market. No executive, however, may participate in more than one STI plan. Equity allocated under ANZ incentive schemes remain at risk until fully vested (in the case of Deferred Shares) or are exercisable (in the case of options or Performance Rights). As such, it is a condition of grant that no schemes are entered into that specifically protect the unvested value of shares, options and Performance Rights allocated. Doing so would constitute a breach of the grant conditions and would result in the forfeiture of the relevant shares or options. C4.1 Short-Term Incentives ANZ’s STI approach supports our strategic objectives by providing rewards that are significantly differentiated on the basis of achievement against performance targets. Most executives participate in the plan explained below. All STI plans are reviewed and approved by the Compensation & Human Resources Committee. Determination of Award Levels The size of the overall pool available each year is determined based on ANZ Group performance against a balanced scorecard of financial and qualitative measures. This pool is then distributed amongst divisions and then individuals based on relative performance. 82 Comparator Group The peer group of companies against which ANZ’s TSR performance is measured, comprises the following companies: AMP Limited AXA Asia Pacific Holdings Limited Commonwealth Bank of Australia Insurance Australia Group Limited Macquarie Bank Limited National Australia Bank Limited QBE Insurance Group Limited St George Bank Limited Suncorp-Metway Limited Westpac Banking Corporation This comparator group was chosen because it represents ANZ’s key competitors in the financial services industry, are an appropriate reference group for investors and are of sufficient size by market capitalisation and weight in ASX Top 50. Refer to Equity Instruments Transactions Section K in Note 51 for details pertaining to legacy LTI equity vehicles (which are yet to vest). Performance Rights (To be granted from October 2005) A Performance Right is a right to acquire a share at nil cost, subject to satisfactorily meeting time and performance hurdles. Upon exercise, each Performance Right entitles the holder to one ordinary share. Performance Rights are ANZ’s preferred LTI delivery vehicle as they provide a clearer, more tangible value to the executive, subject to satisfactorily performing relative to the performance hurdle for vesting. Performance Rights are designed to reward executives for share price growth dependent upon the Company’s Total Shareholder Return (TSR) outperforming peers. TSR represents the change in the value of a share plus the value of reinvested dividends paid. TSR was chosen as the most appropriate comparative measure as it focuses on the delivery of shareholder value and is a well understood and tested mechanism to measure performance. The TSR vesting scale is designed to ensure that executive rewards are directly linked to the Company’s TSR and are therefore aligned to the outcomes experienced by other shareholders. The proportion of Performance Rights that become exercisable will depend upon the TSR achieved by ANZ relative to the companies in the comparator group (shown below) over a three-year period. There will not be any retesting feature. Performance equal to the 50th percentile of the comparator group will result in half the Performance Rights becoming exercisable. Performance above the 50th percentile will result in further Performance Rights becoming exercisable, increasing on a straight-line basis until all of the Performance Rights become exercisable where ANZ’s TSR is at or above the 75th percentile when compared with the comparator group. TSR is measured on a pro-rata basis; where ANZ’s performance falls between two of the comparators, the actual relative level of TSR, rather than simple ranking, will determine the level of vesting. An averaging calculation will be used for TSR over a 90 day period for start and end values in order to reduce share price volatility. It should also be noted that where median performance is achieved, executives’ total remuneration will typically be below market median for the financial services industry. 75th percentile performance is required for full vesting which enables executives to receive the full value of their LTI. To ensure an independent TSR measurement, ANZ engages the services of an external organisation (Macquarie Financial Services) to calculate ANZ’s performance against the TSR hurdle. The conditions under which Performance Rights are granted are approved by the Board in accordance with the rules of the ANZ Share Option Plan. Performance conditions are explained in more detail below. Each Performance Right has the following features n The performance hurdle is tested at the end of three years; n No dividends will be payable on the Performance Rights until they vest; n A two-year exercise period that commences three years after the grant date subject to the performance hurdle being cleared; n Upon exercise, each Performance Right entitles the holder to one ordinary share; n In case of dismissal for misconduct, Performance Rights are forfeited; n In case of resignation or termination on notice, only Performance Rights that become exercisable by the end of the notice period may be exercised; n In case of retrenchment or retirement, Performance Rights will be performance tested at the date of termination, and where performance hurdles have been met, Performance Rights will be pro- rated and a grace period provided in which to exercise; n In case of death or total and permanent disablement, a grace period is provided in which to exercise all Performance Rights. The hurdles would be waived; and n Performance hurdle, which is explained above. anz financial report 2005 83 C5. PERFORMANCE OF ANZ Table 4 shows ANZ’s annual performance over the five-year period spanning 1 October 2000 to 30 September 2005. The table illustrates the impact of ANZ’s performance on shareholder wealth, taking into account dividend payments, share price changes and returns on capital during the financial year. TABLE 4 Basic Earnings Per Share (EPS) NPAT ($m) Total Dividend (cps) Share price at 30 September ($) Total Shareholder Return (%) FY 2001 112.7 1,870 73 15.28 26.2 FY 2002 141.4 2,322 85 16.88 15.3 FY 2003 142.4 2,348 95 17.17 6.7 FY 2004 153.1 2,815 101 19.02 17.0 FY 2005 160.9 3,018 110 24.00 32.6 In table 4, ANZ’s Total Shareholder Return (TSR, which includes share price growth, dividends and other capital adjustments) has been shown for each individual financial year between 2001 and 2005. Figure 2 however, compares ANZ’s TSR performance against the median TSR of the LTI comparator group and the S&P/ASX 200 Banks Accumulation Index over the 2000 to 2005 measurement period. The difference between S&P/ASX 200 Banks Accumulation Index and the median of ANZ’s comparator group over the 2004 and 2005 financial years is due to the weightings in the Index of the large banking institutions that have underperformed comparatively during this period; whereas the organisations in ANZ’s comparator group are weighted evenly. 84 SECTION D. CHIEF EXECUTIVE OFFICER’S REMUNERATION D1. CEO REMUNERATION OVERVIEW The structure of J McFarlane’s remuneration, which is in accordance with his employment agreement, is as follows: n Fixed Remuneration: Consists of salary, benefits and superannuation contributions. Since October 2003, J McFarlane has elected to receive almost all of his Fixed Remuneration in the form of shares purchased under the Directors’ Share Plan. These shares are not subject to a performance condition as they are provided in place of cash remuneration at the CEO’s choice. However, they are subject to forfeiture in case of termination for serious misconduct. n Short-Term Incentive: The Board sets J McFarlane’s balanced scorecard at the beginning of the financial year. The Board then assesses performance against these objectives at the end of the year. These objectives are aligned with the achievement of ANZ’s business plan, and are the most appropriate indicators of performance. These objectives include a number of quantitative and qualitative measures, which include (but are not limited to) financial, customer, people, environment and community measures. J McFarlane’s STI may be paid in cash or in shares purchased under the Directors’ Share Plan. J McFarlane has typically elected to receive shares. n Long-Term Incentive: J McFarlane’s Long-Term Incentive is made up of Hurdled Options and Performance Shares as approved by shareholders at the 2001 and 2004 Annual General Meetings respectively. The performance conditions pertaining to the options issued during the year are indicated in Equity Instruments Transactions Section K1 Hurdled A options of Note 51. The remuneration of J McFarlane for the year ended 30 September 2005 is set out in Table 1 in Section A. The mix of remuneration for J McFarlane under his current contract is made up as follows: n Fixed Remuneration of $2,000,000 per annum; n Target variable Short-Term Incentive of $2,000,000 per annum; n Long-Term Incentive of $2,600,000 – one allocation only (based on valuation of 175,000 performance shares at issue). Shareholding Guideline The Chief Executive Officer of ANZ is expected to accumulate ANZ shares, over a five year period, to the value of 200% of his Fixed Remuneration and to maintain this shareholding while CEO of ANZ. This shareholding guideline was introduced in September 2005 and adherence to this guideline will be regularly monitored. D2. CEO’S CONTRACT TERMS On 26 October 2004, the Company announced an extension to J McFarlane’s contract: n The term of the contract was extended by one year to 30 September 2007; n In addition to mandatory superannuation contributions, the Company makes additional employer contributions of $300,000 per annum (effective from 1 October 2003), paid quarterly to J McFarlane’s chosen superannuation fund; and n J McFarlane was granted 175,000 Performance Shares on 31 December 2004. A separate agreement, made on 23 October 2001, provides for reimbursements to J McFarlane for any additional tax liabilities that may arise on his UK Pension Plan holdings as a result of his continuing Australian residency. Under this agreement, ANZ reimburses J McFarlane for any additional tax liability incurred on his UK Pension Plan during his employment with ANZ, arising as a consequence of Australian Foreign Investment Fund rules. In the event of decreased Australian tax liabilities due to a decreased value in J McFarlane’s UK Pension Plan, the reduced liability will be used to offset potential subsequent reimbursements. D3. CEO’S RETIREMENT AND TERMINATION BENEFITS In accordance with J McFarlane’s contract variation (refer section D2), J McFarlane’s nominated superannuation fund receives $300,000 per annum (effective from 1 October 2003, paid quarterly) in addition to mandatory superannuation contributions. J McFarlane can terminate his employment agreement by providing 12 months’ notice. ANZ may terminate the employment agreement by providing notice equal to the unexpired term of the employment agreement (which ends on 30 September 2007). If ANZ terminates the employment agreement without notice and thus breaches its obligation to provide the required notice, ANZ has agreed with J McFarlane that the damages payable by ANZ for breach of contract would be equal to the Total Employment Cost (TEC) that would otherwise be received over the remainder of the contract (TEC comprises salary or fees, non-monetary benefits and mandatory superannuation contributions). In circumstances of serious misconduct, J McFarlane is only entitled to payment of TEC up to the date of termination. Payment of accumulated superannuation benefits plus statutory entitlements of long service leave and annual leave (calculated on the basis of salary or fees) applies in all events of separation. In the event of resignation not approved by the Board or dismissal for serious misconduct, all unexercised options and Performance Shares will be forfeited. In the event of termination on notice or agreed separation, all vested options and Performance Shares must be exercised within 6 months of the termination or agreed separation date, subject to meeting the relevant performance hurdles. In the event of serious misconduct, shares held in the Directors’ Share Plan will be forfeited. On resignation or termination on notice, shares held under the Directors’ Share Plan will be released. D4. CEO’S PARTICIPATION IN EQUITY PROGRAMS Hurdled Options At the 2001 Annual General Meeting, four tranches of options were approved for granting by the Board: 500,000 in 2001; 1,000,000 in 2002; 1,000,000 in 2003 and 500,000 in 2004. For options granted to the CEO, the exercise price is equal to the weighted average share price on the ASX during the 5 trading days immediately before or after the Company’s Annual General Meeting that immediately precedes the allocation. The exercise of these options is subject to performance hurdles being satisfied. J McFarlane’s specific performance hurdles, for options granted during the year, are indicated in Equity Instruments Transactions Section K1 (Hurdled A) of Note 51, and for Performance Shares in Equity Instruments Transactions Section K3 of Note 51. For options granted to the CEO, the life and exercise period may differ, as disclosed in Equity Instruments Transactions Section C of Note 51. Performance Shares 175,000 Performance Shares were issued to J McFarlane on 31 December 2004 as part of his contract extension, as approved by shareholders at the 2004 Annual General Meeting. No dividends will be payable on the shares until they vest. Vesting will be subject to time and performance hurdles being satisfied as detailed in Equity Instruments Transactions Section K3 of Note 51. As these Performance Shares were granted as part of J McFarlane’s contract extension, as opposed to a new contract, the conditions of grant were aligned with those of the original contract apart from the application of a TSR performance hurdle. Directors’ Share Plan J McFarlane participates in the Directors’ Share Plan, which is explained in section B3. Please refer to Equity Instruments Transactions in Note 51 for details of grants and holdings. anz financial report 2005 85 SECTION E. SPECIFIED EXECUTIVES’ CONTRACT TERMS Contractual terms for most executives are similar, but do, on occasion, vary to suit different needs. Section E1 details the contractual terms for those Specified Executives who are on open-ended contracts. Section E2 details the contractual terms for Sir J Anderson, who is on a fixed term contract. E1. OPEN-ENDED CONTRACTS (Dr RJ EDGAR, E FUNKE KUPPER, BC HARTZER, GK HODGES, PR MARRIOTT, S TARGETT) Length of Contract Open-ended. Fixed Remuneration Remuneration consists of salary, mandatory employer superannuation contributions and benefits. Short-Term Incentive Eligible to participate. Target opportunity of 100% of Total Employment Cost (refer to section C4.1 for details of short-term incentive arrangements). Long-Term Incentive Eligible to participate at the Board’s discretion – refer to section C4.2 for long-term incentive arrangements. Resignation Employment may be terminated by giving 6 months’ written notice. On resignation any options and unvested deferred shares will be forfeited. Retirement On retirement, shares and options are released in full. Termination on Notice by ANZ ANZ may terminate the executive’s employment by providing 12 months’ written notice or payment in lieu of the notice period based on Total Employment Cost (TEC). On termination on notice by ANZ any options or LTI deferred shares that have vested, or will vest during the notice period will be released, in accordance with the ANZ Share Option Plan Rules. LTI shares that have not yet vested will generally be forfeited, although for some executives (E Funke Kupper, BC Hartzer and PR Marriott) these shares will be released in full. Deferred shares granted under STI arrangements will vest in full for all executives. There is discretion to pay incentives on a pro-rata basis (depending on termination date and subject to business performance). If ANZ terminates employment for reasons of bona fide redundancy, a severance payment will be made that is equal to 12 months TEC. All STI deferred shares are released. All options granted since 24 April 2002 are released on a pro-rata basis – all prior grants may be exercised. All LTI deferred shares granted since 23 October 2002 are released on a pro-rata basis – all prior grants will vest. There is discretion to pay incentives on a pro-rata basis (depending on termination date and subject to business performance). All options and shares released; pro-rata incentive. ANZ may immediately terminate the executive’s employment at any time without notice in the case of serious misconduct, and the employee will only be entitled to payment of TEC up to the date of termination. On termination for serious misconduct any options and any deferred shares still held in trust will be forfeited. S Targett: Subject to continued employment and the approval of the Board, four tranches to the value of $700,000 each of deferred shares to be granted at six month intervals in May and November in 2004 and 2005, and Hurdled Options with a value of $750,000 granted within 3 months of commencement of employment, to compensate for the loss of equity from S Targett’s previous employer. On Termination on Notice, sign-on options can be exercised as a pro-rata proportion to the period of employment. Sign-on deferred shares will vest in full, including any scheduled to be granted during the notice period. Redundancy Death or Total and Permanent Disablement Termination for serious misconduct Other Aspects 86 E2. FIXED TERM CONTRACT (SIR J ANDERSON) Length of Contract Contract was effective from 1 December 2003 to 30 September 2005, and extended to 15 April 2006. Fixed Remuneration The Total Employment Cost (TEC) package is NZD1,000,000 per annum and is inclusive of employer contributions to the superannuation fund. Short-Term Incentive STI payments are subject to both business and individual performance. The target payment is 50% of TEC. Equity Participation Resignation Retirement Termination on Notice by ANZ Death or Total and Permanent Disablement Termination for serious misconduct A Zero priced option (ZPO) is a right to acquire a share at nil cost. ZPOs are granted as part of Sir J Anderson’s contract under the ANZ Share Option Plan. They were designed to deliver equity to the CEO of The National Bank of New Zealand (NBNZ) and to meet the particular needs and circumstances at the time of the acquisition of NBNZ. Grants are fixed at NZD500,000 worth of ZPOs annually, granted in two tranches per annum and with a nil exercise price. The ZPOs have no time based vesting criteria, and so can be exercised at any time during employment and within 6 months of the termination of employment. Sir J Anderson may terminate his employment by giving 12 months’ written notice. On resignation any ZPOs which have not been exercised as at the termination date will lapse. A policy for payment of retirement gratuities was in place with NBNZ employees prior to the acquisition by the Company of NBNZ. This policy has been continued for eligible staff who were ANZ National Bank Limited employees as at 1 December 2003, including Sir J Anderson. Under this policy, a payment will be made to Sir J Anderson on his retirement that is equal to the number of full years’ service divided by 35 and multiplied by 85% of finishing salary (where finishing salary is fixed remuneration less any superannuation contribution). This value is then grossed up for tax (i.e. divided by 0.61) and from this value the total accrual value of long service leave taken is deducted. ANZ National Bank Limited may terminate Sir J Anderson’s employment by providing notice or payment in lieu of notice equal to the unexpired term of the employment agreement (which ends on 15 April 2006). On termination on notice, any options may be exercised in accordance with the ANZ Share Option Plan Rules. Exercise any ZPOs; pro-rata incentive. ANZ National Bank Limited may terminate Sir J Anderson’s employment at any time without notice for serious misconduct, and Sir J Anderson will only be entitled to payment up to the date of termination. On termination for serious misconduct any ZPOs which have not been exercised as at the termination date will lapse. E3. PARTICIPATION IN EQUITY PROGRAMS A number of shares and options are granted to executives under the remuneration programs detailed in Section C. For Specified Executives, details of all grants made during the year and legacy LTI programs are listed in Equity Instruments Transactions Section K, of Note 51. Aggregate holdings of shares and options are also shown. The deferred shares component of the LTI is administered under the ANZ Employee Share Acquisition Plan. For executives, the shares are deferred for three years. The directors and specified executives shares and options disclosures are detailed in Note 51: Directors and Specified Executives – Related Party Transactions. anz financial report 2005 87 NOTES TO THE FINANCIAL STATEMENTS 51: DIRECTORS AND SPECIFIED EXECUTIVES - RELATED PARTY TRANSACTIONS This note covers the related party transactions (excluding remuneration information as detailed in Note 50) of the directors of the Company and the specified executives as required by AASB1046 “Director and Executive Disclosures by Disclosing Entities” and the Corporations Act 2001. Directors Specified Executives Sir J Anderson Dr RJ Edgar E Funke Kupper BC Hartzer GK Hodges PR Marriott S Targett Non Executive CB Goode GJ Clark JC Dahlsen (retired 3 February 2005) RS Deane JK Ellis DM Gonski MA Jackson DE Meiklejohn JP Morschel BW Scott (retired 23 April 2005) Executive J McFarlane Australian Securities and Investments Commission (ASIC) Class Order 98/110 dated 10 July 1998 (as amended) The directors and specified executives have been exempted, subject to certain conditions, by an ASIC class order, 98/110 dated 10 July 1998 (as amended), from making disclosures of loans regularly made, guaranteed or secured directly or indirectly by the Group to related parties or in respect of a financial instrument transaction regularly made by the Group to related parties (other than shares and share options), other than to the director or specified executive, or to an entity controlled or significantly influenced by the director or specified executive, where the loan or financial instrument transaction is lawfully made and occurs in the course of ordinary banking business either at arm’s length or with the approval of a general meeting of the relevant entity and its ultimate chief entity (if any). The class order does not apply to a loan or financial instrument transaction of which any director or specified executive should reasonably be aware that, if not disclosed, would have the potential to adversely affect the decisions made by users of the financial statements about the allocation of scarce resources. A condition of the class order is that for each financial year to which it applies, the Company must provide evidence to ASIC that the Company has systems of internal controls and procedures which: i) ii) in the case of any material financial instrument transaction, ensure that; and in any other case, are designed to provide a reasonable degree of assurance that, any financial instrument transaction of a bank which may be required to be disclosed in the Company’s financial statements and which is not entered into regularly, is drawn to the attention of the directors. 88 NOTES TO THE FINANCIAL STATEMENTS 51: DIRECTORS AND SPECIFIED EXECUTIVES - RELATED PARTY TRANSACTIONS (CONTINUED) LOAN TRANSACTIONS Details regarding loans outstanding at the reporting date to directors and specified executives including personally related parties (subject to the ASIC Class Order 98/110 (as amended) disclosure limitation as described above), where the individuals aggregate loan balance exceeded $100,000 at any time in the reporting period, are as follows: Directors Non-executive Directors J P Morschel J C Dahlsen1 D M Gonski Executive Directors J McFarlane2 Specified executives R J Edgar E Funke Kupper B C Hartzer G K Hodges Balance 1 October 2004 Balance 30 September 2005 Interest paid and payable in the reporting period Highest balance in the reporting period $ $ $ $ 310,000 17,695,111 18,342,000 716,880 14,736,607 18,342,000 51,127 1,024,458 1,097,742 779,933 17,695,111 18,342,000 10,349,429 6,264,681 495,517 16,249,944 181,814 680,000 2,645,581 1,172,688 918,284 680,000 2,703,626 1,019,242 17,001 4,7973 163,0283 61,658 1,130,316 680,000 2,771,944 2,869,921 1 J C Dahlsen ceased to be a director in February 2005 2 The loan balances as at 30 September 2005 largely relate to loans for the purchase of ANZ shares, including the exercise of options 3 Interest payments were reduced as a result of a linked offset account Details regarding the aggregate of loans made, guaranteed or secured by any entity in the Group to each group of directors and specified executives including related parties (subject to the ASIC Class Order 98/110 (as amended) disclosure limitation as described above) are as follows: Directors 2005 Specified executives 2005 Balance 1 October 2004 Balance 30 September 2005 Interest paid and payable in the reporting period Number in group at 30 September $ $ $ 46,696,540 40,060,168 2,668,844 4,680,083 5,321,152 246,483 43 43 3 Number in the Group includes directors and specified executive with loan balances greater than zero Loans made to the non-executive directors are made in the course of ordinary business on normal commercial terms and conditions. Loans to the executive director are made pursuant to the Executive Directors’ Loan Scheme authorised by shareholders on 18 January 1982, on the same terms and conditions applicable to other employees within the Group in accordance with established policy. No amounts have been written down or recorded as allowances, as the balances are considered fully collectible. OTHER TRANSACTIONS OF DIRECTORS AND SPECIFIED EXECUTIVES Other transactions (other than shares and share options) Under the ASIC class order referred to above, disclosure of other transactions regularly made by the Group is limited to disclosure of such transactions with a director of the Company, specified executives of the Group and to an entity controlled or significantly influenced by the directors and specified executives, on the basis the transactions are: - on arm’s length terms and conditions no more favourable than those entered into by other employees or unrelated customers; - information about them does not have the potential to affect adversely decisions about the allocations of scarce resources made by users of the financial report, or the discharge of accountability by the director or specified executive; and - are deemed trivial or domestic in nature. Transactions between the directors, specified executives and related entities and the Group during the financial year were in the nature of normal personal banking, debentures, investment and deposit transactions. These transactions occurred on an arm’s length basis and on normal commercial terms and conditions no more favourable than those given to other employees or customers and were trivial and domestic in nature. anz financial report 2005 89 NOTES TO THE FINANCIAL STATEMENTS 51: DIRECTORS AND SPECIFIED EXECUTIVES - RELATED PARTY TRANSACTIONS (CONTINUED) EQUITY INSTRUMENTS TRANSACTIONS The Company equity instruments and transactions relating to the Directors of the Company and the Corporations Act 2001 and AASB 1046 specified executives of the Group and Company are detailed as follows: A. SHAREHOLDINGS OF NON-EXECUTIVE DIRECTORS (INCLUDING MOVEMENTS DURING THE YEAR) Name CB Goode GJ Clark JC Dahlsen (retired 3 February 2005) RS Deane JK Ellis DM Gonski MA Jackson DE Meiklejohn JP Morschel BW Scott (retired 23 April 2005) Balance of shares as at 1 October 20041 Shares acquired during the year in lieu of salary2 Shares resulting from any other change during the year3 Balance of shares held as at 30 Sept 20051,4 Balance of shares held as at Financial Report sign-off date1 502,464 2,000 121,915 75,364 84,476 52,612 93,297 4,185 4,000 72,475 20,781 – – – 1,703 2,055 – – 1,502 – 12,392 – (8,441) – 5,017 237 – 2,141 – (6,494) 535,637 2,000 113,474 75,364 91,196 54,904 93,297 6,326 5,502 65,981 559,451 3,766 113,474 75,364 92,658 57,217 93,297 6,326 7,268 65,981 1 Balance of shares held at 1 October 2004, 30 September 2005 and 2 November 2005 (Financial Report sign-off date), includes directly held shares, nominally held shares and shares held by personally related entities. 2 All shares acquired in lieu of salary were done so under the Directors’ Share Plan (refer to Section B3 of Note 50, for an overview of the Directors’ Share Plan). 3 Other shares resulting from any other changes during the year include the net result of any shares purchased, sold or acquired under the Dividend Reinvestment Plan. 4 The following shares were nominally held as at 30 September 2005: CB Goode – 141,860; RS Deane – 73,000; JK Ellis – 23,900; DM Gonski – 52,159; MA Jackson – 10,632; DE Meiklejohn – 2,656; JP Morschel – 1,502. B. SHAREHOLDINGS OF CHIEF EXECUTIVE OFFICER (CEO) (INCLUDING MOVEMENTS DURING THE YEAR) Balance of shares as at 1 Oct 20041 Shares acquired during the year in lieu of salary2 Performance shares granted during the year3,4 Value of performance shares granted during the year5 $ Shares acquired during the year through the exercise of options6 Shares resulting from any other change during the year7 Balance of shares held as at 30 Sep 20051,8 Balance of shares held as at Financial Report sign-off date1 1,690,507 89,995 175,000 2,628,500 500,000 (635,787) 1,819,715 1,820,056 1 Balance of shares held at 1 October 2004, 30 September 2005 and 2 November 2005 (Financial Report sign-off date) includes directly held shares, nominally held shares and shares held by personally related entities. 2 All shares acquired in lieu of salary were done so under the Directors’ Share Plan (refer to Section B3 of Note 50) for an overview of the Directors’ Share Plan). 3 The grant of performance shares on 31 December 2004 was approved by shareholders at the 2004 AGM, with the earliest vesting date being 31 December 2006. Refer to Section K3 for further details. 4 Nil performance shares forfeited or vested. The maximum amortisation balance (i.e. 1 October 2005 to vesting date) is $1,645,513 for subsequent financial years, however the value will be nil if the minimum performance hurdle is not achieved. 5 The fair value of performance shares granted during the year is based on the fair value of the shares as at 31 December 2004 ($15.02) multiplied by the number granted. 6 All options held/exercised by the CEO have been approved by shareholders (December 1999 and December 2001). 7 Other shares resulting from any other changes during the year includes the net result of any shares purchased, sold, or acquired under the Dividend Reinvestment Plan. It also includes those shares received on 28 October 2004 in regards to the 2004 incentive (for the period ending 30 September 2004). 8 1,270,176 shares were held nominally as at 30 September 2005. C. OPTIONS GRANTED TO CEO1 Type of options Hurdled2 Hurdled A Hurdled A Hurdled A Hurdled A3 Total Grant date 31-Dec-01 31-Dec-01 31-Dec-02 31-Dec-03 31-Dec-04 First date exercisable 31-Dec-04 31-Dec-03 31-Dec-04 31-Dec-05 31-Dec-06 Date of expiry4 Exercise price5 $ Number granted6,7 Number vested during the year Percentage that vested during the year % Vested and Vested and exercisable as at unexercisable as at 30 Sep 2005 30 Sep 2005 31-Dec-05 31-Dec-07 31-Dec-07 31-Dec-08 31-Dec-08 16.48 16.80 16.69 17.48 20.49 500,000 500,000 1,000,000 1,000,000 500,000 500,000 – 1,000,000 – – 100 – 100 – – – 500,000 500,000 – – – – 500,000 – – 3,500,000 1,500,000 1,000,000 500,000 1 All options held/exercised by the CEO have been approved by shareholders (December 1999 and December 2001). 2 The options may be exercised only if the “ANZ Accumulation Index” over the period from the date on which the options are granted to the last trading day of any month occurring during the relevant exercise period equals or exceeds the “ASX 100 Accumulation Index” calculated over the same period. Refer to Section K1 for Hurdled A details. 3 The fair value per option at the 31 December 2004 grant date is $1.98. Refer to Section I for details of the valuation methodology and inputs. 4 Treatment of options on termination of employment is explained in Section D3 of Note 50. 5 The exercise price is equal to the weighted average share price during the 5 trading days immediately after the Company’s Annual General Meeting. Note, the original exercise price of options issued prior to the Renounceable Rights issue in November 2003, have been reduced by 72 cents because of the dilution of share capital associated with the Renounceable Rights issue. 6 Nil options forfeited or expired during the period. 7 The maximum amortisation balance (i.e. 1 October 2005 to vesting date) is $885,321 for subsequent financial years, however the value will be nil if the minimum performance hurdles are not achieved. D. OPTION HOLDINGS OF CEO (INCLUDING MOVEMENTS DURING THE YEAR)1 Balance as at 1 Oct 2004 Granted during the year as remuneration Value of options granted during the year2 $ Exercised during the year Date of exercise of options Number of Value of ordinary shares options exercised during the year3 $ issued on exercise of options Share price on date of exercise of of options $ Amount paid per share $ Balance as at 30 Sep 2005 Total value of options granted and exercised during the year $ 3,000,000 500,000 990,000 500,000 08-Aug-05 500,000 2,530,000 21.54 16.48 3,000,000 3,520,000 1 All options held/exercised by the CEO have been approved by shareholders (December 1999 and December 2001). 2 The value of options granted during the year is based on the fair value of the option ($1.98) multiplied by the number granted. Refer to section I. for details of the valuation methodology and inputs. 3 The value per option used in this calculation is based on the difference between the volume weighted average price of the Company’s shares traded on the ASX on the day the options were exercised, and the exercise price. This is then multiplied by the number granted. 90 NOTES TO THE FINANCIAL STATEMENTS 51: DIRECTORS AND SPECIFIED EXECUTIVES - RELATED PARTY TRANSACTIONS (CONTINUED) E. DEFERRED SHARES GRANTED TO SPECIFIED EXECUTIVES LTI Deferred Shares1 Name Dr RJ Edgar Total E Funke Kupper Total BC Hartzer Total GK Hodges Total PR Marriott Total S Targett Grant date Vesting date 24-Oct-01 24-Apr-02 23-Oct-02 20-May-03 05-Nov-03 05-Nov-03 11-May-04 05-Nov-04 05-Nov-04 24-Oct-01 24-Apr-02 23-Oct-02 20-May-03 05-Nov-03 11-May-04 05-Nov-04 24-Oct-01 24-Apr-02 23-Oct-02 20-May-03 05-Nov-03 11-May-04 05-Nov-04 24-Oct-01 24-Apr-02 23-Oct-02 20-May-03 05-Nov-03 11-May-04 05-Nov-04 24-Oct-01 24-Apr-02 23-Oct-02 20-May-03 05-Nov-03 11-May-04 05-Nov-04 24-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 05-Nov-06 11-May-07 05-Nov-07 05-Nov-07 24-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 05-Nov-07 24-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 05-Nov-07 24-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 05-Nov-07 24-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 05-Nov-07 05-Nov-04 05-Nov-07 Number granted2,3 2,700 3,200 7,600 8,500 8,889 25,000 8,452 6,519 26,000 96,860 6,000 4,500 8,000 6,800 6,838 6,256 6,018 44,412 2,800 4,600 6,600 6,500 7,408 7,135 9,127 44,170 1,000 1,400 3,800 6,500 5,699 6,586 7,522 32,507 5,700 5,500 9,300 9,100 9,573 9,275 8,475 56,923 6,519 Value of deferred shares granted during the year4 $ Number that vested during the year Percentage that vested during the year % n/a n/a n/a n/a n/a n/a n/a 134,941 538,189 673,130 n/a n/a n/a n/a n/a n/a 124,570 124,570 n/a n/a n/a n/a n/a n/a 188,925 188,925 n/a n/a n/a n/a n/a n/a 155,702 155,702 n/a n/a n/a n/a n/a n/a 175,429 175,429 134,941 2,700 3,200 – – – – – – – 5,900 6,000 4,500 – – – – – 10,500 2,800 4,600 – – – – – 7,400 1,000 1,400 – – – – – 2,400 5,700 5,500 – – – – – 11,200 – 100 100 – – – – – – – 6 100 100 – – – – – 24 100 100 – – – – – 17 100 100 – – – – – 7 100 100 – – – – – 20 – 1 Deferred shares issued as LTI shares were granted under the ANZ Long-Term Incentive Program and relate to those deferred shares granted or vested during the year, and those yet to vest. The shares are restricted for 3 years and may be held in trust for up to ten years. Refer to Section K2 for more details 2 Nil shares forfeited during the year 3 The maximum amortisation balance (i.e. 1 October 2005 to vesting date) for each Specified Executive for subsequent financial years is as follows: Dr RJ Edgar $801,535; E Funke Kupper $220,014; BC Hartzer $275,486; GK Hodges $235,101; PR Marriott $311,436; S Targett $94,397 4 The value of deferred shares granted during the year is based on the volume weighted average price of the Company’s shares traded on the ASX on the day the shares were granted, multiplied by the number granted anz financial report 2005 91 Number that vested during the year Percentage that vested during the year % NOTES TO THE FINANCIAL STATEMENTS 51: DIRECTORS AND SPECIFIED EXECUTIVES - RELATED PARTY TRANSACTIONS (CONTINUED) E. DEFERRED SHARES GRANTED TO SPECIFIED EXECUTIVES (continued) STI Deferred Shares1 Name Dr RJ Edgar Total E Funke Kupper Total BC Hartzer Total GK Hodges Total PR Marriott Total Grant date Vesting date 24-Oct-01 24-Apr-02 23-Oct-02 20-May-03 05-Nov-03 11-May-04 24-Oct-01 24-Apr-02 23-Oct-02 20-May-03 05-Nov-03 11-May-04 24-Oct-01 24-Apr-02 23-Oct-02 20-May-03 05-Nov-03 11-May-04 24-Oct-01 24-Apr-02 23-Oct-02 20-May-03 05-Nov-03 11-May-04 24-Oct-01 24-Apr-02 23-Oct-02 20-May-03 05-Nov-03 11-May-04 24-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 24-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 24-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 24-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 24-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 Number granted2,3 3,891 4,302 6,423 5,622 6,781 7,683 34,702 6,510 5,724 8,554 4,148 7,636 7,052 3,891 4,302 – – – – 8,193 6,510 5,724 – – – – 39,624 12,234 7,058 6,364 4,457 1,992 7,322 7,244 7,058 6,364 – – – – 34,437 13,422 3,128 3,324 4,761 4,503 5,129 5,653 26,498 5,963 5,475 8,527 5,403 7,978 9,604 3,128 3,324 – – – – 6,452 5,963 5,475 – – – – 42,950 11,438 100 100 – – – – 24 100 100 – – – – 31 100 100 – – – – 39 100 100 – – – – 24 100 100 – – – – 27 1 Deferred shares issued as STI shares were granted under a historical ANZ Short-Term Incentive Program and relate to those deferred shares vested during the year and those yet to vest (STI is now delivered generally as 100% cash, therefore no STI deferred shares were granted to Specified Executives during the year. Refer Section C4.1 of Note 50). The shares are restricted for 3 years and may be held in trust for up to ten years 2 Nil shares forfeited during the year 3 The maximum amortisation balance (i.e. 1 October 2005 to vesting date) for each Specified Executive for subsequent financial years is as follows: Dr RJ Edgar $141,285; E Funke Kupper $135,693; BC Hartzer $125,786; GK Hodges $106,248; PR Marriott $167,451 92 NOTES TO THE FINANCIAL STATEMENTS 51: DIRECTORS AND SPECIFIED EXECUTIVES - RELATED PARTY TRANSACTIONS (CONTINUED) E. DEFERRED SHARES GRANTED TO SPECIFIED EXECUTIVES (continued) Other Deferred Shares1 Name S Targett Total Value of deferred shares granted during the year4 $ Number that vested during the year Percentage that vested during the year % Grant date Vesting date 11-May-04 05-Nov-04 13-May-05 11-May-07 05-Nov-07 13-May-08 Number granted2,3 38,419 35,105 32,080 n/a 726,659 707,339 105,604 1,433,998 – – – – – – – – 1 Other deferred shares issued to S Targett relate to the issue of deferred shares (four tranches to the value of $700,000 each to be issued at 6 month intervals in May and November in 2004 and 2005, subject to Board approval and continuing employment) to compensate S Targett for the loss of access to equity as a result of his resignation from his previous employer 2 Nil shares forfeited during the year 3 The maximum amortisation balance (i.e. 1 October 2005 to vesting date) is $1,498,908 for subsequent financial years 4 The value of deferred shares granted during the year is based on the volume weighted average price of the Company’s shares traded on the ASX on the day the shares were granted, multiplied by the number granted F. SHAREHOLDINGS OF SPECIFIED EXECUTIVES (INCLUDING MOVEMENTS DURING THE YEAR) Name Sir J Anderson Dr RJ Edgar E Funke Kupper4 BC Hartzer GK Hodges PR Marriott S Targett Balance of shares as at 1 Oct 20041 Shares granted during the year as remuneration Number of shares acquired during the year through exercise of options Shares resulting from any other change during the year2 Balance of shares held as at 30 Sep 20051,3 12,022 384,214 185,008 79,046 139,397 677,867 38,419 – 32,519 6,018 9,127 7,522 8,475 73,704 22,370 75,000 134,000 – 55,000 80,000 – – (70,000) (135,134) 465 (55,000) (124,709) 1,000 34,392 421,733 189,892 88,638 146,919 641,633 113,123 1 Balance of shares held at 1 October 2004 and 30 September 2005, include directly held shares, nominally held shares and shares held by personally related entities 2 Other shares resulting from any other changes during the year include the net result of any shares purchased, sold or acquired under the Dividend Reinvestment Plan 3 The following shares were held nominally as at 30 September 2005: Sir J Anderson – 55; Dr RJ Edgar – 213,510; E Funke Kupper – 189,242; BC Hartzer –78,607; GK Hodges – 104,012; PR Marriott – 177,930; S Targett – 112,123 4 Amounts shown do not include ANZ Stapled Exchangeable Preferred Securities (ANZ StEPS).E Funke Kupper held 500 ANZ StEPS as at 1 October 2004; this holding remained unchanged up to and including 30 September 2005. No other Specified Executives held ANZ StEPS anz financial report 2005 93 NOTES TO THE FINANCIAL STATEMENTS 51: DIRECTORS AND SPECIFIED EXECUTIVES - RELATED PARTY TRANSACTIONS (CONTINUED) G. OPTIONS GRANTED TO SPECIFIED EXECUTIVES1 Name Type of options2 Grant date First date exercisable Date of expiry3 Sir J Anderson Zero-Priced Zero-Priced 05-Nov-04 13-May-05 05-Nov-04 13-May-05 04-Nov-06 12-May-07 Total Dr RJ Edgar Total E Funke Kupper Total BC Hartzer Total 24-Oct-01 Hurdled A 24-Apr-02 Hurdled A Index Linked 23-Oct-02 Index Linked 20-May-03 05-Nov-03 Hurdled A 11-May-04 Hurdled A Hurdled B 05-Nov-04 25-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 05-Nov-07 24-Oct-08 24-Apr-09 22-Oct-09 19-May-10 04-Nov-10 10-May-11 04-Nov-11 24-Oct-01 Hurdled A 24-Apr-02 Hurdled A Index Linked 23-Oct-02 Index Linked 20-May-03 05-Nov-03 Hurdled A 11-May-04 Hurdled A 05-Nov-04 Hurdled B 25-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 05-Nov-07 24-Oct-08 24-Apr-09 22-Oct-09 19-May-10 04-Nov-10 10-May-11 04-Nov-11 24-Apr-01 Hurdled A 24-Oct-01 Hurdled A 24-Apr-02 Hurdled A 24-Apr-02 Hurdled A Index Linked 23-Oct-02 Index Linked 20-May-03 05-Nov-03 Hurdled A 11-May-04 Hurdled A 05-Nov-04 Hurdled B 25-Apr-04 25-Oct-04 24-Apr-05 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 05-Nov-07 24-Apr-08 24-Oct-08 24-Apr-09 24-Apr-09 22-Oct-09 19-May-10 04-Nov-10 10-May-11 04-Nov-11 Value per option at grant date for options granted during the year7 20.70 22.05 n/a n/a n/a n/a n/a n/a 2.50 n/a n/a n/a n/a n/a n/a 2.50 n/a n/a n/a n/a n/a n/a n/a n/a 2.50 Exercise price4 $ – – 16.33 18.03 17.34 17.60 17.55 18.22 20.68 16.33 18.03 17.34 17.60 17.55 18.22 20.68 12.98 16.33 18.03 18.03 17.34 17.60 17.55 18.22 20.68 Number granted5,6 11,699 10,671 22,370 34,000 41,000 125,000 147,000 66,666 63,115 52,000 528,781 77,000 57,000 131,000 119,000 51,282 46,722 48,000 530,004 42,000 36,000 59,000 50,000 109,000 113,000 55,555 53,279 72,800 590,634 Number vested during the year Percentage that vested during the year Vested and exercisable as at % 30 Sep 2005 11,699 10,671 22,370 34,000 41,000 – – – – – 75,000 77,000 57,000 – – – – – 134,000 – 36,000 59,000 50,000 – – – – – 100 100 100 100 100 – – – – – 14 100 100 – – – – – 25 – 100 100 100 – – – – – – – – – – – – – – – – – – – – – – – – 42,000 36,000 59,000 50,000 – – – – – 145,000 25 187,000 H. OPTION HOLDINGS OF SPECIFIED EXECUTIVES (INCLUDING MOVEMENTS DURING THE YEAR) Name Type of options Sir J Anderson Zero-priced1 Dr RJ Edgar Hurdled Index-Linked E Funke Kupper Hurdled BC Hartzer Index-Linked Hurdled Index-Linked GK Hodges Hurdled PR Marriott Index-Linked Hurdled Index-Linked Other4 S Targett Hurdled Balance as at 1 Oct 2004 – 204,781 272,000 232,004 250,000 295,834 222,000 214,316 176,000 559,057 311,000 11,000 307,377 Granted during the year as remuneration 22,370 52,000 – 48,000 – 72,800 – 60,000 – 67,600 – – 52,000 Resulting from any other change during year – – – – – – – – – – – 442 – Value of options granted during the year1 $ 477,452 130,000 – 120,000 – 182,000 – 150,000 – 169,000 – – 130,000 Exercised during the year ex 11,699 10,671 34,000 41,000 – 77,000 57,000 – – – 26,000 16,000 13,000 – 80,000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1 The value of options granted during the year is based on the fair value of the option multiplied by the number granted. Refer to section I for details of the valuation methodology and inputs 2 The value per option used in this calculation is based on the difference between the volume weighted average price of the Company’s shares traded on the ASX on the day the options were exercised, and the exercise price. This is then multiplied by the number granted 94 NOTES TO THE FINANCIAL STATEMENTS 51: DIRECTORS AND SPECIFIED EXECUTIVES - RELATED PARTY TRANSACTIONS (CONTINUED) Name Type of options2 Grant date First date exercisable Date of expiry3 21-Nov-00 Hurdled A 24-Apr-01 Hurdled A 24-Oct-01 Hurdled A 24-Apr-02 Hurdled A 24-Apr-02 Hurdled A Index Linked 23-Oct-02 Index Linked 20-May-03 Hurdled A 05-Nov-03 11-May-04 Hurdled A 05-Nov-04 Hurdled B 23-Feb-00 Hurdled A 21-Nov-00 Hurdled A 24-Apr-01 Hurdled A 24-Oct-01 Hurdled A 24-Apr-02 Hurdled A Index Linked 23-Oct-02 Index Linked 20-May-03 05-Nov-03 Hurdled A 11-May-04 Hurdled A 05-Nov-04 Hurdled B 22-Nov-03 25-Apr-04 25-Oct-04 24-Apr-05 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 05-Nov-07 23-Feb-03 22-Nov-03 25-Apr-04 25-Oct-04 24-Apr-05 23-Oct-05 20-May-06 05-Nov-06 11-May-07 05-Nov-07 21-Nov-07 24-Apr-08 24-Oct-08 24-Apr-09 24-Apr-09 22-Oct-09 19-May-10 04-Nov-10 10-May-11 04-Nov-11 22-Feb-07 21-Nov-07 24-Apr-08 24-Oct-08 24-Apr-09 22-Oct-09 19-May-10 04-Nov-10 10-May-11 04-Nov-11 Exercise price4 $ 13.62 12.98 16.33 18.03 18.03 17.34 17.60 17.55 18.22 20.68 9.39 13.62 12.98 16.33 18.03 17.34 17.60 17.55 18.22 20.68 Number granted5,6 26,000 16,000 13,000 17,400 50,000 63,000 113,000 42,735 49,181 60,000 450,316 25,000 170,000 80,000 73,000 70,000 153,000 158,000 71,794 69,263 67,600 937,657 Value per option at grant date for options granted during the year7 Number vested during the year Percentage that vested during the year Vested and exercisable as at % 30 Sep 2005 n/a n/a n/a n/a n/a n/a n/a n/a n/a 2.50 n/a n/a n/a n/a n/a n/a n/a n/a n/a 2.50 n/a 2.50 – – 13,000 17,400 50,000 – – – – – 80,400 – – – 73,000 70,000 – – – – – – – 100 100 100 – – – – – 18 – – – 100 100 – – – – – – – – 17,400 50,000 – – – – – 67,400 25,000 170,000 – 73,000 70,000 – – – – – 143,000 15 338,000 – – – – – – – – – Hurdled A Hurdled B 11-May-04 05-Nov-04 11-May-07 05-Nov-07 10-May-11 04-Nov-11 18.22 307,3778 52,000 20.68 359,377 1 Options granted to Specified Executives pertains to these options granted, vested or exercised during the year, options yet to vest and any unexercised options 2 Refer to Section K1 for more details pertaining to hurdled A, hurdled B and index linked options. Refer to Section E2 of Note 50, for further information on zero priced options granted to Sir J Anderson 3 Treatment of options on termination of employment is explained in Section E of Note 50 4 The exercise price is equal to the weighted average share price over the 5 trading days up to and including the grant date. Note, the original exercise price of options issued prior to the Renounceable Rights issue in November 2003, have been reduced by 72 cents because of the dilution of share capital associated with the Renounceable Rights issue. Given index-linked options have a dynamic exercise price, the original exercise price is shown in G (refer to Section K1 for more details) 5 No additional options were granted in the period up to and including 2 November 2005, and nil options forfeited or expired 6 The maximum amortisation balance (i.e. 1 October 2005 to vesting date) for each Specified Executive for subsequent financial years is as follows: Dr RJ Edgar $266,582; E Funke Kupper $218,793; BC Hartzer $272,560; GK Hodges $232,767; PR Marriott $309,425; S Targett $493,628. The value will be nil however, if the minimum performance hurdles are not achieved 7 Refer to section I for details of the valuation methodology and inputs 8 S Targett was granted Hurdled Options to compensate for the loss of equity from S Targett’s previous employer Number of ordinary shares issued on exercise of options Value of options exercised during the year2 $ Share price on date of exercise of options $ Amount paid per share $ Balance as at 30 Sep 2004 Total value of options granted and exercised during the year3 $ 11,699 10,671 34,000 41,000 – 77,000 57,000 – – – 26,000 16,000 13,000 – 80,000 – – – 233,515 229,533 187,982 156,984 – 264,403 214,666 – – – 214,211 142,062 71,875 – 693,116 – – 19.96 21.51 21.86 21.86 – 19.76 21.80 – – – 21.86 21.86 21.86 – 21.64 – – – – – 16.33 18.03 – 16.33 18.03 – – – 13.62 12.98 16.33 – 12.98 – – – – 940,500 181,781 272,000 146,004 250,000 368,634 222,000 219,316 176,000 546,657 311,000 11,442 359,377 474,966 – 599,069 – 182,000 – 578,148 – 862,116 – – 130,000 anz financial report 2005 95 3 Nil options lapsed during the year 4 Other refers to share options granted to a personally related entity. 11,000 of these options were vested and exercisable as at 30 September 2005 GK Hodges Total PR Marriott Total S Targett Total Date of exercise of options 10-Nov-04 17-May-05 20-May-05 20-May-05 – 27-Oct-04 06-May-05 – – – 20-May-05 20-May-05 20-May-05 – 11-May-05 – – – NOTES TO THE FINANCIAL STATEMENTS 51: DIRECTORS AND SPECIFIED EXECUTIVES - RELATED PARTY TRANSACTIONS (CONTINUED) I. OPTION VALUATIONS Option type Grant date Hurdled Hurdled (CEO) Zero-priced Zero-priced 05-Nov-04 31-Dec-04 05-Nov-04 13-May-05 Option value1 $ Exercise price (5 day VWAP) $ Share price at grant $ ANZ expected volatility2 % Option term (years) Vesting period (years) Expected life (years) Expected dividend yield3 % Risk free interest rate4 % 2.50 1.98 20.70 22.05 20.68 20.49 – – 20.70 20.56 n/a n/a 18.50 16.50 n/a n/a 7 4 2 2 3 2 – – 3 2 n/a n/a 5.30 5.50 n/a n/a 5.24 5.10 n/a n/a 1 The Binomial Option Pricing Model (“the model”) is used to assess the value of ANZ’s options (other than zero priced options, for which the value is the volume weighted average price of the Company’s shares traded on the ASX on the day the options were granted). The model utilises probability theory to determine the value of an ANZ option based on likely share prices at the expiry date of the option. In accordance with AASB 1046 and 1046A, the model reflects both the performance hurdles that currently apply to the Hurdled Options and the non-transferability of the options. Under the terms of the Options, the hurdle conditions (outlined in section K) must be met before the options may be exercised during the exercise period 2 Expected volatility represents a measure of the amount by which ANZ’s share price is expected to fluctuate over the life of the options. The measure of volatility used in the model is the annualised standard deviation of the continuously compounded rates of return on the historical share price over a defined period of time preceding the date of grant. This historical average annualised volatility is then used to estimate a reasonable expected volatility over the expected life of the options 3 In estimating the fair value of the ANZ option grant, expected dividends were included in the application of the model. The expected dividend yield applied to the model was based on an analysis of ANZ’s historical dividend payments and yields 4 The risk-free interest rate is based on the implied yield currently available on zero-coupon bonds issued by the Australian government, with a remaining term equal to the expected life of ANZ’s options J. PERFORMANCE SHARE VALUATION Share type Grant date Share value1 $ Share price at grant $ ANZ expected volatility2 % CEO Performance Shares 31-Dec-04 15.02 20.56 16.50 Term of shares (years) 5 Vesting period (years) 2 Expected life (years) Expected dividend yield3 % Risk free interest rate4 % 2 5.40 5.00 1 The Binomial Pricing Model (“the model”) is used to assess the value of the Performance Shares. In accordance with AASB 1046 and 1046A, the model utilises probability theory to determine the value of the performance shares which also reflects the performance hurdle. Under the terms of the performance shares, the hurdle conditions (outlined in Section K) must be met before the shares can vest 2 Expected volatility represents a measure of the amount by which ANZ’s share price is expected to fluctuate over the life of the options. The measure of volatility used in the model is the annualised standard deviation of the continuously compounded rates of return on the historical share price over a defined period of time preceding the date of grant. This historical average annualised volatility is then used to estimate a reasonable expected volatility over the expected life of the performance shares 3 In estimating the fair value of the performance shares, expected dividends were included in the application of the model. The expected dividend yield applied to the model was based on an analysis of ANZ’s historical dividend payments and yields 4 The risk-free interest rate is based on the implied yield currently available on zero-coupon bonds issued by the Australian government, with a remaining term equal to the expected life of the performance shares Comparator Group AMP Limited AXA Asia Pacific Holdings Limited Commonwealth Bank of Australia Insurance Australia Group Limited Macquarie Bank Limited National Australia Bank Limited QBE Insurance Group Limited St George Bank Limited Suncorp-Metway Limited Westpac Banking Corporation K. LEGACY LONG TERM INCENTIVE (LTI) PROGRAMS K1 Options (Granted prior to October 2005) Each option has the following features: n An exercise price (or for index-linked options, the original exercise price) that is set equal to the weighted average sale price of all fully paid ordinary shares in the Company sold on the Australian Stock Exchange during the 1 week prior to and including the date of grant; n A maximum life of 7 years and an exercise period that commences 3 years after the date of grant, subject to performance hurdles being cleared. Options are re-tested monthly (if required) after the commencement of the exercise period; n Upon exercise, each option entitles the option-holder to one ordinary share; n In case of resignation or termination on notice or dismissal for misconduct: options are forfeited; n In case of redundancy: options are pro-rated and a grace period is provided 96 in which to exercise the remaining options (with hurdles waived, if applicable); n In case of retirement, death or total and permanent disablement: A grace period is provided in which to exercise all options (with hurdles waived, if applicable); and n Performance hurdles, which are explained below for each type of option. Hurdled Options (Hurdled B) (Granted November 2004) In November 2004 hurdled options were granted with a relative Total Shareholder Return (TSR) performance hurdle attached. The proportion of options that become exercisable will depend upon the TSR achieved by ANZ relative to the companies in the comparator group shown below. Performance equal to the median TSR of the comparator group will result in half the options becoming exercisable. Performance above median will result in further options becoming exercisable, increasing on a straight-line basis until all of the options become exercisable where ANZ’s TSR is at or above the 75th percentile in the comparator group. n During the deferral period, the Comparator Group AMP Limited AXA Asia Pacific Holdings Limited Commonwealth Bank of Australia Insurance Australia Group Limited Macquarie Bank Limited National Australia Bank Limited QBE Insurance Group Limited St George Bank Limited Suncorp-Metway Limited Westpac Banking Corporation employee is entitled to any dividends paid on the shares; n Shares issued under this plan may be held in trust for up to 10 years; n The value used to determine the number of LTI deferred shares to be allocated has been based on the volume weighted average price of the shares traded on the ASX in the week leading up to and including the date of issue; n In case of resignation or termination on notice or dismissal for misconduct: LTI shares are forfeited; n In case of redundancy: the number of LTI shares that are released is pro-rated according to the time held as a proportion of the vesting period; and n In case of retirement, death or total & permanent disablement: LTI shares are released to executives. Deferred Shares no longer form part of ANZ’s Senior Executive LTI program, however there may be circumstances (such as retention) where this type of equity (including Deferred Share Rights) will be issued. K3 Performance Shares (Granted December 2004 to CEO) In December 2004 Performance Shares were granted to the CEO of ANZ with a relative TSR performance hurdle attached. The proportion of shares that vest will depend upon the TSR achieved by ANZ relative to the companies in the comparator group shown below. Performance equal to the median TSR of the comparator group will result in half the Performance Shares becoming exercisable. Performance above median will result in further Performance Shares becoming exercisable, increasing on a straight-line basis until all of the Performance Shares become exercisable where ANZ’s TSR is at or above the 75th percentile in the comparator group. No dividends will be payable on the shares until they vest, with the earliest possible vesting date being 31 December 2006. NOTES TO THE FINANCIAL STATEMENTS 51: DIRECTORS AND SPECIFIED EXECUTIVES - RELATED PARTY TRANSACTIONS (CONTINUED) Hurdled Options (Hurdled A) (Granted to Executives from February 2000 until July 2002, and from November 2003 until May 2004. Granted to CEO from December 2001 until December 2004.) Until May 2004, hurdled options were granted to executives with the following performance hurdles attached. The following performance hurdles also pertain to the options granted to the CEO during the year: 1. Half the options may only be exercised once ANZ’s TSR exceeds the percentage change in the S&P/ASX 200 Banks (Industry Group) Accumulation Index, measured over the same period (since issue) and calculated as at the last trading day of any month (once the exercise period has commenced); and 2. The other half of hurdled options may only be exercised once the ANZ TSR exceeds the percentage change in the S&P/ASX 100 Accumulation Index, measured over the same period (since issue) and calculated as at the last trading day of any month (once the exercise period has commenced). Index-linked options (Granted from October 2002 to May 2003) Index-linked options have a dynamic exercise price that acts as a built-in performance hurdle, i.e. the exercise price is adjusted in line with the movement in the S&P/ASX 200 Banks (Industry Group) Accumulation Index (excluding ANZ). As an additional constraint, the adjusted exercise price can only be set at or above the original exercise price. They are exercisable between the 3rd and 7th year after grant date, subject to the adjusted exercise price being above the prevailing share price. K2 Deferred Shares (Granted from February 2000) Deferred Shares granted under the Long Term Incentive (LTI) arrangements were designed to reward executives for superior growth whilst also encouraging executive retention and an increase in the Company’s share price. n Shares are subject to a time-based vesting hurdle of 3 years, during which time they are held in trust; anz financial report 2005 97 NOTES TO THE FINANCIAL STATEMENTS 52: DIRECTORS OF CONTROLLED ENTITIES OF THE COMPANY - RELATED PARTY TRANSACTIONS1 LOAN TRANSACTIONS Loans to executive directors of controlled entities are made pursuant to the Executive Directors’ Loan Scheme authorised by shareholders on 18 January 1982. These loans were in the nature of normal personal loans and were made on the same terms and conditions applicable to other eligible employees within the Group in accordance with established policy. OTHER TRANSACTIONS OF DIRECTORS AND PERSONALLY RELATED ENTITIES i) Financial instrument transactions ASIC class order 98/110 dated 10 July 1998 (as amended). Disclosure of financial instrument transactions regularly made by a bank is limited to disclosure of such transactions with a director of the controlled entity concerned or an entity controlled or significantly influenced by the director of the controlled entity. Financial instrument transactions between the directors of the controlled entities or their personally related entities and the Bank during the financial year were in the nature of normal personal banking, investment and deposit transactions. These transactions occurred on an arm’s length basis and on normal commercial terms and conditions no more favourable than those given to other employees or customers. ii) Transactions other than financial instrument transactions of banks All other transactions with directors of the controlled entities of the Company and their personally related entities are conducted on arm’s length terms and conditions, and are deemed trivial or domestic in nature. These transactions are in the nature of deposits, debentures, or investment transactions conducted with non-bank controlled entities. All other transactions with directors’ personally related entities occur within a normal customer or supplier relationship and are on arm’s length terms and conditions. 1 Relates to all other related party disclosures not concerning directors of Australia and New Zealand Banking Group Limited as disclosed in note 51 53: TRANSACTIONS WITH ASSOCIATES AND JOINT VENTURE ENTITIES - RELATED PARTY DISCLOSURES During the course of the financial year the Company and the Group conducted transactions with associates and joint venture entities on normal commercial terms and conditions as shown below: Aggregate Amounts receivable from associates and joint venture entities Interest revenue Dividend revenue Commissions received from ING Australia joint venture Costs recovered from ING Australia joint venture Consolidated The Company 2005 $’000 2004 $’000 2005 $’000 2004 $’000 340,916 15,920 107,298 122,153 9,430 101,835 4,078 38,353 87,026 9,776 305,493 14,464 6,647 114,509 9,430 27,553 2,422 365 80,127 9,761 98 NOTES TO THE FINANCIAL STATEMENTS 54: EXCHANGE RATES The exchange rates used in the translation of the results and the assets and liabilities of major overseas branches and controlled entities are: Euro Great British pound New Zealand dollar United States dollar 2005 2004 2003 Closing Average Closing Average Closing Average 0.6325 0.4325 1.0998 0.7623 0.6024 0.4142 1.0847 0.7657 0.5814 0.3983 1.0700 0.7165 0.5968 0.4054 1.1254 0.7263 0.5847 0.4070 1.1431 0.6795 0.5649 0.3822 1.1139 0.6124 55: IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (AIFRS) Management of the Group’s transition to AIFRS For reporting periods commencing 1 October 2005, the Group is required to prepare financial statements using Australian Equivalents to International Financial Reporting Standards (AIFRS), issued by the Australian Accounting Standards Board. On 1 October 2005, the Group commenced application of AIFRS, covering all financial systems and records. The Group will report for the first time in compliance with AIFRS when the results for the half year ending 31 March 2006 are released. The Group is required to prepare an opening balance sheet in accordance with AIFRS as at 1 October 2004. Most accounting policy adjustments to retrospectively apply AIFRS will be made against retained earnings in this opening balance sheet. However, transitional adjustments relating to those standards for which comparatives are not required will only be made on 1 October 2005. The standards are AASB 132: ‘Financial Instruments: Disclosure and Presentation’, AASB 139: ‘Financial Instruments: Recognition and Measurement’, and AASB 4: ‘Insurance Contracts’. Impact of transition to AIFRS The key impacts identified below are based on accounting policy decisions current at the date of this financial report. Further developments in AIFRS attributable to: n new or revised accounting standards or interpretations issued by the Australian Accounting Standards Board; n additional guidance on the application of AIFRS to the financial industry; or n changes to the Group’s operations if any, may result in changes to accounting policy decisions made to date and, consequently, the likely impacts outlined below. Any such changes will be reflected within the Group’s first AIFRS compliant statement for the half year ending 31 March 2006, or a later financial report as appropriate. The key impacts identified below are separated between those applicable for the comparative financial year (ie from 1 October 2004), and those applicable from 1 October 2005. All amounts are stated on an after tax basis, unless otherwise stated. anz financial report 2005 99 NOTES TO THE FINANCIAL STATEMENTS 55: IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (AIFRS) (CONTINUED) Issues with effective impact from 1 October 2004 The adoption of AIFRS does not impact the carrying amount of goodwill on transition as the Group has elected not to restate past business combinations. Under AIFRS, the past practice of systematically amortising goodwill over the expected period of benefit ceases and is replaced by impairment testing annually or more frequently if events or circumstances indicate that goodwill might be impaired. As a result, the Group amortisation expense for the AIFRS comparative financial year ended 30 September 2005 will decrease by $224 million (including notional INGA goodwill of $43 million). On adoption of AASB 119: ‘Employee Benefits’, surpluses (assets) and/or deficits (liabilities) that arise within defined benefit superannuation schemes will be recognised in the statement of financial position. Under AGAAP, the Group accounts for the defined benefit superannuation schemes on a cash basis and does not currently recognise an asset or liability for the net position of the defined benefit superannuation schemes. The Group has elected to apply the option available under AASB 119 to recognise actuarial gains and losses in the statement of financial position (i.e. the ‘direct to retained earnings’ approach). The non-cash expense reflecting the notional cost of the benefits accruing to members of the defined benefit schemes in respect of service provided over the reporting period is charged to the statement of financial performance. All transitional adjustments and ongoing movements reported for each scheme will be actuarially determined in accordance with AASB 119. At 1 October 2004, the Group will recognise a net liability position of $142 million (Company: $143 million) after recognising a net deferred tax asset of $56 million (Company: $57 million) which will be applied against retained earnings. For the AIFRS comparative year ended 30 September 2005, a $35 million adjustment will be made to retained earnings to recognise a decrease in the Group’s pension liability, representing largely a net actuarial gain (Company: $32 million). The impact on the statement of financial performance of moving from a contributions basis to a service cost basis is not expected to be material for either the Group and Company. The Group currently recognises immediately an expense equal to the full fair value of all deferred shares issued as part of the short term and long term incentive arrangements. The deferred shares vest over one to three years and may be forfeited under certain conditions. The Group does not currently recognise an expense for options issued to staff or for shares issued under the $1,000 employee share plan. On adoption of AASB 2: ‘Share-based Payment’, the Group will recognise an expense for all share based remuneration, including deferred shares and options, and will recognise this expense over the relevant vesting period. The Group has elected to retrospectively apply AASB 2 to share based payments granted prior to 7 November 2002. On 1 October 2004, this change in accounting policy will result in: n the establishment of a share options reserve of $43 million (Company: $43 million) to reflect the fair value of options granted to employees; n a reduction in paid up capital of $49 million (Company: $49 million), in order to reflect the fair value of vested shares; n recognition of a deferred tax liability of $18 million (Company: $16 million); and n a net decrease to retained earnings of $12 million (Company: $13 million). i) Goodwill No initial impact on retained earnings Potential volatility in future earnings ii) Defined benefits superannuation plan Initial reduction in retained earnings Actuarial movements through retained earnings iii) Share based payments Initial reduction in shareholders’ equity Higher ongoing expenses 100 NOTES TO THE FINANCIAL STATEMENTS 55: IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (AIFRS) (CONTINUED) Issues with effective impact from 1 October 2004 (continued) iii) Share based payments (continued) For the AIFRS comparative year ended 30 September 2005, the impact of the change is expected to be: n an increase in the share options reserve of $23 million (Company: $23 million); n an increase in paid up capital of $41 million (Company: $41 million); and n a decrease in profit after tax of $64 million (Company: $57 million). iv) Fee Revenue – financial service fees recognised over the period of service Initial reduction in retained earnings v) Securitisation Additional assets/liabilities recognised vi) Foreign currency translation reserve Initial increase in retained earnings – no change to shareholders’ equity vii) Asset revaluation reserve – balance relating to land and buildings Initial increase in retained earnings – no change to shareholders’ equity viii) Taxation Change in methodology Immaterial impacts Under AASB 118: ‘Revenue’, certain service type fees (such as administration fees) will be deferred and amortised over the period of service. On 1 October 2004, $3 million (Company: $2 million) of fees that have previously been recognised in the statement of financial performance will be recognised as a liability in the statement of financial position, with a corresponding reduction to retained earnings. For the AIFRS comparative year ended 30 September 2005, the impact of this change on the statement of financial performance for the Group and the Company are expected to be immaterial. AIFRS has introduced new requirements for the recognition of financial assets, including those transferred to a special purpose entity for securitisation. The accounting treatment of existing securitisations has been reassessed. Consequently, some vehicles, which were previously not consolidated, are being consolidated by the Group. This will result in an increase in assets and liabilities recorded within the statement of financial position of $4,900 million as at 1 October 2004 for the Group. Vehicles set up for assisting customers securitise their own assets will continue to not be consolidated under AIFRS. For the comparative AIFRS year ended 30 September 2005, the Group will recognise a decrease of $400 million in both assets and liabilities, reflecting the net impact of repayment and securitisation of new assets during the year. Within the Group statement of financial performance, income and expenses will be increased to recognise the income and expense items recorded within these vehicles. The overall impact on net profit is expected to be immaterial. The Group has elected to apply the option under AASB 121: ‘The Effects of Changes in Foreign Exchange Rates’, to reset amounts recorded within the Foreign currency translation reserve to zero. On 1 October 2004, adopting this election will result in an increase in retained earnings of $218 million and $233 million for the Group and the Company respectively. The Group has elected to apply the option under AASB 1: ‘First time Adoption of Australian Equivalents to International Financial Reporting Standards’, to recognise the value of Land and Buildings at deemed cost. As a result, the Group and the Company Asset revaluation reserve of $31 million relating to Land and Buildings will be reset to zero as at 1 October 2004 and adjusted against retained earnings. Under AASB 112: ‘Income taxes’, a balance sheet method of tax effect accounting will be adopted, replacing the ‘statement of financial performance’ approach currently used by the Group. Income tax expense comprises current and deferred taxes, with income tax expense recognised in the statement of financial performance, or recognised in equity to the extent that it relates to items recognised directly in equity. anz financial report 2005 101 NOTES TO THE FINANCIAL STATEMENTS 55: IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (AIFRS) (CONTINUED) Issues with effective impact from 1 October 2004 (continued) viii) Taxation (continued) ix) Intangible assets – software No impact on earnings Reclassification only x) Business Combinations No impact Deferred tax is calculated using the balance sheet method by determining temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the tax base of those assets and liabilities as used for taxation purposes. At 1 October 2004, an additional net deferred tax asset of $14 million (Company: $11 million) will be recognised with a corresponding increase to retained earnings. Capitalised software assets will be reclassified from Premises and Equipment to a separately identifiable intangible asset on transition to AIFRS. For the Group, this will result in a reclassification of $430 million (Company: $375 million) as at 1 October 2004. There will be no impact on the statement of financial performance. At 1 October 2004, the Group has elected under AASB 1: ‘First time Adoption of Australian Equivalents for International Financial Reporting Standards’, to not restate the classification and accounting treatment of business combinations that occurred prior to 1 October 2004. Issues with effective impact from 1 October 2005 xi) Credit loss provisioning Initial increase on retained earnings Volatility in future earnings 102 AASB 139: ‘Financial Instruments: Recognition and Measurement’ adopts an incurred loss approach for credit loss provisioning and provides guidance on the measurement of incurred losses. Provisions are raised for losses that have already been incurred for exposures that are known to be impaired. The estimated losses on these impaired exposures are then discounted to their present value. As this discount unwinds during the period between recognition of impairment and recovery of the written down amount, it is recognised in the statement of financial performance as interest income. The current General Provision in the statement of financial position will be replaced on adoption of AIFRS by a Collective Provision. Exposures not individually known to be impaired are placed into pools of similar assets with similar risk characteristics to be collectively assessed for losses that have been incurred, but not identified yet. The required provision is estimated on the basis of historical loss experience for assets with credit risk characteristics similar to those in the collective pool. The historical loss experience is adjusted based on current observable data. The Collective Provision under AIFRS shares the same underlying measurement objectives as the current General Provision. However, as a result of the application of a new estimation methodology, certain judgemental risk measures have changed. The Group believes that the resulting Collective Provision, while lower than the current General Provision, comfortably falls within the probable range of losses that have been incurred but not identified in our portfolio. On adoption of AIFRS, the current Economic Loss Provisioning (ELP) charge to profit will be replaced by a charge for individual provisions on impaired exposures together with a charge for movements in the Collective Provision. As a result of these changes: n at 1 October 2005, there will be a reduction of $6 million to retained earnings for the Group (Company: $3 million) relating to individual provisions on impaired exposures as a result of discounting estimated future cash flows; n at 1 October 2005, the Collective Provision for the Group will be $307 million less than the AGAAP General Provision (Company: $151 million). After tax, this will result in an increase to retained earnings of $197 million at 1 October 2005 (Company: $102 million). Due to current uncertainty around AIFRS accounting interpretations and the development of Australian industry practice in this area, this Collective Provision on impaired exposures may be subject to further refinement; n individual provisions and movements in the Collective Provision will be charged direct to the statement of financial performance, driving increased earnings volatility; and n movements in the Collective Provision will be driven by changes in portfolio size, portfolio mix, credit risk and economic cycles. NOTES TO THE FINANCIAL STATEMENTS 55: IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (AIFRS) (CONTINUED) Issues with effective impact from 1 October 2005 (continued) xii) Fee Revenue – financial service fees recognised as an adjustment to yield Initial reduction in retained earnings xiii) Derivative financial instruments including hedging Initial reduction in retained earnings Volatility in future earnings New assets and liabilities recognised xiv) Financial instruments classification and measurement Certain assets reclassified and measured at fair value Initial decrease in retained earnings Under AASB 139: ‘Financial Instruments: Recognition and Measurement’, fee income (such as loan approval fees) integral to the yield of an originated financial instrument (such as loans and advances measured at amortised cost), net of any direct incremental costs, will be capitalised and deferred over the expected life of the financial instrument. On 1 October 2005, certain fees that have previously been recognised in the statement of financial performance, will be deferred and recognised against net loans and advances in the statement of financial position with a corresponding reduction to retained earnings. The impact will be $266 million and $195 million for the Group and the Company respectively. The annual impact on net profit from this change is not expected to be material. However, there will be an increase in interest income (offset by a reduction in fee income) and a reclassification to interest earning assets of customer’s liabilities for acceptances of $13,449 million. Under AIFRS, all derivative financial instruments, including those used as hedging instruments, will be measured at fair value and recognised in the statement of financial position. This will require an adjustment to reflect the market value of counterparty risk in the fair value of derivatives. This will result in a decrease in retained earnings of $24 million and $22 million at 1 October 2005 for the Group and Company respectively. (Under AGAAP, counterparty risk is notionally allowed for as part of the General Provision.) At 1 October 2005, recognition of the fair value of derivatives relating to securitisation vehicles and structured finance transactions will reduce retained earnings by $64 million for the Group (Company: $50 million). The Group continues to evaluate hedging relationships and effectiveness for certain structured finance transactions, which may introduce volatility within the statement of financial performance. Accordingly, the likely AIFRS impact cannot be reliably estimated at present. AIFRS permits hedge accounting (if certain criteria are met) for fair value hedges, cash flow hedges and hedges of investments in foreign operations. Fair value and cash flow hedge accounting can only be considered where prospective and retrospective effectiveness tests are met and the hedge relationship has been adequately documented. Ineffectiveness precludes the use of hedge accounting. The Group uses cash flow and fair value hedging in respect of its interest rate risk exposures. As at 1 October 2005, the Group has designated certain fair value and cash flow hedges and financial liabilities as fair value through profit and loss, resulting in an increase in net assets of $97 million (Company: decrease in net assets of $53 million), represented by a decrease in retained earnings of $65 million (Company: $64 million), and an increase in reserves of $162 million (Company: $11 million). Any volatility through the statement of financial performance due to hedge ineffectiveness is not expected to be material. Under AIFRS, certain financial assets of the Group currently carried at amortised cost will be either: n reclassified as available for sale, resulting in measurement at fair value with movements being taken to an ‘Available for Sale’ equity reserve; or n reclassified as financial assets held at fair value through the profit and loss, with movements in fair value being taken to the statement of financial performance. On 1 October 2005, the reclassification of financial assets as either available for sale financial assets or financial assets designated at fair value, will not result in a material adjustment for the Group and the Company. Under AIFRS, most financial liabilities will continue to be recognised at amortised cost and, as a result, there will be no material adjustment to the statements of financial position and performance. Financial instruments will be measured under AIFRS at ‘bid’ or ‘offer’ prices rather than the current use of ‘mid’ prices. On 1 October 2005, this change in measurement will result in a decrease to retained earnings of $5 million for the Group and $4 million for the Company. anz financial report 2005 103 NOTES TO THE FINANCIAL STATEMENTS 55: IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (AIFRS) (CONTINUED) Issues with effective impact from 1 October 2005 (continued) xv) Classification of hybrid financial instruments Reclassification of ANZ StEPS from equity to debt xvi) Accounting for INGA Initial reduction in retained earnings Under AASB 132: ‘Financial Instruments: Disclosure and Presentation’, ANZ StEPS, a hybrid Tier 1 instrument currently treated as equity, will be reclassified as debt. Prepaid issue costs, currently offset against the preference share capital balance, will be capitalised and amortised to interest over a 5 year period from the date of issue. At 1 October 2005, an amount of $987 million will be transferred from Preference Share Capital to Loan Capital, and capitalised prepaid issue costs of $5 million will have been amortised. Ongoing distributions to the holders of ANZ StEPS will be treated as an interest expense in the statement of financial performance rather than as dividends. Under AASB 131: ‘Interests in Joint Ventures’, and in line with current policy, the Group is required to equity account for its interest in INGA. The adoption of AIFRS by INGA will result in the following significant measurement and recognition differences to AGAAP: n increased policy liabilities resulting from a change in the discount rates applied in the actuarial calculation of policy liabilities and the separate presentation and change in basis of deferred acquisition costs (largely commissions) previously included within net policy liabilities; n write-off of the excess of the market value over net assets (EMVONA) for INGA’s life insurance controlled entities, which under AIFRS will no longer be recognised, together with a reassessment of other non-allowable intangibles; and n initial entry fee income previously taken upfront will be deferred and amortised to income over time. The Group’s 49% share of INGA’s net AIFRS adjustment is $181 million, thus reducing the Group’s retained earnings and the carrying value of its interest in INGA as at 1 October 2005. Following the adoption of AIFRS, the Group’s investment in INGA will also be impacted by INGA’s adoption of classifying and measuring its shareholder investments as “available for sale” assets. This change in measurement is likely to result in a reduction in investment return volatility experienced by INGA, as only realised gains and losses will be reported in its net profit. xvii) Accounting for ING New Zealand Immaterial impacts On 30 September 2005, ANZ announced its funds management and life insurance joint venture with ING had been extended through the creation of a New Zealand joint venture. The adoption of AIFRS by ING New Zealand is not expected to have a material impact on the Group’s financial statements. 104 NOTES TO THE FINANCIAL STATEMENTS 55: IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (AIFRS) (CONTINUED) Summary of Financial Impacts A summary of the material after-tax financial impacts of conversion to AIFRS is set out in the following tables: Table 1 represents the impact of the transition to AIFRS on Shareholders’ Equity as at 1 October 2004, for those standards with an effective date of 1 October 2004. Table 2 sets out the additional impacts on Shareholders’ Equity as at 1 October 2005 including those standards with an effective date of 1 October 2005. Table 3 sets out the expected comparative adjustment to the result for the year ended 30 September 2005. References are provided within the tables to the detailed narrative disclosure in the section above. Table 1: Shareholders’ Equity Reconciliation as at 1 October 2004 Shareholders’ Equity Reconciliation Total Shareholders’ Equity under AGAAP as at 1 October 2004 AIFRS 1 October 2004 After Tax Adjustments to Shareholders’ Equity Retained Earnings Impacts: Initial recognition of defined benefit superannuation plans net obligation Net adjustment for share based payments Transfer from Foreign Currency Translation Reserve Transfer from Asset Revaluation Reserve Initial recognition of balance sheet tax effect accounting Other Foreign Currency Translation Reserve Transfer to Retained Earnings Asset Revaluation Reserve Transfer to Retained Earnings Other Reserves and Share Capital Impacts Initial recognition of Share Options Reserve Decrease in paid up capital in respect of share based payments Other Reference Group $m The Company $m 17,925 16,647 ii) iii) vi) vii) viii) vi) vii) iii) iii) (142) (12) 218 31 14 (5) (218) (31) 43 (49) 2 (143) (13) 233 31 11 (4) (233) (31) 43 (49) 2 AIFRS restated Shareholders’ Equity as at 1 October 2004 17,776 16,494 anz financial report 2005 105 NOTES TO THE FINANCIAL STATEMENTS 55: IMPACT OF ADOPTING AUSTRALIAN EQUIVALENTS TO INTERNATIONAL FINANCIAL REPORTING STANDARDS (AIFRS) (CONTINUED) Table 2: Shareholders’ Equity Reconciliation as at 1 October 2005 AIFRS restated Shareholders’ Equity as at 1 October 2004 Other current AGAAP shareholders’ equity movements for the year ended 30 September 2005 1 AIFRS net profit after tax for the year ended 30 September 2005 AIFRS 1 October 2005 after tax adjustments to shareholders’ equity Retained Earnings Impacts: Actuarial movements within defined benefit superannuation plans Adjustment to credit loss provision Deferral of financial services fees recognised as an adjustment to yield Adjustment to reflect counterparty risk in the fair value of derivatives Recognition of fair value of derivatives2 49% share of INGA joint venture opening AIFRS adjustments Other Other Reserves and Share Capital impacts: Movements in share options reserve Movement in paid up capital in respect of share based payments Hedge accounting adjustment to establish cash flow hedging reserve Reclassification of ANZ StEPS hybrid financial instrument from preference share capital to liabilities Other AIFRS Restated Shareholder’s Equity as at 1 October 2005 1 Represents movements in Shareholders’ Equity other than profit for the year: Change in Share Capital Change in Reserves Change in Outside Equity Interests Dividends paid Net adjustment 2 Represents the fair value of derivatives Reference Table 1 Table 3 Group $m The Company $m 17,776 16,494 (1,455) 3,182 (1,150) 2,178 ii) xi) xii) xiii) xiii) xvi) iii) iii) xiii) xv) 35 191 (266) (24) (129) (181) (12) 23 41 162 (987) 2 32 99 (195) (22) (114) – (11) 23 41 11 (987) 2 18,358 16,401 940 (443) 9 (1,961) (1,455) 940 (213) – (1,877) (1,150) n that no longer meet hedge accounting criteria of $65 million for the Group and $64 million for the Company; and n relating to securitisation and structured finance transactions of $64 million for the Group and $50 million for the Company including the impact of designating certain financial liabilities as fair value through profit and loss Table 3: Restatement of AGAAP after tax profit and loss for the year ended 30 September 2005 to an AIFRS comparative basis AGAAP Net Profit After Tax for the year ended 30 September 2005 Writeback of goodwill amortisation Recognition of share based payments expense Other1 Total AIFRS after tax adjustments to Net Profit After Tax for the year ended 30 September 2005 Reference i) iii) Group $m 3,018 The Company $m 2,227 224 (64) 4 164 – (57) 8 (49) AIFRS Net Profit after tax for the year ended 30 September 2005: comparative basis 3,182 2,178 1 Comprises after tax profit impact for n financial services fees recognised over the period of service n income and expense items recorded within securitisation vehicles, and n recognition of non-cash pensions expense for defined benefit superannuation plans, net of AGAAP contributions expense 106 NOTES TO THE FINANCIAL STATEMENTS 56: EVENTS SINCE THE END OF THE FINANCIAL YEAR There were no significant events from 30 September 2005 to the date of this report. anz financial report 2005 107 DIRECTORS’ DECLARATION The directors of Australia and New Zealand Banking Group Limited declare that: a) in the directors’ opinion the financial statements and notes of the Company and the consolidated entity have been prepared in accordance with the Corporations Act 2001, including that they: i) comply with applicable Australian Accounting Standards, and other mandatory professional reporting requirements; and ii) give a true and fair view of the financial position of the Company and of the consolidated entity as at 30 September 2005 and of their performance as represented by the results of their operations and their cash flows, for the year ended on that date; and b) that the directors have received the declaration under section 295A of the Corporations Act 2001; and c) 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. The Company and certain of its wholly owned controlled entities (listed in note 47) have executed a Deed of Cross Guarantee enabling them to take advantage of the accounting and audit relief offered by class order 98/1418 (as amended), issued by the Australian Securities and Investments Commission. The nature of the Deed of Cross Guarantee is to guarantee each creditor payment in full of any debt in accordance with the terms of the Deed of Cross Guarantee. At the date of this declaration, there are reasonable grounds to believe that the Company and its controlled entities which executed the Deed of Cross Guarantee are able, as an economic entity, to meet any obligations or liabilities to which they are, or may become, subject by virtue of the Deed of Cross Guarantee. Signed in accordance with a resolution of the directors. Charles Goode Director 2 November 2005 John McFarlane Chief Executive Officer 108 INDEPENDENT AUDIT REPORT TO THE MEMBERS OF AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED SCOPE We have audited the financial report of Australia and New Zealand Banking Group Limited for the financial year ended 30 September 2005, consisting of the statements of financial performance, statements of financial position, statement of changes in shareholders’ equity, statements of cash flows, accompanying notes 1 to 56 and the directors’ declaration, set out on pages 2 to 108. The financial report includes the consolidated financial statements of the consolidated entity, comprising the Company and the entities it controlled at the end of the year or from time to time during the financial year. The Company’s directors are responsible for the financial report. We have conducted an independent audit of this financial report order to express an opinion on it to the members of the Company. Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance whether the financial report is free of material misstatement. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the financial report, and the evaluation of accounting policies and significant accounting estimates. These procedures have been undertaken to form an opinion whether, in all material respects, the financial report is presented fairly in accordance with Accounting Standards and other mandatory professional reporting requirements in Australia and statutory requirements so as to present a view which is consistent with our understanding of the Company’s and the consolidated entity’s financial position, and performance as represented by the results of their operations and their cash flows. The audit opinion expressed in this report has been formed on the above basis. AUDIT OPINION In our opinion, the financial report of Australia and New Zealand Banking Group Limited is in accordance with: a) the Corporations Act 2001, including: i) giving a true and fair view of the Company’s and the consolidated entity’s financial position as at 30 September 2005 and of their performance for the year ended on that date; and ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and b) other mandatory financial reporting requirements in Australia. KPMG Melbourne, Australia 2 November 2005 Mitch Craig Partner anz financial report 2005 109 CRITICAL ACCOUNTING POLICIES The Group prepares its consolidated financial statements in accordance with Australian Accounting Standards and other authoritative accounting pronouncements. However, notwithstanding the existence of relevant accounting standards, there are a number of critical accounting treatments, which include complex or subjective decisions or assessments. All material changes to accounting policy are approved by the Audit Committee of the Board. HISTORICAL CHANGES There have been no material changes to the Group’s critical accounting policies or their related methodologies over the last 3 years. A brief discussion of critical accounting policies, and their impact on the Group, follows: a) Economic Loss Provisioning Description and Significance The Group recognises an expense for credit losses ‘provision for doubtful debts’ based on the average one year loss expected to be incurred if the same loan portfolio was held over an economic cycle. The provision for doubtful debts is booked to the General Provision which is maintained to cover the losses inherent in the Group’s existing loan portfolio. The method used by the Group for determining the expense charge is referred to as ‘Economic Loss Provisioning’ (ELP). The Group uses ELP models to calculate the expected loss by considering: n the size, composition and risk profile of the current loan portfolio; and n the history of credit losses for each loan portfolio. Ongoing reviews The Group regularly reviews the assumptions used in the ELP models. These reviews are conducted in recognition of the subjective nature of the ELP methodology. Methodologies are updated as improved analysis becomes available. In addition, the robustness of outcomes is reviewed considering the Group’s actual loss experience, and losses sustained by other banks operating in similar markets. To the extent that credit losses are not consistent with previous loss patterns used to develop the assumptions within the ELP methodology, the existing General 110 Provision may be determined to be either in excess of or insufficient to cover credit losses not yet specifically identified. As a result of the reassessments, ELP charge levels may be periodically increased or decreased with a direct impact on profitability. As part of its review of the ELP model outputs, the Group also regularly evaluates the overall level of the General Provision. The Group is required, by APRA prudential standards, to have policies which cover the level of General Provisions that are needed to absorb estimated losses inherent in the credit portfolio. In some limited circumstances, the assessment of the inherent losses in the portfolio may require an additional charge to profits to ensure the adequacy of the General Provision. The Group considers it appropriate to maintain its General Provision in excess of the APRA guidelines. Quantification of Sensitivity The average charge to profit for ELP was 0.25% of average net lending assets or $580 million (Sep 2004: 0.31% or $632 million; Sep 2003: 0.39% or $614 million). As at September 2005, the balance of the General Provision of $2,167 million (Sep 2004: $1,992 million) represents 0.99% (Sep 2004: 1.01%) of risk weighted assets). b) Specific Provisioning Description and Significance The Group maintains a specific provision for doubtful debts arising from its exposure to organisations and credit counterparties. When a specific debt loss is identified as being probable, its value is transferred from the general provision to the specific provision. Specific provisioning is applied when the full recovery of one of the Group’s exposures is identified as being doubtful resulting in the creation of a specific provision equal to the full amount of the expected loss plus any enforcement/recovery expenses. Recoveries resulting from proceeds received from accounts which were written off in prior years are transferred back to the General Provision. Quantification of Sensitivity The recognition of losses has an impact on the size of the General Provision rather than directly impacting profit. However, to the extent that the General Provision is drawn down beyond a prudent amount it will be restored through a transfer from the current year’s earnings. The amount of net transfer from the General Provision to the Specific Provision, net of recoveries, during the year was $357 million (Sept 2004: $443 million; Sep 2003: $527 million). c) Deferred acquisition costs, software assets and deferred income Description and Significance The Group recognises assets and liabilities that represent: n Deferred acquisition costs – direct costs from the acquisition of interest earning assets; n Software assets – direct costs incurred in developing software systems; and n Deferred income – liabilities representing income received in advance of services performed. Deferred acquisition costs – Initially, expenses related to the acquisition of interest earning assets are recognised as part of the cost of acquiring the asset and written-off as an adjustment to its yield over its expected life. For assets subject to prepayment, expected life is determined on the basis of the historical behaviour of the asset portfolio, taking into account prepayments. Commissions paid to third party mortgage brokers are an example of expenditure that is deferred and amortised over the expected average life of a mortgage of 4 years. Software assets – Costs incurred in acquiring and building software and computer systems are capitalised as fixed assets and expensed as depreciation over periods of between 3 and 5 years except for the branch front end applications where 7 years is used. The carrying value of these assets is subject to a ‘recoverable amount test’ to determine their value to the Group. If it is determined that the value of the asset is less than its ‘book’ value, the asset is written down to the recoverable amount. Costs incurred in planning or evaluating software proposals, or in maintaining systems after implementation, are not capitalised. Deferred income – Income received in advance of the Group’s performance of services or in advance of having been earned, is initially recorded as a liability. Once the recognition criteria are met, it is then recognised as income. CRITICAL ACCOUNTING POLICIES (CONTINUED) Quantification of Sensitivity Deferred acquisition costs – At 30 September, the Group’s assets included $524 million (Sep 2004: $465 million) in relation to costs incurred in acquiring interest earning assets. During the year, amortisation of $258 million (Sep 2004: $218 million) was recognised as an adjustment to the yield earned on interest earning assets. Software assets – At 30 September, the Group’s fixed assets included $381 million (Sep 2004: $430 million) in relation to costs incurred in acquiring and developing software. During the year, depreciation expense of $121 million (Sep 2004: $129 million) was recognised. Following prior periods of above average project activity which replaced significant parts of the Group’s core infrastructure, the software depreciation expense is expected to stabilise going forward. Consistent with US accounting rules on software capitalisation, only costs incurred during configuration, coding and installation stages are capitalised. Administrative, preliminary project and post implementation costs including determining performance requirements, vendor selection and training costs are expensed as incurred. Deferred income – At 30 September, the Group’s liabilities included $79 million (Sep 2004: $156 million) in relation to income received in advance. This income is largely comprised of two components: (1) fees received for services not yet completed; and (2) profit made on interest rate swaps from a shortening of the investment term of capital. Under Australian Accounting Standards, this profit is deferred and recognised when the hedged transaction occurs, or immediately if the hedged transaction is no longer expected to occur. The balances of deferred assets and liabilities at 30 September were: Deferred Acquisition Costs Software Assets Personal Esanda New Zealand Business Institutional Other1 Total Deferred acquisition costs analysis Personal Esanda New Zealand Business Institutional Other1 Total 2005 $m 153 284 61 6 20 524 2004 $m 145 250 38 10 22 465 2005 $m 241 5 15 47 73 381 2004 $m 296 8 30 43 53 430 Deferred Income 2004 $m 2005 $m 27 – 15 19 18 79 36 – 41 11 68 156 Balance3 $m 145 250 38 10 22 465 Brokerage amortised $m 2005 Brokerage capitalised2 $m Balance3 $m Brokerage amortised $m 2004 Brokerage capitalised2 $m 63 165 20 4 6 258 71 199 43 – 4 317 153 284 61 6 20 524 64 147 7 – – 218 66 170 30 – 24 290 1 Includes Group Centre, Corporate Australia and Asia Pacific 2 Costs capitalised during the year exclude trailer commissions paid, relating to the acquisition of mortgage assets of $83 million (2004: $87 million) 3 Includes capitalised debt raising expenses d) Derivatives and Hedging Description and Significance The Group buys and sells derivatives as part of its trading operations and to hedge its interest rate risk, foreign exchange risk and equity risks (in ING Australia). The derivative instruments used to hedge the Group’s exposures include: n swaps; n foreign exchange contacts n forward rate agreements; n futures; n options; and n combinations of the above instruments. The Group classifies derivatives into two types according to the purpose they are entered into: trading or hedging. Income and loss relating to trading derivatives is reported in the statement of financial performance as trading income. The fair value of trading derivatives is recorded on a gross basis as other assets or other liabilities as appropriate unless there is a legal right of set off. The fair value of a derivative financial instrument is the net present value of future expected cash flows arising from that instrument. In order to be classified as a hedging derivative the hedging relationship must be expected to be effective. Hedging derivatives are accounted for in the same manner as the underlying asset or liability they are hedging. For example, if the hedged instrument is accounted for using the accrual method, the hedging instrument will also be accounted for using the accrual method. Accounting treatment – Derivative instruments entered into for the purpose of hedging are accounted for on the same basis as the underlying exposures or risks. anz financial report 2005 111 CRITICAL ACCOUNTING POLICIES (CONTINUED) d) Derivatives and Hedging Description and Significance (continued) Derivative instruments entered into to hedge exposures that are not recorded at fair value, do not have their fair values recorded in the Group’s Statement of Financial Position. Exposures hedged by derivatives not recorded at their fair value include risks related to: n revenues from and capital invested into foreign operations; n structured lending transactions; n lending assets; and n funding liabilities. Hedge accounting is only applied when the hedging relationship is identified at the time the Group enters into the hedging derivative transaction. If a hedge ceases to be effective, the hedging derivative transaction will be recognised at fair value. Gains and losses on derivative instruments not carried at their fair value amounts are recognised at the same time as the gain or loss on the hedged exposure is booked. Movements in the value of foreign exchange contracts that are hedging overseas operations are not recognised as income or expenses. Instead these movements are recognised in the Foreign Currency Translation Reserve together with the net difference arising from the translation of the overseas operation. Fair value determination – Derivatives entered into as part of the Group’s trading operations are carried at their fair values with any change in fair value being immediately recognised as part of trading income. Where liquid markets exist, fair value is based on quoted market prices. For certain complex or illiquid derivative instruments, it may be necessary to use projections, estimates and models to determine fair value. e) Special purpose and off balance sheet vehicles The Group may invest in or establish special purpose entities (SPEs), to enable it to undertake specific types of transactions. Where the Group has established SPEs which are controlled by the Group to facilitate transactions undertaken for Group purposes, these are consolidated into the Group’s financial statements. The table below summarises the main types of SPEs that are not consolidated into the Group, the reason for their establishment, and the key risks associated with them. Type of Special Purpose Entity (SPE) Securitisation vehicles Reason for establishment Key Risks Assets are transferred to an SPE which funds the purchase by issuing securities. Enables ANZ or customers to increase diversity of funding sources. The amount disclosed here is the total assets of SPEs managed or arranged by ANZ. It includes SPEs that purchase assets from sellers other than ANZ. ANZ may manage securitisation vehicles, service assets in a vehicle or provide liquidity or other support and retains the risks associated with the provision of these services. Credit and market risks associated with the underlying assets are not retained or assumed by ANZ except to the limited extent that ANZ provides arm’s length services and facilities. SPE Assets 2005 $m 2004 $m 15,181 13,013 Structured finance entities These entities are set up to assist with the structuring of client financing. Managed funds These funds invest in specified investments on behalf of clients. ANZ may retain liquidity risk, if it provides liquidity support to the vehicle. ANZ may also manage these vehicles. 1,243 1,993 INGA, INGNZ and certain subsidiaries of ANZ National Bank Limited, as managers of the funds, expose ANZ to operational and reputational risk. 44,779 39,544 f) Valuation of investment in ING Australia Limited (INGA) Description and significance The Group adopts the equity method of accounting for its 49% interest in INGA. As at 30 September 2005, the Group's carrying value was $1,479 million (September 2004: $1,697 million). The carrying value is subject to a recoverable amount test to ensure that this does not exceed its recoverable amount at the reporting date. 112 Any excess of carrying value above recoverable amount is written off to the statement of financial performance. Quantification of sensitivity During the year the Group engaged Ernst & Young ABC Limited (EY ABC) to provide an independent valuation of INGA for 31 March 2005 assessment purposes. The valuation was a stand alone market based assessment of economic value, and excluded the Group's specific synergies and hedging arrangements. The independent valuation was based on a discounted cashflow approach, with allowance for the cost of capital. EY ABC presented an independent valuation range of $3,458 million to $3,727 million, reflecting a range of sales and cost base assumptions. Based on this review, ANZ believed that no change was required to the carrying value of the investment as at 31 March 2005. A review for 30 September 2005 reporting purposes revealed there were no indicators of impairment and a further independent review was not required. CRITICAL ACCOUNTING POLICIES (CONTINUED) g) Valuation of goodwill in ANZ National Bank Ltd Goodwill arising from the acquisition of National Bank of New Zealand (NBNZ) is systematically amortised over the period of time during which the benefits of the acquisition are expected to arise, such period of benefit not exceeding 20 years. The carrying value of goodwill is reviewed at each balance date and is written down, to the extent that it is no longer supported by probable future benefits. The Group obtained an independent valuation of ANZ National Bank Limited as at 31 March 2005. This valuation, based on a capitalisation of earnings methodology, calculated the value of ANZ National Bank Limited at a New Zealand geographic and New Zealand business unit reporting level. Based on the results of this valuation, no write-down in the carrying value of goodwill was required. At 30 September 2005, a management review was conducted to determine whether there were any indicators of impairment in the carrying value of NBNZ goodwill. The assessment did not indicate the existence of impairment indicators and accordingly no write-down was required. RISK MANAGEMENT ANZ recognises the importance of effective risk management to its business success. Management is committed to achieving strong control and a distinctive risk management capability that enables ANZ business units to meet their performance objectives. ANZ approaches risk through managing the various elements of the system as a whole rather than viewing them as independent and unrelated parts. The Risk function is independent of the business with clear delegations from the Board and operates within a comprehensive framework comprising: n The Board, providing leadership, setting risk appetite/strategy and monitoring progress. n A strong framework for development and maintenance of Group-wide risk management policies, procedures and systems, overseen by an independent team of risk professionals. n The use of sophisticated risk tools, applications and processes to execute the global risk management strategy across the Group. n Business Unit level accountability, as the “first line of defence”, and for the management of risks in alignment with the Group's strategy. n Independent oversight to ensure Business Unit compliance with policies, regulations and laws, and to provide regular risk evaluation and reporting. The various risks inherent in the operations of the Group may be broadly grouped together under the following major categories: Credit Risk The Group has an overall lending objective of sound growth for appropriate returns. The credit risk management framework exists to provide a structured and disciplined process to support this objective. This framework is top down, being defined firstly by the Group's Vision and Values and secondly, by Credit Principles and Policies. The effectiveness of the credit risk management framework is validated through compliance and monitoring processes. These, together with portfolio selection, define and guide the credit process, organisation and staff. Risk Management's responsibilities for credit risk policy and management are executed through dedicated departments, which support the Group's business units. All major Business Unit credit decisions require approval by both business writers and independent risk personnel. Market Risk ANZ has a detailed market risk management and control framework, to support trading activities, which incorporates an independent risk measurement approach to quantify the magnitude of market risk within the trading books. This approach, along with related analysis, identifies the range of possible outcomes that can be expected over a given period of time, and establishes the relative likelihood of those outcomes. Market risk also includes the risk that the Group will incur increased interest expense arising from funding requirements during periods of poor market liquidity (balance sheet or non- traded market risk). ANZ has a separate risk management and control framework for such risks, which is built around a Board-approved policy and limit framework. Within overall strategies and policies, control of market risk exposures at Group level is the responsibility of Market Risk, who work closely with the Markets, and Treasury business units. Operational Risk Risk Management is responsible for establishing the Group's operational risk framework and associated Group-level policies. Business Units are responsible for the identification, analysis, assessment and treatment of operational risks on a day-to-day basis. A Risk Drivers and Controls (or “Scorecards”) Approach to operational risk measurement is used to measure the operational risk profile of individual business units, and to allocate operational risk economic capital. This approach gives business managers a strong and clear incentive to reduce operational risk. Compliance ANZ conducts its business in accordance with all relevant compliance requirements in each point of representation. In order to assist the Group identify, manage, monitor and measure its compliance obligations, the Group has a comprehensive regulatory compliance framework in place, which is consistent with the Australian Standard on Compliance Programs (AS 3806) and which addresses both external (regulatory) and internal compliance. In addition, Group Compliance, a discrete function within Risk Management, is responsible for working in conjunction with Business Unit Compliance teams and other risk management areas to provide a compliance infrastructure and framework to facilitate planning, reporting and management of new and changing business obligations and processes. Assocations with Related Entities ANZ has a policy and compliance plan to provide a framework for managing the risks resulting from associations between the Company, as an Authorised Deposit- taking Institution (ADI), and its “related entities”. Under this policy, all dealings between the Company and its related entities are conducted on an arm’s-length basis, unless approved by the ANZ Board. anz financial report 2005 113 FINANCIAL INFORMATION 1: CROSS BORDER OUTSTANDINGS Cross border outstandings of the Group to countries which individually represented in excess of 0.75% of the Group’s total assets are shown below. There were no cross border outstandings to any other country exceeding 0.75% of total assets. Cross border foreign outstandings are based on the country of domicile of the borrower or guarantor of the ultimate risk and comprise loans (including accrued interest), placements with banks, acceptances and other monetary assets denominated in currencies other than the borrower’s local currency. For certain countries, local currency obligations are also included. Cross border foreign outstandings are before specific and general provisions. At 30 September 2005 USA United Kingdom China At 30 September 2004 United Kingdom USA Governments and other official institutions $m Banks and other financial institutions $m Other commercial and industrial $m 158 94 4 217 177 3,671 2,192 2,393 2,400 3,157 878 2,320 159 2,652 1,184 Total $m 4,707 4,606 2,556 5,269 4,518 % of Group assets 1.6 1.6 0.9 2.0 1.7 2: CERTIFICATES OF DEPOSIT AND TERM DEPOSIT MATURITIES The following table shows the maturity profile of the Group’s certificates of deposit and term deposits in excess of $100,000 issued at 30 September 2005. Between Between Less than 3 months and 6 months and 3 months 12 months 6 months $m $m $m After 1 year $m Total $m 9,129 17,127 26,256 3,733 18,017 21,750 48,006 1,453 2,090 3,543 721 2,887 3,608 7,151 200 1,350 1,550 487 2,044 2,531 4,081 6,730 210 17,512 20,777 6,940 38,289 142 1,004 5,083 23,952 1,146 29,035 8,086 67,324 Australia Certificates of deposit Term deposits Overseas Certificates of deposit Term deposits Total 114 FINANCIAL INFORMATION (CONTINUED) 3: VOLUME AND RATE ANALYSIS The following table allocates changes in interest income and interest expense between changes in volume and changes in rate for the past two years. Volume and rate variances have been calculated on the movement in average balances and the change in the interest rates on average interest earning assets and average interest bearing liabilities. The variance caused by the change of both volume and rate has been allocated in proportion to the relationship of the absolute dollar amounts of each change to the total. Interest earning assets Due from other financial institutions Australia New Zealand Overseas markets Investments in public securities Australia New Zealand Overseas markets Loans, advances and bills discounted Australia New Zealand Overseas markets Other assets Australia New Zealand Overseas markets Intragroup assets Overseas markets Change in interest income Intragroup elimination Interest bearing liabilities Time deposits Australia New Zealand Overseas markets Savings deposits Australia New Zealand Overseas markets Other demand deposits Australia New Zealand Overseas markets Due to other financial institutions Australia New Zealand Overseas markets Commercial paper Australia New Zealand Overseas markets Borrowing corporations’ debt Australia New Zealand Loan capital, bonds and notes Australia New Zealand Overseas markets Other liabilities Australia New Zealand Overseas markets Intragroup liabilities Australia New Zealand Change in interest expense Intragroup elimination Change in net interest income 2005 over 2004 Change due to Rate $m Volume $m Total $m Volume $m 2004 over 2003 Change due to Rate $m 12 (2) 7 53 (45) (17) 1,492 1,041 (34) 40 20 81 (28) 2,620 28 2,648 458 277 (43) 25 26 – 175 71 2 – 4 22 (26) 58 (7) 13 2 482 190 – 43 106 2 7 42 1,929 28 1,957 691 1 13 40 2 28 10 158 390 74 (66) 23 (17) 133 789 (133) 656 79 182 130 36 53 – 75 85 2 1 13 67 12 80 93 19 13 87 24 1 (138) (26) (2) (1) 57 942 (133) 809 (153) 13 11 47 55 (17) (7) 7 84 6 42 68 43 1,650 1,431 40 1,320 2,146 (102) (26) 43 64 105 (6) 25 (75) 17 3,409 3,575 (105) (17) 3,304 3,558 537 459 87 61 79 – 250 156 4 1 17 89 (14) 138 86 32 15 569 214 1 (95) 80 – 6 99 282 557 (45) 26 97 – 115 174 – 28 44 (53) 31 383 20 24 6 522 90 (1) 186 (78) 18 (30) 141 2,871 2,537 (105) 2,766 538 (17) 2,520 1,038 1 8 (11) 46 9 (26) 310 (82) 20 28 (13) 62 8 360 (8) 352 142 11 5 47 36 – 104 (16) – 8 9 19 30 – (4) 10 (4) 42 (6) – 60 64 (24) (123) 37 447 (8) 439 (87) Total $m 8 92 (5) 88 77 17 1,630 2,064 (82) 22 12 (13) 25 3,935 (25) 3,910 424 568 (40) 73 133 – 219 158 – 36 53 (34) 61 383 16 34 2 564 84 (1) 246 (14) (6) (153) 178 2,984 (25) 2,959 951 anz financial report 2005 115 FINANCIAL INFORMATION (CONTINUED) 4: CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk exist if a number of counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Off balance sheet transactions of the Group are substantially with other banks. Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate – construction Real estate – mortgage3 Retail and wholesale trade Other Overseas Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate – construction Real estate – mortgage3 Retail and wholesale trade Other 2005 2004 2003 Loans and advances1 $m Specific provision $m Loans and advances1 $m Specific provision $m Loans and advances1 $m Specific provision $m 5,303 3,912 3,638 4,640 61 2,855 5,736 23,253 3,082 93,275 8,551 7,445 22 13 3 4 – 2 35 26 3 9 18 29 4,592 3,346 3,660 3,548 126 2,667 4,734 19,491 2,368 81,770 7,626 6,552 26 4 7 5 – 1 26 24 3 8 21 84 3,829 2,632 2,632 4,966 51 2,613 5,366 15,648 1,767 69,660 6,821 5,335 71 4 23 5 – 2 5 23 4 11 54 65 161,751 164 140,480 209 121,320 267 11,277 703 1,036 2,376 423 856 4,497 3,022 804 39,634 2,533 6,054 73,215 1 2 7 14 – – 28 17 1 8 14 17 10,551 931 968 3,288 461 604 4,682 2,497 721 35,400 2,233 5,998 43 4 3 9 – 3 21 4 9 6 9 64 2,756 323 534 1,516 274 609 3,654 1,771 472 12,759 1,741 5,058 109 68,334 175 31,467 12 1 5 5 – – 17 19 1 4 9 144 217 484 Total portfolio 234,966 273 208,814 384 152,787 1 Loans and advances exclude acceptances 2 Personal includes non-business loans to individuals through overdrafts, personal loans, credit cards and fully drawn advances 3 Real estate mortgage includes residential and commercial property exposure. Loans within this category are for the purchase of such properties and must be secured by property 116 FINANCIAL INFORMATION (CONTINUED) 4: CONCENTRATIONS OF CREDIT RISK (CONTINUED) Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate – construction Real estate – mortgage3 Retail and wholesale trade Other Overseas Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Government and official institutions Lease finance Manufacturing Personal2 Real estate – construction Real estate – mortgage3 Retail and wholesale trade Other Total portfolio 135,349 585 126,690 1 Loans and advances exclude acceptances 2 Personal includes non-business loans to individuals through overdrafts, personal loans, credit cards and fully drawn advances 3 Real estate mortgage includes residential and commercial property exposure. Loans within this category are for the purchase of such properties and must be secured by property 2002 2001 Loans and advances1 $m Specific provision $m Loans and advances1 $m Specific provision $m 3,436 2,120 2,465 4,603 67 2,503 4,303 14,893 1,152 57,049 5,957 3,990 16 5 28 13 – 2 7 27 5 32 15 61 3,500 2,044 2,293 4,311 122 2,524 4,034 13,435 1,198 49,127 6,017 3,850 102,538 211 92,455 2,526 435 586 1,561 212 844 4,701 1,848 551 11,956 1,648 5,943 32,811 3 1 4 21 – 1 34 7 1 5 15 282 374 2,686 214 361 2,276 372 936 5,153 1,804 921 11,638 2,021 5,853 34,235 104 7 27 3 – 5 11 36 11 13 16 70 303 8 1 1 26 27 4 30 18 9 12 18 43 197 500 anz financial report 2005 117 FINANCIAL INFORMATION (CONTINUED) 5: DOUBTFUL DEBTS – INDUSTRY ANALYSIS Balance at start of year Adjustment for exchange rate fluctuations Acquisition (disposal) of provisions Bad debts written off (refer (i) below) Charge to statement of financial performance Recoveries (refer (ii) below) Total provisions for doubtful debts i) Total write-offs by industry Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Lease finance Manufacturing Personal1 Real estate – construction Real estate – mortgage2 Retail and wholesale trade Other Overseas Other Total write-offs ii) Total recoveries by industry Australia Agriculture, forestry, fishing and mining Business service Entertainment, leisure and tourism Financial, investment and insurance Lease finance Manufacturing Personal1 Real estate – construction Real estate – mortgage2 Retail and wholesale trade Other Overseas Other Total recoveries Net write-offs 2005 $m 2,376 (46) (13) (571) 580 114 2004 $m 2,018 51 273 (680) 632 82 2003 $m 2,081 (98) – (640) 614 61 2002 $m 1,886 (28) – (697) 860 60 2001 $m 2,082 32 – (834) 531 75 2,440 2,376 2,018 2,081 1,886 (20) (20) – (1) (14) (16) (209) (2) (4) (29) (45) (211) (571) – – – – 1 – 50 1 – 1 3 58 114 (457) (86) (4) (5) – (2) (15) (203) (2) (8) (38) (105) (212) (680) – 1 – 1 2 – 46 3 1 2 2 24 82 (4) (11) (3) (9) (22) (10) (177) (10) (11) (42) (15) (326) (640) 2 1 1 1 2 6 24 3 1 3 – 17 61 (72) (8) (4) (8) (7) (17) (237) (12) (19) (47) (37) (229) (697) 3 1 2 – 2 3 27 2 4 3 1 12 60 (14) (6) (5) (7) (11) (22) (292) (13) (13) (97) (28) (326) (834) 5 1 1 2 1 2 30 1 3 2 1 26 75 (598) (579) (637) (759) Ratio of net write-offs to average loans and acceptances 0.2% 0.3% 0.4% 0.4% 0.5% 1 Personal includes non-business loans to individuals through overdrafts, personal loans, credit cards and fully drawn advances 2 Real estate mortgage includes residential and commercial property exposure. Loans within this category are for the purchase of such properties and must be secured by property 118 FINANCIAL INFORMATION (CONTINUED) 6: SHORT TERM BORROWINGS The Group’s short-term borrowings comprise commercial paper, as well as unsecured notes issued by subsidiary borrowing corporations with an original term to maturity of less than one year. The Group has commercial paper programs in the United States, where it issues paper through ANZ (Delaware) Inc., and in Europe and Asia, where the Group issues paper direct. Balance at end of year Commercial paper – ANZ (Delaware) Inc. Commercial paper – other Unsecured notes Weighted average interest rate at end of year Commercial paper – ANZ (Delaware) Inc. Commercial paper – other Unsecured notes Maximum amount outstanding at any month end during year Commercial paper – ANZ (Delaware) Inc. Commercial paper – other Unsecured notes Average amount outstanding during year Commercial paper – ANZ (Delaware) Inc. Commercial paper – other Unsecured notes Weighted average interest rate during year Commercial paper – ANZ (Delaware) Inc. Commercial paper – other Unsecured notes 2005 $m 2004 $m 2003 $m 6,373 14,634 – 3.66% 6.40% – 6,822 14,925 – 5,915 13,072 – 2.71% 6.26% – 7,068 11,712 – 1.68% 5.41% – 7,068 18,387 – 6,485 12,588 – 1.14% 5.53% – 6,981 5,458 – 1.07% 4.76% – 6,988 7,407 7 4,740 5,216 7 1.22% 4.83% 5.85% anz financial report 2005 119 GLOSSARY Asia Pacific provides primarily retail and corporate banking services in the Pacific Region and Asia, including ANZ's share of PT Panin Bank in Indonesia; this division excludes Institutional businesses in the Asia Pacific region that are included in the Institutional result. Corporate consists of Corporate Banking, Business Banking and Small Business Banking in Australia. n Small Business Banking - provides business banking services to metropolitan-based small businesses, with business banking funds under management of up to $50,000. n Business Banking - provides a full range of banking services to metropolitan- based small to medium businesses, with turnover up to $10 million and business banking funds under management of more than $50,000. n Corporate Banking - manages customer relationships and develops financial solutions for medium-sized businesses, with a turnover of $10 million to $150 million. Economic loss provisioning (ELP) charge is determined based on the expected average annual loss of principal over the economic cycle for the current risk profile of the lending portfolio. Equity standardisation. Economic Value Added (EVATM) principles are in use throughout the Group, whereby risk adjusted capital is allocated and charged against business units. Equity standardised profit is determined by eliminating the impact of earnings on each business unit’s book capital and attributing earnings on the business unit’s risk adjusted capital. This enhances comparability of business unit performance. Geographic results are not equity standardised. Esanda and UDC comprises Esanda Finance Corporation Limited and UDC Finance Corporation Limited. They provide vehicle and equipment finance, rental services and fixed and at call investments. Operating in Australia as Esanda and Esanda FleetPartners, and in New Zealand as UDC and Esanda FleetPartners. Group Centre provides support to the other segments in the areas of People Capital, Risk Management, Finance, Operations, Technology, Strategy and Treasury. 120 Impaired assets are loans or other credit facilities where there is reasonable doubt about the collectability of interest, fees (past and future) or principal outstanding, or where concessional terms have been provided because of the financial difficulties of the customer. ING Australia (INGA), the joint venture between the Group and ING Group. Institutional is a segment encompassing businesses that provide a full range of financial services to the Group's largest corporate and institutional customers. n Client Relationship Group - manages customer relationships and develops financial services solutions and strategies for large businesses with a turnover greater than $150 million in Australia and New Zealand and, through corporate clients where the Group has an existing customer relationship, in the United Kingdom, United States and Asia. n Trade and Transaction Services - provides cash management, trade finance, international payments, clearing and custodian services principally to corporate and institutional customers. n Markets - provides origination, underwriting, structuring, risk management, advice and sale of credit and derivative products, foreign exchange and commodity trading and sales-related services, globally. Net non-interest bearing items, which are referred to in the analysis of interest spread and net interest average margin, includes shareholders’ equity, provisions for doubtful debts, and deposits not bearing interest and other liabilities not bearing interest, offset by premises and equipment and other non-interest earning assets. Non-accrual loans are included within interest bearing loans, advances and bills discounted. Net specific provision is the transfer from the general provision to the specific provision (representing new and increased specific provisions less specific provision releases on impaired assets) less recoveries. New Zealand Business comprises n ANZ Retail - operating under the ANZ brand in New Zealand, provides a full range of banking service to personal and business banking customers. n NBNZ Retail - operating under the National Bank brand in New Zealand, provides a full range of banking services to personal customers from youth through to private banking, and business banking customers with turnover up to NZD5 million. n Corporate Banking - incorporates the ANZ and NBNZ brands in New Zealand, and provides financial solutions through a relationship management model for medium-sized businesses with a turnover up to NZD100 million. n Corporate and Structured Financing - n Rural Banking - provides a full range of provides complex financing and advisory services, structured financial products, leasing, private equity, project and leveraged finance and infrastructure investment to ANZ's corporate, institutional, and small business customers. Net advances include gross loans and advances and acceptances less income yet to mature and provisions (for both as at and average volumes). Net interest average margin is net interest income as a percentage of average interest earning assets. Non-assessable interest income is grossed up to the equivalent before tax amount for the purpose of these calculations. Net interest spread is the average interest rate received on interest earning assets less the average interest rate paid on interest bearing liabilities. Non-assessable interest income is grossed up to the equivalent before tax amount for the purpose of these calculations. banking services to rural and agribusiness customers in New Zealand. n NBNZ - refers to the operations of the National Bank of New Zealand Limited purchased on 1 December 2003. These operations were amalgamated with ANZ Banking Group (New Zealand) Limited on 26 June 2004 to form ANZ National Bank Limited. NBNZ was reported as a separate business unit until 30 September 2004. Operating expenses exclude the charge for doubtful debts. Operations, Technology and Shared Services comprises the Group's core support units responsible for operating the Group's global technology platforms, development and maintenance of business applications, information security, the Group's payments back-office processing, and the provision of other essential shared services to the Group, including property, human resources operations, procurement and outsourcing. Total advances include gross loans and advances and acceptances less income yet to mature (for both as at and average volumes). Treasury is the banker to all ANZ businesses charged with providing cashflow support, ensuring liquidity, managing interest rate risk and providing capital to the businesses. Unproductive facilities comprise certain facilities (such as standby letters of credit, bill endorsements, documentary letters of credit and guarantees to third parties, undrawn facilities to which the Group is irrevocably committed and market related exposures) where the customer status is defined as non-accrual. Overseas includes the results of all operations outside Australia, except if New Zealand is separately shown. Overseas markets includes all operations outside of Australia and New Zealand. The Group’s geographic segments are Australia, New Zealand and Overseas markets. Personal comprises the following business in Australia: n Banking Products - manufactures deposit, transaction account and margin lending products. n Consumer Finance - provides consumer and commercial credit cards, ePayment products, personal loans, and merchant payment and ATM facilities. n Mortgages - provides mortgage finance secured by residential real estate in Australia. n Regional Commercial and Agribusiness Products - provides a full range of banking services to personal customers across Australia, and to small business and agricultural customers in rural Australia. n Wealth Management - comprises the equity accounted earnings from INGA’s core business operations (excludes investment earnings) and the Financial Planning distribution business. n Other - includes the branch network, whose costs are full recovered from product business units, Private Banking and marketing and support costs. Service transfer pricing is used to allocate services that are provided by central areas to each of its business units. The objective of service transfer pricing is to remove cross-subsidies between business units, and ensure each business accounts for the cost of the services it uses. Service transfer pricing charges are reported in the profit and loss statement of each business unit as: n Net inter business unit fees - includes intra-group receipts or payments for sales commissions and branch service fees. A product business will pay a distribution channel for product sales. Both the payment and receipt are shown as net inter business unit fees. n Net inter business unit expenses - consists of the charges made to business units for the provision of support services. Both payments by business units and receipts by service providers are shown as net inter business unit expenses. anz financial report 2005 121 ALPHABETICAL INDEX Accounting Policies Associates Auditors’ Report Average Balance Sheet and Related Interest Bonds and Notes Capital Adequacy Certificates of Deposit and Term Deposit Maturities Commitments Concentrations of Credit Risk Contingent Liabilities, Contingent Asset 6 62 109 41 34 39 114 64 116 and Credit Related Commitments 65 27 Controlled Entities 110 Critical Accounting Policies Cross Border Outstandings 114 Customer’s Liabilities for Acceptances 26 27 Deferred Tax Assets 31 Deposits and Other Borrowings 51 Derivative Financial Instruments Directors’ Declaration 108 Directors and Specified Executives - 88 Related Party Transactions Directors of Controlled Entities of the Company - Related Party Transactions 98 13 Dividends Doubtful Debts – Industry Analysis 118 Due from Other Financial Institutions 16 31 Due to Other Financial Institutions 15 Earnings Per Ordinary Share 71 Employee Share and Option Plans Regulatory Deposits Remuneration of Auditors Remuneration Report Risk Management Securitisation Segment Analysis Share Capital Shares in Controlled Entities, Associates and Joint Venture Entities Short Term Borrowings Statements of Cash Flows Statements of Changes in Shareholders’ Equity Statements of Financial Performance Statements of Financial Position Superannuation Commitments Trading Securities Transactions with Associates and Joint Venture Entities - Related Party Disclosures Volume and Rate Analysis 26 12 76 113 56 57 36 61 119 5 4 2 3 69 16 98 115 Equity Instruments Issued to Employees Events Since the End of the Financial Year Exchange Rates Expenses Fiduciary Activities Glossary Goodwill Impaired Assets Income Income Tax Expense Income Tax Liabilities Interest Sensitivity Gap Interest Spreads and Net Interest Average Margins Interests in Joint Venture Entities International Financial 12 107 99 11 64 120 28 23 10 13 32 47 44 62 Reporting Standards 99 Investment Securities 17 Liquid Assets 16 Loan Capital 35 45 Market Risk Net Fair Value of Financial Instruments 49 Net Loans and Advances 20 Notes to the Statements of Cash Flows 59 28 Other Assets 39 Outside Equity Interests 32 Payables and Other Liabilities 29 Premises and Equipment 33 Provisions 25 Provisions for Doubtful Debts 122 THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY anz financial report 2005 123 THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY 124 THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY 124 When people are inspired. A N Z F i n a n c i a l R e p o r t 2 0 0 5 Australia and New Zealand Banking Group Limited www.anz.com ABN 11 005 357 522 Financial Report 2005 

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