Australia and New Zealand Banking Group Annual Report 2006

Plain-text annual report

the rewards of being different. ANZ Financial Report 2006 Income Statements Balance Sheets Statements of Recognised Income and Expense Cash Flow Statements Notes to the Financial Statements 1 Signiﬁ cant Accounting Policies 2 Critical Estimates and Judgements Used in Applying Accounting Policies Income 3 4 Expenses 5 Compensation of Auditors 6 Income Tax Expense 7 Dividends 8 Earnings per Ordinary Share 9 Liquid Assets 10 Due from Other page 2 3 4 5 6 14 16 17 18 19 20 22 22 Financial Institutions 22 11 Trading Securities 23 12 Derivative Financial Instruments 23 13 Available-for-sale Assets and Investment Securities 14 Net Loans and Advances 15 Impaired Financial Assets 16 Provision for Credit Impairment 17 Regulatory Deposits 18 Shares in Controlled Entities, 27 30 31 32 33 Associates and Joint Venture Entities 33 ﬁ nancial report 19 Deferred Tax Assets 20 Goodwill and Other Intangible page 34 Assets 35 21 Other Assets 36 36 22 Premises and Equipment 23 Due to Other Financial Institutions 38 38 24 Deposits and Other Borrowings 39 25 Income Tax Liabilities 39 26 Payables and Other Liabilities 40 27 Provisions 40 28 Bonds and Notes 41 29 Loan Capital 30 Share Capital 43 31 Reserves and Retained Earnings 45 32 Minority Interests 46 33 Average Balance Sheet and 47 50 51 57 Related Interest 34 Interest Spreads and Net Interest Average Margins 35 Financial Risk Management 36 Interest Rate Risk 37 Fair Value of Financial Assets and Financial Liabilities 59 38 Segment Analysis 61 39 Notes to the Cash Flow Statements 64 66 40 Controlled Entities 41 Associates 67 42 Interests in Joint Venture Entities 67 69 43 Fiduciary Activities 44 Commitments 69 45 Contingent Liabilities, Contingent Assets and Credit Related Commitments 70 1 page 46 Superannuation and Other Post Employment Beneﬁ t Schemes 75 47 Employee Share and Option Plans 80 48 Key Management Personnel Disclosures 49 Transactions with Other Related Parties 50 Exchange Rates 51 Impact of Adopting Australian Equivalents to International Financial Reporting Standards 52 Events Since the End of the Financial Year Directors’ Declaration Independent Audit Report Financial Information 1 Cross Border Outstandings 2 Certiﬁ cates of Deposit and Term Deposit Maturities 3 Volume and Rate Analysis 4 Concentrations of Credit Risk 5 Provision for Credit Impairment – Industry Analysis 6 Short Term Borrowings 7 Capital Management Glossary Alphabetical Index 87 89 89 90 108 110 111 112 112 113 114 115 116 117 120 122 Income statements for the year ended 30 September Total income Interest income Interest expense Net interest income Other operating income Share of joint venture proﬁ t from ING Australia and ING New Zealand Share of associates proﬁ t Operating income Operating expenses Proﬁ t before credit impairment and income tax Provision for credit impairment Proﬁ t before income tax Income tax expense Proﬁ t for the year Proﬁ t attributable to minority interests Proﬁ t attributable to shareholders of the Company1,2 Earnings per ordinary share (cents) Basic Diluted Consolidated The Company 2006 $m 20053 $m 2006 $m 20053 $m 25,510 21,297 17,914 14,037 22,301 (15,358) 17,719 (11,901) 14,618 (10,341) 10,948 (7,648) 6,943 5,818 4,277 3,300 3,015 138 56 3,377 149 52 3,296 – – 3,089 – – 10,152 (4,531) 9,396 (4,418) 7,573 (3,250) 6,389 (3,126) Note 3 3 4 3 3 3 4 16 5,621 (407) 4,978 (580) 4,323 (278) 3,263 (388) 5,214 4,398 4,045 2,875 6 (1,522) (1,220) (871) (700) 3,692 3,178 3,174 2,175 4 3,688 3 3,175 – 3,174 – 2,175 8 8 200.0 194.0 169.5 164.4 n/a n/a n/a n/a The notes appearing on pages 6 to 108 form an integral part of these ﬁ nancial statements. 1 The results of 2006 include the impact of these signiﬁ cant items: ■ Settlement of ANZ National Bank claims ($14 million proﬁ t after tax), Company (NIL) ■ Settlement of NHB insurance claim ($79 million proﬁ t after tax), Group and Company The results of 2005 include the impact of the signiﬁ cant item: ■ Gain on sale of NBNZ Life ($14 million proﬁ t after tax), Company (NIL) Includes NBNZ incremental integration costs of $26 million (2005: $52 million) after tax. 2 3 2005 comparatives are not restated for the ﬁ nancial instruments standards being AASB 132, AASB 139 and AASB 4, as permitted under the ﬁ rst time adoption transitional provisions. 2 ANZ Full Financial Report 2006 Balance sheets as at 30 September Assets Liquid assets Due from other ﬁ nancial institutions Trading securities2 Derivative ﬁ nancial instruments Available-for-sale assets/investment securities3 Net loans and advances Customer’s liabilities for acceptances Due from controlled entities Regulatory deposits Shares in controlled entities Shares in associates and joint venture entities Deferred tax assets Goodwill and other intangible assets4 Other assets Premises and equipment Total assets Liabilities Due to other ﬁ nancial institutions Deposits and other borrowings Derivative ﬁ nancial instruments Liability for acceptances Due to controlled entities Current tax liabilities Deferred tax liabilities Payables and other liabilities Provisions Bonds and notes Loan capital Total liabilities Net assets Equity Ordinary share capital Preference share capital Reserves Retained earnings Share capital and reserves attributable to shareholders of the Company Minority interests Total Equity Commitments Contingent liabilities, contingent assets and credit related commitments The notes appearing on pages 6 to 108 form an integral part of these ﬁ nancial statements. Note Consolidated The Company 2006 $m 20051 $m 2006 $m 20051 $m 15,019 9,665 9,179 9,164 10,653 255,410 13,435 – 205 – 2,200 1,384 3,337 5,011 1,109 11,601 6,348 6,285 6,511 10,042 232,490 13,449 – 159 – 1,926 1,389 3,458 6,173 1,054 10,427 6,253 7,508 8,787 8,657 172,155 13,425 9,418 132 11,424 307 867 419 2,690 527 7,191 3,452 5,309 6,027 5,301 153,361 13,449 8,625 113 11,998 92 806 422 2,833 495 335,771 300,885 252,996 219,474 14,118 204,794 8,753 13,435 – 569 1,384 10,679 957 50,050 11,126 12,027 190,322 7,006 13,449 – 199 1,602 7,618 914 39,073 9,137 11,652 128,321 8,442 13,425 12,556 701 999 8,823 688 39,839 10,251 9,029 113,089 6,322 13,449 11,694 281 1,211 5,472 650 32,739 8,452 315,865 281,347 235,697 202,388 19,906 19,538 17,299 17,086 8,271 871 (354) 11,084 19,872 34 8,053 1,858 (46) 9,646 19,511 27 8,271 871 (16) 8,173 8,053 1,858 (135) 7,310 17,299 – 17,086 – 19,906 19,538 17,299 17,086 9 10 11 12 13 14 17 18 18 19 20 21 22 23 24 12 25 25 26 27 28 29 30 30 31 31 32 44 45 1 2005 comparatives are not restated for the ﬁ nancial instruments standards being AASB 132, AASB 139 and AASB 4, as permitted under the ﬁ rst time adoption transitional provisions. 2 3 4 Excludes notional goodwill related to the ING Australia joint venture of $826 million (September 2005: $826 million) and the ING New Zealand joint venture of $79 million (September 2005: Includes bills held in portfolio $1,569 million (September 2005: $1,182 million). In 2005 available-for-sale assets were reported as investment securities. $82 million). 3 Statements of recognised income and expense for the year ended 30 September Items recognised directly in equity1 Currency translation adjustments Exchange differences on translation of foreign operations taken to equity (203) (443) 97 (213) Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m Available-for-sale assets Valuation gain taken to equity Cumulative (gain) transferred to the income statement on sale Cash ﬂ ow hedges Valuation gain taken to equity Transferred to income statement for the year Actuarial (loss)/gain on deﬁ ned beneﬁ t plans Net income/(loss) recognised directly in equity Proﬁ t for the year Total recognised income and expense for the year Total recognised income and expense for the year attributable to minority interests Total recognised income and expense for the year attributable to shareholders of the Company Effect of adoption of AASB 139:2 Available-for-sale reserve Hedging reserve Retained earnings The notes appearing on pages 6 to 108 form an integral part of these ﬁ nancial statements. 1 These items are disclosed net of tax (refer Note 6). 2 No portion is attributable to minority interests. 20 (8) 121 (56) (55) n/a n/a n/a n/a 25 (181) (418) 15 (7) 36 (7) (54) 80 n/a n/a n/a n/a 23 (190) 3,692 3,178 3,174 2,175 3,511 2,760 3,254 1,985 4 3 – – 3,507 2,757 3,254 1,985 (10) 162 (431) (279) n/a n/a n/a n/a (11) 11 (201) (201) n/a n/a n/a n/a 4 ANZ Full Financial Report 2006 Cash ﬂ ow statements for the year ended 30 September Note Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m Cash ﬂ ows from operating activities Interest received Dividends received Fee income received Other income received Interest paid Personnel expenses paid Premises expenses paid Other operating expenses paid Recovery from NHB litigation Income taxes paid Australia Overseas Goods and services tax received (paid) (Increase)/decrease in operating assets Liquid assets – greater than three months Due from other ﬁ nancial institutions Trading securities Regulatory deposits Loans and advances Increase/(decrease) in operating liabilities Deposits and other borrowings Due to other ﬁ nancial institutions Payables and other liabilities Net cash (used in)/provided by operating activities Cash ﬂ ows from investing activities Net (increase)/decrease Available-for-sale assets 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 provided by/(used in) investing activities Cash ﬂ ows from ﬁ nancing activities Net increase (decrease) Due from/to controlled entities Bonds and notes Issue proceeds Redemptions Loan capital Issue proceeds Redemptions Change in minority interests Dividends paid Share capital issues Share capital buyback Euro Trust security issue Euro Trust issue costs Net cash provided by ﬁ nancing activities Net cash (used in)/provided by operating activities Net cash provided by/(used in) investing activities Net cash provided by ﬁ nancing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Foreign currency translation on opening balances Cash and cash equivalents at end of year The notes appearing on pages 6 to 108 form an integral part of these ﬁ nancial statements. 23,014 53 2,082 1,057 (14,676) (2,737) (379) (2,416) 114 (788) (437) (18) (1,300) 1,318 (1,681) (42) (26,848) 16,129 1,859 541 (5,155) 17,868 144 2,303 1,013 (11,414) (2,498) (367) (2,144) – (572) (500) 18 (728) (371) (821) 5 (28,788) 19,856 4,972 (1,339) (3,363) 14,623 1,151 1,434 1,273 (9,311) (1,887) (262) (1,154) 114 (793) (46) – (441) 177 (182) (17) (18,732) 14,736 2,462 1,221 4,366 10,926 475 1,340 1,517 (7,541) (1,702) (251) (931) – (434) (37) – (631) (180) (523) 22 (20,599) 14,085 3,422 (1,375) (2,417) (15,480) 16,239 (17,188) 17,856 (16,880) 13,695 (13,873) 14,421 (289) 14 (250) 19 1,697 1,950 (208) 360 (325) 86 (1,719) (1,138) (230) 10 (161) 12 (239) (3,793) – – (277) 1 (2,370) (2,098) – – 66 1,085 17,506 (8,949) 17,968 (5,025) 14,316 (8,873) 13,691 (4,665) 1,248 (656) – (1,930) 147 (146) – – 7,220 (5,155) 1,950 7,220 4,015 13,702 2,627 20,344 1,225 (93) 8 (1,808) 120 (204) 875 (4) 13,062 (3,363) (1,138) 13,062 8,561 7,854 (2,713) 13,702 1,188 (626) – (1,903) 147 (146) – – 4,169 4,366 (3,793) 4,169 4,742 7,899 929 13,570 1,225 – – (1,724) 120 (204) 875 (4) 10,399 (2,417) (2,098) 10,399 5,884 4,242 (2,227) 7,899 39(a) 39(b) 5 Notes to the ﬁ nancial statements 1: Signiﬁ cant Accounting Policies i) Basis of preparation These consolidated ﬁ nancial statements comprise a general purpose ﬁ nancial report and: comply with the accounts provisions of the Banking Act 1959 have been prepared in accordance with the Australian equivalents to the International Financial Reporting Standards (AIFRS), other authoritive pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act 2001. are presented in Australian dollars have been prepared in accordance with the historical cost convention except that the following assets and liabilities are stated at their fair value: derivative ﬁ nancial instruments, including the fair value of any applicable underlying exposure; assets treated as available- for-sale; ﬁ nancial instruments held for trading; term funding instruments including speciﬁ c bonds and notes; and deﬁ ned beneﬁ t plan assets and liabilities. The preparation of the ﬁ nancial report requires the use of management judgement, estimates and assumptions that affect reported amounts and the application of policies. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable. Actual results may differ from these estimates. Discussion of these critical accounting treatments, which include complex or subjective decisions or assessments, are covered within Note 2. Such estimates may require review in future periods. The Parent entity is an entity of the kind referred to in Australian Securities and Investments Commission class order 98/100, dated 10 July 1998 (as amended). Consequently, amounts in the ﬁ nancial report have been rounded to the nearest million dollars except where otherwise indicated. The ﬁ nancial report was authorised for issue by the directors on 1 November 2006. International Financial Reporting Standards (IFRS) form the basis of Australian Accounting Standards issued by the AASB, being AIFRS. The Group revised its accounting policies effective 1 October 2004 to enable the preparation of ﬁ nancial statements that comply with AIFRS. This is the Group’s ﬁ rst annual ﬁ nancial report prepared in accordance with AIFRS. AASB 1: ‘First-time Adoption of Australian Equivalents to International Financial Reporting Standards’ has been applied in preparing these ﬁ nancial statements. An explanation of how the transition from superseded policies to AIFRS has impacted the Group’s reported ﬁ nancial position, ﬁ nancial performance and cash ﬂ ow, is set out in Note 51. The accounting policies have been consistently applied by all consolidated entities and to all periods presented in the consolidated ﬁ nancial report, and the opening AIFRS balance sheet as at 1 October 2004, except for those policies relating to standards for which comparatives are not restated, as permitted under the ﬁ rst time adoption transitional provisions of AASB 1. The standards are AASB 132: ‘Financial Instruments: Presentation and Disclosure’, AASB 139: ‘Financial Instruments: Recognition and Measurement’, and AASB 4: ‘Insurance Contracts’. Policies applied in respect of the period 1 October 2004 to September 2005 prior to the adoption of these standards are set out as ‘comparative accounting policy’ throughout this note. The Group has elected to early adopt the following accounting standards and amendments: AASB 119: ‘Employee Beneﬁ ts’ (December 2004) AASB 2004-3: ‘Amendments to Australian Accounting Standards’ (December 2004) amending AASB 1, AASB 101: ‘Presentation of Financial Statements’ and AASB 124: ‘Related Party Disclosures’ AASB 2005-3: ‘Amendment to Australian Accounting Standards’ (June 2005) amending AASB 119: ‘Employee Beneﬁ ts’ (December 2004) AASB 2005-4: ‘Amendments to Australian Accounting Standards’ (June 2005) amending AASB 139: ‘Financial Instruments: Recognition and Measurement’, AASB 132: ‘Financial Instruments: Presentation and Disclosure’, AASB 1: ‘First-time Adoption of Australian Equivalents to International Financial Reporting Standards’ (July 2004), AASB 1023: ‘General Insurance Contracts’ and AASB 1038: ‘Life Insurance Contracts’. The following standards and amendments were available for early adoption but have not been applied by the Group in these ﬁ nancial statements: AASB 7: ‘Financial Instruments: Disclosure’. AASB 7 is applicable for annual reporting periods beginning on or after 1 January 2007 AASB 2005-1: ‘Amendments to Australian Accounting Standards’ (May 2005) amending AASB 139. AASB 2005-1 is applicable for annual reporting periods beginning on or after 1 January 2006. 6 ANZ Full Financial Report 2006 AASB 2005-9: ‘Amendments to Australian Accounting Standards’ (September 2005) replacing the presentation requirements for ﬁ nancial instruments in AASB 132. AASB 2005-9 is applicable for annual reporting periods beginning on or after 1 January 2006. AASB 2005-10: ‘Amendments to Australian Accounting Standards’ (September 2005) makes consequential amendments to AASB 132: ‘Financial Instruments: Presentation and Disclosure’, AASB 101: ‘Presentation of Financial Statements’, AASB 114: ‘Segment Reporting’, AASB 117: ‘Leases’, AASB 133: ‘Earnings per Share’, AASB 139: ‘Financial Instruments: Recognition and Measurement’, AASB 1, AASB 4, AASB 1023: ‘General Insurance Contracts’ and AASB 1038: ‘Life Insurance Contracts’ arising from the release of AASB 7. AASB 2005-10 is applicable for annual reporting periods beginning on or after 1 January 2007. The initial application of AASB 7 and AASB 2005-10 is not expected to have an impact on the ﬁ nancial results of the Company and the Group as the standard and the amendment are only concerned with disclosures. AASB 7 requires the disclosure of the signiﬁ cance of ﬁ nancial instruments on an entity’s ﬁ nancial position and performance and of qualitative and quantitative information about exposure to risks arising from ﬁ nancial instruments. AASB 2005-10 amendments arise from the release of AASB 7 and are only applicable when an entity adopts AASB 7. AASB 2005-1 permits the foreign currency risk of a highly probable intragroup forecast transaction to qualify as the hedged item in consolidated ﬁ nancial statements provided that the transaction is denominated in a currency other than the functional currency of the entity entering into that transaction and the foreign currency risk will affect consolidated ﬁ nancial statements. As a result of the amendments introduced by AASB 2005-1, the Group can no longer designate NZD denominated revenues of its New Zealand subsidiary as hedged items. The realised gains on the hedges of future years’ revenues of approximately $141 million (net of tax) are included in the hedging reserve in equity at 30 September 2006. In line with AIFRS requirements, these gains (which would have otherwise been transferred to the income statement in future years as the hedged transactions occurred) were transferred directly to retained earnings at 1 October 2006. Notes to the ﬁ nancial statements 1: Signiﬁ cant Accounting Policies (continued) The initial application of AASB 2005-9 could have an impact on the ﬁ nancial results of the Company and the Group as the amendment could result in liabilities being recognised for ﬁ nancial guarantee contracts that have been provided by the Company and the Group. However, the quantiﬁ cation of the impact is not yet known or reasonably estimable. An exercise to quantify the ﬁ nancial impact is currently being undertaken by the Company and the Group. ii) Consolidation The ﬁ nancial statements consolidate the ﬁ nancial statements of Australia and New Zealand Banking Group Limited (the Company) and all of its controlled entities where it is determined that there is a capacity to control. Where controlled entities 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 power to govern directly or indirectly the ﬁ nancial and operating policies of an entity so as to obtain beneﬁ ts from its activities. Control is usually present when an entity has: power over more than one-half of the voting rights of the other entity; power to govern the ﬁ nancial and operating policies of the other entity; power to appoint or remove the majority of the members of the board of directors or equivalent governing body; or power to cast the majority of votes at meetings of the board of directors or equivalent governing body of the entity. In addition, potential voting rights that are presently exercisable or convertible are taken into account. However, all the facts of a particular situation are considered when determining whether control exists. In relation to special purpose entities, such control is also deemed to exist even where an entity owns less than a majority of the shareholder or Board voting power of such companies, provided that the following factors exist: the majority of the beneﬁ ts from their activities accrue to the entity the entity has the majority of the residual risks and rewards of the special purpose entity. Further detail on special purpose entities is provided in note 2(i). 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 income statement. Shares in associates and joint venture entities are stated in the consolidated balance sheet 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 ﬂ ow methodology. In the course of completing this impairment review other methodologies are considered to determine the reasonableness of the valuation, including the multiples of earnings methodology. In the Company’s ﬁ nancial statements, investments in associates and joint venture entities are carried at cost. All signiﬁ cant activities of the Group, with the exception of the ING Australia Joint Venture, are operated through wholly owned controlled entities. Derecognition The Group enters into transactions where it transfers assets recognised on its balance sheet but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, the transferred assets are not derecognised from the balance sheet. The main types of ﬁ nancial assets that do not qualify for derecognition are debt securities held by counterparties as collateral under repurchase agreements, equity securities lent under securities lending agreements and securitised assets. In transactions where substantially all the risks and rewards of ownership of a ﬁ nancial asset are neither retained nor transferred, the Group derecognises the asset if control over the asset is lost. The rights and obligations retained in the transfer are recognised separately as assets and liabilities as appropriate. In transfers where control over the asset is retained, the Group continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred asset. iii) Foreign currency Functional and presentation currency Items included in the ﬁ nancial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). 7 The consolidated ﬁ nancial statements are presented in Australian dollars, which is the Company’s functional and presentation currency. Translation differences on non-monetary items, such as derivatives measured at fair value through proﬁ t or loss, are reported as part of the fair value gain or loss on these items. For 2006, translation differences on non-monetary items measured at fair value through equity, such as equities classiﬁ ed as available-for-sale ﬁ nancial assets, are included in the available-for-sale reserve in equity. Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from (i) the settlement of such transactions, and (ii) the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies, are recognised in the income statement, except when deferred in equity as qualifying cash ﬂ ow hedges and qualifying net investment hedges. Foreign operations The results and ﬁ nancial position of all Group entities (none of which has the currency of a hyperinﬂ ationary economy), that have a functional currency different from the Group’s presentation currency, are translated into the Group’s presentation currency as follows: (i) assets and liabilities of each foreign operation are translated at the rates of exchange ruling at balance date; (ii) revenue and expenses of each foreign operation are translated at the average exchange rate for the period, unless this average is not a reasonable approximation of the rate prevailing on transaction date, in which case revenue and expenses are translated at the exchange rate ruling at transaction date; and (iii) all resulting exchange differences are recognised in the foreign currency translation reserve. On consolidation, exchange differences arising from borrowings and other currency instruments designated as hedges of net investment in foreign operations, are taken to the foreign currency translation reserve. Notes to the ﬁ nancial statements 1: Signiﬁ cant Accounting Policies (continued) When a foreign operation is disposed, such exchange differences are recognised in the income statement as part of the gain or loss on sale. Fees charged for providing ongoing services (for example, maintaining and administering existing facilities) are recognised as income over the period the service is provided. Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the rate ruling at balance date. iv) Interest income and interest expense Current accounting policy Interest income and interest expense are recognised in the income statement as they accrue, using the effective interest method. The effective interest method calculates the amortised cost of a ﬁ nancial asset or ﬁ nancial liability and allocates the interest income or interest expense, including fees and directly related transaction costs that are an integral part of the effective interest rate, over the expected life of the ﬁ nancial instrument. Income and expense on the ﬁ nancial instruments are recognised on an effective yield basis in proportion to the amount outstanding over the period to maturity or repayment. Loan commitment fees, together with related direct costs, are deferred and recognised as an adjustment to the interest yield on the loan once drawn or immediately to the income statement for expired commitments. Fees and commissions payable to brokers in respect of originating lending business, where these are direct and incremental costs related to the issue of a ﬁ nancial instrument, are deferred in other assets and recognised in interest income as part of the effective interest rate. Comparative period policy Interest on amounts outstanding is accounted for on an accruals basis with the exception of interest on non-accrual loans as set out in note 1(x) under comparative period policy. v) Fee and commission income Current accounting policy Fees and commissions that are integral to the effective interest rate of a ﬁ nancial asset or liability are included in the determination of the effective interest rate. Fees and commissions that relate to the execution of a signiﬁ cant act (for example, advisory or arrangement services, placement fees and underwriting fees) are recognised when the signiﬁ cant act has been completed. Comparative period policy 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. vi) Offsetting of income and expenses Income and expenses are not offset unless required or permitted by an accounting standard. At the Group level, this generally arises in the following circumstances: where transaction costs form an integral part of the effective interest rate of a ﬁ nancial instrument which is measured at amortised cost, these are offset against the interest income generated by the ﬁ nancial instrument where gains and losses relating to fair value hedges are assessed as being effective where gains and losses from a group of similar transactions are reported on a net basis, such as foreign exchange gains and losses where amounts are collected on behalf of third parties, where the Group is acting as an agent only, or where costs are incurred on behalf of customers from whom the Group is reimbursed. vii) Trading securities and other ﬁ nancial assets at fair value through proﬁ t or loss Current accounting policy Trading securities and other ﬁ nancial instruments acquired principally for the purpose of selling in the short-term or which are a part of a portfolio which is managed for short-term proﬁ t-taking are initially recognised and subsequently measured in the balance sheet at their fair value. Additionally, this valuation basis is used as an alternative to hedge accounting for certain ﬁ nancial instruments where certain conditions are met. Changes in the fair value (gains or losses) of these ﬁ nancial instruments are recognised in the income statement in the period in which they occur. 8 ANZ Full Financial Report 2006 Comparative period policy Securities held for trading purposes are recorded at market value. Unrealised gains and losses on revaluation are taken to the income statement. viii) Derivative ﬁ nancial instruments Current accounting policy Derivative ﬁ nancial instruments are contracts whose value is derived from one or more underlying price, index or other variable. They include swaps, forward rate agreements, futures, options and combinations of these instruments. Derivative ﬁ nancial instruments are entered into for trading purposes (including customer-related reasons), or for hedging purposes (where the derivative instruments are used to hedge the Group’s exposures to interest rate risk, currency risk, price risk, credit risk and other exposures relating to non-trading positions). Derivative ﬁ nancial instruments are recognised initially at fair value with gains or losses from subsequent measurement at fair value being recognised in the income statement. Where the derivative is designated effective as a hedging instrument, the timing of the recognition of any resultant gain or loss in the income statement is dependent on the hedging designation. These hedging designations and associated accounting are as follows: Fair value hedge Where the Group hedges the fair value of a recognised asset or liability or ﬁ rm commitment, changes in the fair value of the derivative designated as a fair value hedge are recognised in the income statement. Changes in the fair value of the hedged item attributable to the hedged risk are reﬂ ected in adjustments to the carrying value of the hedged item, which are also recognised in the income statement. Hedge accounting is discontinued when the hedge instrument expires or is sold, terminated, exercised or no longer qualiﬁ es for hedge accounting. The resulting adjustment to the carrying amount of the hedged item arising from the hedged risk is amortised to the income statement over the period to maturity. If the hedged item is sold or repaid, the unamortised fair value adjustment is recognised immediately in the income statement. Notes to the ﬁ nancial statements 1: Signiﬁ cant Accounting Policies (continued) Cash ﬂ ow hedge The Group designates derivatives as cash ﬂ ow hedges where the instrument hedges the variability in cash ﬂ ows of a recognised asset or liability, a foreign exchange component of a ﬁ rm commitment or a highly probable forecast transaction. The effective portion of changes in the fair value of derivatives qualifying and designated as cash ﬂ ow hedges is deferred to the hedging reserve which forms part of shareholders’ equity. Any ineffective portion is recognised immediately in the income statement. Amounts deferred in equity are recognised in the income statement in the period during which the hedged forecast transactions take place. When the hedge expires, is sold, terminated, exercised, or no longer qualiﬁ es for hedge accounting, the cumulative amount deferred in equity remains in the hedging reserve, and is subsequently transferred to the income statement when the hedged item is recognised in the income statement. When a forecast transaction is no longer expected to occur, the amount deferred in equity is recognised immediately in the income statement. Net investment hedge Hedges of net investments in foreign operations are accounted for similarly to cash ﬂ ow hedges. The gain or loss from remeasuring the fair value of the hedging instrument relating to the effective portion of the hedge is deferred in equity and the ineffective portion is recognised immediately in the income statement. Derivatives that do not qualify for hedge accounting All gains and losses from changes in the fair value of derivatives that are not designated in a hedging relationship but are entered into to manage the interest rate and foreign exchange risk of funding instruments are recognised in the income statement. Under certain circumstances, the component of the fair value change in the derivative which relates to current period realised and unrealised interest is included in net interest income. The remainder of the fair value movement is included in other income. Purchases and sales of derivatives that do not qualify for hedge accounting are recognised on trade date, being the date on which the Group commits to purchase or sell the asset. Embedded derivatives Derivatives embedded in ﬁ nancial instruments or other host contracts are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contracts, and the host contracts are not measured at fair value. The embedded derivative is measured at fair value with changes in fair value immediately recognised in the income statement. Cash ﬂ ow treatment Movements in the derivative ﬁ nancial position are recorded in the cash ﬂ ow statement when they are settled on the other ﬁ nancing and investing lines. Set-off arrangements Fair value gains/losses arising from trading derivatives are not offset against fair value gains/losses on the balance sheet 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 income statement, unrealised gains on derivatives are recognised as part of other assets and unrealised losses are recognised as part of other liabilities. Comparative accounting policy Trading derivatives, comprising derivatives entered into for customer-related or for 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 income statement. 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 income statement in the other operating income line. 9 Gains and losses on derivatives related to hedging exposures arising from anticipated transactions are deferred and recognised in the ﬁ nancial 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 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 designated 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 balance sheet. Gains and losses that arise prior to and upon 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 income statement in other income. ix) Available-for-sale assets Current accounting policy Available-for-sale assets comprise non- derivative ﬁ nancial assets which the Group designates as available-for-sale but which are not deemed to be held principally for trading purposes, and include equity investments, certain loans and advances, and ﬁ xed term securities. They are initially recognised at fair value plus transaction costs. Subsequent gains or losses arising from changes in fair value are included as a separate component of equity, the ‘Available-for-sale revaluation reserve’. When the asset is sold the cumulative gain or loss relating to the asset is transferred to the income statement. Where there is objective evidence of impairment on an available-for-sale asset, the cumulative loss related to that asset is removed from equity and recognised in the income statement. If, in a subsequent period, the amount of an impairment loss relating to an available-for-sale debt instrument decreases and the decrease can be linked objectively to an event occurring after the impairment event, the loss is reversed through the income statement. Notes to the ﬁ nancial statements 1: Signiﬁ cant Accounting Policies (continued) Premiums and discounts are included within the calculation of the fair value of the security. Interest income is accrued on an effective yield basis and dividend income is recognised when the right to receive payment is established. Financial assets previously disclosed as investment securities are now predominantly treated as available-for-sale securities. Purchases and sales of available-for-sale ﬁ nancial assets are recognised on trade date, being the date on which the Group commits to purchase or sell the asset. Comparative period policy Investment securities are those which the Group 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 value market disclosures is determined using quoted market prices for securities with the same or similar credit, maturity and yield characteristics. x) Net loans and advances Current accounting policy Net loans and advances are non-derivative ﬁ nancial assets with ﬁ xed or determinable payments that are not quoted in an active market. They arise when the Group provides money to a debtor with no intention of trading the loans and advances. The loans and advances are initially recognised at fair value plus transaction costs that are directly attributable to the issue of the loan or advance. They are subsequently measured at amortised cost using the effective interest method (refer note 1(iv)). They are derecognised when the rights to receive cash ﬂ ows have expired or the Group has transferred substantially all the risks and rewards of ownership. All loans are subject to scrutiny and graded according to the level of credit risk. investment outstanding in respect of the lease. Any unguaranteed operating lease residual is recorded as other assets and not within net loans and advances. At the end of the lease term, goods are disposed of and proceeds received are applied against the residual value. Any resulting gains or losses are recognised through the income statement. xi) Impairment of loans and advances Current accounting policy Loans and advances are reviewed at least at each reporting date for impairment. Credit impairment provisions are raised for exposures, including off-balance sheet items such as commitments and guarantees, that are known to be impaired. Exposures are impaired and impairment losses are recorded if, and only if, there is objective evidence of impairment as a result of one or more loss events that occurred after the initial recognition of the loan and prior to the reporting date, and that loss event or events has had an impact on the estimated future cash ﬂ ows of the individual loan or the collective portfolio of loans that can be reliably estimated. Impairment is assessed individually for assets that are individually signiﬁ cant (or on a portfolio basis for small value loans), and then on a collective basis for those exposures not individually known to be impaired. Exposures that are assessed collectively are placed in pools of similar assets with similar risk characteristics. 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 estimated impairment losses are measured as the difference between the assets carrying amount and the estimated future cash ﬂ ows discounted to their present value. As this discount unwinds during the period between recognition of impairment and recovery of the cash ﬂ ow, it is recognised in interest income. The process of estimating the amount and timing of cash ﬂ ows involves considerable management judgment. These judgments are reviewed regularly to reduce any differences between loss estimates and actual loss experience. Net loans and advances includes direct ﬁ nance provided to customers such as bank overdrafts, credit cards, term loans, ﬁ nance lease receivables and commercial bills. Overdrafts, credit cards, term loans and commercial bills are carried at amortised cost. Customer ﬁ nancing through redeemable preference shares is included within net loans and advances. Dividends received on redeemable preference shares are taken to the income statement as part of interest income. Comparative accounting policy Loans are classiﬁ ed as either productive or non-accrual. 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. 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. Finance lease receivables Finance lease receivables include amounts due from lessees in relation to ﬁ nance leases and hire purchase contracts. A hire purchase contract is one where the Group (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 passes to the customer. The gross amount of contractual payments regarding lease ﬁ nance to business customers that have a ﬁ xed rate and a ﬁ xed term are recorded as gross lease receivables and the unearned interest component is recognised as income yet to mature. Finance lease receivables are initially recognised at amounts equal to the present value of the minimum lease payments, plus the present value of any unguaranteed residual value expected to accrue at the end of the lease term. Finance lease payments are allocated between interest revenue and reduction in the lease receivable over the term of the ﬁ nance lease, reﬂ ecting a constant periodic rate of return on the net 10 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 1: Signiﬁ cant Accounting Policies (continued) The provision for impairment loss (individual and collective) is deducted from loans and advances in the balance sheet and the movement for the reporting period is reﬂ ected in the income statement. When a loan is uncollectible, it is written- off against the related provision for loan impairment. Subsequent recoveries of amounts previously written-off are credited back to the income statement. Where impairment losses recognised in previous periods have subsequently decreased or no longer exist, such impairments are reversed in the income statement. A provision is also raised for off balance sheet items such as commitments and guarantees that are considered to be onerous. Comparative accounting policy The Group recognises an expense for credit losses through a systematic approach drawing on historical loss experience, portfolio composition, internal rating statistics and overlaid by management judgement to ensure the estimated expense reﬂ ects current economic conditions and credit risks. 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 incurred loss by considering: the history of credit loss for each type and risk rate of lending; and the size, composition and risk proﬁ le 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. 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 insufﬁ cient to cover credit losses not yet individually identiﬁ ed. As a result of the reassessments, ELP charge levels may be periodically increased or decreased. Speciﬁ c provisions are raised to cover expected losses, where full recovery of principal is doubtful. All known bad debts are written off in the year in which they are identiﬁ ed. The speciﬁ c provision requirement (representing new and increased speciﬁ c provisions less speciﬁ c provision releases) is transferred from the General Provision to the Speciﬁ c Provision. Recoveries, representing excess transfers to the Speciﬁ c Provision, are credited to the General Provision. Provisions for doubtful debts are deducted from loans and advances in the balance sheet. xii) Leasing Leases as lessee Leases entered into by the Group as lessee are predominantly operating leases, and the operating lease payments are recognised as an expense on a straight-line basis over the lease term. Leases as lessor Contracts to lease assets, and hire purchase agreements are classiﬁ ed as ﬁ nance leases if they transfer substantially all the risks and rewards of ownership of the asset to the customer or an unrelated third party. All other lease contracts are classiﬁ ed as operating leases. The policy for accounting for ﬁ nance leases as lessor is explained in note 1(x) above. xiii) Acceptances Commercial bills accepted but not held in portfolio are accounted for as a liability with a corresponding contra asset. The liability is disclosed as liability for acceptances, and the asset is disclosed as Customer’s liability for acceptances The Group’s own acceptances discounted are held as part of the trading securities portfolio. xiv) Goodwill and other intangible assets Goodwill Goodwill, representing the excess of the purchase consideration over the fair value of the identiﬁ able net assets of a controlled entity at the date of gaining control, is recognised as an asset and not amortised, but assessed for impairment annually and whenever there is an indication that the goodwill may be impaired. This involves, where required, using the discounted cash ﬂ ow (DCF) or the capitalisation of earnings methodology (CEM) to determine the expected future beneﬁ ts of the cash- 11 generating units. Where the assessment results in the goodwill balance exceeding the value of expected future beneﬁ ts, the difference is charged to the income statement. Any impairment of goodwill is not subsequently reversed. Other intangible assets Other intangible assets include costs incurred in acquiring and building software and computer systems (“software”). Software is amortised using the straight- line method over its expected useful life to the Group. The period of amortisation is between 3 and 5 years except for branch front-end applications where 7 years is used. At each reporting date, software assets are reviewed for impairment. If any such indication exists, the recoverable amount of the assets are estimated and compared against the existing carrying value. Where the existing carrying value exceeds the recoverable amount, the difference is charged to the income statement. Costs incurred in planning or evaluating software proposals, or in maintaining systems after implementation, are not capitalised. xv) Premises and equipment Premises and equipment are carried at cost less accumulated depreciation and impairment. The gain 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: 1% Buildings 10% Building integrals Furniture & equipment 10% Computer & ofﬁ ce equipment 12.5%–33% Leasehold improvements are amortised on a straight-line basis over the shorter of their useful lives or remaining terms of the lease. Notes to the ﬁ nancial statements 1: Signiﬁ cant Accounting Policies (continued) Premises and equipment impairment assessment At each reporting date, the carrying amounts of premises and equipment are reviewed for impairment. If any such indication exists, the recoverable amount of the assets are estimated and compared against the existing carrying value. Where the existing carrying value exceeds the recoverable amount, the difference is charged to the income statement. If it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash generating unit to which the asset belongs. A previously recognised impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. xvi) Repurchase agreements Securities sold under repurchase agreements are retained in the ﬁ nancial statements where substantially all the risks and rewards of ownership remain with the Group, and a counterparty liability is disclosed under the classiﬁ cations of due to other ﬁ nancial institutions or payables and other liabilities. The difference between the sale price and the repurchase price is accrued over the life of the repurchase agreement and charged to interest expense in the income statement. Securities purchased under agreements to resell, where the Group does not acquire the risks and rewards of ownership, are recorded as liquid assets, net loans and advances, or due from other ﬁ nancial institutions, depending on the term of the agreement and the counterparty. The security is not included in the balance sheet. Interest income is accrued on the underlying loan amount. Securities borrowed are not recognised in the balance sheet, unless these are sold to third parties, at which point the obligation to repurchase is recorded as a ﬁ nancial liability at fair value with fair value movements included in the income statement. xvii) Capitalised expenses Direct external expenses, comprising direct and incremental costs related to the acquisition of interest earning assets, including structured institutional lending, mortgages and ﬁ nance leases, are initially recognised as part of the cost of acquiring the asset and amortised as part of expected yield over its expected life using the effective interest method. The write-off is to interest income as part of the effective interest rate. 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. xviii) Deposits and other borrowings Deposits and other borrowings include certiﬁ cates of deposit, interest bearing deposits, debentures and other related interest bearing ﬁ nancial instruments. They are measured at amortised cost. The interest expense is recognised using the effective interest method as explained in note 1(iv). xix) Bonds, notes and loan capital Bonds, notes and loan capital are accounted for in the same way as deposits and other borrowings, except for those bonds and notes which are stated at fair value, with fair value movements recorded in the income statement. xx) Employee beneﬁ ts Leave beneﬁ ts 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 calculated and accrued for in respect of all applicable employees (including on-costs) using an actuarial valuation. Deﬁ ned contribution superannuation schemes The Group operates a number of deﬁ ned contribution schemes and also contributes, according to local law, in the various countries in which it operates, to government and other plans that have the characteristics of deﬁ ned contribution schemes. The Group’s contributions to these schemes are recognised as an expense in the income statement when incurred. Deﬁ ned beneﬁ t superannuation schemes The directors have elected under s334(5) of the Corporations Act 2001 to early adopt the December 2004 revision of Australian Accounting Standard AASB 119: ‘Employee Beneﬁ ts’. The Group operates a number of deﬁ ned beneﬁ t schemes. The liability and expense related to providing beneﬁ ts to employees under each deﬁ ned beneﬁ t scheme are calculated by independent actuaries. Initially, a deﬁ ned beneﬁ t liability is recognised, to the extent that the present value of the deﬁ ned beneﬁ t obligation of each scheme, calculated using the Projected Unit Credit Method, is greater than the fair value of each scheme’s assets. Where this calculation results in a beneﬁ t to the Group, a deﬁ ned beneﬁ t asset is recognised. In each subsequent reporting period, ongoing movements in the deﬁ ned beneﬁ t liability or asset carrying value is treated as follows: the net movement relating to the current period’s service cost, interest cost, expected return on scheme assets, past service costs and other costs (such as the effects of any curtailments and settlements) is recognised as an employee expense in the income statement movements relating to actuarial gains and losses are recognised directly in retained earnings contributions incurred are recognised directly against the net deﬁ ned beneﬁ t position. Share-based compensation The Group has various equity settled share-based compensation plans. These are described in Note 47 of the 2006 annual ﬁ nancial report and largely comprise the Employee Share Acquisition Plan and the ANZ Share Option Plan. ANZ ordinary shares: The fair value of ANZ ordinary shares granted under the Employee Share Acquisition Plan is measured at grant date, using the one-day volume weighted average market price of ANZ shares. The fair value is expensed immediately when shares vest immediately or on a straight-line basis over the relevant vesting period. This is recognised as an employee compensation expense with a corresponding increase in equity. 12 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 1: Signiﬁ cant Accounting Policies (continued) Share options: The fair value of share options is measured at grant date, using an option pricing model. The fair value is expensed on a straight-line basis over the relevant vesting period. This is recognised as an employee compensation expense with a corresponding increase in the share options reserve. The option pricing model takes into account the exercise price of the option, the risk-free interest rate, the expected volatility of ANZ ordinary share price and other factors. Market vesting conditions are taken into account in estimating the fair value. Performance rights: From October 2005, ANZ has granted Performance Rights to certain employees. A Performance Right is a right to acquire a share at nil cost to the employee subject to satisfactorily meeting time and performance hurdles. Upon exercise, each Performance Right entitles the holder to one ordinary share in ANZ. The fair value of Performance Rights is determined at grant date using an option pricing model, taking into account market conditions. The fair value is expensed over the relevant vesting period. This is recognised as an employee expense with a corresponding increase in equity. Other adjustments: The amount recognised as an expense is adjusted to reﬂ ect the actual number of shares or share options that vest, except where forfeiture is only due to share prices not achieving the threshold for vesting. xxi) Provisions The Group recognises provisions when there is a present obligation, the future sacriﬁ ce of economic beneﬁ ts is probable, and the amount of the provision can be measured reliably. The amount recognised is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation at reporting date. Where a provision is measured using the cash ﬂ ows estimated to settle the present obligation, its carrying amount is the present value of those cash ﬂ ows. Any expected third party recoveries are recognised as an asset if it is virtually certain that recovery will be received and the amount of the receivable can be measured reliably. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year(s) when the asset and liability giving rise to them are realised or settled, based on tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. The measurement reﬂ ects the tax consequences that would follow from the manner in which the Group, at the reporting date, recovers or settles the carrying amount of its assets and liabilities. Deferred tax liabilities are recognised for all taxable temporary differences, other than those in relation to taxable temporary differences arising from goodwill. Deferred tax liabilities are recognised for taxable temporary differences arising on investments in controlled entities, branches, associates and joint ventures, except where the Group is able to control the reversal of the temporary differences and it is probable that temporary differences will not reverse in the foreseeable future. Deferred tax assets associated with these interests are recognised only to the extent that it is probable that the temporary difference will reverse in the foreseeable future and there will be sufﬁ cient taxable proﬁ ts against which to utilise the beneﬁ ts of the temporary difference. Deferred tax assets, including those related to the tax effects of income tax losses and credits available to be carried forward, are recognised only to the extent that it is probable that future taxable proﬁ ts will be available against which the deductible temporary differences or unused tax losses and credits can be utilised. For details of Tax Consolidation, refer note 6. xxv) Change in accounting policy In the current reporting period the Group has adopted AASB 132: ‘Financial Instruments: Presentation and Disclosure’, AASB 139: ‘Financial Instruments: Recognition and Measurement’ and AASB 4: ‘Insurance Contracts’. This change in accounting policy has been adopted in accordance with the transitional rules of AASB 1, which does not require the restatement of comparative information for ﬁ nancial instruments within the scope of AASB 132, AASB 139 and AASB 4. The impact of this change in accounting policy in the current reporting period is detailed in note 51. xxii) Offsetting of assets and liabilities Assets and liabilities are offset and the net amount reported in the balance sheet only where there is: a current enforceable legal right to offset the asset and liability, and an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. xxiii) Loss contingencies These items are recorded as liabilities on the balance sheet when the following requirements are met: the transaction is probable in that the contingency is likely to occur; and the contingency can be reasonably estimated. Further disclosure is made in note 45, where the above requirements are not met but there is a possible obligation that is higher than remote. Speciﬁ c details are provided together with an estimate of the range or a statement that such an estimate is not possible. xxiv) Income tax Income tax expense Income tax on earnings for the year comprises current and deferred tax and is based on the applicable tax law in each jurisdiction. It is recognised in the income statement as tax expense, except when it relates to items credited directly to equity, in which case it is recorded in equity, or where it arises from the initial accounting for a business combination, in which case it is included in the determination of goodwill. Current tax Current tax is the expected tax payable on taxable income for the year, based on tax rates (and tax laws) which are enacted or substantively enacted by the reporting date, including any adjustment for tax payable in previous years. Current tax for current and prior years is recognised as a liability (or asset) to the extent that it is unpaid (or refundable). Deferred tax Deferred tax is accounted for using the comprehensive tax balance sheet liability method. It is generated by temporary differences between the carrying amounts of assets and liabilities for ﬁ nancial reporting purposes, and the amounts used for taxation purposes. 13 Notes to the ﬁ nancial statements 2: Critical Estimates and Judgements Used in Applying Accounting Policies The Group prepares its consolidated ﬁ nancial statements in accordance with policies which are based on Australian Equivalents to International Financial Reporting Standards, other authoritative accounting pronouncements of the Australian Accounting Standards Board, Urgent Issues Group Interpretations and the Corporations Act of 2001. This involves the Group making estimates and assumptions that affect the reported amounts within the ﬁ nancial statements. Estimates and judgements are continually evaluated and are based on historical factors, including expectations of future events that are believed to be reasonable under the circumstances. All material changes to accounting policies and estimates and the application of these policies and judgements are approved by the Audit Committee of the Board. A brief explanation of critical estimates and judgements, and their impact on the Group, follows: Critical Accounting Estimates and Assumptions Provisions for credit impairment The accounting policy, as explained in note 1(xi), relating to measuring the impairment of loans and advances, requires the Group to assess impairment regularly. The credit provisions raised (individual and collective) represent management’s best estimate of the losses incurred in the loan portfolio at balance date based on their experienced judgement. The collective provision is estimated on the basis of historical loss experience for assets with credit characteristics similar to those in the collective pool. The historical loss experience is adjusted based on current observable data and events and an assessment of the impact of model risk. The use of such judgements and reasonable estimates is considered by management to be an essential part of the process and does not impact on reliability. Individual provisioning is applied when the full collectibility of one of the Group’s loans is identiﬁ ed as being doubtful. Individual and collective provisioning is calculated using discounted expected future cash ﬂ ows. The methodology and assumptions used for estimating both the amount and timing of future cash ﬂ ows are revised regularly to reduce any differences between loss estimates and actual loss experience. Critical judgements in applying the entity’s accounting policies i) Special purpose and off balance sheet entities The Group may invest in or establish special purpose entities (SPEs) to enable it to undertake speciﬁ c types of transactions. The main types of these SPEs are securitisation vehicles, structured ﬁ nance entities, entities used to sell credit protection and managed funds. Where the Group has established SPEs which are controlled by the Group to facilitate transactions undertaken for Group purposes, these are consolidated in the Group’s ﬁ nancial statements. The Group does not consolidate SPEs that it does not control in accordance with the Group’s policy outlined in note 1(ii). As it can sometimes be difﬁ cult to determine whether the Group has control of an SPE, it makes judgments about its exposure to the risks and rewards, as well as about its ability to make operational decisions for the SPE in question. 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 SPE Reason for establishment Key Risks Securitisation vehicles Assets are transferred to an SPE which funds the purchase by issuing securities. This 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. ANZ does not bear the majority of residual rights and rewards. SPE Assets 2006 $m 2005 $m 9,381 11,981 Structured ﬁ nance entities1 These entities are set up to assist with the structuring of client ﬁ nancing. ANZ may manage these vehicles and also provide derivatives. n/a n/a Credit protection Managed funds These entities are set up to allow the Group to sell the credit risk on portfolios. These funds invest in speciﬁ ed investments on behalf of clients. ANZ may manage these vehicles. 2,145 – INGA, INGNZ and certain subsidiaries of ANZ National Bank Limited, as managers of the funds, expose ANZ to operational and reputational risk. 53,760 44,779 1 ANZ’s net investment in the structured ﬁ nance entities is $233 million (30 September 2005: $1,243 million). 14 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 2: Critical Estimates and Judgements Used in Applying Accounting Policies (continued) Impairment testing of purchased goodwill is performed annually in March through an independent valuation, by comparing the recoverable value of the CGU with the current carrying amount of its net assets, including goodwill. Where the current carrying value is greater than fair value a charge for impairment of goodwill will be recorded in the income statement. In determining the fair value of the CGU for testing of the goodwill in ANZ National Bank Ltd, an independent valuation is obtained based on a capitalisation of earnings approach. Under this methodology, valuation multiples (such as the price to earnings (PE) ratio) observed from previous transactions in the banking sector and current price/cash earnings multiples from similar businesses are used to determine an appropriate price/earnings multiple for the CGU. In determining an appropriate price multiple for the valuation, judgement is applied when assessing comparable companies and transactions, particularly with respect to the mix of business, geographic location, growth prospects, riskiness of future earnings and size of the overall business. The results of the independent valuation carried out as at 31 March 2006 showed a fair value in excess of the then current carrying value for the CGU and hence the carrying value of the goodwill was not considered impaired. At 30 September 2006, impairment testing via a management review was conducted to determine whether there were any indicators of impairment in the carrying value of ANZ National Bank Ltd’s goodwill. The assessment involved review of the following indicators of impairment: Performance Operational and regulatory factors Economic and industry factors The assessment did not indicate the existence of impairment indicators and accordingly no write-down was required. ii) Valuation of investment in ING Australia Limited (INGA) The Group adopts the equity method of accounting for its 49% interest in INGA. As at 30 September 2006, the Group’s carrying value was $1,462 million (September 2005: $1,530 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. Any excess of carrying value above recoverable amount is written off to the income statement as an impairment write-down. During the year the Group engaged Ernst & Young [ABC] Limited (EY [ABC]) to provide an independent valuation of INGA for 31 March 2006 assessment purposes. The valuation was a stand alone market based assessment of economic value, and excluded the Group’s speciﬁ c synergies and hedging arrangements. The independent valuation was based on a discounted cashﬂ ow approach, with allowance for the cost of capital. EY [ABC] presented an independent valuation range of $3,955 million to $4,194 million, reﬂ ecting 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 2006. At 30 September 2006, impairment testing via a management review was conducted to determine whether there were any indicators of impairment. The assessment involved review of the following indicators of impairment: Performance Operational and regulatory factors Economic and industry factors The assessment did not indicate the existence of impairment indicators and accordingly no write-down was required. (iii) Valuation of investment in ING (NZ) Holdings Limited (ING NZ) The Group adopts the equity method of accounting for its 49% interest in ING NZ. As at 30 September 2006, the Group’s carrying value was $146 million (September 2005: $131 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. Any excess of carrying value above recoverable amount is written off to the income statement as an impairment write-down. During the year the Group engaged PricewaterhouseCoopers (PwC) to provide an impairment analysis of ING NZ for 31 March 2006 assessment purposes. The valuation was based on a discounted cashﬂ ow approach. PwC presented a valuation range as at 31 December 2005 of $337 million to $371 million (at 30 September 2006 exchange rates), reﬂ ecting a range of sales and cost base assumptions. PwC also considered the additional cash generated by ING NZ in the period between 31 December 2005 and 31 March 2006 in order to provide an assessment as at 31 March 2006 of the appropriateness of the carrying value. Based on this review ANZ believed that no change was required to the carrying value of the investment as at 31 March 2006. At 30 September 2006, impairment testing via a management review was conducted to determine whether there were any indicators of impairment based on the 31 March 2006 valuation. The assessment involved review of the following indicators of impairment: Performance Operational and regulatory factors Economic and industry factors The assessment did not indicate the existence of impairment indicators and accordingly no write-down was required. iv) Goodwill and valuation of goodwill in ANZ National Bank Ltd 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 beneﬁ ts. Any excess of carrying value over recoverable amount is taken to the income statement as an impairment write-down. As at 30 September 2006, the balance of goodwill recorded as an asset in ANZ National Bank Ltd was $2,828 million (30 September 2005: $2,943 million). Goodwill is allocated to cash-generating units (CGU) for the purpose of impairment testing, which is undertaken at the lowest level at which goodwill is monitored for internal management reporting purposes. 15 Notes to the ﬁ nancial statements 3: Income Interest income Other ﬁ nancial institutions Trading securities Available-for-sale assets Loans and advances Acceptances Other Controlled entities Total interest income Other operating income Lending1 Non lending fees and commissions Controlled entities Total fee and commission income Fee and commission expense Net fee and commission income ii) Other income Net foreign exchange earnings Net gains/(losses) from trading securities2 Net gains/(losses) from trading derivatives Fair value movements on ﬁ nancial instruments measured at fair value through proﬁ t or loss3 Signiﬁ cant item: Net proﬁ t before tax from the sale of NBNZ Life to new joint venture ING NZ Signiﬁ cant item: Settlement of ANZ National Bank Limited claims Life insurance margin on services operating income Proﬁ t (loss) on sale of premises4 Rental income Dividends received from controlled entities Other Total other income Total other operating income Share of joint venture proﬁ t from ING Australia and ING NZ5 (refer note 42) Share of associates proﬁ t (net of write-offs) (refer note 41) Total share of joint venture and associates proﬁ t Total income6 Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 407 526 736 18,802 969 861 22,301 – 258 303 519 16,178 – 461 17,719 – 254 384 448 11,791 969 507 14,353 265 127 254 242 9,826 – 286 10,735 213 22,301 17,719 14,618 10,948 430 1,956 2,386 – 2,386 (241) 1,043 1,800 2,843 – 2,843 (232) 336 1,343 1,679 173 1,852 (175) 856 1,190 2,046 218 2,264 (169) 2,145 2,611 1,677 2,095 447 (7) 216 49 – 14 – 2 2 – 147 870 454 33 101 – 14 – 18 6 2 – 138 766 203 (17) 167 36 – – – – 2 1,145 83 1,619 351 40 77 – – – – (3) 2 478 49 994 3,015 3,377 3,296 3,089 138 56 194 149 52 201 – – – – – – 25,510 21,297 17,914 14,037 1 Lending fees in 2006 exclude fees treated as part of the effective yield calculation and included in interest income (refer note 1(iv)). 2 Does not include interest income. 3 Includes any fair value movements (excluding realised and accrued interest) on derivatives entered into to manage interest rate and foreign exchange risk on funding instruments, not designated as accounting hedges, ineffective portions of cashﬂ ow hedges, and fair value movements in bonds and notes designated at fair value. 4 Gross proceeds on sale of premises is $4 million (2005: $9 million). 5 A joint venture entity from 30 September 2005. 6 Total income includes external dividend income of $53 million (2005: $106 million) for the Group and $6 million (2005: $7 million) for the Company. 16 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 4: Expenses Interest expense Financial institutions Deposits Borrowing corporations’ debt Commercial paper Acceptances Loan capital, bonds and notes Other Controlled entities Total interest expense Operating expenses i) Personnel Employee entitlements and taxes Salaries and wages Superannuation costs – deﬁ ned beneﬁ t plans (refer note 46) Superannuation costs – deﬁ ned contribution plans Equity-settled share-based payments (refer note 47) Temporary staff Other Total personnel expenses ii) Premises Amortisation of leasehold improvements (refer note 22) Depreciation of buildings and integrals (refer note 22) Rent Utilities and other outgoings Other Total premises expenses iii) Computer Computer contractors Data communication Depreciation and amortisation1 Rentals and repairs Software purchased Other Total computer expenses iv) Other Advertising and public relations Amortisation of other intangible assets (refer note 20) Audit fees (refer note 5) Depreciation of furniture and equipment (refer note 22) Freight and cartage Loss on sale of equipment Non-lending losses, frauds and forgeries Postage and stationery Professional fees Signiﬁ cant item: Settlement of NHB insurance claim Telephone Travel Other Total other expenses v) Restructuring Total operating expenses Total expenses Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 636 8,000 652 1,440 809 3,387 434 345 6,732 643 1,135 – 2,477 569 15,358 – 11,901 – 527 5,296 – 245 809 2,537 299 9,713 628 15,358 11,901 10,341 207 1,746 11 160 76 121 408 2,729 190 1,625 16 143 80 111 364 2,529 18 15 228 128 25 414 47 57 208 68 117 52 549 175 3 9 48 47 4 55 116 127 (113) 56 136 125 788 51 16 11 213 122 32 394 53 60 235 58 115 37 558 161 3 7 43 45 9 62 113 123 – 55 124 140 885 52 137 1,201 6 121 65 75 297 1,902 12 2 146 92 24 276 39 33 170 49 84 29 404 123 3 6 36 40 2 18 73 96 (113) 30 89 224 627 41 251 4,337 – 133 – 2,070 453 7,244 404 7,648 130 1,071 10 105 71 66 274 1,727 9 2 137 91 23 262 49 34 182 48 84 14 411 92 3 4 29 36 4 45 67 93 – 29 76 201 679 47 4,531 4,418 3,250 3,126 19,889 16,319 13,591 10,774 1 Comprises software amortisation of $114 million (2005: $125 million), refer note 20 and computer depreciation of $94 million (2005: $110 million), refer note 22. The Company comprises software amortisation of $100 million (2005: $106 million), refer note 20 and computer depreciation of $70 million (2005: $76 million), refer note 22. 17 Notes to the ﬁ nancial statements 5: Compensation of Auditors KPMG Australia Audit or review of ﬁ nancial reports of the Company or any entity in the Group1 Other audit-related services2 Other assurance services3 Total Overseas Related practices of KPMG Australia Audit or review of ﬁ nancial reports of Group entities Other audit-related services2 Other assurance services3 Taxation3 Total Total compensation of auditors Consolidated The Company 2006 $’000 2005 $’000 2006 $’000 2005 $’000 6,462 1,152 209 4,981 1,150 1,296 5,572 878 209 3,732 712 1,296 7,823 7,427 6,659 5,740 2,654 1,031 38 2,343 1,292 5 527 497 – 655 487 5 3,723 3,640 1,024 1,147 – 4 – – 3,723 3,644 1,024 1,147 11,546 11,071 7,683 6,887 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 conﬂ ict 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 conﬂ ict 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. 1 2006 and 2005 includes services in relation to the transition to Australian equivalents to International Financial Reporting Standards. 2006 includes additional audit fees in relation to Sarbanes- Oxley matters. In 2005 KPMG provided Sarbanes-Oxley advisory services which have been included within other assurance services, refer footnote 3 below. Includes prudential supervision reviews for central banks and prospectus reviews. 2 3 Other assurance services includes: Consolidated Tax compliance and related services Controls and process reviews Sarbanes-Oxley matters Accounting advice Sustainability review Training course Other Total 2006 $’000 – – – – 203 44 – 247 2005 $’000 4 254 885 74 82 - 6 1,305 18 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 6: Income Tax Expense (a) Income tax recognised in the Income Statement Tax expense/(income) comprises: Income tax expense/(income) Adjustments recognised in the current year in relation to the current tax of prior years Deferred tax expense/(income) relating to the origination and reversal of temporary differences Beneﬁ ts arising from previously unrecognised tax losses, tax credits, or temporary differences of a prior period that is used to reduce: - current tax expense Total income tax expense charged in the Income Statement Reconciliation of the prima facie income tax expense on pre-tax proﬁ t with the income tax expense charged in the Income Statement. Operating proﬁ t before income tax Prima facie income tax expense at 30% Change in income tax expense due to: Overseas tax rate differential Rebateable and non-assessable dividends Other non-assessable income Proﬁ t from associated and joint venture entities Life insurance accounting Other Income tax under/(over) provided in previous years Total income tax expense charged in the Income Statement Effective Tax Rate Australia Overseas Consolidated The Company 2006 $’000 2005 $’000 2006 $’000 2005 $’000 1,754 (4) 1,046 (2) 1,206 – (225) 176 (333) (3) – 1,522 1,220 (2) 871 541 (1) 160 – 700 5,214 1,564 4,398 1,320 4,045 1,214 2,875 863 25 (6) (9) (57) – 9 22 (23) (32) (59) (5) (1) 1,526 1,222 (4) (2) 1,522 1,220 (5) (345) – – – 7 871 – 871 (2) (141) (3) – – (16) 701 (1) 700 29.2% 27.7% 21.5% 24.3% 984 538 803 417 784 87 625 75 (b) Income tax recognised directly in equity The following income tax amounts were charged directly to equity during the period 2 23 (3) 9 Tax consolidation The Company and all its wholly owned Australian resident entities are part of a tax-consolidated group under Australian taxation law. The Company is the head entity in the tax-consolidated group. Tax expense/income and deferred tax liabilities/assets arising from temporary differences of the members of the tax-consolidated group are recognised in the separate ﬁ nancial statements of the members of the tax- consolidated group on a ‘group allocation’ basis. Current tax liabilities and assets of the tax consolidated group are recognised by the Company (as head entity in the tax-consolidated group). Due to the existence of a tax funding arrangement between the entities in the tax-consolidated group, amounts are recognised as payable to or receivable by the Company and each member of the group in relation to the tax contribution amounts paid or payable between the Company and the other members of the tax-consolidated group in accordance with the arrangement. Members of the tax-consolidated group have also entered into a tax sharing agreement that provides for the allocation of income tax liabilities between the entities should the head entity default on its income tax payment obligations. 19 Notes to the ﬁ nancial statements 7: Dividends Ordinary dividends Interim dividend Final dividend Bonus option plan adjustment Dividends on ordinary shares Consolidated The Company 2006 $m 1,024 1,0781 (34) 2005 $m 930 9831 (36) 2006 $m 1,024 1,0781 (34) 2005 $m 930 9831 (36) 2,068 1,877 2,068 1,877 1 Dividends are not accrued and are recorded when determined. Final dividend of $1,267 million for 2006 is not included in the table above. A ﬁ nal dividend of 69 cents, fully franked, is proposed to be paid on each fully paid ordinary share on 15 December 2006 (2005: ﬁ nal dividend of 59 cents, paid 16 December 2005, fully franked). The 2006 interim dividend of 56 cents, paid 3 July 2006, was fully franked (2005: interim dividend of 51 cents, paid 1 July 2005, fully franked). The tax rate applicable to the franking credits attached to the interim dividend and to be attached to the proposed ﬁ nal dividend is 30% (2005: 30%). Dividends paid in cash or satisﬁ ed by the issue of shares under the dividend reinvestment plan during the years ended 30 September 2006 and 2005 were as follows: Paid in cash Satisﬁ ed by issue of shares Preference dividends ANZ Stapled Exchangeable Preferred Securities (ANZ StEPS)1 Euro Trust Securities Dividends on preference shares Consolidated The Company 2006 $m 1,903 165 2005 $m 1,724 153 2006 $m 1,903 165 2005 $m 1,724 153 2,068 1,877 2,068 1,877 Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m – 27 27 66 18 84 – – – – – – 1 Under AIFRS, the ANZ Stapled Exchangeable Preferred Securities are now treated as loan capital (refer note 29), with distributions being reported as an interest expense in the ﬁ nancial year ended 30 September 2006. 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. 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 of ANZ StEPS. Distributions are reported as interest expense from 1 October 2005, due to the reclassiﬁ cation of the preference securities as loan capital under AIFRS. Further details in relation to ANZ StEPS are set out in note 29. 20 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 7: Dividends (continued) 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 comprise 2 fully paid securities – an interest paying unsecured note issued by a United Kingdom subsidiary (ANZ Jackson Funding PLC) and 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 ﬂ oating 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. (Refer to note 30 for further details.) Dividend Franking Account The amount of franking credits available to the Company for the subsequent ﬁ nancial year is $341 million (2005: $78 million) after adjusting for franking credits that will arise from the payment of tax on Australian proﬁ ts for the 2006 ﬁ nancial year, $543 million of franking credits which will be utilised in franking the proposed ﬁ nal 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 signiﬁ cant 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. 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 speciﬁ ed capital adequacy ratio. In particular, the Australian Prudential Regulation Authority has advised 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 proﬁ ts. Dividend Reinvestment Plan During the year, 3,545,901 ordinary shares were issued at $23.85 per share, and 3,039,401 ordinary shares at $26.50 per share, under the dividend reinvestment plan (2005: 3,900,116 ordinary shares at $19.95 per share, and 3,406,775 ordinary shares at $21.85 per share). All eligible shareholders can elect to participate in the dividend reinvestment plan. Bonus Option Plan Dividends paid during the year have been reduced as a result of certain shareholders participating in the bonus option plan and foregoing all or part of their right to dividends. These shareholders were issued bonus shares. During the year, 1,384,144 ordinary shares were issued under the bonus option plan (2005: 1,749,584 ordinary shares). Final dividend 2005 Interim dividend 2006 Determined dividend $m Bonus option plan adjustment $m 1,078 1,024 2,102 (18) (16) (34) Amount paid $m 1,060 1,008 2,068 21 Notes to the ﬁ nancial statements 8: Earnings per Ordinary Share Basic earnings per share (cents) Earnings reconciliation ($millions) Proﬁ t for the year Less: net proﬁ t attributable to minority interests Less: preference share dividend paid Earnings used in calculating basic earnings per share Weighted average number of ordinary shares (millions) Diluted earnings per share (cents) Earnings reconciliation ($millions) Earnings used in calculating basic earnings per share Add: US Trust Securities interest expense Add: ANZ StEPS interest expense Earnings used in calculating diluted earnings per share Weighted average number of ordinary shares (millions) Used in calculating basic earnings per share Add: potential conversion of options to ordinary shares potential conversion of US Trust Securities to ordinary shares potential conversion of ANZ StEPS to ordinary shares Used in calculating diluted earnings per share Consolidated 2006 200.0 3,692 4 27 3,661 1,830.3 2005 169.5 3,178 3 84 3,091 1,823.7 194.0 164.4 3,661 53 45 3,759 1,830.3 13.9 54.8 38.2 1,937.2 3,091 48 44 3,183 1,823.7 9.7 60.1 42.7 1,936.2 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 1.6 million. 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 in less than 90 days New Zealand Coins, notes and cash at bankers Money at call, bills receivable and remittances in transit Other banks’ certiﬁ cates of deposit Securities purchased under agreement to resell in less than 90 days Overseas markets Coins, notes and cash at bankers Money at call, bills receivable and remittances in transit Other banks’ certiﬁ cates of deposit Securities purchased under agreement to resell in less than 90 days Total liquid assets Maturity analysis based on original term to maturity Less than 90 days More than 90 days Total liquid assets 10: Due from Other Financial Institutions Australia New Zealand Overseas markets Total due from other ﬁ nancial institutions Maturity analysis based on original term to maturity Less than 90 days More than 90 days Total due from other ﬁ nancial institutions 22 ANZ Full Financial Report 2006 Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 1,286 938 4,776 7,000 913 1,398 1,351 260 3,922 251 2,279 1,566 1 4,097 15,019 11,633 3,386 15,019 888 1,013 1,405 3,306 242 1,405 1,896 249 3,792 232 2,302 1,969 – 4,503 11,601 9,600 2,001 11,601 1,242 892 4,776 6,910 865 958 1,394 3,217 – – – – – 111 1,946 1,460 – 3,517 10,427 8,050 2,377 10,427 – – – – – 119 1,980 1,875 – 3,974 7,191 5,315 1,876 7,191 Consolidated The Company 2006 $m 3,090 3,236 3,339 9,665 8,711 954 9,665 2005 $m 917 2,731 2,700 6,348 4,102 2,246 6,348 2006 $m 3,068 – 3,185 6,253 5,520 733 6,253 2005 $m 899 – 2,553 3,452 2,584 868 3,452 Notes to the ﬁ nancial statements 11: Trading Securities Trading securities are allocated between Australia, New Zealand and Overseas markets based on the domicile of the issuer Listed – Australia Other securities and equity securities Listed – Overseas markets Other government securities Total listed Unlisted – Australia Commonwealth securities Local, semi-government and other government securities ANZ accepted bills Other securities and equity securities Unlisted – New Zealand Other government securities Other securities and equity securities Unlisted – Overseas markets Other government securities Other securities and equity securities Total unlisted Total trading securities 12: Derivative Financial Instruments Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 5 5 44 44 49 328 2,635 1,569 2,639 7,171 210 1,220 1,430 – 529 529 9,130 9,179 – – – – – 551 1,646 1,182 1,594 4,973 343 551 894 27 391 418 6,285 6,285 5 5 44 44 49 328 2,635 1,569 2,363 6,895 37 – 37 – 527 527 7,459 7,508 – – – – – 551 1,646 1,182 1,490 4,869 – 24 24 27 389 416 5,309 5,309 Derivative instruments are contracts whose value is derived from one or more underlying ﬁ nancial 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 ﬂ uctuations in exchange and interest rates as part of its asset and liability management activities and are classiﬁ ed as other than trading. Derivatives are subject to the same types of credit and market risk as other ﬁ nancial 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 speciﬁ ed quantity of foreign currency on a speciﬁ ed 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 ﬁ xed amount of a currency at a speciﬁ ed 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 speciﬁ ed 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 ﬁ xed income security or time deposit at a future date. Interest rate swap transactions generally involve the exchange of ﬁ xed and ﬂ oating interest payment obligations without the exchange of the underlying principal amounts. Interest rate options provide the buyer with the right but not the obligation either to receive or pay interest at a speciﬁ ed 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 credit contracts used by the Group are default swaps. Default swaps are contracts that provide for a speciﬁ ed payment to be made to the purchaser of the swap following a deﬁ ned credit event. The credit risk of derivative ﬁ nancial 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. 23 Notes to the ﬁ nancial statements 12: Derivative Financial Instruments (continued) The Group further restricts its exposure to credit losses by entering into master agreements with counterparties with which it undertakes a signiﬁ cant volume of transactions. The use of a master agreement does not generally result in an offset of balance sheet assets and liabilities. However, the credit risk is reduced by a master agreement to the extent that if an event of default occurs, all contracts with the counterparty are terminated and settled on a net basis. Despite this, as a result of the number of transactions that are usually subject to such master agreements, the Group’s overall exposure to credit risk on derivative instruments can change substantially within a short period. The following table provides an overview of the Group’s and the Company’s foreign 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 ﬁ nancial commodity and represent the volume of outstanding transactions. They are not a measure of the risk associated with a derivative. The derivative instruments become favourable (assets) or unfavourable (liabilities) as a result of ﬂ uctuations in market rates relative to their terms. The aggregate contractual or notional amount of derivative ﬁ nancial instruments on hand, the extent to which instruments are favourable or unfavourable, and thus the aggregate fair values of derivative ﬁ nancial assets and liabilities, can ﬂ uctuate signiﬁ cantly from time to time. The fair values of derivative instruments held and notional principal amounts are set out below. Sept–06 Fair value Hedging Sept–05 Total fair value of derivatives Notional principal amount $m Trading Fair value Cash ﬂ ow Assets $m Liabilities $m Assets $m Liabilities $m Assets $m Liabilities $m Net investment in foreign operations Assets $m Liabilities $m Assets $m Liabilities $m Notional principal amount $m Net Fair value Assets $m 217,522 110,638 557 9,166 13,916 7,397 – 2,054 2,714 45 259 – 1,055 (1,279) (2,195) (2,247) (29) – (202) (916) 1,256 359,196 4,848 (4,333) 96,147 589,135 99,184 17,733 33,638 14 3,296 249 141 – (10) (3,566) (242) – (100) 835,837 3,700 (3,918) – 114 – – – – – 114 – 212 – – – 212 – (64) – – – – – (64) – (263) – – – (263) – – – – – – – – – 211 2 – – 213 – – – – – – – – – (61) (2) – – (63) 23,965 76 (78) – – – – 1,218,998 8,624 (8,329) 326 (327) 213 (63) 1 – – – – – – 1 – – – – – – – 1 (34) – – – – – – 2,055 2,828 45 259 – 1,055 (1,279) (2,229) (2,311) (29) – (202) (916) 1,256 184,958 68,892 256 9,340 14,925 4,963 – (413) (746) 4 186 (174) (2) 586 (34) 4,963 (4,431) 283,334 (559) – – – – – – – 14 3,719 251 141 – (10) (3,890) (244) – (100) 47,734 405,152 35,111 12,810 16,715 1 431 8 62 (42) 4,125 (4,244) 517,522 460 76 (78) 15,437 (1) (34) 9,164 (8,753) 816,293 (100) Consolidated at 30 September 2006 Foreign exchange and commodities contracts Spot and forward contracts Swap agreements Futures contracts Options purchased Options sold Other contracts Collateral1 Interest rate contracts Forward rate agreements Swap agreements Futures contracts Options purchased Options sold Credit contracts Credit default swaps 1 Collateral relates predominantly to Foreign Exchange contracts. 24 ANZ Full Financial Report 2006 Trading Fair value Sept–06 Fair value Hedging Cash ﬂ ow Total fair value of derivatives Assets $m Liabilities $m Assets $m Liabilities $m Assets $m Liabilities $m Assets $m Liabilities $m Sept–05 Notional principal amount $m Net Fair value Assets $m – 112 – – – – – 112 – 121 – – – 121 – (64) – – – – – (64) – (106) – – – (106) – – – – – – – – – 194 2 – – 196 – 196 – – – – – – – – – (45) (2) – – (47) – (47) 1,902 3,198 45 250 – 1,056 (1,279) (1,948) (2,356) (29) – (193) (917) 571 174,092 64,990 256 9,111 14,748 4,963 – (607) (618) 4 178 (166) (2) 586 5,172 (4,872) 268,160 (625) 7 3,158 250 124 – (6) (3,143) (243) – (100) 38,554 312,205 25,141 13,712 17,906 – 459 9 54 (45) 3,539 (3,492) 407,518 477 76 (78) 15,412 (1) 8,787 (8,442) 691,090 (149) Notes to the ﬁ nancial statements 12: Derivative Financial Instruments (continued) Notional principal amount $m 201,577 149,823 557 8,798 13,654 7,678 – 1,902 3,086 45 250 – 1,056 (1,279) (1,948) (2,292) (29) – (193) (917) 571 382,087 5,060 (4,808) 85,514 460,101 84,259 17,863 34,092 7 2,843 248 124 – (6) (2,992) (241) – (100) 681,829 3,222 (3,339) Company at 30 September 2006 Foreign exchange and commodities contracts Spot and forward contracts Swap agreements Futures contracts Options purchased Options sold Other contracts Collateral1 Interest rate contracts Forward rate agreements Swap agreements Futures contracts Options purchased Options sold Credit contracts Credit default swaps 23,940 76 (78) – – 1,087,856 8,358 (8,225) 233 (170) 1 Collateral relates predominantly to Foreign Exchange contracts. 25 Notes to the ﬁ nancial statements 12: Derivative Financial Instruments (continued) Cashﬂ ow Hedges (consolidated) The effective portion of changes in the fair value of derivatives qualifying and designated as cash ﬂ ow hedges is deferred to the hedging reserve which forms part of shareholders’ equity. Amounts deferred in equity are recognised in the income statement in the period during which the hedged forecast transactions take place. As at 30 September 2006, net gains on derivative ﬁ nancial instruments designated as cash ﬂ ow hedges deferred to the hedging reserve were $227 million. Concentrations of Credit Risk (consolidated) 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 72% (2005: 57%) of the Group’s exposures are with counterparties which are either Australian banks or banks based in other OECD countries. Consolidated at 30 September 2006 Australia New Zealand Overseas markets Consolidated at 30 September 2005 Australia New Zealand Overseas markets OECD governments $m 133 57 19 209 OECD governments $m 140 55 31 226 Australian and OECD banks $m 10,099 2,134 912 Corporations, non-OECD banks and others $m 3,900 736 359 Total credit equivalent amount $m 14,132 2,927 1,290 13,145 4,995 18,349 Australian and OECD banks $m 6,185 1,610 236 8,031 Corporations, non-OECD banks and others $m 4,997 606 224 Total credit equivalent amount $m 11,322 2,271 491 5,827 14,084 26 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 13: Available-for-sale Assets/Investment Securities Investment securities and available-for-sale are allocated between Australia, New Zealand and Overseas markets based on the domicile of the issuer Consolidated The Company Available-for-sale assets 2006 $m Investment securities1 2005 $m Available-for-sale assets 2006 $m Investment securities1 2005 $m Listed – Australia Other securities and equity investments Listed – Overseas Markets Other government securities Other securities and equity investments Total listed Unlisted – Australia Local and semi-government securities Other securities and equity investments Loans and advances Unlisted – New Zealand New Zealand government securities Other securities and equity investments Unlisted – Overseas markets Other government securities Other securities and equity investments Total unlisted 6 6 102 2,198 2,300 2,306 1,908 2,971 1,946 6,825 285 29 314 532 676 1,208 8,347 – – 196 1,411 1,607 1,607 1,412 4,886 – 6,298 1,096 173 1,269 431 437 868 8,435 Total investment securities and available-for-sale assets 10,653 10,042 6 6 102 2,198 2,300 2,306 1,908 2,421 1,946 6,275 – – – 71 5 76 6,351 8,657 – – 196 1,410 1,606 1,606 1,412 2,168 – 3,580 – – – 108 7 115 3,695 5,301 1 Investment securities have been classiﬁ ed as available-for-sale assets following the adoption of AIFRS on 1 October 2005. Investment securities were recorded at cost or at cost adjusted for amortisation of premiums or discounts. Changes in market values of investment securities were not taken into account unless there was considered to be other than temporary diminution in value. No impairment loss was recognised or reversed in the Income Statement. 27 Notes to the ﬁ nancial statements 13: Available-for-sale Assets/Investment Securities (continued) Available-for-sale assets by maturities and yields Based on remaining term to maturity at 30 September 2006 Less than 3 months $m Between 3 months and 12 months $m Between 1 year and 5 years $m Between 5 years and 10 years $m After 10 years $m No maturity speciﬁ ed $m Australia Local and semi-government securities Other securities and equity investments Loans and advances Overseas New Zealand government securities Other government securities Other securities and equity investments 1,224 2,544 1,080 684 – 359 4,848 1,043 273 474 342 1,089 – 108 622 730 – 308 507 815 12 51 1,460 1,523 Total (fair value) 5,937 1,773 2,338 – – – – – – 96 96 96 – 107 – 107 – 1 336 337 444 – 18 – 18 – – 47 47 65 Total fair value $m 1,908 2,977 1,946 6,831 285 634 2,903 3,822 10,653 Weighted average yields1 Australia Local and semi-government securities Other securities and equity investments Loans and advances Overseas New Zealand government securities Other government securities Other securities and equity investments Less than 1 year % Between 1 year and 5 years % Between 5 year and 10 years % After 10 years % 6.08 6.14 6.77 7.19 5.20 3.94 – 6.41 6.99 6.90 4.20 5.18 – – – – – 4.86 – 8.37 – – 7.50 4.54 1 Based on effective yields for loans and advances, ﬁ xed interest and discounted securities and dividend yield for equity investments at 30 September 2006. 28 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 13: Available-for-sale Assets/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 Less than 3 months $m Between 3 months and 12 months $m Between 1 year and 5 years $m Between 5 years and 10 years $m After 10 years $m No maturity speciﬁ ed $m Total $m Market value $m 972 4,390 5,362 760 452 197 1,409 440 280 720 333 100 370 803 – 100 100 – 75 1,279 1,354 6,771 1,523 1,454 6,773 1,520 1,457 – – – 3 – 40 43 43 42 – 107 107 – – 135 135 242 219 – 9 9 – – – – 9 9 1,412 4,886 1,412 4,862 6,298 6,274 1,096 627 2,021 1,096 630 2,020 3,744 3,746 10,042 n/a n/a 10,020 Less than 1 year % Between 1 year and 5 years % Between 5 year and 10 years % After 10 years % 5.55 5.71 6.51 3.98 4.86 – 6.37 – 6.78 3.99 – – 7.20 – 2.00 – 7.14 – – 2.68 1 Based on effective yields for ﬁ xed interest and discounted securities and dividend yield for equity investments at 30 September 2005. 29 Notes to the ﬁ nancial statements 14: Net Loans and Advances Loans and advances are classiﬁ ed between Australia, New Zealand and Overseas markets based on the domicile of the lending point Australia Overdrafts Credit card outstandings Term loans – housing Term loans – non-housing Lease receivables (refer below) Other New Zealand Overdrafts Credit card outstandings Term loans – housing Term loans – non-housing Lease receivables (refer below) Other Overseas markets Overdrafts Credit card outstandings Term loans – housing Term loans – non-housing Lease receivables (refer below) Commercial bills Other Total gross loans and advances Less: Provision for credit impairment (refer note 16) Less: Unearned income Total net loans and advances Lease receivables a) Finance lease receivables Gross ﬁ nance lease receivables Less than 1 year 1 to 5 years Later than 5 years Less: unearned future ﬁ nance income on ﬁ nance leases Net investment in ﬁ nance lease receivables b) Operating lease receivables Gross operating lease receivables Less than 1 year 1 to 5 years Later than 5 years Total lease receivables Present value of net investment in ﬁ nance lease receivables Less than 1 year 1 to 5 years Later than 5 years 30 ANZ Full Financial Report 2006 Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 6,237 6,190 101,945 53,905 2,580 9,650 5,276 5,434 91,196 48,893 2,854 9,636 6,237 6,190 100,874 49,774 1,006 1,482 5,276 5,434 89,558 44,086 1,222 2,216 180,507 163,289 165,563 147,792 1,666 1,081 37,845 26,979 421 937 1,647 1,026 34,859 25,012 639 1,207 68,929 64,390 518 198 766 8,347 179 192 2 10,202 303 134 592 7,510 217 62 7 8,825 – – – – – – – 333 8 599 7,160 112 192 2 8,406 – – – – – – – 213 7 466 6,428 97 62 6 7,279 259,638 236,504 173,969 155,071 (2,226) (2,440) (1,566) (1,709) (2,002) (1,574) (248) (1) (4,228) (4,014) (1,814) (1,710) 255,410 232,490 172,155 153,361 606 1,488 256 924 1,432 515 (474) (375) 140 751 227 (248) 238 693 386 (1) 1,876 2,496 870 1,316 411 398 21 830 397 430 12 839 – – – – 1 1 – 2 2,706 3,335 870 1,318 516 1,172 188 1,876 639 1,345 512 2,496 55 657 158 870 237 692 387 1,316 Notes to the ﬁ nancial statements 15: Impaired Financial Assets Summary of impaired ﬁ nancial assets Non-performing loans Restructured loans Unproductive facilities Gross impaired ﬁ nancial assets Individual provisions Non-performing loans Unproductive facilities Net impaired ﬁ nancial assets Restructured loans Real estate or other assets acquired through the enforcement of security In the event of customer default, any loan security is held as mortgagee in possession and therefore the Group does not hold any real estate or other assets acquired through the enforcement of security Accruing loans past due 90 days or more1 These amounts are not classiﬁ ed as impaired assets as they are either 90 days or more past due and well secured, or are portfolio managed facilities that can be held on an accrual basis for up to 180 days past due Consolidated The Company 2006 $m 661 – 37 698 (279) (7) 412 – – 2005 $m 642 28 43 713 (256) (17) 440 28 – 2006 $m 452 – 30 482 (179) (6) 297 – – 2005 $m 380 28 36 444 (135) (10) 299 28 – 499 381 381 267 Interest and other income forgone on impaired ﬁ nancial assets The following table shows the estimated amount of interest and other income not recognised, net of interest recoveries and unwind of discount, on average impaired ﬁ nancial assets during the period. Gross interest and other income receivable on non-performing loans, restructured loans and unproductive facilities Australia New Zealand Overseas markets Total gross interest and other income receivable on non-performing loans, restructured loans and unproductive facilities Interest recognised2 Australia New Zealand Overseas markets Total interest recognised Net interest and other income not recognised Australia New Zealand Overseas markets Total net interest and other income not recognised Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 34 13 7 54 (20) (6) – (26) 14 7 7 28 26 9 16 51 (10) (5) (10) (25) 16 4 6 26 29 – 2 31 (20) – – (20) 9 – 2 11 21 – 11 32 (10) – (8) (18) 11 – 3 14 1 Includes unsecured credit card and personal loans 90 day past due accounts which are allowed by APRA to be retained on a performing basis for up to 180 days past due amounting to $64 million (2005: $51 million). The remainder of 90 day past due accounts are predominately ‘well secured’, for example no loss of principal or interest is expected. 2 The impairment loss on a non-performing loan is calculated as the difference between the asset’s carrying amount and the estimated future cashﬂ ows discounted to their present value. As this discount unwinds during the period it is recognised as interest income. Refer note 1(xi) for explanation on how it arises. The comparatives do not reﬂ ect this change and represent interest and other income received. 31 Notes to the ﬁ nancial statements 16: Provision for Credit Impairment Movement in provision for credit impairment Collective provision Balance at start of year Adjustment due to adoption of accounting standard AASB139 Provisions acquired (disposed) Adjustment for exchange rate ﬂ uctuations Charge to income statement Transfer to individual provision1 Recoveries1 Consolidated The Company 2006 $m 2,167 (288) – (8) 69 – – Previous AGAAP 2005 $m 1,992 – (13) (35) 580 (471) 114 2006 $m 1,564 (238) – 3 52 – – Previous AGAAP 2005 $m 1,381 – (13) (24) 388 (250) 82 Total collective provision2 1,940 2,167 1,381 1,564 Individual provision Balance at start of year Adjustment due to adoption of accounting standard AASB139 Charge to income statement Adjustment for exchange rate ﬂ uctuations Discount unwind Bad debts written off Recoveries of amounts previously written off Transfer from collective provision1 Total individual provision Total provision for credit impairment Provision movement analysis New and increased provisions Australia New Zealand Asia Other overseas markets Provision releases Recoveries of amounts previously written off Individual provision charge Net credit to collective provision Charge to income statement Ratios Provisions3 as a % of total advances4 Individual Collective Provisions3 as a % of risk weighted assets Individual Collective Bad debts written off as a % of total advances 273 (1) 338 (4) (26) (421) 127 – 286 384 – – (11) – (571) – 471 273 145 4 226 (1) (20) (259) 90 – 185 274 – – (3) – (376) – 250 145 2,226 2,440 1,566 1,709 508 81 24 5 618 (153) 465 (127) 338 69 407 % 0.1 0.7 0.1 0.8 0.2 378 146 19 61 604 (133) 471 (114) 357 223 580 % 0.1 0.9 0.1 1.0 0.2 417 – – 2 419 (103) 316 (90) 226 52 278 % 0.1 0.7 0.1 0.8 0.1 312 – 4 29 345 (95) 250 (82) 168 220 388 % 0.1 0.9 0.1 1.0 0.2 1 Under AIFRS, the impairment calculation results in a nil amount for these lines from 1 October 2005. 2 The Collective Provision includes amounts for off balance sheet credit exposures, $260 million at September 2006 ($255 million at 1 October 2005). The charge to the income statement for the year ended 30 September 2006 relating to off balance sheet credit exposures was $5 million. 3 Excludes provisions for unproductive facilities. 4 See Glossary on page 120. 32 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 17: Regulatory Deposits Overseas central banks Maturity: Less than 90 days After 5 years 18: Shares in Controlled Entities, Associates and Joint Venture Entities Total shares in controlled entities Total shares in associates1 (refer note 41) Total shares in joint venture entities2 (refer note 42) Total shares in controlled entities, associates and joint venture entities Consolidated The Company 2006 $m 205 70 135 205 2005 $m 159 62 97 159 2006 $m 132 61 71 132 2005 $m 113 54 59 113 Consolidated The Company 2006 $m – 592 1,608 2,200 2005 $m – 265 1,661 1,926 2006 $m 11,424 307 – 2005 $m 11,998 92 – 11,731 12,090 1 2 Investments in associates are accounted for in the consolidated ﬁ nancial statements using the equity method of accounting and are carried at cost by the parent entity Investments in joint venture entities are accounted for in the consolidated ﬁ nancial statements using the equity method of accounting and are carried at cost by the parent entity ACQUISITIONS OF CONTROLLED ENTITIES The following securitisation special purpose entities were consolidated as part of the Group from 1 October 2004 because of the application of UIG Interpretation 112: ‘Consolidation – Special Purpose Entities’. Arc Funding Pty Ltd Eos Trust Kingﬁ sher Trust No 1 Kingﬁ sher Trust No 2 Kingﬁ sher Trust 2001–1G Kingﬁ sher Trust 2004–1G Kingﬁ sher Securitisation Pty Ltd Omeros Trust Omeros II Trust Solera Trust Stellar Funding Pty Ltd Coral Finance Ltd The impact of the consolidation of these entities is explained in note 51. There were no material controlled entities acquired during the years ended 30 September 2006 and 2005. DISPOSAL OF CONTROLLED ENTITIES There were no material controlled entities disposed of during the year ended 30 September 2006. In respect of the year ended 30 September 2005, ANZ National Bank Limited entered into a joint venture with ING Insurance International Limited (INGII) in September 2005. 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: ANZ National Bank Limited and INGII invested NZD163 million and NZD170 million respectively into INGNZ. 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 ﬁ nancial statements: - reduction in unamortised goodwill of NZD114 million; - recognition of approximately NZD16 million ($14 million) proﬁ t on sale of 51% of the NBNZ Life and Funds Management businesses; - an investment in INGNZ of NZD145 million. INGNZ acquired at market value the New Zealand-based businesses previously owned by INGA. The proﬁ t on sale of the New Zealand-based businesses of approximately $40 million is recognised in INGA, however, ANZ’s share of this proﬁ t is eliminated on consolidation. 33 Notes to the ﬁ nancial statements 19: Deferred Tax Assets Deferred tax assets recognised in proﬁ t and loss Collective provision for impaired loans and advances Deferred fee revenue Provision for employee entitlements Other provisions Other Deferred tax assets recognised directly in equity Deﬁ ned beneﬁ t obligations Available for sale reserve Foreign currency translation reserve Consolidated The Company 2006 $m 596 92 107 270 247 2005 $m 719 – 105 230 304 1,312 1,358 67 2 3 72 44 – (13) 31 2006 $m 417 70 75 182 56 800 66 1 – 67 2005 $m 505 – 73 145 39 762 44 – – 44 Total deferred tax assets 1,384 1,389 867 806 Movements Restated balance 1 October Change on adoption of accounting policy AASB 139 Movements in temporary differences during the year Closing balance at 30 September Deferred tax assets by geography Australia New Zealand Overseas markets Total deferred tax assets Unrecognised deferred tax assets The following deferred tax assets will only be obtained if: assessable income is derived of a nature and an amount sufﬁ cient to enable the beneﬁ t to be realised the conditions for deductibility imposed by tax legislation are complied with; and no changes in tax legislation adversely affect the Group in realising the beneﬁ t. Unused realised tax losses (on revenue account) Unused realised capital losses Total unrecognised deferred tax assets 1,389 64 (69) 1,514 n/a (125) 1,384 1,389 924 296 164 874 377 138 1,384 1,389 806 41 20 867 732 – 135 867 797 n/a 9 806 686 – 120 806 20 63 83 23 66 89 9 63 72 11 66 77 34 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 20: Goodwill and Other Intangible Assets Goodwill Gross carrying amount Restated balance at start of year Additions through business combinations Derecognised on disposal Foreign currency exchange differences Other Balance at end of year1 Software and other intangible assets Gross carrying amount Restated balance at start of year Impact of adoption of AIFRS (refer to note 51) Additions Additions from internal developments Foreign currency exchange differences Other Balance at end of year Accumulated amortisation and impairment Restated balance at start of year Impact of adoption of AIFRS (refer to note 51) Amortisation expense2 (refer note 4) Foreign currency exchange differences Other Balance at end of year Net book value Balance at start of year Balance at end of year Goodwill, software and other intangible assets Net book value Balance at start of the year Balance at end of the year1 Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 3,015 2 – (117) – 3,210 – (112) (87) 4 2,900 3,015 898 (38) 2 135 (3) (7) 987 455 (23) 117 (1) 2 550 443 437 844 – 3 96 (2) (43) 898 351 – 128 (1) (23) 455 493 443 3,458 3,337 3,703 3,458 15 – – – – 15 793 (38) 2 128 – (12) 873 386 (23) 103 – 3 469 407 404 422 419 15 – – – – 15 727 – 3 94 – (31) 793 292 – 109 – (15) 386 435 407 450 422 1 Excludes notional goodwill related to the ING Australia joint venture of $826 million (September 2005: $826 million) and the ING New Zealand joint venture of $79 million (September 2005: $82 million). 2 Includes software amortisation expense of $114 million (September 2005: $125 million) and amortisation of other intangible assets $3 million (September 2005: $3 million). The Company includes software amortisation expense of $100 million (September 2005: $106 million) and amortisation of other intangible assets $3 million (September 2005: $3 million). Goodwill allocated to cash-generating units The goodwill balance above largely comprises the goodwill purchased on acquisition of NBNZ Holdings Limited in December 2003. Discussion of the goodwill and impairment testing for the cash generating unit containing this goodwill is discussed in note 2(iv). 35 Notes to the ﬁ nancial statements 21: Other Assets Accrued interest/prepaid discounts Accrued commission Deﬁ ned beneﬁ t superannuation plan surplus (see note 46) Prepaid expenses Issued securities settlements Operating leases residual value Capitalised expenses Other Total other assets 22: Premises and Equipment Freehold and leasehold land and buildings At cost Depreciation Leasehold improvements At cost Amortisation Furniture and equipment At cost Depreciation Computer and ofﬁ ce equipment At cost Depreciation Capital works in progress At cost Total premises and equipment Consolidated The Company 2006 $m 1,569 102 5 69 1,377 799 570 520 5,011 2005 $m 1,443 78 7 153 2,144 712 524 1,112 6,173 Consolidated 2006 $m 2005 $m 632 (195) 437 253 (158) 95 734 (467) 267 906 (688) 218 639 (201) 438 239 (149) 90 691 (445) 246 924 (700) 224 92 56 1,109 1,054 2006 $m 1,088 74 – 30 1,074 3 189 232 2,690 2005 $m 1,164 47 – 46 785 2 176 613 2,833 The Company 2006 $m 80 (36) 44 159 (93) 66 538 (332) 206 674 (505) 169 42 527 2005 $m 83 (40) 43 147 (84) 63 499 (308) 191 625 (454) 171 27 495 36 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 22: Premises and Equipment (continued) Reconciliations of the carrying amounts for each class of premises and equipment are set out below: Consolidated Freehold and leasehold land and buildings1 Carrying amount at beginning of year Additions Disposals Depreciation Foreign currency exchange difference Carrying amount at end of year Leasehold improvements Carrying amount at beginning of year Additions Disposals Amortisation Foreign currency exchange difference Carrying amount at end of year Furniture and equipment Carrying amount at beginning of year Additions Disposals Depreciation Foreign currency exchange difference Carrying amount at end of year Computer and ofﬁ ce equipment Carrying amount at beginning of year Additions Disposals Depreciation Foreign currency exchange difference Carrying amount at end of year Capital works in progress Carrying amount at beginning of year Net additions Carrying amount at end of year Total premises and equipment 1 Includes integrals. 2006 $m 438 21 (5) (15) (2) 437 90 26 (5) (18) 2 95 246 72 (3) (48) – 267 224 95 (6) (94) (1) 218 56 36 92 2005 $m 498 22 (68) (11) (3) 438 61 46 – (16) (1) 90 251 81 (41) (43) (2) 246 252 92 (8) (110) (2) 224 35 21 56 The Company 2006 $m 2005 $m 43 4 – (2) (1) 44 63 16 (5) (12) 4 66 191 53 (2) (36) – 206 171 73 (5) (70) – 169 27 15 42 40 6 – (2) (1) 43 39 33 – (9) – 63 161 64 (5) (29) – 191 185 65 (3) (76) – 171 21 6 27 1,109 1,054 527 495 37 Notes to the ﬁ nancial statements 23: Due to Other Financial Institutions Australia New Zealand Overseas markets Total due to other ﬁ nancial institutions 24: Deposits and Other Borrowings Consolidated The Company 2006 $m 6,656 2,448 5,014 2005 $m 3,396 2,976 5,655 2006 $m 6,654 – 4,998 14,118 12,027 11,652 2005 $m 3,394 – 5,635 9,029 Deposits and other borrowings are classiﬁ ed between Australia, New Zealand and Overseas markets based on the location of the deposit taking point. Australia Certiﬁ cates of deposit Term deposits Other deposits bearing interest Deposits not bearing interest Commercial paper Borrowing corporations’ debt1 Other borrowings New Zealand Certiﬁ cates of deposit Term deposits Other deposits bearing interest Deposits not bearing interest Commercial paper Borrowing corporations’ debt2 Overseas markets Certiﬁ cates of deposit Term deposits Other deposits bearing interest Deposits not bearing interest Commercial paper Other borrowings Total deposits and other borrowings Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 16,650 26,219 61,245 4,749 8,092 8,843 458 17,512 25,829 50,707 4,310 8,994 9,338 308 16,650 27,206 61,245 4,749 3,842 – 458 17,512 26,642 50,707 4,310 2,929 – 308 126,256 116,998 114,150 102,408 3,428 23,128 17,335 3,421 6,028 1,813 4,211 21,056 14,843 4,021 8,434 1,938 55,153 54,503 3,170 10,329 1,538 1,182 6,630 536 901 8,948 1,259 1,064 6,569 80 – – – – – – – – – – – – – – 3,117 9,165 1,062 788 – 39 845 8,198 806 752 – 80 23,385 18,821 14,171 10,681 204,794 190,322 128,321 113,089 1 Included in this balance is debenture stock of controlled entities. $7.9 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 ﬂ oating charges upon the undertaking and all the assets of the entity other than land and buildings ($14.1 billion). 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 NZD2.1 billion of secured debenture stock of the consolidated subsidiary UDC Finance Limited and the accrued interest thereon which are secured by a ﬂ oating charge over all assets of UDC Finance Limited and its subsidiaries (NZD2.4 billion). 38 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 25: Income Tax Liabilities Australia Current tax payable Deferred tax liabilities New Zealand Current tax payable Deferred tax liabilities Overseas markets Current tax payable Deferred tax liabilities Total current and deferred income tax liability Total current tax payable Deferred tax liabilities recognised in proﬁ t and loss Lease Finance Treasury instruments Capitalised expenses Other Deferred tax liabilities recognised directly in equity Cash ﬂ ow hedges Consolidated 2006 $m 2005 $m 700 1,075 1,775 294 1,341 1,635 (163) 211 48 32 98 130 (129) 138 9 34 123 157 The Company 2006 $m 698 912 1,610 – – – 3 87 90 2005 $m 269 1,099 1,368 – – – 12 112 124 1,953 1,801 1,700 1,492 569 199 701 281 252 385 131 576 229 687 131 555 1,344 1,602 40 40 – – 82 388 44 465 979 20 20 89 687 47 388 1,211 – – Total deferred tax liability 1,384 1,602 999 1,211 Movements Opening balance at 1 October Change on adoption of AIFRS Movements in temporary differences during the year Closing Balance at 30 September 1,602 25 (243) 1,384 1,579 7 16 1,602 1,211 (49) (163) 999 1,030 14 167 1,211 Unrecognised deferred tax liabilities The following deferred tax liabilities have not been brought to account as liabilities: Other unrealised taxable temporary differences Total unrecognised deferred tax liabilities 33 33 25 25 – – – – 26: Payables and Other Liabilities Creditors Accrued interest and unearned discounts Deﬁ ned beneﬁ t plan obligations (see note 46) Accrued charges Security settlements Other liabilities Total payables and other liabilities Consolidated The Company 2006 $m 4,282 2,488 229 604 1,236 1,840 10,679 2005 $m 2,949 2,002 154 596 317 1,600 7,618 2006 $m 4,030 1,832 229 392 1,104 1,236 8,823 2005 $m 2,723 1,400 154 377 – 818 5,472 39 Notes to the ﬁ nancial statements 27: Provisions Employee entitlements1 Restructuring costs and surplus leased space2 Non-lending losses, frauds and forgeries3 Other4 Total provisions Reconciliations of the carrying amounts of each class of provision, except for employee entitlements, are set out below: Consolidated Restructuring costs and surplus leased space2 Carrying amount at beginning of the year Provision made during the year Payments made during the year Transfer/release of provision Adjustment for exchange rate ﬂ uctuations Carrying amount at the end of the year Non-lending losses frauds and forgeries3 Carrying amount at beginning of the year Provision made during the year Transfer/release of provision Release of provisions Carrying amount at the end of the year Other provisions4 Carrying amount at beginning of the year Provision made during the year Payments made during the year Transfer/release of provision Adjustment for exchange rate ﬂ uctuations Carrying amount at the end of the year 2006 $m 77 51 (43) (10) (1) 74 184 52 (19) (30) 187 293 235 (161) (37) – 330 2005 $m 106 52 (47) (33) (1) 77 171 37 (8) (16) 184 235 222 (132) (31) (1) 293 Consolidated The Company 2006 $m 366 74 187 330 957 2005 $m 360 77 184 293 914 2006 $m 267 61 125 235 688 2005 $m 260 57 136 197 650 The Company 2006 $m 2005 $m 57 41 (33) (4) – 61 136 17 (3) (25) 125 197 197 (137) (23) 1 235 66 47 (34) (22) – 57 125 23 (2) (10) 136 179 142 (93) (31) – 197 1 The aggregate liability for employee beneﬁ ts largely comprises employee entitlements provisions for annual leave and long service leave. 2 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 beneﬁ ts. 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 their timing is uncertain, and the costs can be reliably estimated. 3 Non-lending losses, frauds and forgeries provisions arise from inadequate or failed internal processes and systems, or from external events. 4 Other provisions comprise various other provisions including loyalty programs, workers’ compensation and make-good provisions on leased premises. 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 Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 16,957 6,528 1,371 1,350 787 14,821 3,153 2,216 2,631 85 73 78 11,401 5,268 1,138 1,140 1,173 11,138 3,381 1,929 2,284 81 71 69 11,004 5,423 1,371 303 685 13,337 2,633 2,216 2,631 85 73 78 8,598 4,343 1,133 323 1,173 9,794 2,941 1,929 2,284 81 71 69 50,050 39,073 39,839 32,739 40 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 29: Loan Capital Hybrid loan capital (subordinated) ANZ Stapled Exchangeable Preferred securities (ANZ StEPS)1,2 US Trust Securities USD 350m non-cumulative trust securities due 2053 USD 750m non-cumulative trust securities due 2053 Perpetual subordinated notes 300m USD ﬂ oating rate notes Subordinated notes USD USD JPY USD USD JPY AUD NZD AUD AUD NZD NZD NZD USD NZD EUR AUD AUD USD AUD GBP EUR AUD AUD GBP NZD GBP 500m 4.4m 279.9m 6.1m 79m 434.1m 400m 100m 400m 100m 300m 125m 125m 550m 100m 300m 380m 350m 400m 300m 200m 500m 300m 300m 250m 350m 400m ﬁ xed notes due 2006 ﬂ oating rate notes due 2007 ﬂ oating rate notes due 2007 ﬂ oating rate notes due 2008 ﬂ oating rate notes due 2008 ﬂ oating rate notes due 2008 ﬂ oating rate notes due 2010 ﬁ xed notes due 20113 (called April 2006) ﬁ xed notes due 20124 ﬂ oating rate notes due 20123 ﬁ xed notes due 20123 ﬁ xed notes due 20123 ﬁ xed notes due 20123 ﬂ oating rate notes due 20133 ﬁ xed notes due 20133 ﬂ oating rate notes due 20133 ﬂ oating rate notes due 20143 ﬁ xed notes due 20144 ﬂ oating rate notes due 20153 ﬁ xed notes due 20154 ﬂ oating rate notes due 20153 ﬁ xed notes due 20154 ﬁ xed notes due 20164 ﬂ oating rate notes due 20163 ﬁ xed notes due 20164 ﬁ xed notes due 20164 ﬁ xed notes due 20184 Total loan capital Loan capital by currency AUD NZD USD GBP EUR JPY Australian dollars New Zealand dollars United States dollars Great British pounds Euro Japanese yen Interest rate % BBSW + 1.00 4.484 5.36 LIBOR + 0.15 7.55 LIBOR + 0.50 LIBOR + 0.50 LIBOR + 0.50 LIBOR + 0.53 LIBOR + 0.55 BBSW + 0.29 6.87 6.75 BBSW + 0.57 7.04 7.61 7.40 LIBOR + 0.55 6.46 EURIBOR + 0.375 BBSW + 0.41 6.50 LIBOR + 0.20 6.00 5.625 4.45 6.25 BBSW + 0.22 4.75 7.16 4.75 Consolidated The Company 2006 $m 1,000 468 1,003 2,471 401 401 – 6 3 8 106 5 400 – 400 100 263 109 109 735 88 510 380 350 535 295 506 861 298 300 613 306 968 8,254 11,126 3,523 875 3,262 2,087 1,371 8 11,126 2005 $m – 459 984 1,443 394 394 654 11 6 10 103 6 400 91 400 100 273 115 115 722 91 474 380 350 525 300 462 791 – – – – 921 7,300 9,137 1,930 685 3,862 1,383 1,265 12 9,137 2006 $m 1,000 468 1,003 2,471 401 401 – 6 3 8 106 5 400 – 400 100 – – – 735 – 510 380 350 535 295 506 861 298 300 613 – 968 7,379 10,251 3,523 – 3,262 2,087 1,371 8 10,251 2005 $m – 459 984 1,443 394 394 654 11 6 10 103 6 400 – 400 100 – – – 722 – 474 380 350 525 300 462 791 – – – – 921 6,615 8,452 1,930 – 3,862 1,383 1,265 12 8,452 1 On 23 September 2008 the margin of 1.00% can be reduced if the security is not redeemed or converted. 2 Under AIFRS, ANZ StEPS securities are now classiﬁ ed Loan Capital instead of Share Capital. 3 Callable ﬁ ve years prior to maturity. 4 Callable ﬁ ve years prior to maturity and reverts to ﬂ oating 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 ANZ StEPS and US Trust Securities, constitutes Tier 2 capital as deﬁ ned by the Australian Prudential Regulation Authority (APRA) for capital adequacy purposes. ANZ StEPS and the US Trust Securities constitutes Tier 1 capital, as deﬁ ned by APRA, for capital adequacy purposes. 41 Notes to the ﬁ nancial statements 29: Loan Capital (continued) 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 ﬂ oating 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 proﬁ ts 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 ﬂ oating rate to a ﬁ xed rate, or vice versa), margin and the frequency and timing of the distribution payment dates. The ﬁ rst reset date is 15 September 2008. Holders of ANZ StEPS can require exchange on any reset date or earlier if certain speciﬁ ed 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 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. ANZ StEPS qualify as Tier 1 capital as deﬁ ned by the Australian Prudential Regulation Authority. 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 stapled security. The issue was made in two tranches: USD350 million tranche with a coupon of 4.48% 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. 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 42 ANZ Full Financial Report 2006 the underlying note. Distributions are subject to certain payment tests (eg. APRA requirements and distributable proﬁ ts 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 investors 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 converted 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 deﬁ ned by the Australian Prudential Regulation Authority. Notes to the ﬁ nancial statements 30: Share Capital Number of issued shares Ordinary shares each fully paid Preference shares each fully paid Total number of issued shares The Company 2006 2005 1,836,572,115 500,000 1,826,449,480 10,500,000 1,837,072,115 1,836,949,480 ORDINARY SHARES Ordinary shares have no par value and entitle the holder to participate in dividends and the proceeds on winding up of the Company in proportion to the number of the shares held. On a show of hands every holder of fully paid ordinary shares present at a meeting in person or by proxy is entitled to one vote, and upon a poll one vote for each share held. Number of issued shares Balance at start of year Bonus option plan1 Dividend reinvestment plan1 ANZ employee share acquisition plan2 ANZ share option plan2 Share capital buyback3 Balance at end of year Ordinary share capital Balance at start of year Dividend reinvestment plan1 ANZ employee share acquisition plan2 ANZ share option plan2 Share Capital buyback3 Balance at end of year 1 Refer to note 7 for details of plan. 2 Refer to note 47 for details of plan. 3 Between January 2005 to March 2006, the Group bought back ordinary shares for a total value of $350 million. The Company 2006 2005 1,826,449,480 1,384,144 6,585,302 1,590,457 6,654,818 (6,092,086) 1,818,401,807 1,749,584 7,306,891 1,979,649 6,642,326 (9,630,777) 1,836,572,115 1,826,449,480 Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 8,053 165 90 109 (146) 7,943 153 57 104 (204) 8,053 165 90 109 (146) 7,943 153 57 104 (204) 8,271 8,053 8,271 8,053 43 Notes to the ﬁ nancial statements 30: Share Capital (continued) PREFERENCE SHARES 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 ﬂ oating 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 proﬁ ts 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 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 investors 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 Preference share balance at start of year - Euro Trust Securities1 - ANZ StEPS2 Less ANZ StEPS securities reclassiﬁ ed under AIFRS2 Adjusted preference share balance at start of year Preference share net proceeds from new issues during the year - Euro Trust Securities1 Preference share balance at end of year - Euro Trust Securities1 - ANZ StEPS2 Balance at end of year 2006 $m 871 987 1,858 (987) 871 – 871 871 – 871 2005 $m – 987 987 n/a 987 871 1,858 871 987 1,858 2006 $m 871 987 1,858 (987) 871 – 871 871 – 871 2005 $m – 987 987 n/a 987 871 1,858 871 987 1,858 1 There was no transaction cost relating to the Euro Trust Securities in the ﬁ nancial year ended 30 September 2006 (2005: $5 million). 2 Under AIFRS, ANZ StEPS securities are now classiﬁ ed as loan capital (refer note 29). 44 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 31: Reserves and Retained Earnings a) Asset revaluation reserve Restated balance at beginning of year b) Foreign currency translation reserve Restated balance at beginning of year Currency translation adjustments net of hedges Total foreign currency translation reserve c) Share option reserve1 Restated balance at beginning of year Share-based payments Transfer (to) retained earnings Total share option reserve d) Available-for-sale revaluation reserve Balance at start of year Adjustments on adoption of accounting policies speciﬁ ed by AASB 132 and AASB 1392 Restated balance at beginning of year Valuation gain recognised after tax Cumulative (gain) transferred to the income statement on sale of ﬁ nancial assets Total available-for-sale revaluation reserve e) Hedging reserve Balance at start of year Adjustments on adoption of accounting policies speciﬁ ed by AASB 132 and AASB 1392 Restated balance at beginning of year Gain (loss) recognised after tax Transferred (to) income statement Total hedging reserve f) General reserve Balance at start of year Transfer (to) retained earnings3 Total general reserve g) Capital reserve Balance at start of year Transfer (to) retained earnings3 Total capital reserve Total reserves Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m – – – – (443) (203) (646) – (443) (443) (213) 97 (116) – (213) (213) 67 (3) (1) 63 n/a (10) (10) 20 (8) 2 n/a 162 162 121 (56) 227 181 (181) – 149 (149) – (354) 44 23 – 67 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 181 – 181 149 – 149 (46) 67 (3) (1) 63 n/a (11) (11) 15 (7) (3) n/a 11 11 36 (7) 40 11 (11) – – – – 44 23 – 67 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 11 – 11 – – – (16) (135) 45 Notes to the ﬁ nancial statements 31: Reserves and Retained Earnings (continued) Retained earnings Restated balance at start of year Adjustment on adoption of accounting policies speciﬁ ed by AASB 4, AASB 132 and AASB 1394 Restated balance at beginning of year Proﬁ t attributable to shareholders of the Company Transfers from (to) reserves Actuarial gain (loss) on deﬁ ned beneﬁ t plans after tax5 Ordinary share dividends paid Preference share dividends paid Retained earnings at end of year Total reserves and retained earnings Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 9,646 8,407 7,310 6,989 (431) n/a (201) n/a 9,215 3,688 331 (55) (2,068) (27) 11,084 10,730 8,407 3,175 – 25 (1,877) (84) 9,646 9,600 7,109 3,174 12 (54) (2,068) – 8,173 8,157 6,989 2,175 – 23 (1,877) – 7,310 7,175 1 Further information about share based payments to employees is disclosed in note 47 to the ﬁ nancial statements. 2 ANZ has taken the election, pursuant to accounting standard AASB 1 (36A), to not comply with accounting standards AASB 132 and AASB 139 in the comparative information in its ﬁ rst AIFRS ﬁ nancial report. Therefore the 2005 year is nil for this line item. 3 The transfer of balances from the general and capital reserves to retained earnings represent items of a distributable nature. 4 Comprises: - Remeasurement of the carrying value of the Group’s investment in INGA as at 1 October 2005 - Adjustment in respect of hedging derivative ﬁ nancial instruments as at 1 October 2005 - Recognition of the fair value of derivatives relating to securitisation and structured ﬁ nance transactions as at 1 October 2005 - Deferral of previously recognised fees now treated as an adjustment to yield on 1 October 2005 - Recalculation of the loan impairment provision on 1 October 2005 in line with change in policy as covered in note 1(xi). 5 ANZ has taken the option available under AASB 119 to recognise actuarial gains/losses on deﬁ ned beneﬁ t superannuation plans directly in retained proﬁ ts (refer note 1(xx) and note 46). a) Asset Revaluation Reserve The asset revaluation reserve related to the revaluation of premises and equipment and investments in shares in controlled entities. The impact of adoption of AIFRS reset the asset revaluation reserve to nil. b) Foreign Currency Translation Reserve The translation reserve comprises exchange differences, net of hedges, arising on translation of the ﬁ nancial statements of foreign operations, as described in note 1(iii). Refer note 51(v) for the impact of adopting AIFRS on the foreign currency translation reserve. When a foreign operation is sold, attributable exchange differences are recognised in the income statement. c) Share Option Reserve The share options reserve arises on the grant of share options to selected employees under the ANZ share option plan. Amounts are transferred out of the reserve and into share capital when the options are exercised. Refer to note 1(xx). d) Available-for-sale Revaluation Reserve Changes in the fair value and exchange differences on the revaluation of available-for-sale ﬁ nancial assets are taken to the available-for-sale revaluation reserve. Where a revalued available-for-sale ﬁ nancial asset is sold, that portion of the reserve which relates to that ﬁ nancial asset, is realised and recognised in the income statement. Where the available-for-sale ﬁ nancial asset is impaired, that portion of the reserve which relates to that asset is recognised in the income statement. Refer to note 1(ix). e) Hedging Reserve The hedging reserve represents hedging gains and losses recognised on the effective portion of cashﬂ ow hedges. The cumulative deferred gain or loss on the hedge is recognised in the income statement when the hedged transaction impacts the income statement. Refer to note 1(viii). f) General Reserve and g) Capital Reserve The transfer of balances from the general and capital reserves to retained earnings represent items of a distributable nature. 32: Minority Interests Share capital Retained proﬁ ts Total minority interests Consolidated 2006 $m 14 20 34 2005 $m 11 16 27 46 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 33: Average Balance Sheet and Related Interest Averages used in the following table are predominantly daily averages. Interest income ﬁ gures are presented on a tax-equivalent basis. Impaired loans are included under the interest earning asset category ‘loans and advances’. Intragroup interest earning assets and interest bearing liabilities are treated as external assets and liabilities for the geographic segments. The data in the table below is not comparable as the 2005 comparatives have not been restated to reﬂ ect the impact of AASB 132 – “Financial Instruments: Presentation and Disclosure” and AASB 139 – “Financial Instruments: Recognition and Measurement”. Interest earning assets Due from other ﬁ nancial institutions Australia New Zealand Overseas markets Trading and available-for-sale assets/investment securities Australia New Zealand Overseas markets Loans and advances Australia New Zealand Overseas markets Customer’s liabilities for acceptances1 Australia Overseas markets Other assets Australia New Zealand Overseas markets Intragroup assets Overseas markets Intragroup elimination Non-interest earning assets Derivative ﬁ nancial instruments Australia New Zealand Overseas markets Customer’s liabilities for acceptances1 Premises and equipment Other assets Provision for credit impairment 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 Average balance $m 2006 Interest $m Average rate % Average balance $m 2005 Interest $m Average rate % 1,442 2,236 4,061 15,957 2,459 2,883 71 146 190 946 182 134 170,118 65,134 9,538 12,478 5,653 671 13,786 216 3,833 4,361 4,155 11,501 958 11 317 283 261 559 4.9 6.5 4.7 5.9 7.4 4.6 7.3 8.7 7.0 6.9 5.1 8.3 6.5 6.3 4.9 807 2,242 2,664 10,799 2,226 2,992 42 126 90 589 133 100 152,912 61,035 9,060 10,671 5,071 461 – – 2,215 2,912 3,319 9,473 – – 110 162 189 330 5.2 5.6 3.4 5.5 6.0 3.3 7.0 8.3 5.1 – – 5.0 5.6 5.7 3.5 311,680 22,860 (11,501) (559) 262,656 18,074 (9,473) (330) 300,179 22,301 7.4 253,183 17,744 7.0 9,600 2,593 (579) – 1,074 13,223 (1,567) (419) (191) 23,734 323,913 220,710 81,072 33,632 335,414 (11,501) 323,913 31.9% 5,082 1,645 (404) 13,240 1,094 13,100 (1,823) (608) (15) 31,311 284,494 190,595 74,473 28,899 293,967 (9,473) 284,494 33.0% 1 Customer’s liabilities for acceptances have been classiﬁ ed as interest earning assets following the adoption of AIFRS on 1 October 2005. This is consistent with the reclassiﬁ cation of commercial bill margins from fees to net interest. 47 Notes to the ﬁ nancial statements 33: Average Balance Sheet and Related Interest (continued) 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 ﬁ nancial institutions Australia New Zealand Overseas markets Commercial paper Australia New Zealand Overseas markets Borrowing corporations’ debt Australia New Zealand Liability for acceptances1 Australia Overseas markets Loan capital, bonds and notes Australia New Zealand Overseas markets Other liabilities Australia New Zealand Overseas markets Intragroup liabilities Australia New Zealand Average balance $m 42,907 26,363 13,699 15,087 6,841 566 38,935 8,494 1,003 4,151 1,961 5,965 10,858 6,315 7,373 9,117 1,863 13,786 216 45,244 9,293 135 5,122 149 510 5,146 6,355 2006 Interest $m 2,445 1,839 646 480 305 10 1,751 502 22 223 107 306 637 470 333 522 130 799 10 2,677 703 7 304 94 36 169 390 Average rate % Average balance $m 2005 Interest $m 2,126 1,659 383 413 291 3 1,432 412 13 86 93 166 443 521 171 518 125 – – 39,388 25,582 11,075 13,896 7,210 417 33,950 7,992 794 1,456 1,680 4,642 7,879 7,717 6,260 9,336 1,954 – – 38,305 4,757 137 2,138 335 4 4,593 106 90 3,648 5,825 451 101 17 (13) 343 Average rate % 5.4 6.5 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 5.7 7.0 4.7 3.2 4.5 1.8 4.5 5.9 2.2 5.4 5.5 5.1 5.9 7.4 4.5 5.7 7.0 5.8 4.6 5.9 7.6 5.2 n/a n/a n/a 3.3 6.1 Intragroup elimination (11,501) (559) (9,473) (330) 287,454 15,917 238,689 12,231 275,953 15,358 5.6 229,216 11,901 5.2 1 Liability for acceptances have been classiﬁ ed as interest bearing liabilities following the adoption of AIFRS on 1 October 2005. This is consistent with the reclassiﬁ cation of commercial bill margins from fees to net interest. 48 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 33: Average Balance Sheet and Related Interest (continued) Non-interest bearing liabilities Deposits Australia New Zealand Overseas markets Derivative ﬁ nancial instruments Australia New Zealand Overseas markets Liability for acceptances1 Other liabilities Total liabilities Total average liabilities Australia New Zealand Overseas markets Intragroup elimination Total average shareholders’ equity Ordinary share capital2 Preference share capital Total average liabilities and shareholders’ equity % of total average liabilities attributable to overseas activities 2006 Average balance $m 2005 Average balance $m 4,412 3,682 1,123 8,642 2,663 (635) 4,147 3,535 976 4,519 2,104 (483) – 13,240 9,457 8,607 29,344 36,645 305,297 265,861 210,364 75,331 31,103 180,325 70,038 24,971 316,798 275,334 (11,501) (9,473) 305,297 265,861 17,745 871 16,949 1,684 18,616 18,633 323,913 284,494 32.8% 33.5% 1 Liability for acceptances have been classiﬁ ed as interest bearing liabilities following the adoption of AIFRS on 1 October 2005. This is consistent with the reclassiﬁ cation of commercial bill margins from fees to net interest. Includes reserves and retained earnings. 2 49 Notes to the ﬁ nancial statements 34: Interest Spreads and Net Interest Average Margins Net interest income1,4 Australia New Zealand Overseas markets Average interest earning assets Australia New Zealand Overseas markets Intragroup elimination Gross earnings rate2,4 Australia New Zealand Overseas markets Group Interest spreads and net interest average margins may be analysed as follows4 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 15. 4 Interest in the 2006 year includes deferred fees and costs that are considered part of the effective yield and have therefore been reclassiﬁ ed as interest. 50 ANZ Full Financial Report 2006 2006 $m 2005 $m 4,763 1,724 456 6,943 3,818 1,612 413 5,843 205,136 74,190 32,354 (11,501) 166,733 68,415 27,508 (9,473) 300,179 253,183 % % 7.20 8.44 5.64 7.43 1.95 (0.01) 1.94 0.38 2.32 1.74 (0.01) 1.73 0.59 2.32 1.02 (0.02) 1.00 0.41 1.41 1.87 (0.01) 1.86 0.45 2.31 6.84 8.03 4.25 7.01 1.87 (0.01) 1.86 0.43 2.29 1.86 (0.01) 1.85 0.51 2.36 1.04 (0.02) 1.02 0.48 1.50 1.83 (0.01) 1.82 0.48 2.30 Notes to the ﬁ nancial statements 35: Financial Risk Management STRATEGY IN USING FINANCIAL INSTRUMENTS Financial instruments are fundamental to the Group’s business, constituting the core element of its operations. The risks associated with ﬁ nancial instruments are a signiﬁ cant component of the risks faced by the Group. Financial instruments create, modify or reduce the credit, market (including traded or fair value risks and non-traded or interest and foreign currency related risks) and liquidity risks of the Group’s balance sheet. These risks and the Group’s policies and objectives for managing such risks are outlined below. The Group’s overall risk management programme focuses on the unpredictability of ﬁ nancial markets and seeks to minimise potential adverse effects on the ﬁ nancial performance of the Group. The Group uses derivative ﬁ nancial instruments such as foreign exchange contracts, and interest rate contracts to hedge certain risk exposures. This is outlined in Note 12. CREDIT RISK Credit risk is the risk of ﬁ nancial loss from counterparties being unable to fulﬁ l their contractual loan or credit equivalent obligations. 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. Credit Risk Management This risk management framework exists across the Group with the aim of ensuring a structured and disciplined approach is maintained in achieving the objective set by the Board. The framework is top-down and focuses on policies, people, skills, vision, values, controls, concentrations and portfolio balance. It is supported by portfolio analysis and asset-writing strategies which assist asset-writing direction and identify areas requiring attention. The effectiveness of the framework is validated through a series of compliance and monitoring processes overseen within a risk committee structure. All credit decisions greater than a predetermined amount require approval by both business writers and independent risk personnel. The Group sets strict limits on the acceptable level of credit risk. Acceptance of credit risk is ﬁ rstly based on a counterparty’s assessed capacity to meet contractual obligations, in particular interest and capital repayments. Obtaining collateral further supports this. Credit Risk Measurement The relative ‘Probability of Default’ (PD) for all counterparties is captured by the Group’s Credit Rating process, which assigns an internal risk rating to all borrowers and counterparties. The risk rating assessment utilises quantitative and independently validated measurement tools and each internal risk rating corresponds to the statistical probability of a customer (in that rating class) defaulting within the next 12-month period. This is the foundation of the Group’s risk grade proﬁ le. The Group’s risk grade proﬁ les are subject to change through new counterparty acquisitions and/or existing counterparty movements in either risk or volume. All counterparty risk grades are subject to frequent review, including statistical and behavioural reviews in consumer and small business segments and individual counterparty reviews in segments with larger single name borrowers. Credit Risk Mitigation The Credit Risk objectives of the Group are set by the Board and are strategically implemented and monitored within a tiered structure of delegated authority, designed to oversee multiple facets of credit risk, including asset writing strategies, credit policies/controls, single exposures, portfolio monitoring and risk concentrations. Credit Risk is mitigated by the independence of the Credit chain and is supported by comprehensive risk analysis, risk tools, monitoring processes and policies. Concentrations of credit risk Concentrations of credit risk arise when a number of customers are engaged in similar business activities or activities within the same geographic region, or when they have similar risk characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The Group monitors its portfolio, largely comprising net loans and advances, customer’s liabilities for acceptances and available-for-sale loan assets, to assess risk concentrations. Concentration limits are used to guard against large single customer or correlated credit risks. 51 Notes to the ﬁ nancial statements 35: Financial Risk Management (continued) Concentrations of credit risk by industry and geographic analysis: Based on carrying amount at 30 September 2006 and 30 September 2005 Net loans and advances 2006 $m 2005 $m Customer liability for acceptances 2006 $m 2005 $m Available-for-sale loans and advances 2006 $m 2005 $m Total 2006 $m 2005 $m Consolidated Australia Agriculture, forestry, ﬁ shing and mining Business service Construction Entertainment, leisure and tourism Financial, investment and insurance Government and ofﬁ cial institutions Lease ﬁ nance Manufacturing Personal1 Real estate – commercial2 Real estate – mortgage3 Retail and wholesale trade Other New Zealand Agriculture, forestry, ﬁ shing and mining Business service Construction Entertainment, leisure and tourism Financial, investment and insurance Government and ofﬁ cial institutions Lease ﬁ nance Manufacturing Personal1 Real estate – commercial2 Real estate – mortgage3 Retail and wholesale trade Other Overseas Markets Agriculture, forestry, ﬁ shing and mining Business service Construction Entertainment, leisure and tourism Financial, investment and insurance Government and ofﬁ cial institutions Lease ﬁ nance Manufacturing Personal1 Real estate – commercial2 Real estate – mortgage3 Retail and wholesale trade Other 7,079 4,882 3,757 4,408 4,795 52 2,580 7,050 15,579 10,229 100,362 9,811 9,923 5,626 4,151 3,270 3,861 4,924 65 2,854 6,087 13,702 10,970 89,909 9,074 8,796 1,116 687 202 1,186 970 7 – 1,508 239 4,108 – 2,155 1,060 1,023 600 173 1,201 1,215 4 – 1,759 251 4,079 – 1,942 1,074 180,507 163,289 13,238 13,321 1,030 12 146 243 132 – – 113 – – – – 270 1,946 11,180 627 554 756 2,573 656 421 1,991 3,041 5,071 37,063 1,540 3,456 10,310 662 625 877 2,011 319 639 2,224 2,626 4,453 34,593 1,578 3,473 68,929 64,390 718 209 73 681 536 237 179 2,562 651 205 881 1,137 2,133 558 134 141 219 345 285 133 2,250 475 213 743 940 2,389 – – – – – – – – – – – – – – 9 – – 4 68 – – 86 – – – 30 – – – – – – – – – – – – – – – – – – – 16 – – 37 6 – – 68 1 10,202 8,825 197 128 – – – – – – – – – – – – – – – – – – – – – – – – – – – – Gross total 259,638 236,504 13,435 13,449 1,946 Individual provision for credit impairment Collective provision for credit impairment4 Income yet to mature Net total (286) (1,940) (273) (2,167) (2,226) (2,440) (2,002) (1,574) – – – – – – – – – – – – 255,410 232,490 13,435 13,449 1,946 1 Personal includes consumer lending except for lease ﬁ nance facilities and those facilities secured by a mortgage. 2 Real Estate Commercial includes all business lending relating to commercial property. 3 Real Estate Mortgage includes all consumer lending secured by a mortgage. 4 2005 comparatives are calculated under previous AGAAP. 52 ANZ Full Financial Report 2006 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 9,225 5,581 4,105 5,837 5,897 59 2,580 8,671 15,818 14,337 100,362 11,966 11,253 6,649 4,751 3,443 5,062 6,139 69 2,854 7,846 13,953 15,049 89,909 11,016 9,870 195,691 176,610 11,180 627 554 756 2,573 656 421 1,991 3,041 5,071 37,063 1,540 3,456 10,310 662 625 877 2,011 319 639 2,224 2,626 4,453 34,593 1,578 3,473 68,929 64,390 727 209 73 685 604 237 179 2,648 651 205 881 1,167 2,133 558 134 141 219 361 285 133 2,287 481 213 743 1,008 2,390 10,399 8,953 275,019 249,953 (286) (1,940) (273) (2,167) (2,226) (2,440) (2,002) (1,574) 270,791 245,939 Notes to the ﬁ nancial statements 35: Financial Risk Management (continued) Aggregate concentrations of credit risk by industry analysis1 Consolidated Agriculture, forestry, ﬁ shing and mining Business service Construction Entertainment, leisure and tourism Financial, investment and insurance Government and ofﬁ cial institutions Lease ﬁ nance Manufacturing Personal2 Real estate – commercial3 Real estate – mortgage4 Retail and wholesale trade Other 2006 $m 2005 $m 21,132 6,417 4,732 7,278 9,074 952 3,180 13,310 19,510 19,613 138,306 14,673 16,842 17,517 5,547 4,209 6,158 8,511 673 3,626 12,357 17,060 19,715 125,245 13,602 15,733 275,019 249,953 1 Calculated prior to deduction for provisions and unearned income. 2 Personal includes consumer lending except for lease ﬁ nance facilities and those facilities secured by a mortgage. 3 Real Estate commercial includes all business lending relating to commercial property. 4 Real Estate mortgage includes all consumer lending secured by a mortgage. MARKET RISK Market risk is the risk to the Group’s earnings arising from changes in interest rates, currency exchange rates, credit spreads, or from ﬂ uctuations in bond, commodity or equity prices. Market risk management and control responsibilities To facilitate the management, control, measurements and reporting of market risk, ANZ has grouped market risk into two broad categories: a) Traded market risk:- This is the risk of loss from changes in the value of ﬁ nancial instruments due to movements in price factors for both physical and derivative trading positions. They arise in trading transactions where ANZ acts as principal with clients or with the market. The principal risk categories monitored are: Currency risk is the potential loss arising from the decline in the value of a ﬁ nancial instrument due to changes in foreign exchange rates or their implied volatilities. Interest rate risk is the potential loss arising from the change in the value of a ﬁ nancial instrument due to changes in market interest rates or their implied volatilities. Credit Spread risk is the potential loss arising from a decline in value of an instrument due to a deterioration in the credit worthiness of the issuer of the instrument. b) Non-traded market risk (or balance sheet risk):- This embraces the management of non-traded interest rate risk, liquidity, and the risk to the AUD denominated value of the Group’s capital and earnings as a result of foreign exchange rate movements. The Board of Directors through the Risk 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 Ofﬁ cer, is responsible for traded market risk, while the Group Asset and Liability Committee, chaired by the Chief Financial Ofﬁ cer, 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. In addition, the Group Asset and Liability Committee delegates to the Credit and Trading Risk Committee responsibility for the monthly monitoring of non-traded market risk exposures. The Group Asset and Liability Committee reviews balance sheet based risk measures and strategies quarterly, or more frequently if required. 53 Notes to the ﬁ nancial statements 35: Financial Risk Management (continued) 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 conﬁ dence 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% conﬁ dence 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, it 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 market risk. Traded and non-traded market risks are 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% conﬁ dence Foreign exchange Interest rate Credit spread Diversiﬁ cation beneﬁ t Total VaR Value at risk at 99% conﬁ dence Foreign exchange Interest rate Credit spread Diversiﬁ cation beneﬁ t Total VaR As at Sep 06 $m High for year Sep 06 $m Low for year Sep 06 $m Average for year Sep 06 $m As at Sep 05 $m High for year Sep 05 $m Low for year Sep 05 $m Average for year Sep 05 $m 0.5 1.7 1.1 (1.4) 1.9 0.6 2.0 2.8 (2.9) 2.5 1.6 3.2 1.7 n/a 3.6 2.0 4.4 3.6 n/a 4.9 0.3 0.8 0.7 n/a 0.9 0.3 1.3 1.1 n/a 1.2 0.7 1.8 1.1 (1.5) 2.1 0.8 2.4 2.3 (2.6) 2.9 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 VaR is calculated separately for Foreign Exchange/Commodities and for Interest Rate/Debt Markets businesses as well as for the Group. The diversiﬁ cation beneﬁ t reﬂ ects the correlation implied by historical rates between Foreign Exchange/Commodities and Interest Rate/Debt Markets. 54 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 35: Financial Risk Management (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 manage the market value of the Group’s capital. Liquidity risk is dealt with in the next section. 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 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 ﬁ gures covering non-traded interest rate risk. As at Sep 06 $m High for year Sep 06 $m Low for year Sep 06 $m Average year Sep 06 $m As at Sep 05 $m High for year Sep 05 $m Low for year Sep 05 $m Average year Sep 05 $m Value at risk at 97.5% conﬁ dence Group 17.7 19.3 13.7 16.2 14.2 24.0 13.7 18.1 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 succeeding 12 months. This is a standard risk quantiﬁ cation tool. The ﬁ gures in the table below indicate the outcome of this risk measure for the current and previous ﬁ nancial 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 signiﬁ es 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 2006 2005 1.50% 1.85% 0.81% 1.51% 1.73% 1.87% 0.25% 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 quantiﬁ es 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 reﬂ ective of the actual interest rate sensitivity (for example, products priced at the Group’s discretion), a proﬁ le 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 ofﬁ cial rate increase the Group does not reprice certain customer business until the ﬁ rst repricing date after the ofﬁ cial 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 identiﬁ ed. 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 proﬁ les. Foreign Currency Related Risks This risk relates to the potential loss arising from the decline in the value of foreign currency positions due to changes in foreign exchange rates. 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 reﬂ ected in the foreign currency translation reserve. The Group incurs some non-traded foreign currency risk related to the potential repatriation of proﬁ ts from non-Australian business units. This risk is routinely monitored and hedging is conducted in accordance with policy and where it is likely to add shareholder value. 55 Notes to the ﬁ nancial statements 35: Financial Risk Management (continued) LIQUIDITY RISK The primary objective of the Group’s liquidity management framework and processes is to ensure that the Group has sufﬁ cient liquidity to meet its obligations as they fall due across a wide range of operating circumstances. The following key principles underpin the Group’s Board-approved liquidity management framework. The Group aims to adopt a conservative, low risk approach to liquidity management. The Group holds a portfolio of high quality liquid assets to buffer it against short term adverse conditions and to support day-to-day operations. Liquidity management reporting includes scenario analyses which quantify the Group’s forecast position under both normal and extreme, name-crisis conditions. The Group has detailed contingency plans in the event of a liquidity crisis. The Group targets a diversiﬁ ed funding base, avoiding undue concentrations by investor type, maturity, source and currency. Minimum compositional requirements based on the liquidity term of the Group’s funding base are established and regularly monitored to ensure that the Group remains well positioned relative to the other major Australian trading banks. Analysis of the Group’s liquidity position under differing scenarios is an important part of daily liquidity risk management. Future cashﬂ ows are projected under two scenarios: a) a short term crisis which assumes that a number of extreme liquidity events occur concurrently putting pressure on the Group’s ability to meet its obligations to depositors; and b) normal business conditions which projects cashﬂ ows on the basis that future business conditions will be much the same as now. These cashﬂ ow projections make use of contractual liquidity information to which are applied assumptions about the likely behaviour of individual customer product classes under each scenario. Maturity analysis of the Group’s assets and liabilities The tables below analyse the Group’s assets and liabilities, as required by AASB 130 ‘Disclosures in the Financial Statements of Banks and Similar Financial Institutions’, into relevant maturity groupings based on the remaining period at balance sheet date to the contractual maturity date. This is not how the Group manages its liquidity risk. The management of this risk is detailed above. Maturity analysis for selected assets and liabilities at 30 September 2006: Consolidated Assets Due from other ﬁ nancial institutions Available-for-sale assets Net loans and advances Customer’s liabilities for acceptances Liabilities Due to other ﬁ nancial institutions Deposits and other borrowings Bonds and notes Loan capital Less than1 3 months $m 3 to 122 months $m 1 to 5 years $m After 5 years $m No maturity speciﬁ ed $m 8,420 5,937 24,545 13,435 13,407 165,145 662 – 820 1,773 36,139 – 659 27,094 5,633 – 372 2,338 48,227 – 10 12,383 41,984 528 53 540 146,499 – 42 15 1,771 10,197 – 65 – – – 157 – 401 Total $m 9,665 10,653 255,410 13,435 14,118 204,794 50,050 11,126 Maturity analysis for selected assets and liabilities at 30 September 2005: Consolidated Assets Due from other ﬁ nancial institutions Available-for-sale assets Net loans and advances Customer’s liabilities for acceptances Liabilities Due to other ﬁ nancial institutions Deposits and other borrowings Bonds and notes Loan capital 1 Includes credit cards. 2 Includes revolving facilities. Less than1 3 months $m 3 to 122 months $m 1 to 5 years $m After 5 years $m No maturity speciﬁ ed $m Total $m 4,393 6,771 22,432 13,449 10,013 157,135 1,823 – 424 1,523 30,337 – 1,029 22,432 6,463 654 393 1,454 46,788 – 123 10,580 29,249 536 1,138 285 132,933 – 862 21 1,538 7,553 – 9 – – 6,348 10,042 232,490 13,449 – 154 – 394 12,027 190,322 39,073 9,137 56 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 36: Interest Rate Risk The Group has an exposure to the effects of ﬂ uctuations in market interest rates on both cashﬂ ow and fair value risks associated with its ﬁ nancial assets and liabilities. Interest margins are impacted as a result of such changes and there are Group strategies in place to manage these risks. The tables following summarises the Group’s exposure to interest rate risks as at 30 September 2006 and 30 September 2005. The tables show the interest rate sensitivity (or repricing proﬁ le) of the Group’s ﬁ nancial assets and liabilities based on the earlier of contractual maturity or repricing. Repricing gaps are based upon the earliest of contractual repricing or maturity dates information except where the contractual terms are not considered to be reﬂ ective of actual interest rate sensitivity (eg. 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. Repricing gaps arise 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 which have been approved by the Board. The majority of the Group’s loan/deposit business is conducted in the domestic balance sheets of Australia and New Zealand and is priced on a ﬂ oating rate basis. The mix of repricing maturities in these books is inﬂ uenced by the underlying ﬁ nancial 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 reﬂ ection of the positions in Australia and New Zealand. In Australia and New Zealand, a combination of pricing initiatives and derivatives 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 proﬁ le’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 speciﬁ ed by policy. The objectives and policies in managing the interest risks are also covered under note 35 ‘Financial Risk Management’, under the heading ‘Market risk’. At 30 September 2006 Liquid assets and due from other ﬁ nancial institutions Trading and available-for-sale assets Derivative ﬁ nancial instruments Net loans and advances Other assets1 Less than 3 months $m 21,572 11,493 – 176,511 13,890 Between 3 months and 6 months $m Between 6 months and 12 months $m 1,121 1,874 – 9,250 32 175 697 – 14,327 55 Between 1 year and 5 years $m 200 4,051 – 54,244 336 After 5 years $m – 1,697 – 1,078 49 Not bearing interest $m 1,616 20 9,164 – 12,319 Total $m 24,684 19,832 9,164 255,410 26,681 Total assets 223,466 12,277 15,254 58,831 2,824 23,119 335,771 Certiﬁ cates of deposit and term deposits Other deposits Other borrowings and due to other ﬁ nancial institutions Derivative ﬁ nancial instruments Other liabilities1 Bonds, notes and loan capital 58,543 71,394 31,808 – 17,230 35,858 11,209 776 4,994 – 3 1,961 6,985 1,556 3,874 – 3 1,014 6,142 5,025 3,996 – 658 19,850 25 1 875 – 291 2,493 20 10,718 971 8,753 8,839 – 82,924 89,470 46,518 8,753 27,024 61,176 Total liabilities 214,833 18,943 13,432 35,671 3,685 29,301 315,865 Total equity Derivative items affecting interest rate sensitivity – (563) – 8,896 – 596 – (10,789) – 1,860 19,906 – 19,906 – Interest sensitivity gap – net – cumulative 8,070 8,070 2,230 10,300 2,418 12,718 12,371 25,089 999 26,088 (26,088) – – – 1 Customer’s liabilities for acceptances have been classiﬁ ed as interest earning assets following the adoption of AIFRS on 1 October 2005. 57 Notes to the ﬁ nancial statements 36: Interest Rate Risk (continued) At 30 September 2005 Liquid assets and due from other ﬁ nancial institutions Trading and investment securities Derivative ﬁ nancial instruments Net loans and advances Other assets Less than 3 months $m 13,511 11,044 – 164,892 318 Between 3 months and 6 months $m Between 6 months and 12 months $m Between 1 years and 5 years $m 984 1,263 – 8,621 55 286 627 – 14,061 111 259 2,489 – 45,461 570 After 5 years $m 1,082 807 – 1,032 77 Not bearing interest $m 1,827 97 6,511 (1,577) 26,477 Total $m 17,949 16,327 6,511 232,490 27,608 Total assets 189,765 10,923 15,085 48,779 2,998 33,335 300,885 Certiﬁ cates of deposit and term deposits Other deposits Other borrowings and due to other ﬁ nancial institutions Derivative ﬁ nancial instruments Other liabilities Bonds, notes and loan capital 58,515 58,497 35,113 – 169 28,207 10,176 898 4,055 – 1 2,585 5,190 1,771 3,007 – 14 1,235 4,565 4,614 2,495 – 479 11,830 11 46 1,020 – 286 4,353 – 10,378 1,998 7,006 22,833 – 78,457 76,204 47,688 7,006 23,782 48,210 Total liabilities 180,501 17,715 11,217 23,983 5,716 42,215 281,347 Total equity Derivative items affecting interest rate sensistivity – 2,013 – 9,271 – (2,879) – (11,737) – 3,332 19,538 – 19,538 – Interest sensitivity gap – net – cumulative 11,277 11,277 2,479 13,756 989 14,745 13,059 27,804 614 28,418 (28,418) – – – 58 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 37: Fair Value of Financial Assets and Financial Liabilities AIFRS requires disclosure of the fair value of ﬁ nancial instruments. The disclosures exclude all non-ﬁ nancial instruments, such as income taxes and regulatory deposits. The aggregate 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. Quoted market prices, where available, are used as the measure of fair value. In cases where quoted market prices are not available, fair values are based on present value estimates or other valuation techniques. For the majority of short-term ﬁ nancial instruments, deﬁ ned as those which reprice or mature in 90 days or less, with no signiﬁ cant change in credit risk, the fair value was assumed to equate to the carrying amount in the Group’s balance sheet. The fair values are based on relevant information available as at 30 September 2006. While judgement is used in obtaining the fair value of ﬁ nancial instruments, there are inherent weaknesses in any estimation technique. Many of the estimates involve uncertainties and matters of signiﬁ cant judgement and changes in underlying assumptions could signiﬁ cantly affect these estimates. Furthermore, market prices or rates of discount are not available for many of the ﬁ nancial instruments valued and surrogates have been used which may not reﬂ ect the price that would apply in an actual sale. The fair value amounts have not been updated for the purposes of these ﬁ nancial statements since 30 September 2006, and therefore the fair value of the ﬁ nancial instruments subsequent to 30 September 2006 may be different from the amounts reported. Financial assets have been classed into categories following the adoption of AIFRS on 1 October 2005, namely amortised cost, ﬁ nancial assets at fair value through proﬁ t and loss, and available-for-sale ﬁ nancial assets. Similarly ﬁ nancial liabilities have been classiﬁ ed into two categories, namely amortised cost and ﬁ nancial liabilities at fair value through proﬁ t and loss. The signiﬁ cant accounting policies in note 1 describe how the categories of ﬁ nancial assets and ﬁ nancial liabilities are measured and how income and expenses, including fair value gains and losses, are recognised. The carrying amount and fair value (2005: net fair value) of the Group’s ﬁ nancial assets and ﬁ nancial liabilities are set out below. Carrying amount Fair value At amortised cost 2006 $m At fair value through proﬁ t or loss 2006 $m Available- for-sale assets 2006 $m At amortised cost 2006 $m At fair value through proﬁ t or loss 2006 $m Available- for-sale assets 2006 $m Total 2006 $m Total carrying amount 2005 $m Net fair value 2005 $m Total 2006 $m Consolidated Financial assets Liquid assets Due from other ﬁ nancial institutions Trading securities Derivative ﬁ nancial instruments Available-for-sale assets Net loans and advances1 Shares in associates and joint venture entities Customer’s liabilities for acceptances Other ﬁ nancial assets 15,019 9,665 – – – 255,410 2,200 13,435 5,379 – – 9,179 9,164 – – – – – – – – – 10,653 – 15,019 9,665 9,179 9,164 10,653 255,410 15,019 9,665 – – – 255,072 – – – 2,200 13,435 5,379 2,807 13,435 5,379 – – 9,179 9,164 – – – – – – – – – 10,653 – 15,019 9,665 9,179 9,164 10,653 255,072 11,601 6,348 6,285 6,511 10,042 232,490 11,601 6,348 6,285 7,103 10,020 232,299 – – – 2,807 13,435 5,379 1,926 13,449 6,464 2,309 13,449 6,464 Total ﬁ nancial assets 301,108 18,343 10,653 330,104 301,377 18,343 10,653 330,373 295,116 295,878 Financial liabilities Due to other ﬁ nancial institutions Derivative ﬁ nancial instruments Deposits and other borrowings Liability for acceptances Payables and other liabilities Bonds and notes1 Loan capital1 14,118 – 204,794 13,435 9,910 46,439 8,348 – 8,753 – – – 3,611 2,778 Total ﬁ nancial liabilities 297,044 15,142 – – – – – – – – 14,118 8,753 204,794 13,435 9,910 50,050 11,126 14,118 – 204,752 13,435 9,910 46,440 8,344 – 8,753 – – – 3,611 2,778 312,186 296,999 15,142 – – – – – – – – 14,118 8,753 204,752 13,435 9,910 50,051 11,122 12,027 7,006 190,322 13,449 6,914 39,073 9,137 12,027 7,203 190,274 13,449 6,914 39,137 9,215 312,141 277,928 278,219 1 Fair value hedging is applied to ﬁ nancial assets within net loans and advances and liabilities within bonds and notes and loan capital. The resulting fair value adjustments mean that the carrying value differs from the amortised cost. 59 PAYABLES AND OTHER FINANCIAL LIABILITIES This category includes accrued interest and fees payable for which the carrying amount is considered to approximate the fair value. COMMITMENTS AND CONTINGENCIES As outlined in note 45, 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 (USED IN THE NET FAIR VALUE CALCULATION AS AT 30 SEPTEMBER 2005) The fair value of ﬁ nancial 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 as at 30 September 2005 would not differ materially from fair values calculated in accordance with SFAS 107. Notes to the ﬁ nancial statements 37: Fair Value of Financial Assets and Financial Liabilities (continued) LIQUID ASSETS AND DUE FROM/TO OTHER FINANCIAL INSTITUTIONS The carrying values on these ﬁ nancial 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 fair value. Fair 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. DERIVATIVE FINANCIAL INSTRUMENTS The fair values of derivative ﬁ nancial instruments such as interest rate swaps and currency swaps are calculated using discounted cash ﬂ ow 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 are valued using market prices and options valuation models as appropriate. AVAILABLE-FOR-SALE ASSETS AND INVESTMENT SECURITIES Fair value is based on quoted market prices or broker or dealer price quotations. If this information is not available, fair value is estimated using quoted market prices for securities with similar credit, maturity and yield characteristics. NET LOANS AND ADVANCES AND ACCEPTANCES The carrying value of loans and advances and acceptances includes deferred fees and expenses, and is net of provision for credit impairment and income yet to mature. The estimated fair value of loans, advances and acceptances is based on the discounted amount of estimated future cash ﬂ ows and accordingly has not been adjusted for provision for credit impairment. Estimated contractual cash ﬂ ows for performing loans are discounted at estimated current bank credit spreads to determine fair value. For loans with doubt as to collection, expected cash ﬂ ows (inclusive of the value of security) are discounted using a rate, which includes a premium for the uncertainty of the ﬂ ows. The difference between estimated fair values for loans and advances and acceptances and their carrying value reﬂ ects changes in interest rates and the credit worthiness of borrowers since loan origination. 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. OTHER FINANCIAL ASSETS Included in this category are accrued interest and fees receivable. 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. DEPOSITS AND OTHER BORROWINGS The fair value of a deposit liability without a speciﬁ ed maturity or at call is deemed 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 ﬁ xed 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 ﬂ ows. BONDS AND NOTES AND LOAN CAPITAL The aggregate fair value of bonds and notes and loan capital is calculated based on quoted market prices. For those debt issues where quoted market prices were not available, a discounted cash ﬂ ow model using a yield curve appropriate for the remaining term to maturity of the debt instrument is used. 60 ANZ Full Financial Report 2006 38: Segment Analysis For management purposes the Group is organised into three major business segments being Personal, Institutional and New Zealand Business. 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 Provides: Institutional Provides: Regional, Commercial and Agribusiness Products, Banking Products, Consumer Finance, Investment and Insurance Products, Mortgages and other (including the branch network) in Australia; Retail banking services in the Paciﬁ c region, including ANZ’s share of PT Panin Bank Indonesia; and Vehicle and equipment ﬁ nance, rental services and ﬁ xed and at call investments. A full range of ﬁ nancial services to the Group’s business banking, corporate and institutional customers including Corporate and Structured Financing, Client Relationship Group, Markets and Trade and Transaction Services; and Retail banking services in the Asia region. New Zealand Businesses Provides: A full range of banking services for personal, small business and corporate customers in New Zealand. Comprises ANZ Retail, NBNZ retail Corporate Banking, Investment Insurance Products, Rural Banking and Central Support. As the composition of segments was amended during the year, September 2005 comparatives have been adjusted to be consistent with the 2006 segment deﬁ nitions. BUSINESS SEGMENT ANALYSIS1, 2 Consolidated At 30 September 2006 External interest income External interest expense Adjust for intersegment interest Net interest income Other external operating income Share of net proﬁ t/(expense) of equity accounted investments Net intersegment income Segment revenue Other external expenses Net intersegment expenses Operating expenses Impairment losses on loans and advances Segment result Income tax expense Minority interests Proﬁ t after income tax attributable to shareholders of the company Non-Cash Expenses Depreciation & amortisation Equity-settled share-based payment expenses Provision for credit impairment Provisions for employee entitlements Provision for restructuring Financial Position Total external assets4 Share of associate and joint venture companies Total external liabilities5 Goodwill Intangibles Personal $m Institutional $m New Zealand Businesses $m Other3 $m Consolidated total $m 9,323 (2,663) (3,647) 3,013 1,180 7 34 4,234 (1,745) (358) (2,103) (341) 1,790 (533) (1) 1,256 (126) (25) (341) (21) (4) 7,393 (4,774) (550) 2,069 1,245 15 (70) 3,259 (1,020) (193) (1,213) (58) 1,988 (588) (4) 1,396 (26) (30) (58) (13) – 136,730 22 67,449 39 269 119,104 152 108,686 13 95 5,421 (3,450) (452) 1,519 463 20 (2) 2,000 (984) (2) (986) (6) 1,008 (325) – 683 (43) (9) (6) (51) (1) 66,064 164 57,153 20 19 164 (4,471) 4,649 342 127 152 38 659 (782) 553 (229) (2) 428 (76) 1 353 (97) (12) (2) (10) (46) 22,301 (15,358) – 6,943 3,015 194 – 10,152 (4,531) – (4,531) (407) 5,214 (1,522) (4) 3,688 (292) (76) (407) (95) (51) 13,873 1,862 82,577 2,828 54 335,771 2,200 315,865 2,900 437 1 Results are equity standardised. 2 Intersegment transfers are accounted for and determined on an arm’s length or cost recovery basis. 3 Includes Partnerships & Private Bank, Treasury, Operations, Technology & Shared Services, Corporate Centre, Risk Management, Group Financial Management and signiﬁ cant items. Also includes the London headquartered project ﬁ nance and certain structured ﬁ nance transactions that ANZ has exited as part of its de-risking strategy. 4 Includes deferred tax assets of $0.2 billion in Personal, $0.1 billion in Institutional and $0.1 billion in New Zealand Businesses. 5 Includes income tax liabilities of $0.4 billion In Personal, $1.1 billion in Institutional and nil in New Zealand Businesses. 61 Notes to the ﬁ nancial statements 38: Segment Analysis (continued) The following analysis details ﬁ nancial information by business segment. BUSINESS SEGMENT ANALYSIS1, 2 Consolidated At 30 September 2005 External interest income External interest expense Adjust for intersegment interest Net interest income Other external operating income Share of net proﬁ t of equity accounted investments Net intersegment income/expense Segment revenue Other external expenses Net intersegment expenses Operating expenses Impairment losses on loans and advances Segment result Income tax expense Minority interests Proﬁ t after income tax attributable to the shareholders of the Company Non-Cash Expenses Depreciation & amortisation Equity-settled share-based payment expenses Provision for credit impairment Provisions for employee entitlements Provision for restructuring Financial Position Total external assets4 Share of associate and joint venture entities Total external liabilities5 Goodwill Intangibles Personal $m Institutional $m 7,996 (2,294) (3,113) 2,589 1,117 7 41 3,754 (1,580) (350) (1,930) (261) 1,563 (467) (1) 1,095 (144) 24 (261) (18) (1) 4,603 (3,721) 508 1,390 1,680 5 (75) 3,000 (922) (157) (1,079) (195) 1,726 (511) (2) 1,213 (26) 28 (195) (12) – New Zealand Business $m 4,779 (3,058) (223) 1,498 530 8 4 2,040 (984) (13) (997) (102) 941 (302) – 639 (49) 7 (102) (42) 1 Other3 $m Consolidated total $m 341 (2,828) 2,828 17,719 (11,901) – 341 50 181 30 602 (932) 520 (412) (22) 168 60 – 228 (89) 21 (22) (9) (52) 5,818 3,377 201 – 9,396 (4,418) – (4,418) (580) 4,398 (1,220) (3) 3,175 (308) 80 (580) (81) 52 122,372 17 60,350 51 301 105,455 92 91,755 – 57 61,980 2 55,458 21 18 11,078 1,815 73,784 2,943 67 300,855 1,926 281,347 3,015 443 1 Results are equity standardised. 2 Intersegment transfers are accounted for and determined on an arm’s length or cost recovery basis. 3 Includes Partnerships & Private Bank, Treasury, Operations, Technology & Shared Services, Corporate Centre, Risk Management and Group Financial Management and signiﬁ cant items. Also includes the London headquartered project ﬁ nance and certain structured ﬁ nance transactions that ANZ has exited as part of its de-risking strategy. 4 Includes deferred tax assets of $0.1 billion in Personal, $0.1 billion in Institutional and $0.2 billion in New Zealand Businesses. 5 Includes income tax liabilities of $0.3 billion In Personal, $0.8 billion in Institutional and $0.1 billion in New Zealand Businesses. 62 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 38: Segment Analysis (continued) The following analysis details ﬁ nancial information by geographic location. GEOGRAPHIC SEGMENT ANALYSIS1, 2 Consolidated Income Australia New Zealand Overseas markets Total assets Australia New Zealand Overseas markets Proﬁ t before tax3 Australia New Zealand Overseas markets 2006 2005 $m % $m % 16,861 6,962 1,687 25,510 230,898 83,067 21,806 335,771 3,472 1,241 501 5,214 66% 27% 7% 100% 69% 25% 6% 100% 67% 24% 9% 100% 13,804 6,210 1,283 21,297 202,778 78,655 19,452 300,885 2,950 1,000 448 4,398 65% 29% 6% 100% 67% 26% 7% 100% 67% 23% 10% 100% Intersegment transfers are accounted for and determined on an arm’s length or cost recovery basis. 1 2 The geographic segments represent the locations in which the transaction was booked. 3 Includes minority interests. 63 Notes to the ﬁ nancial statements 39: Notes to the Cash Flow Statements a) Reconciliation of net proﬁ t after income tax to net cash provided by operating activities Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m Inﬂ ows (Outﬂ ows) Inﬂ ows (Outﬂ ows) Inﬂ ows (Outﬂ ows) Inﬂ ows (Outﬂ ows) Operating proﬁ t after income tax attributable to shareholders of the Company 3,688 3,175 3,174 2,175 Adjustments to reconcile operating proﬁ t after income tax to net cash provided by operating activities Provision for credit impairment Depreciation and amortisation Provision for employee entitlements, restructuring and other provisions Payments from provisions (Proﬁ t)/loss on sale of premises and equipment Liquid assets greater than three months (Increase)/decrease in Due from other banks-more than 90 days (Increase) in loans and advances Regulatory deposits Proﬁ t /(loss) on sale of available for sale securities Net (increase)/decrease Share based payments Trading securities Interest receivable Accrued income Current tax liability Deposits and other borrowings Due to other ﬁ nancial institutions Payables and other liabilities Amortisation of discounts/premiums included in investing activities Net increase/(decrease) Interest payable Accrued expenses Other Total adjustments Net cash provided by operating activities 407 292 250 (223) 4 (1,300) 1,318 (26,848) (42) (2) 31 (1,681) (119) (24) 297 16,129 1,859 541 (151) 580 484 556 (498) 22 (728) (371) (28,788) 5 – – (821) 88 4 162 19,856 4,972 (1,339) (93) 482 10 (73) 214 52 (895) (8,843) (6,538) (5,155) (3,363) 278 223 106 (83) 5 (441) 177 (18,732) (17) 1 31 (182) 4 (27) 32 14,736 2,462 1,221 – 830 13 555 1,192 4,366 388 230 363 (334) 25 (631) (180) (20,599) 22 – – (523) (8) 8 246 14,085 3,422 (1,375) (12) 105 82 94 (4,592) (2,417) b) Reconciliation of cash and cash equivalents Cash and cash equivalents include liquid assets and amounts due from other ﬁ nancial institutions with an original term to maturity of less than 90 days. Cash and cash equivalents at the end of the ﬁ nancial year as shown in the statements of cash ﬂ ows are reconciled to the related items in the statements of ﬁ nancial position as follows Consolidated The Company Liquid assets – less than 90 days (refer note 9) Due from other ﬁ nancial institutions – less than 90 days (refer note 10) 2006 $m 11,633 8,711 2005 $m 9,600 4,102 2006 $m 8,050 5,520 Cash and cash equivalents in the statement of cashﬂ ows 20,344 13,702 13,570 2005 $m 5,315 2,584 7,899 64 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 39: Notes to the Cash Flow Statements (continued) c) Acquisitions and disposals No material acquisitions and disposals have occured in 2006 or 2005 d) Non-cash ﬁ nancing and investing activities Share capital issues Dividend reinvestment plans e) Financing arrangements Credit standby arrangements Standby Lines Other ﬁ nancing arrangements Overdraft and other ﬁ nancing arrangements Total ﬁ nance available Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 165 153 165 153 2006 2005 Available $m Unused $m Available $m Unused $m 827 3,466 4,293 821 985 1,806 865 3,694 4,559 851 890 1,741 65 Notes to the ﬁ nancial statements 40: Controlled Entities Ultimate parent of the Group Australia and New Zealand Banking Group Limited 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 Investment Services (New Zealand)* ANZ National (Int’l) Limited* Arawata Finance Limited* Cortland Finance Limited* Arawata Holdings Limited* Harcourt Corporation Limited* Airlie Investments Limited* Nerine Finance No. 21 Arawata Trust Company* Arawata Trust* Endeavour Finance Limited* Tui Endeavour Limited* National Bank of New Zealand Custodians Limited* Alos Holdings Limited* NBNZ Holdings Ltd* Private Nominees 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 ANZ Investment Holdings Pty Ltd 530 Collins Street Property Trust ANZ Lenders Mortgage Insurance Pty Limited ANZ Nominees Limited ANZ Orchard Investments Pty Ltd ANZ Rural Products Pty Ltd Australia and New Zealand Banking Group (PNG) Limited* Coral Finance Limted1 Esanda Finance Corporation Limited Fleet Partners Pty Limited2 Kingﬁ sher Trust 2004-1G1 NMRSB Pty Ltd PT ANZ Panin Bank*1 Incorporated in Nature of Business Australia Banking American 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 Australia Australia Australia Australia Australia Australia Papua New Guinea England Australia Australia Australia Australia Indonesia Banking Investment Banking Funding Hedging Captive-Insurance Finance Trustee/Nominee Investment Holding Company Banking Banking Holding Company Banking Fund Manager Finance Finance Investment Holding Company Investment Investment Finance Finance Finance Finance Finance Custodians Investment Holding Company Nominee Finance Leasing Holding Company Banking Banking Holding Company Merchant Banking Banking Banking Holding Company Holding Company Investment Mortgage Insurance Nominee Holding Company Investment Banking Securitisation General Finance Finance Securitisation Investment Banking * Audited by overseas KPMG ﬁ rms. 1 Minority interests hold ordinary shares or units in the controlled entities listed above as follows: Bank of Kiribati - 150,000 $1 ordinary shares (25%) (2005 : 150,000 $1 ordinary shares 25%); PT ANZ Panin Bank – 7,500 IDR 1M shares (15%) (2005: 7,500 IDR 1M shares 15%); Nerine Finance No. 2 – 3,650 NZD100,000 redeemable preference shares and 35 NZD1 Class ‘A’ shares (42%) (2005: 3,650 NZD100,000 redeemable preference shares and 35 NZD1 Class ‘A’ shares (42%)); ANZ Royal Bank (Cambodia) Limited – 99,000 $100 USD ordinary shares (45%) (2005: 81,000 100 USD ordinary shares (45%)); Coral Finance Limted – GBP 1 ordinary share (67%) (2005: GBP 1 ordinary share (67%)) and Kingﬁ sher Trust 2004 – 1G $5 residual capital unit (50%) (2005: $5 residual capital unit (50%)). 2 Sold after year end, see note 52. 66 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 41: Associates Signiﬁ cant associates of the Group are as follows: P.T. Bank Pan Indonesia1 Tianjin City Commercial Bank2 Metrobank Card Corporation Inc3 ETrade Australia Limited4 Other associates Total shares in associates Ownership interest held 29% 20% 40% 34% Voting interest 29% 20% 40% 34% Incorporated in Carrying value5 $m Indonesia Peoples Republic of China Philippines Australia 222 164 28 22 156 592 Fair value6 $m 321 n/a n/a 79 n/a Reporting date 31 December 31 December Principal activity Banking Banking 31 December 30 June Cards Issuing Online Stockbroking 1 An associate from 1 April 2001. 2 An associate from 13 June 2006. 3 An associate from 9 October 2003. 4 An associate from 1 October 2002. 5 2005 carrying values as follows: P.T. Bank Pan Indonesia $133 million, Metrobank Card Corporation Inc $18 million, ETrade $17 million, and Other associates $97million. Total $265 million. 6 Applicable to those investments in associates where there are published price quotations. Aggregate assets of signiﬁ cant associates Aggregate liabilities of signiﬁ cant associates Aggregate revenue of signiﬁ cant associates Results of Associates Share of associates proﬁ t before income tax Share of income tax expense Share of associates net proﬁ t – as disclosed by associates Adjustments - withholding tax - provisioning - other Share of associates net proﬁ t accounted for using the equity method 42: Interests in Joint Venture Entities The Group has interests in joint venture entities as follows: Ownership interest held Voting interest held Incorporated in Carrying value6 $m Reporting dates ING Australia Limited1, 5 49%2 49%2 Australia 1,462 31 December ING (NZ) Holdings Limited3,5 49%4 50%4 New Zealand 146 31 December 2006 $m 16,784 15,356 586 2005 $m 15,669 14,426 557 Consolidated 2006 $m 2005 $m 70 (17) 53 (2) 4 1 56 70 (19) 51 (4) – 5 52 Principal activity Funds Management and Insurance Funds Management and Insurance Total interests in Joint Venture entities 1,608 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: ■ ING Australia Limited is owned 51% by ING Group and 49% by ANZ. ■ 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. ■ 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. ■ Refer to Critical Accounting Estimate item (ii) 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: ■ ING (NZ) Holdings Limited is owned 51% by ING Group and 49% by ANZ. ■ 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. ■ 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. ■ Refer to Critical Accounting Policies item (iii) for details regarding valuation of investment in ING (NZ) Holdings Limted The joint venture includes the majority of the Group’s and ING’s funds management and insurance activities in New Zealand. ING Australia Limited and ING (NZ) Holdings Limited have different reporting dates than the Consolidated Group to align with the ING Group parent entity. 5 6 2005 carrying values as follows: ING Australia Limited $1,530 million; and ING (NZ) Holdings Limited $131 million. 67 Notes to the ﬁ nancial statements 42: Interests in Joint Venture Entities (continued) Retained proﬁ ts 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 proﬁ t Dividend received Capital return Movement in reserves IFRS opening balance sheet adjustments Adjustment for exchange rate ﬂ uctuations ING Australia Limited 2006 $m 183 256 2005 $m 116 183 1,530 1,697 n/a 119 (46) – (3) (138) – n/a 149 (82) (245) 2 9 – Carrying amount at the end of the year 1,462 1,530 Share of assets and liabilities1 Investments Other assets Share of total assets Policy holder liabilities Other liabilities Share of total liabilities Share of net assets Share of revenues, expenses and results Revenues Expenses Proﬁ t before income tax Income tax expense Proﬁ t after income tax Net equity accounted proﬁ t Share of commitments Lease commitments Other commitments Share of total expenditure commitments Share of contingent liabilities In relation to its interest in the joint venture entity2 ING (NZ) Holdings Limited 2006 $m 2005 $m – 19 131 n/a 19 – – – – (4) 146 70 154 224 45 16 61 – – – 131 – – – – – – 131 98 133 231 60 23 83 Consolidated Total 2006 $m 183 275 2005 $m 116 183 1,661 1,697 n/a 138 (46) – (3) (138) (4) 131 149 (82) (245) 2 9 – 1,608 1,661 12,563 1,724 11,445 984 14,287 12,429 12,475 751 10,716 720 13,226 11,436 12,493 1,570 11,347 851 14,063 12,198 12,430 735 10,656 697 13,165 11,353 898 845 163 148 1,061 993 372 (216) 156 (37) 119 119 154 18 172 65 65 383 (184) 199 (50) 149 149 163 9 172 80 80 59 (39) 20 (1) 19 19 3 – 3 – – – – – – – – 3 – 3 – – 431 (255) 176 (38) 138 138 157 18 175 65 65 383 (184) 199 (50) 149 149 166 9 175 80 80 1 This represents the Group’s share of the assets and liabilities of ING Australia Limited and ING (NZ) Holdings Limited, less minority interests and including goodwill on acquisition of ANZ Funds Management entities. 2 This represents Deeds of Subordination with ASIC and buyer of last resort. 68 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 43: Fiduciary Activities The Group conducts various ﬁ duciary activities as follows: Investment ﬁ duciary activities for trusts The Group conducts investment ﬁ duciary 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 sufﬁ cient 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 ﬁ nancial statements. The aggregate amounts of funds concerned are as follows: Trusteeships Consolidated 2006 $m 2005 $m 2,080 1,927 Funds management activities Funds management activities are conducted through the ING Australia Limited and ING (NZ) Holdings Limited Joint Ventures. As stated in note 1 (ii), shares in joint venture entities are stated in the consolidated balance sheet at cost plus the Group’s share of post acquisition earnings. Funds under management on behalf of customers are not consolidated. As at 30 September 2006, the ING Australia Limited Joint Venture had funds under management of $42,783 million (30 September 2005: $34,569 million), the ING (NZ) Holdings Limited Joint Venture had funds under management of $7,256 million (30 September 2005: $6,839 million) and certain subsidiaries of ANZ National Bank Limited had funds under management of $3,721 million (30 September 2005: $3,371 million). Custodian services activities Custodian services are conducted through ANZ Custodian Services. ANZ Custodian Services holds investment assets under custody on behalf of external customers and as a consequence the assets are not consolidated in the Group’s accounts. As at 30 September 2006, ANZ Custodian Services had funds under custody of $120.2 billion (30 September 2005: $98.3 billion). 44: Commitments Capital expenditure Contracts for outstanding capital expenditure Not later than 1 year Total capital expenditure commitments1 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 Later than 5 years Total lease rental commitments Total commitments 1 Relates to premises and equipment. Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 55 55 227 567 433 80 80 205 547 431 1,227 1,183 24 19 1 44 17 17 – 34 1,271 1,326 1,217 1,297 16 16 151 399 399 949 17 10 – 27 976 992 26 26 136 390 405 931 13 13 – 26 957 983 69 Notes to the ﬁ nancial statements 45: Contingent Liabilities, Contingent Assets and Credit Related Commitments CUSTOMER RELATED CREDIT RELATED COMMITMENTS AND CONTINGENT LIABILITIES Credit related commitments Facilities provided Undrawn facilities1 Australia New Zealand Overseas markets Total Consolidated The Company 2006 Contract amount $m 2005 Contract amount $m 2006 Contract amount $m 2005 Contract amount $m 98,554 87,319 77,720 68,491 62,746 18,840 16,968 55,451 17,001 14,867 61,741 – 15,979 54,485 – 14,006 98,554 87,319 77,720 68,491 1 The credit risk of the undrawn facilities may be less than the contract amount, however the credit risk has been taken to be the contract amount. The majority of undrawn facilities are subject to customers maintaining speciﬁ c 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. 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 below relates to customer contingent liabilities, ie direct credit substitutes and trade and performance related items. Guarantees, Standby letters of credit, Bill endorsements and Other are classiﬁ ed 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 ﬁ nancial 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 conﬁ rmatory letter of credit from another bank. Performance related contingencies are liabilities that oblige the Group to make payments to a third party should the customer fail to fulﬁ l 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 reﬂ ect future cash requirements. The credit risk of these facilities may be less than the contract amount, however the credit risk has been taken to be the contract amount. 70 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 45: Contingent Liabilities, Contingent Assets and Credit Related Commitments (continued) Guarantees Standby letters of credit Bill endorsements Documentary letters of credit Performance related contingencies Other Total customer contingent liabilities Australia New Zealand Overseas markets Total customer contingent liabilities Consolidated The Company 2006 Contract amount $m 4,690 1,468 100 3,078 11,710 1,009 2005 Contract amount $m 4,878 1,446 125 3,015 10,160 1,433 2006 Contract amount $m 4,611 1,296 100 2,939 11,265 628 2005 Contract amount $m 4,744 1,277 125 2,763 9,864 1,128 22,055 21,057 20,839 19,901 9,473 1,011 11,571 9,448 1,006 10,603 9,462 – 11,377 9,445 – 10,456 22,055 21,057 20,839 19,901 ASSETS PLEDGED AS SECURITY AND SECURED LIABILITIES Assets are pledged as collateral: mandatory reserve deposits held with local central banks in accordance with statutory requirements. These deposits are not available to ﬁ nance the Group’s day to day operations; and in relation to debenture undertakings covering the assets of Esanda and its subsidiaries and UDC Finance Limited. The debenture stock of Esanda and its subsidiaries and UDC Finance Limited is secured by a trust deed and collateral debentures, giving ﬂ oating charges upon the undertaking of all the assets of the entity, other than land and buildings. All controlled entities of Esanda and UDC Finance Limited have guaranteed the payment of principal, interest and other monies in relation to all debenture stock and unsecured notes issued by Esanda and UDC Finance Limited respectively. Note that the only loans pledged are those in Esanda and UDC Finance Limited. The value of assets pledged as security is as follows: Regulatory deposits Assets pledged as collateral under debenture undertakings1 1 Related liabilities is $9,757 million (2005: $9,639 million). Consolidated 2006 $m 2005 $m 205 16,028 159 15,482 16,233 15,641 The Company 2006 $m 132 – 132 2005 $m 113 – 113 The Group has accepted collateral that it is permitted to sell or repledge in connection with its stock-lending activities. The fair value of the collateral accepted is $3.3 billion (2005: $3.1 billion) and this equates to our obligation to our counterparties. 71 Notes to the ﬁ nancial statements 45: Contingent Liabilities, Contingent Assets and Credit Related Commitments (continued) OTHER BANK RELATED CONTINGENT LIABILITIES 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: 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 comply with rules which could result in a bilateral exposure and loss in the event of a failure to settle by a member institution; and in the Austraclear System Regulations and the CLS Bank International Rules, 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 certiﬁ ed 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 2005 subjected to client risk reviews by the Australian Taxation Ofﬁ ce (ATO) across a broad spectrum of matters, as part of normal ATO procedures. The reviews mainly covered years up to 2003. Some matters listed by the ATO for further investigation remain outstanding. The ATO is also reviewing the taxation treatment of certain other transactions, including legacy structured ﬁ nance transactions, undertaken by the Group in the course of normal business activities. The ATO’s review of the sale of Grindlays in 2000 and of the transfer of the life and funds management businesses into the joint venture with ING Australia in 2002 was ﬁ nalised during the year. The Inland Revenue Department (IRD) in New Zealand is reviewing a number of conduit- relieved structured ﬁ nance transactions as part of normal revenue authority audit procedures. This is part of an industry-wide review by the IRD of these transactions undertaken in New Zealand. The IRD has issued Notices of Proposed Adjustment (the ‘Notices’) in respect of some of those structured ﬁ nance transactions. The Notices are not tax assessments and do not establish a tax liability, but are the ﬁ rst step in a formal dispute 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 reﬂ ected in the Notices and in the tax assessments received, the maximum potential tax liability would be approximately NZD469 million (including interest tax effected) for the period to 30 September 2006. Of that maximum potential liability, approximately NZD133 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. All of these conduit- relieved transactions have now been either matured or been terminated. Additional or issue-speciﬁ c audits and other investigations are being undertaken by the New Zealand IRD, and 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 considers that it holds appropriate provisions. v) Sale of Grindlays businesses On 31 July 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 was 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 may be held liable in relation to the following: FERA In 1991 certain amounts were transferred from non-convertible Indian Rupee accounts maintained with Grindlays in India. 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 ofﬁ cers in India that could lead to possible penalties. Criminal prosecutions have also been foreshadowed and, in the case of two former ofﬁ cers and the bank, commenced. Grindlays is contesting the validity of these prosecutions. 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. These orders had directed repayment of Indian Rupees 24 million (plus interest accruing at 24% since 1991). Since the appeal decision was handed down, no further action has been taken against Grindlays in relation to notices in respect of a further eleven payments received by it in 1991 in similar circumstances totalling Indian Rupees 225 million. 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. 72 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 45: Contingent Liabilities, Contingent Assets and Credit Related Commitments (continued) vi) Deed of Cross Guarantee in respect of certain controlled entities 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 ﬁ nancial statements. The results of these companies are included in the consolidated Group results. The entities to which relief was granted are: ANZ Properties (Australia) Pty Ltd1 ANZ Capital Hedging Pty Ltd1 Alliance Holdings Pty Ltd1 1 Relief originally granted on 21 August 2001. 2 Relief originally granted on 13 August 2002. 3 Relief originally granted on 9 September 2003. ANZ Orchard Investments Pty Ltd2 ANZ Securities (Holdings) Limited3 ANZ Funds Pty Ltd1 Votraint No. 1103 Pty Ltd2 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 executed by them and lodged with the Australian Securities and Investments Commission. The Deed of Cross Guarantee is dated 1 March 2006. 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. If a winding up occurs, 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 ﬁ nancial performance and consolidated statement of ﬁ nancial position of the Company and its wholly owned controlled entities which have entered into the Deed of Cross Guarantee are: Proﬁ t before tax Income tax expense Proﬁ t after income tax Retained proﬁ ts at start of year1 Total available for appropriation Ordinary share dividends provided for or paid Transfer from reserves Adjustment on adoption of AIFRS Retained proﬁ ts at end of year Assets Liquid assets Available-for-sale assets/investment securties 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 Consolidated 2006 $m 4,161 (922) 3,239 7,103 10,342 (2,068) 49 (83) 2005 $m 3,107 (754) 2,353 6,825 9,178 (1,877) – – 8,240 7,301 10,428 5,388 172,155 54,533 603 7,193 5,398 153,461 40,591 1,132 243,107 207,775 128,321 1,799 95,000 688 113,089 1,566 74,746 650 225,808 190,051 17,299 17,724 17,299 17,724 1 The Companies included in the class order changed in 2006, accordingly retained proﬁ ts did not carry forward in 2006. 2 Shareholders’ equity excludes retained proﬁ ts and reserves of controlled entities within the class order. Pursuant to a Revocation Deed dated 1 March 2006, earlier Deeds of Cross Guarantee dated 9 September 2003 and 21 August 2005, to which the Company and certain wholly-owned controlled entities were parties, have been revoked. The revocation became effective on 1 September 2006. The controlled entities in respect of which this revocation was effective are the controlled entities (listed above) that are parties to the Deed of Cross Guarantee dated 1 March 2006, and the following additional controlled entities: ANZ Infrastructure Investments Limited ES & A Holdings Pty Ltd ANZ Nominees Limited Jikk Pty Ltd Because these last four controlled entities were not parties to a Deed of Cross Guarantee as at 30 September 2006, they are ineligible for the relief under the class order. 73 Notes to the ﬁ nancial statements 45: Contingent Liabilities, Contingent Assets and Credit Related Commitments (continued) vii) Commercial paper notes The Company has guaranteed payment on maturity of the principal and accrued interest of commercial paper notes issued by ANZ (Delaware) Inc. of $6,667 million as at 30 September 2006 (2005: $6,400 million). viii) Underpinning agreement – ANZ National Bank Limited 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) Underpinning agreement – Australia and New Zealand Banking Group (PNG) Limited 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. GENERAL There are outstanding court proceedings, claims and possible claims against the Group, the aggregate amount of which cannot readily be quantiﬁ ed. 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 $405 million (2005: $233 million). CONTINGENT ASSETS National Housing Bank In 1992, Grindlays received a claim aggregating to 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 ﬁ led 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 ($661 million at 19 January 2002 exchange rates), with Grindlays receiving Indian Rupees 6.20 billion ($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 has pursued two separate actions arising from the above. (a) A $130 million plus interest claim against its insurers. $130 million being the balance of the limit of indemnity under ANZ’s insurance arrangements for the 1991–92 policy year. ANZ settled the claim for $114 million which has been recognised in these accounts, less an amount of $1 million which was recognised in the accounts at 30 September 2005. (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. Proceedings are currently on foot in the Special Court, Mumbai to determine these issues. Harris Scarfe The Receiver and Manager of Harris Scarfe Limited (HSL) and related companies, together with ANZ, have initiated proceedings in the Supreme Court of South Australia to recover damages for breach of contract, negligence and statutory causes of action against the former auditors of HSL. These proceedings are continuing. It is not practicable to reliably estimate the ﬁ nancial effect of these proceedings. 74 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 46: Superannuation and Other Post Employment Beneﬁ t Schemes Description of the Group’s post employment beneﬁ t schemes The Group has established a number of pension, superannuation and post retirement medical beneﬁ t schemes throughout the world. 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 $25m are: Country Australia Scheme Scheme type Employee/participant Employer Contribution levels ANZ Australian Staff Superannuation Scheme1,2 Deﬁ ned contribution scheme Section C3 or Optional8 Balance of cost10 New Zealand ANZ Group (New Zealand) Staff Superannuation Scheme1,2 National Bank Staff Superannuation Fund1,2 England ANZ UK Staff Pension Scheme1 Deﬁ ned contribution scheme Section A or Deﬁ ned beneﬁ t scheme Pension Section4 Deﬁ ned beneﬁ t scheme5 or Optional 9% of salary11 Nil Nil Balance of cost12 Balance of cost13 Deﬁ ned contribution scheme Minimum of 2.5% of salary 7.5% of salary14 Deﬁ ned beneﬁ t scheme6 or 5.0% of salary Balance of cost15 Deﬁ ned contribution scheme7 Minimum of 2.0% salary 11.5% of salary16 Deﬁ ned beneﬁ t scheme7 5.0% of salary9 Balance of cost17 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. These schemes provide for pension beneﬁ ts. These schemes provide for lump sum beneﬁ ts. 1 2 3 Closed to new members in 1997. 4 Closed to new members. Operates to make pension payments to retired members or their dependants. 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 dependants. 6 Closed to new members on 1 October 1991. 7 Closed to new members on 1 October 2004. 8 Optional but with minimum of 1% of salary. 9 10 As determined by the Trustee on the recommendation of the actuary - currently 9% (2005: 9%) of members’ salaries. 11 2005: 9% of salary. 12 As determined by the Trustee on the recommendation of the actuary - currently nil (2005: nil). 13 As recommended by the actuary - currently nil (2005: nil). 14 2005: 7.5% of salary. 15 As recommended by the actuary - currently 24.7% (2005: 22.3%) of members’ salaries. 16 2005: 11.2% of salary. 17 As agreed by the Trustee and Group after taking the advice of the actuary - currently 26% (2005: 25%) of pensionable salaries and additional quarterly contributions of GBP 3.5 million until From 1 October 2003, all members contributions are at a rate of 5% of salary. December 2015. 75 Notes to the ﬁ nancial statements 46: Superannuation and Other Post Employment Beneﬁ t Schemes (continued) Funding and contribution information for the deﬁ ned beneﬁ t sections of the schemes The funding and contribution information for the deﬁ ned beneﬁ t sections of the schemes as extracted from the schemes’ most recent ﬁ nancial reports are set out below. In this ﬁ nancial report, the net (liability)/asset arising from the deﬁ ned beneﬁ t obligation recognised in the balance sheet has been determined in accordance with AASB 119 “Employee Beneﬁ ts”. However, the excess or deﬁ cit of the net market value of assets over accrued beneﬁ ts shown below has been determined in accordance with AAS 25 ‘Financial Reporting by Superannuation Plans’. The excess or deﬁ cit for funding purposes below differs from the net (liability)/asset in the balance sheet because AAS 25 prescribes a different measurement date and basis to those used for AASB 119 purposes. 2006 Schemes ANZ Australian Staff Superannuation Scheme Pension Section2 ANZ UK Staff Pension Scheme2 ANZ UK Health Beneﬁ ts Scheme4 ANZ Group (New Zealand) Staff Superannuation Scheme1 National Bank Staff Superannuation Fund3 Other4, 5 Total Net market value of assets held by scheme $m Excess/(deﬁ cit) of net market value of assets over accrued beneﬁ ts $m 35 997 – 6 166 5 1,209 (4) (252) (13) – (4) (2) (275) Accrued beneﬁ ts* $m 39 1,249 13 6 170 7 1,484 * Determined in accordance with AAS 25 ‘Financial Reporting by Superannuation Plans’, which prescribes a different measurement date and basis to those applied in this ﬁ nancial report under AASB 119 ‘Employee Beneﬁ ts’. 1 Amounts were measured at 31 December 2004. 2 Amounts were measured at 31 December 2005. 3 Amounts were measured at 31 March 2006. 4 Amounts were measured at 30 September 2006. 5 Other includes the deﬁ ned beneﬁ t arrangements in Japan, Philippines and Taiwan. 2005 Schemes ANZ Australian Staff Superannuation Scheme Pension Section1 ANZ UK Staff Pension Scheme1 ANZ UK Health Beneﬁ ts Scheme3 ANZ Group (New Zealand) Staff Superannuation Scheme1 National Bank Staff Superannuation Fund2 Other3, 4 Accrued beneﬁ ts* $m 40 855 13 6 173 6 Net market value of assets held by scheme $m Excess/(deﬁ cit) of net market value of assets over accrued beneﬁ ts $m 35 811 – 6 165 5 (5) (44) (13) – (8) (1) (71) Total 1,093 1,022 * Determined in accordance with AAS 25 ‘Financial Reporting by Superannuation Plans’, which prescribes a different measurement date and basis to those applied in this ﬁ nancial report under AASB 119 ‘Employee Beneﬁ ts’. 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 deﬁ ned beneﬁ t arrangements in Japan, Philippines and Taiwan. Employer contributions to the deﬁ ned beneﬁ t sections are based on recommendations by the schemes’ actuaries. Funding recommendations are made by the actuaries based on assumptions of various matters such as future investment performance, interest rates, salary increases, mortality rates and turnover levels. The funding methods adopted by the actuaries are intended to ensure that the beneﬁ t entitlements of employees are fully funded by the time they become payable. The Group expects to make contributions of $45 million to the deﬁ ned beneﬁ t sections of the schemes during the next ﬁ nancial year. 76 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 46: Superannuation and Other Post Employment Beneﬁ t Schemes (continued) The current contribution recommendations for the major deﬁ ned sections of the schemes are described below. 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 consulting actuaries Russell Employee Beneﬁ ts as at 31 December 2004 showed a deﬁ cit of $5 million and the actuary recommended that Group contributions to the Pension Section remain suspended. An interim actuarial valuation conducted as at 31 December 2005 showed a deﬁ cit of $4 million and the expectation is that this deﬁ cit has remained materially unchanged since that date. The next full actuarial valuation is due to be conducted as at 31 December 2007, at which time the funding position will be reassessed. The following economic assumptions were used in formulating the actuary’s funding recommendations: Rate of investment return Pension indexation rate 8% p.a. 3% p.a. The Group has no present liability under the Scheme’s Trust Deed to commence contributions or fund the deﬁ cit. ANZ UK Staff Pension Scheme A full actuarial valuation, conducted by consulting actuaries Watson Wyatt LLP, as at 31 December 2005 showed a deﬁ cit of GBP 100 million ($252 million at 30 September 2006 exchange rates). Following the actuarial valuation as at 31 December 2005, the Group agreed to make regular contributions at the rate of 26% of pensionable salaries. These contributions are sufﬁ cient to cover the cost of accruing beneﬁ ts. To address the deﬁ cit, the Group also agreed to pay additional quarterly contributions of GBP 3.5 million until 31 December 2015. These contributions will be reviewed at the next actuarial valuation which is scheduled to be undertaken as at 31 December 2007. The following economic assumptions were used in formulating the actuary’s funding recommendations: Rate of investment return on existing assets Rate of investment return for determining ongoing contributions Salary increases Pension increases 4.75% p.a. 6.6% p.a. 4.6% p.a. 2.8% p.a. The Group has no present liability under the Scheme’s Trust Deed to fund the deﬁ cit measured under AAS 25. A contingent liability may arise if the Scheme was wound up. If this were to happen, the Trustee would be able to pursue the Group for additional contributions under the UK Employer Debt Regulations. The Group intends to continue the Scheme on an on-going basis. On adoption of AIFRS, a net liability representing the deﬁ ned beneﬁ t obligation calculated under AASB 119 was recognised on the balance sheet. The basis of calculation under AASB 119 is detailed in note 1(xx). National Bank Staff Superannuation Fund A full actuarial valuation of the National Bank Staff Superannuation Fund, conducted by consulting actuaries AON Consulting NZ, as at 31 March 2006 showed a deﬁ cit of NZD5 million ($4 million at 30 September 2006 exchange rates). The actuary recommended that the Group make contributions of 24.7% of salaries in respect of members of the deﬁ ned beneﬁ t section. The following economic assumptions were used in formulating the actuary’s funding recommendations: Rate of investment return (net of income tax) Salary increases Pension increases 5.5% p.a. 3.0% p.a. 2.5% p.a. The Group has no present liability under the Scheme’s Trust Deed to fund the deﬁ cit measured under AAS 25. A contingent liability may arise if the Scheme was wound up. Under the Fund’s Trust Deed, if the Fund were wound up, the Group is required to pay the Trustees of the Scheme an amount sufﬁ cient to ensure members do not suffer a reduction in beneﬁ ts to which they would otherwise be entitled. The Group intends to continue the Scheme on an on-going basis. On adoption of AIFRS, a net asset representing the deﬁ ned beneﬁ t surplus calculated under AASB 119 was recognised on the balance sheet. The basis of calculation under AASB 119 is detailed in Note 1(xx). 77 Notes to the ﬁ nancial statements 46: Superannuation and Other Post Employment Beneﬁ t Schemes (continued) The following tables summarise the components of the expense recognised in the income statement and the amounts recognised in the balance sheet under AASB 119 for the deﬁ ned beneﬁ t sections of the schemes: Amount recognised in income in respect of deﬁ ned beneﬁ t schemes Current service cost Interest cost Expected return on assets Past service cost Adjustment for contributions tax Total included in personnel expenses (refer note 4) Amounts included in the balance sheet in respect of its deﬁ ned beneﬁ t schemes Present value of funded deﬁ ned beneﬁ t obligation Fair value of scheme assets Present value of net obligation Amounts recognised in the balance sheet Other assets (refer note 21) Payables and other liabilities (refer note 26) Present value of net obligation Amounts recognised in equity in respect of deﬁ ned beneﬁ t schemes Actuarial losses/(gains) incurred during the year and recognised directly in retained earnings Cumulative actuarial losses/(gains) recognised directly in retained earnings Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m 12 64 (70) 3 2 11 14 67 (68) 1 2 16 9 55 (61) 3 – 6 11 56 (58) 1 – 10 (1,462) 1,238 (1,246) 1,099 (1,296) 1,067 (1,076) 922 (224) (147) (229) (154) 5 (229) (224) 78 43 7 (154) (147) (35) (35) – (229) (229) 77 48 – (154) (154) (29) (29) The Group has a legal liability to fund deﬁ cits in the schemes, but no legal right to use any surplus in the schemes to further its own interests. The Group has no present liability to settle deﬁ cits with an immediate contribution. For more information about the Group’s legal liability to fund deﬁ cits, refer to the earlier description of the current contribution recommendations for the schemes. Movements in the present value of the deﬁ ned beneﬁ t obligation in the relevant period Opening deﬁ ned beneﬁ t obligation Current service cost Interest cost Contributions from scheme participants Actuarial losses Past service cost Exchange differences on foreign schemes Beneﬁ ts paid 1,246 12 64 1 126 3 84 (74) 1,254 14 67 2 65 1 (87) (70) 1,076 9 55 – 121 3 89 (57) 1,084 11 56 1 61 1 (84) (54) Closing deﬁ ned beneﬁ t obligation 1,462 1,246 1,296 1,076 Movements in the fair value of scheme assets in the relevant period Opening fair value of scheme assets Expected return on scheme assets Actuarial gains/(losses) Exchange differences on foreign schemes Contributions from the employer Contributions from scheme participants Beneﬁ ts paid Closing fair value of scheme assets1 Actual return on scheme assets 1,099 70 48 70 24 1 (74) 1,056 68 100 (72) 15 2 (70) 1,238 1,099 118 168 922 61 44 77 20 – (57) 1,067 105 884 58 90 (68) 11 1 (54) 922 148 1 Scheme assets include the following ﬁ nancial instruments issued by the Group: Cash and short term debt instruments $2.5 million (September 2005: $4.9 million), ﬁ xed interest securities $5.7 million ( September 2005: $1.5 million) and equities $0.6 million (September 2005: nil). 78 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 46: Superannuation and Other Post Employment Beneﬁ t Schemes (continued) Consolidated The Company Analysis of the scheme assets Equities Debt securities Property Other Total assets Key actuarial assumptions used (expressed as weighted averages) Discount rate ANZ Australian Staff Superannuation Scheme – Pension Section ANZ UK Staff Pension Scheme ANZ UK Health Beneﬁ ts Scheme ANZ Group (New Zealand) Staff Superannuation Scheme National Bank Staff Superannuation Fund Expected rate of return on scheme assets ANZ Australian Staff Superannuation Scheme – Pension Section ANZ UK Staff Pension Scheme ANZ UK Health Beneﬁ ts Scheme ANZ Group (New Zealand) Staff Superannuation Scheme National Bank Staff Superannuation Fund Future salary increases ANZ UK Staff Pension Scheme National Bank Staff Superannuation Fund Future pension increases ANZ Australian Staff Superannuation Scheme – Pension Section ANZ UK Staff Pension Scheme ANZ Group (New Zealand) Staff Superannuation Scheme National Bank Staff Superannuation Fund Future medical cost trend – short term ANZ UK Health Beneﬁ ts Scheme Future medical cost trend – long term ANZ UK Health Beneﬁ ts Scheme Fair value of scheme assets 2006 % 2005 % 50 33 14 3 50 37 13 – 100 100 Fair value of scheme assets 2006 % 51 30 16 3 100 2006 % 5.50 5.00 5.10 6.00 6.00 7.50 6.50 n/a 4.50 5.50 4.75 3.00 3.00 2.95 2.50 2.50 7.30 4.50 2005 % 50 35 15 – 100 2005 % 5.25 5.00 5.00 6.00 6.00 7.50 6.50 n/a 4.50 5.50 4.60 3.00 2.50 2.80 2.00 2.00 8.00 4.50 To determine the expected returns of each of the asset classes held by the relevant scheme, the directors assessed historical return trends and market expectations for the asset classes. The overall expected rate of return on assets for each scheme is determined as the weighted average of the expected returns for the asset classes. Assumed medical cost trend rates do not have a material effect on the amounts recognised as income or included in the balance sheet. History of experience adjustments Deﬁ ned beneﬁ t obligation Fair value of scheme assets Surplus/(deﬁ cit) Experience adjustments on scheme liabilities Experience adjustments on scheme assets Consolidated 2006 $m 2005 $m The Company 2006 $m 2005 $m (1,462) 1,238 (1,246) 1,099 (1,296) 1,067 (1,076) 922 (224) 7 48 (147) (6) 100 (229) 5 44 (154) (7) 90 79 Notes to the ﬁ nancial statements 47: Employee Share and Option Plans ANZ operates a number of employee share and option schemes which operate under the ANZ Employee Share Acquisition Plan and the ANZ Share Option Plan. ANZ EMPLOYEE SHARE ACQUISITION PLAN ANZ Employee Share Acquisition Plan (ESAP) schemes that existed during the 2005 and 2006 ﬁ nancial years were the $1,000 Share Plan, the Restricted Share Plan, the Deferred Share Plan, the Performance Share Plan and the Employee Share Save Scheme (ESSS). Note the ESSS is an employee salary sacriﬁ ce plan and is not captured as an expense in the share based payment expense model. $1,000 share plan Each permanent employee (excluding senior executives) who has had continuous service for one year is eligible to participate in the $1,000 scheme enabling the grant of up to $1,000 of ANZ shares in each ﬁ nancial year, subject to ANZ’s performance and the approval of the Board. At a date approved by the Board, the shares will be granted to all eligible employees using the ﬁ ve-day weighted average price of ANZ shares traded on the ASX in the ﬁ ve trading days leading up to and including the date of grant. In Australia and most overseas locations, shares are granted to eligible employees for nil consideration and vest immediately when granted, as there is no forfeiture provision. It is a requirement, however, that shares are held in trust for three years from the date of grant, after which time they may remain in trust, be transferred to the employee’s name or sold. In general, dividends received on the shares are automatically reinvested into the Dividend Reinvestment Plan. Shares granted to eligible New Zealand employees under this plan vest subject to the satisfaction of a three year service period, after which time they may remain in trust, be transferred into the employee’s name or sold. At the time of transfer, employees are required to pay NZD 1 cent per share. Shares may be forfeited in the event of dismissal for serious misconduct or resignation. Dividends are received as cash. During the 2006 year, 1,012,008 shares with an issue price of $23.81 were granted under the plan to employees on 5 December 2005. (2005 year: 1,151,157 shares with an issue price of $20.03 were granted on 8 December 2004). Deferred share plan Selected employees may also be granted long term incentive (LTI) deferred shares which vest to the employee up to three years from the date of grant. Ordinary shares granted under this LTI plan may be held in trust beyond the deferral period. Unvested LTI deferred shares are forfeited on resignation, dismissal for serious misconduct or termination on notice. In case of redundancy, unvested LTI deferred shares will be pro-rated, and in the event of death or total and permanent disablement, all shares will be released to the employee in full. Short-term incentive (STI) three year deferred shares were granted under a historical ANZ STI program, and may be held in trust beyond the deferral period. The last grant of three year STI deferred shares was made on 11 May 2004 (with the vesting date being 11 May 2007). There were no 3 year STI deferred share grants in the 2005 or 2006 ﬁ nancial years. STI deferred shares with a one to two year deferral period are still granted under business unit speciﬁ c incentive plans (primarily as a retention tool), and may be held in trust beyond the deferral period. The deferral period will vary according to bonus plan rules. Unvested STI deferred shares are only forfeited on resignation or dismissal for serious misconduct. The employee receives all dividends on LTI and STI deferred shares while held in trust (cash or dividend reinvestment plan). The issue price for LTI and STI deferred shares is based on the volume weighted average price of the shares traded on the ASX in the ﬁ ve trading days leading up to and including the date of grant. During the 2006 year, 269,032 deferred shares (STI and LTI) with a weighted average grant price of $23.68 were granted under the deferred share plan (2005 year: 517,352 shares with a weighted average grant price of $20.76 were granted). Restricted share plan Management level employees and above may elect a pre-tax sacriﬁ ce of part or all of their annual cash bonus for ANZ shares. The shares are subject to a 12 month restriction period, however, they may be left in trust beyond the restriction period. The shares are subject to forfeiture on dismissal for serious misconduct. The shares are released to the employee on termination for any other reason. The employee receives all dividends 80 ANZ Full Financial Report 2006 on restricted shares (cash or dividend reinvestment plan). The issue price is based on the volume weighted average price of the shares traded on the ASX on the ﬁ ve trading days leading up to and including the date of grant. During the 2006 year, 401,575 shares with an issue price of $23.49 were granted under the Restricted Share Plan (2005 year: 137,909 shares with an issue price of $20.68 were granted). Performance share plan Performance shares are essentially LTI deferred shares with a performance hurdle. They were granted to i) a small number of US based employees on 7 November 2005 to accommodate local taxation laws, and ii) to the CEO on 31 December 2004 (as per his employment contract). The proportion of performance shares that vest will depend upon the total shareholder return (TSR) achieved by ANZ relative to a comparator group of major ﬁ nancial services companies. Performance equal to the median TSR of the comparator group will result in half the performance shares vesting. Vesting will increase on a straight- line basis until all of the performance shares vest where ANZ TSR is at or above the 75th percentile of TSRs in the comparator group. Where ANZ’s performance falls between two of the comparators, TSR is measured on a pro-rata basis. The CEO was granted performance shares to be held in trust for two years from the date of grant. The shares will vest two years after the date of grant subject to the achievement of the performance hurdle. The hurdle will be tested monthly at the end of the two year restriction period. Monthly retesting will continue until all performance shares have vested or until 5 years after the grant date. In the event of resignation not approved by the Board or dismissal for serious misconduct, all performance shares will be forfeited. No dividends will be payable on the shares until they vest. 175,000 shares with an issue price of $15.02 were granted (on 31 December 2004). Notes to the ﬁ nancial statements 47: Employee Share and Option Plans (continued) Share valuations The fair value of shares granted in the 2006 year under the $1,000 share plan, the deferred share plan and the restricted share plan, measured as at the date of grant of the shares, is $40m based on 1,682,615 shares at a weighted average price of $23.66 (2005 year: fair value of shares granted is $37m based on 1,806,418 shares at a weighted average price of $20.30). The volume weighted average share price of all ANZ shares sold on the Australian Stock Exchange on the date of grant is used to calculate the fair value of shares. No dividends are incorporated into the measurement of the fair value of shares. A range of outcomes is possible given the uncertainty and assumptions in relation to share valuation. In determining the fair value below, ANZ used standard market techniques for valuation including Monte Carlo and/or Binomial pricing models. The models take into account early exercise, non-transferability and performance hurdles. The signiﬁ cant assumptions used to measure the fair value of performance shares granted during the 2006 and 2005 ﬁ nancial years are contained in the table below. Share Type Grant Date Number of Shares Fair Value (A$) Share price at date of grant ANZ expected Volatility 1 Term of Shares Vesting period Expected life Expected Dividend Yield Risk Free Interest Rate LTI Performance Shares CEO Performance Shares 7-Nov-05 4,115 $14.63 $23.60 15% 5 years 3 years 4 years 5.00% 5.49% 31-Dec-04 175,000 $15.02 $20.59 16.5% 5 years 2 years 2 years2 5.40% 5.00% 1 Expected volatility represents a measure of the amount by which ANZ’s share price is expected to ﬂ uctuate over the life of the plan. 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 deﬁ ned 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. In terms of factoring in early exercise, the model assumes that the recipient will exercise at the time the options vest. 2 ANZ SHARE OPTION PLAN Selected employees may be granted options / rights, which entitle them to purchase ordinary fully paid shares in ANZ at a price ﬁ xed at the time when the options / rights are granted (with the exception of index-linked options). Voting and dividend rights will be attached to the unissued ordinary shares when the options / rights have been exercised. Each option / right entitles the holder to one ordinary share subject to the terms and conditions imposed on grant. The exercise price of the options, determined in accordance with the rules of the plan, is generally based on the weighted average price of the shares traded in the ﬁ ve business days up to and including the date of grant. For zero priced options and performance rights, the exercise price is nil. Index-linked options have a dynamic exercise price that is adjusted in line with the movement in the S&P/ASX 200 Banks (Industry Group) Accumulation Index (excluding ANZ). ANZ Share Option Plan schemes expensed in the 2005 and 2006 years are as follows: Current Option Plans Performance rights plan (Hurdle H) Performance rights are granted to certain employees as part of ANZ’s current long-term incentive (LTI) program. The ﬁ rst grant of performance rights was in November 2005, and provides the right to acquire ANZ shares at nil cost, subject to a three-year vesting period and a Total Shareholder Return (TSR) performance hurdle. The proportion of LTI performance rights that become exercisable will depend upon the TSR achieved by ANZ relative to a comparator group of major ﬁ nancial services companies, measured over the same period (since grant) and calculated at the third anniversary of grant. Performance equal to the median TSR of the comparator group will result in half the performance rights becoming exercisable. Vesting will increase on a straight-line basis until all of the performance rights become exercisable where ANZ TSR is at or above the 75th percentile of TSRs in the comparator group. Where ANZ’s performance falls between two of the comparators, TSR is measured on a pro-rata basis. The performance hurdle will only be tested once at the end of the three year vesting period. If the performance rights do not pass the hurdle on the testing date, or they are not exercised by the end of the exercise period (5 years from the date of grant), they will lapse. In the case of dismissal for serious misconduct, all unexercised performance rights will be forfeited. In the case of resignation or termination on notice, only performance rights that become exercisable (and pass the performance hurdle) by the end of the notice period may be exercised. In the 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. In the case of death or total and permanent disablement, all performance rights are available for exercise (with the performance hurdle waived). Deferred share rights (DSR2: No performance hurdles) Deferred Share Rights are granted instead of deferred shares to accommodate off-shore taxation implications. They provide the right to acquire ANZ shares at nil cost after a speciﬁ ed vesting period. For STI rights granted in November 2005 (relating to a business unit incentive plan), the vesting period was one year. These rights must be exercised by the seventh anniversary of the grant date. In the case of resignation, only rights that become exercisable by the end of the notice period may be exercised. All other rights will lapse. In the case of termination on notice, retrenchment, retirement, death or total and permanent disablement, all rights will be available for exercise. The fair value of rights is adjusted for the absence of dividends during the restriction period. 81 Notes to the ﬁ nancial statements 47: Employee Share and Option Plans (continued) Legacy Option Plans The following legacy plans are no longer being offered to Group employees, but were expensed during the 2005 and 2006 years. Performance options plan (Hurdle N: No performance hurdle applies) Performance options were granted to certain employees (below executive levels) as part of a historical LTI program. Performance options are no longer part of ANZ’s current equity strategy, with 7 November 2005 being the last grant of performance options. The options can only be exercised after a three-year vesting period and before the seventh anniversary of the grant date. There are no performance conditions attached to these options as they were primarily granted as a retention tool. All unexercised options are forfeited on dismissal for serious misconduct, resignation and termination on notice. On retrenchment, entitlements to options will be pro-rated over the three- year vesting period. On death or total and permanent disablement, all unvested options will become available for exercise. Zero-price options (ZPOs) A ZPO is a right to acquire an ANZ share at nil cost. ZPOs were granted to Sir John Anderson (former CEO of ANZ National Bank Limited NZ) as part of his employment contract (refer to Remuneration Report in the Concise Annual Report 2006 / Part 2 of 2 for further details). The ZPOs had no time based vesting criteria, so were able to be exercised at any time during his employment and within six months of termination of his employment. Deferred share rights (DSR: No performance hurdle) Special Deferred Share Rights were granted to a small number of New Zealand employees in December 2004. They provide the right to acquire ANZ shares at nil cost after a three year vesting period. Rights must be exercised by the seventh anniversary of the grant date. They may be forfeited at the Company’s discretion if the employee ceases employment for any reason. The fair value of rights is adjusted for the absence of dividends during the restriction period. Hurdled Options (Hurdles B, C & G) Hurdled options were granted to certain employees as part of an historical LTI program. The options can only be exercised 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 grant date, subject to meeting the relevant performance hurdle. The performance hurdle will be measured during the exercise period by comparing ANZ’s Total Shareholder Return (ANZ’s TSR) against the comparator group relevant to the hurdled option grant. Hurdle G: Hurdled options granted in November 2004 will be tested against a comparator group consisting of major ﬁ nancial services companies, excluding ANZ. 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). Hurdles B & C: These hurdled option grants will be measured against the S&P/ASX 200 Banks Accumulation Index, and with the S&P / ASX 100 Accumulation Index. 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 grant) and calculated as at the last trading day of any month (once the exercise period has commenced); and 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 grant) and calculated as at the last trading day of any month (once the exercise period has commenced). The forfeiture provisions are the same as the performance option plan. Index Linked Options (Hurdle D) 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) since the grant date. As an additional constraint, the adjusted exercise price can only be set at or above the original exercise price. Index linked options are exercisable between the 3rd and 7th year after grant date, subject to the adjusted exercise price being above the prevailing share price. Unexercised options are forfeited on dismissal for serious misconduct, resignation and termination on notice. On retrenchment, and death or total and permanent disablement, entitlements to options will be pro-rated over the three-year vesting period. CEO Options (Hurdles E & F) Options were granted to the CEO as per his employment contract and were approved by shareholders at the December 1999 and December 2001 Annual General Meetings. Refer to Remuneration Report in the Concise Annual Report 2006 / Part 2 of 2 for further details. In the event of termination on notice or agreed separation, all vested options must be exercised within 6 months of the termination or agreed separation date, subject to meeting the relevant performance hurdles. Hurdle E: 500,000 of the options granted to the CEO in 2001 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. Hurdle F: 500,000 of the options granted to the CEO in 2001 may be exercised subject to the following: 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 the 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. In the event of resignation not approved by the Board or dismissal for serious misconduct, all unexercised options will be forfeited. 82 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 47: Employee Share and Option Plans (continued) Option Movements Details of options over unissued ANZ shares and their related weighted average exercise prices as at the beginning and end of the 2006 ﬁ nancial year and movements during the 2006 ﬁ nancial year are set out below: Exercise period Opening Balance 1 October 2005 Options Granted Options Forfeited3 Options Expired3 Options Exercised Closing Balance 30 September 2006 Vested Hurdle Grant Date 23/02/2000 23/05/2000 26/09/2000 21/11/2000 27/12/2000 27/01/2001 21/02/2001 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 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 08/12/2004 31/12/2004 07/11/2005 07/11/2005 Exercise price1 $9.39 $11.09 $12.03 $13.62 $13.91 $13.91 $14.20 $12.98 $12.98 $12.98 $14.61 $15.77 $16.09 $16.33 $16.33 $16.33 $16.80 $18.03 $18.03 $18.03 $18.55 $18.55 $17.18 $17.342 $17.34 $17.562 $16.69 $17.602 $17.60 $18.12 $17.55 $17.55 $17.48 $18.22 $18.22 $20.68 $20.68 $0.00 $20.49 $0.00 $0.00 23/02/03 - 22/02/07 23/05/03 - 23/05/07 26/09/03 - 25/09/07 22/11/03 - 21/11/07 25/10/03 - 07/02/08 07/02/04 - 07/02/08 122,000 85,500 22,500 452,804 678,750 464,800 21/02/04 - 20/02/08 1,972,092 25/04/04 - 24/04/08 169,700 25/04/04 - 24/04/08 1,070,414 07/05/04 - 06/05/08 01/06/04 - 31/05/08 21/08/04 - 20/08/08 27/08/04 - 26/08/08 25/10/04 - 24/10/08 40,800 170,250 76,000 45,000 288,400 25/10/04 - 24/10/08 1,753,170 24/10/04 - 23/10/08 31/12/03 - 31/12/07 50,000 500,000 24/04/05 - 24/04/09 2,161,878 24/04/05 - 24/04/09 24/04/05 - 24/04/09 14/05/05 - 13/05/09 28/06/05 - 27/06/09 22/07/05 - 21/07/09 23/10/05 - 22/10/09 23/10/05 - 22/10/09 20/11/05 - 19/11/09 31/12/04 - 31/12/07 20/05/06 - 19/05/10 20/05/06 - 19/05/10 09/06/06 - 08/06/10 05/11/06 - 04/11/10 05/11/06 - 04/11/10 31/12/05 - 31/12/08 11/05/07 - 10/05/11 11/05/07 - 10/05/11 05/11/07 - 04/11/11 05/11/07 - 04/11/11 08/12/07 - 08/12/11 31/12/06 - 31/12/08 07/11/05 - 15/10/06 07/11/06 - 06/11/12 436,100 345,000 125,000 194,835 17,000 2,003,222 1,894,885 40,000 1,000,000 2,214,860 1,844,639 10,000 2,425,186 1,033,804 1,000,000 2,458,971 1,470,155 1,406,481 2,861,147 42,435 500,000 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 11,250 3,750 9,250 – 8,275 1,400 1,500 – – – 16,175 – – 17,839 – – – 9,750 – 259,091 23,979 – – 186,123 78,839 1,389 142,263 90,206 – 170,581 159,985 172,439 209,822 4,171 – – – 210,548 154,905 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 102,000 28,500 12,500 101,000 185,825 108,500 568,869 49,500 286,725 5,150 59,950 – 5,000 140,000 485,949 – 500,000 650,837 193,200 140,000 110,000 63,185 – – 741,736 – 500,000 – 395,687 8,611 54,972 35,385 1,000,000 40,875 20,884 22,131 27,886 – – 9,961 – – – – 20,000 57,000 10,000 351,804 481,675 352,550 1,393,973 120,200 775,414 34,250 108,800 76,000 40,000 148,400 1,251,046 50,000 – 1,493,202 242,900 205,000 15,000 121,900 17,000 1,744,131 1,129,170 40,000 500,000 2,028,737 1,370,113 – 2,227,951 908,213 – 2,247,515 1,289,286 1,211,911 2,623,439 38,264 500,000 – 10,845 2,695,264 1,410,353 59,400 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 No No Yes No No No No B N N B N N N B N N N B N B N B F N C C N N C D N D F D N N N C F N C G N DSR F N DSR2 N H H 6,654,818 29,400,706 07/11/2005 $23.49 07/11/08 - 06/11/12 18/11/2005 15/05/2006 $0.00 $0.00 19/11/08 - 18/11/10 19/11/08 - 18/11/10 – – – – – 9,961 10,845 2,905,812 1,565,258 59,400 33,447,778 4,551,276 1,943,530 Weighted Average Exercise Price $17.35 $15.00 $17.39 – $16.45 $17.18 1 Reﬂ ects the current exercise price. Note that the exercise price for all options on issue at 31 October 2003 was reduced (effective 1 November 2003) by $0.72 as a result of the Rights Issue. 2 The exercise price for these options is “index linked” and adjusted on a monthly basis. The exercise price shown above reﬂ ects the original exercise price less the $0.72 Rights Issue adjustment. 3 Numbers in the “Options Forfeited” column includes any options which may have expired due to a termination of employment whereby the employee was offered a grace period in which to exercise. The number of options to expire under these circumstances is immaterial. The weighted average share price during the year ended 30 September 2006 was $25.25. The weighted average remaining contractual life of share options outstanding at 30 September 2006 was 3.7 years. 83 Notes to the ﬁ nancial statements 47: Employee Share and Option Plans (continued) Details of options over unissued ANZ shares and their related weighted average exercise prices as at the beginning and end of the 2005 ﬁ nancial year and movements during the 2005 ﬁ nancial year are set out below: Exercise price1 Exercise period Opening Balance 1 October 2004 Options Granted Options Forfeited3 Options Expired3 Options Exercised Closing Balance 30 September 2005 Vested Hurdle 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 $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 $17.342 $17.34 $17.562 $16.69 $17.602 $17.60 $18.12 $17.55 $17.55 $17.48 $18.22 $18.22 $20.68 $20.68 $0.00 $0.00 23/02/03 - 22/02/07 23/05/03 - 23/05/07 26/09/03 - 25/09/07 22/11/03 - 21/11/07 25/10/03 - 07/02/08 07/02/04 - 07/02/08 147,000 163,750 30,000 705,219 994,722 671,800 21/02/04 - 20/02/08 2,971,568 27/02/04 - 26/02/08 25/04/04 - 24/04/08 25,000 531,300 25/04/04 - 24/04/08 1,668,527 07/05/04 - 06/05/08 01/06/04 - 31/05/08 21/08/04 - 20/08/08 27/08/04 - 26/08/08 25/10/04 - 24/10/08 25/10/04 - 24/10/08 24/10/04 - 23/10/08 31/12/04 - 31/12/05 31/12/03 - 31/12/07 26/02/05 - 25/02/09 104,100 310,000 76,000 63,000 753,300 2,811,600 50,000 500,000 500,000 20,000 24/04/05 - 24/04/09 2,880,641 24/04/05 - 24/04/09 24/04/05 - 24/04/09 14/05/05 - 13/05/09 28/06/05 - 27/06/09 22/07/05 - 21/07/09 23/10/05 - 22/10/09 23/10/05 - 22/10/09 20/11/05 - 19/11/09 31/12/04 - 31/12/07 20/05/06 - 19/05/10 20/05/06 - 19/05/10 09/06/06 - 08/06/10 05/11/06 - 04/11/10 05/11/06 - 04/11/10 31/12/05 - 31/12/08 11/05/07 - 10/05/11 11/05/07 - 10/05/11 05/11/07 - 04/11/11 05/11/07 - 04/11/11 05/11/04 - 04/11/06 08/12/07 - 08/12/11 760,501 380,000 145,000 261,810 17,000 2,288,527 2,120,765 40,000 1,000,000 2,597,240 2,027,696 10,000 2,658,242 1,195,665 1,000,000 2,690,420 1,630,235 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,486,617 – – – – 9,000 12,750 21,000 – – 14,175 1,100 3,000 – 3,000 3,600 50,650 – – – – 128,856 10,119 1,112 – 15,947 – 141,111 167,399 – – 246,741 145,398 – 190,959 92,648 – 205,886 97,318 78,788 3,048,066 169,455 11,699 42,435 500,000 10,671 – – – – 31/12/2004 $20.49 31/12/06 - 31/12/08 13/05/2005 $0.00 13/05/05 - 12/05/07 TOTALS 36,800,628 5,099,488 1,810,012 Weighted Average Exercise Price $16.61 $20.40 $17.95 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 25,000 78,250 7,500 252,415 306,972 194,250 978,476 25,000 361,600 583,938 62,200 136,750 – 15,000 461,300 122,000 85,500 22,500 452,804 678,750 464,800 1,972,092 – 169,700 1,070,414 40,800 170,250 76,000 45,000 288,400 1,007,780 1,753,170 – 500,000 50,000 – – 500,000 20,000 589,907 314,282 33,888 20,000 51,028 – 144,194 58,481 – – 135,639 37,659 – 42,097 69,213 – 25,563 62,762 1,348 17,464 11,699 – – 10,671 – 2,161,878 436,100 345,000 125,000 194,835 17,000 2,003,222 1,894,885 40,000 1,000,000 2,214,860 1,844,639 10,000 2,425,186 1,033,804 1,000,000 2,458,971 1,470,155 1,406,481 2,861,147 – 42,435 500,000 – 6,642,326 33,447,778 $15.43 $17.35 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 N B E F B N C C N N C D N D F D N N N C F N C G N N DSR F N 1 Reﬂ ects the current exercise price. Note that the exercise price for all options on issue at 31 October 2003 was reduced (effective 1 November 2003) by $0.72 as a result of the Rights Issue. 2 The exercise price for these options is “index linked” and adjusted on a monthly basis. The exercise price shown above reﬂ ects the original exercise price less the $0.72 Rights Issue adjustment. 3 Numbers in the “Options Forfeited” column includes any options which may have expired due to a termination of employment whereby the employee was offered a grace period in which to exercise. The number of options to expire under these circumstances is immaterial. The weighted average share price during the year ended 30 September 2005 was $21.09 The weighted average remaining contractual life of share options outstanding at 30 September 2005 was 4.2 years. 84 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 47: Employee Share and Option Plans (continued) The following options over ordinary shares have been granted since the end of the 2006 ﬁ nancial year up to the signing of the directors’ report on 1 November 2006. Performance rights Total Grant date Exercise price Earliest exercise date Expiry date Options granted Hurdle 24/10/2006 $0.00 24/10/2009 24/10/2011 1,223,018 H 1,223,018 Details of shares issued as a result of the exercise of options during the year ended 30 September 2006 are as follows: Exercise price $ No. of shares issued Proceeds received $ Exercise price $ No. of shares issued Proceeds received $ 0.00 9.39 11.09 12.03 12.98 12.98 12.98 13.62 13.91 13.91 14.20 14.61 16.09 16.33 16.33 16.69 9,961 102,000 28,500 12,500 49,500 286,725 5,150 101,000 185,825 108,500 568,869 59,950 5,000 140,000 485,949 500,000 0.00 957,780 316,065 150,375 642,510 3,721,691 66,847 1,375,620 2,584,826 1,509,235 8,077,940 875,870 80,450 2,286,200 7,935,547 8,345,000 16.80 17.34 17.48 17.55 17.55 17.60 18.03 18.03 18.03 18.12 18.22 18.22 18.55 18.55 20.68 20.68 500,000 741,736 1,000,000 54,972 35,385 395,687 650,837 193,200 140,000 8,611 40,875 20,884 110,000 63,185 22,131 27,886 8,400,000 12,861,702 17,480,000 964,759 621,007 6,964,091 11,734,591 3,483,396 2,524,200 156,031 744,743 380,506 2,040,500 1,172,082 457,669 576,682 Details of shares issued as a result of the exercise of options during the year ended 30 September 2005 are as follows: 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 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 0.00 0.00 234,750 867,793 90,255 807,356 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 17.60 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 37,659 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 86,000 662,798 611,001 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 Details of shares issued as a result of the exercise of options since the end of the 2006 ﬁ nancial year up to the signing of the directors’ report on 1 November 2006 are as follows: Exercise price $ No. of shares issued Proceeds received $ Exercise price $ No. of shares issued Proceeds received $ 12.98 13.91 13.91 14.20 14.61 16.09 16.33 17.34 17.55 13,800 6,750 8,250 20,250 5,000 1,500 17,400 17,419 8,956 179,124 93,893 114,758 287,550 73,050 24,135 284,142 302,045 157,178 17.55 17.60 18.03 18.22 18.22 18.55 20.68 20.68 24,994 27,832 26,712 8,592 22,696 325 3,284 23,938 438,645 489,843 481,617 156,546 413,521 6,029 67,913 495,038 85 Notes to the ﬁ nancial statements 47: Employee Share and Option Plans (continued) A range of outcomes is possible given the uncertainty and assumptions in relation to option valuation. In determining the fair value below, we used standard market techniques for valuation including Monte Carlo and/or Binomial pricing models were used. The models take into account early exercise, non-transferability and performance hurdles. The signiﬁ cant assumptions used to measure the fair value of instruments granted during the 2006 ﬁ nancial year are contained in the table below. Option Type Performance Options Deferred Share Rights Performance Rights Zero-priced options Grant Date Number of Options Option Fair Value (A$) Exercise Price (5 day VWAP) Share price at date of grant ANZ expected Volatility3 Option Term Vesting period Expected life Expected Dividend Yield Risk Free Interest Rate 7-Nov-05 2,905,812 $3.05 $23.49 $23.60 17% 7 years 3 years n/a1 5.41% 5.30% 7-Nov-05 10,845 $22.48 $0.00 $23.60 15% 7 years 1 year 1 year 5.00% 5.54% 18-Nov-05 1,624,6582 $11.64 $0.00 $24.05 15% 5 years 3 years 4 years 5.00% 5.31% 7-Nov-05 9,961 $23.57 $0.00 $23.60 n/a 1 year Immediate n/a n/a n/a 1 To allow for maturity/marketability a 10% pa turnover rate (post vesting) has been assumed, as well as that option holders will exercise their options if the share price is greater than twice the exercise price. 2 This number includes an additional 59,400 Rights allocated in May 2006, with the same terms and conditions as the 18 November 2005 grant. 3 Expected volatility represents a measure of the amount by which ANZ’s share price is expected to ﬂ uctuate over the life of the options. The measure of volatility used in the model is the annualised standard deviation of the continuously compounded rates of return on the historical share price over a deﬁ ned period of time preceding the date of grant. This historical average annualised volatility is then used to estimate a reasonable expected volatility over the expected life of the options. The signiﬁ cant assumptions used to measure the fair value of instruments granted during the 2005 ﬁ nancial year are contained in the table below. Option Type Performance Options Hurdled Options Deferred Share Rights Zero Priced Options CEO options Zero-priced options Grant Date Number of Options Option Fair Value (A$) Exercise Price (5 day VWAP) Share price at date of grant ANZ expected Volatility2 Option Term Vesting period Expected life Expected Dividend Yield Risk Free Interest Rate 5-Nov-04 3,048,066 $2.71 $20.68 $20.77 18.5% 7 years 3 years n/a1 5.30% 5.24% 5-Nov-04 1,486,617 $2.62 $20.68 $20.77 18.5% 7 years 3 years n/a1 5.30% 5.24% 8-Dec-04 42,435 $16.97 $0.00 $20.03 n/a 7 years 3 years 3 years 5.30% 5.5% 5-Nov-04 11,699 $20.70 $0.00 $20.77 n/a 2 years Immediate n/a n/a n/a 31-Dec-04 500,000 $1.98 $20.49 $20.59 16.50% 4 years 2 years 2 years 5.50% 5.16% 13-May-05 10,671 $22.05 $0.00 $22.15 n/a 2 years Immediate n/a n/a n/a 1 This model assumes that option holders will only exercise at the expiration date, except for 10% (per annum) of option holders who choose to, or must exercise their options or allow them to lapse. 2 Expected volatility represents a measure of the amount by which ANZ’s share price is expected to ﬂ uctuate 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 deﬁ ned 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. 86 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 48: Key Management Personnel Disclosures Compensation details concerning the Directors of the Company and AASB 124 “Related Party Disclosures” concerning the other key management personnel for the Group and Company and the Corporations Act 2001 are detailed as follows: Section A. Remuneration Tables Refer to disclosures from page 70 to page 73 in the Concise Annual Report 2006 . Section B. Non-executive Directors’ remuneration Refer to disclosures on page 74 in the Concise Annual Report 2006 . Section C. Executive remuneration structure Refer to disclosures from page 75 to page 78 in the Concise Annual Report 2006 . Section D. Chief Executive Ofﬁ cer’s remuneration Refer to disclosures from page 78 to page 79 in the Concise Annual Report 2006 . Section E. Disclosed Executives contract terms Refer to disclosures from page 80 to page 81 in the Concise Report. Section F. Equity instruments relating disclosed directors and executives Refer to disclosures from page 82 to page 91 in the Concise Report. OTHER TRANSACTIONS OF DIRECTORS AND OTHER KEY MANAGEMENT PERSONNEL Other transactions (other than shares, share options and loans) Transactions between the directors, other key management personnel and their personally related entities and the Group during the ﬁ nancial 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. 87 Notes to the ﬁ nancial statements 48: Key Management Personnel Disclosures (continued) KEY MANAGEMENT PERSONNEL LOAN TRANSACTIONS Details regarding loans outstanding at the reporting date to directors of the Company and other key management personnel of the Group including their personally related parties, where the individuals aggregate loan balance exceeded $100,000 at any time in the reporting period, are as follows: Directors Non-executive Directors 2006 J P Morschel D M Gonski 2005 J P Morschel J C Dahlsen1 D M Gonski Executive Director 2006 J McFarlane2 2005 J McFarlane2 Other key management personnel 2006 R J Edgar E Funke Kupper3,4 B C Hartzer3 G K Hodges P R Marriot S Targett 2005 R J Edgar5 E Funke Kupper3,4 B C Hartzer3 G K Hodges Opening balance 1 October Closing balance 30 September Interest paid and payable in the reporting period Highest balance in the reporting period $ $ $ $ 716,880 18,342,000 705,489 18,342,000 51,567 1,088,498 716,880 18,342,000 310,000 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 6,264,681 – 335,603 25,624,811 10,349,429 6,264,681 495,517 16,249,944 918,284 680,000 2,703,626 1,019,242 – – 181,814 680,000 2,645,581 1,172,688 1,453,114 n/a 3,486,967 2,986,598 2,614,674 600,000 918,284 680,000 2,703,626 1,019,242 85,329 624 209,367 133,617 160,485 52,278 24,968 4,797 163,028 61,658 1,458,129 680,000 3,868,314 3,616,438 2,614,674 600,000 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 largely relate to loans for the purchase of ANZ shares, including the exercise of options. 3 Interest payments on the loan balances outstanding during the year were reduced as a result of a linked offset account. 4 E Funke Kupper resigned effective 1 February 2006. 5 Interest paid by R J Edgar includes additional interest previously omitted. Details regarding the aggregate of loans made, guaranteed or secured by any entity in the Group to each group of directors and other key management personnel including related parties are as follows: Directors 20062 2005 Other key management personnel 2006 2005 Opening balance 1 October Closing balance 30 September Interest paid and payable in the reporting period Number in group at 30 September1 $ $ $ 25,323,561 46,696,540 19,047,489 40,060,168 1,475,668 2,668,844 5,321,152 4,680,083 11,141,353 5,321,152 641,700 254,451 $ 3 4 5 4 1 Number in the Group includes directors and speciﬁ ed executive with loan balances greater than zero. 2 Opening balance as 1 October 2006 does not include loans made to J C Dahlsen. J C Dahlsen ceased to be a director in February 2005. 88 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 49: Transactions with Other Related Parties Joint Venture Entities During the course of the ﬁ nancial year the Company and the Group conducted transactions with joint venture entities on normal commercial terms and conditions as shown below: Amounts receivable from joint venture entities Interest revenue Dividend revenue Commissions received from joint venture entities Costs recovered from joint venture entities Consolidated The Company 2006 $’000 2005 $’000 2006 $’000 2005 $’000 398,714 18,093 45,570 162,172 11,033 302,649 12,314 81,830 122,153 9,430 301,999 13,607 – 142,072 9,022 272,954 12,314 – 114,509 9,430 There have been no guarantees given or received. No outstanding amounts have been written down or recorded as allowances, as they are considered fully collectible. Associates During the course of the ﬁ nancial year the Company and Group conducted transactions with associates on normal terms and conditions as shown below: Amounts receivable from associates Interest revenue Dividend revenue Consolidated The Company 2006 $’000 78,417 9,070 5,487 2005 $’000 38,267 3,606 25,468 2006 $’000 37,761 5,973 5,487 2005 $’000 32,539 2,150 6,647 There have been no guarantees given or received. No outstanding amounts have been written down or recorded as allowances, as they are considered fully collectible. Subsidiaries During the course of the ﬁ nancial year subsidiaries conducted transactions with each other and joint ventures and associates on normal terms and conditions. They are fully eliminated on consolidation. No outstanding amounts have been written down or recorded as allowances, as they are considered fully collectible. 50: 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 2006 2005 2004 Closing Average Closing Average Closing Average 0.5882 0.3982 1.1455 0.7476 0.6071 0.4150 1.1433 0.7468 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 89 Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) The Company and the Group implemented accounting policies in accordance with Australian Equivalents to International Financial Reporting Standards (AIFRS) on 1 October 2004, except for those relating to ﬁ nancial instruments and insurance contracts, which were implemented on 1 October 2005. The transition was accounted for in accordance with Accounting Standard AASB 1: ‘First time adoption of Australian Equivalents to International Financial Reporting Standards’. The impacts set out below are separated between those applicable from 1 October 2004 (and impacting the comparative periods) and those applicable from 1 October 2005. All amounts are stated on a before tax basis, unless otherwise noted. The reconciliation tables set out in pages 94 to 107 reconcile previous AGAAP to AIFRS and cross reference to the notes below. AIFRS adjustments with effect from 1 October 2004 (i) Goodwill Initial reduction in retained earnings. Potential volatility in future earnings. The adoption of AIFRS reduced the carrying amount of goodwill by $5 million (Company: $6 million) at 1 October 2004 (refer Table 1) and $15 million (Company: $15 million) at 1 October 2005 (refer Table 4) related to the acquisition of assets and liabilities that did not meet the AIFRS deﬁ nition of a business combination. The Group elected not to restate the classiﬁ cation and accounting treatment of past business combinations that occurred prior to 1 October 2004. Under AIFRS, the past practice of systematically amortising goodwill over the expected period of beneﬁ t ceased and was replaced by impairment testing annually or more frequently if events or circumstances indicate that goodwill might be impaired. This change in accounting policy resulted in: a decrease in the amortisation expense of $224 million (Company: $8 million) for the year to 30 September 2005, including notional INGA and associates’ goodwill of $45 million (Company: nil) (refer Table 2); and a corresponding increase in the carrying value of goodwill, associates and joint venture entities (refer Table 3). (ii) Deﬁ ned beneﬁ t superannuation schemes Initial reduction in retained earnings. Actuarial movements recognised in retained earnings. Immaterial impact on net proﬁ t. On adoption of AASB 119: ‘Employee Beneﬁ ts’, surpluses (assets) and/or deﬁ cits (liabilities) that arise within deﬁ ned beneﬁ t superannuation schemes are recognised on the Balance Sheet. Under previous AGAAP, the Group accounted for the deﬁ ned beneﬁ t superannuation schemes on a cash basis and did not recognise an asset or liability for the net position of the deﬁ ned beneﬁ t superannuation schemes. The Group elected to apply the option available under AASB 119 to recognise actuarial gains and losses in the Balance Sheet (i.e. the ‘direct to retained earnings’ approach). The non-cash expense reﬂ ecting the notional cost of the beneﬁ ts accruing to members of the deﬁ ned beneﬁ t schemes in respect of service provided over the reporting period is charged to the Income Statement. All transitional adjustments were, and ongoing movements reported for each scheme are, actuarially determined in accordance with AASB 119. Contributions to the schemes are made in accordance with the governing rules of the relevant schemes and there is no present liability to fund any deﬁ cits. At 1 October 2004, the Group recognised a liability of $200 million (Company: $200 million), an asset of $2 million (Company: nil), and a deferred tax asset of $57 million (Company: $57 million), resulting in a $141 million (Company: $143 million) decrease in retained earnings (refer Table 1). For the AIFRS comparative year ended 30 September 2005, the Group recognised a decrease in the liability of $34 million (Company: $37 million) and an increase in the asset of $6 million (Company: nil) largely representing an actuarial gain and a deferred tax adjustment of $16 million (Company: $13 million). The actuarial gain of $25 million (Company: $23 million) after tax was adjusted against retained earnings (refer Table 3). (iii) Share based payments Initial reduction in shareholders’ equity. Higher ongoing expenses. Under previous AGAAP, the Group recognised an expense equal to the full fair value of all deferred shares issued as part of the short term and long term incentive 90 ANZ Full Financial Report 2006 arrangements. The deferred shares vest over one to three years and may be forfeited under certain conditions. The Group did not 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 recognised an expense for all share based remuneration, including deferred shares and options, and recognises this expense over the relevant vesting period. The Group 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 resulted in: the establishment of a share options reserve of $44 million (Company: $44 million) to reﬂ ect the fair value of options granted to employees; a reduction in paid up capital of $64 million (Company: $64 million) representing the fair value of unvested shares; recognition of a deferred tax liability of $24 million (Company: $21 million); recognition of an amount due from controlled entities of nil (Company: $2 million); and a net decrease to retained earnings of $4 million after tax (Company: net increase of $1 million after tax) (refer Table 1). For the AIFRS comparative year ended 30 September 2005, the impact of the change was: an increase in the share options reserve of $23 million (Company: $23 million); an increase in paid up capital of $41 million (Company: $41 million); an accrual for $1,000 shares of $16 million (Company: $16 million); a decrease in deferred tax liabilities of $12 million (Company: $12 million) and an increase in deferred tax assets of $5 million (Company: $5 million); an increase in amounts due from controlled entities of nil (Company: $2 million); and a decrease in proﬁ t before tax of $80 million (Company: $78 million) (refer Tables 2 and 3). Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) (continued) The Company’s asset revaluation reserve at 30 September 2004 under previous AGAAP of $415 million consisted of $31 million related to the revaluation of land and buildings and $384 million related to the revaluation of investments in controlled entities. The Company has elected to recognise the value of land and buildings at deemed cost and the $31 million asset revaluation reserve was reset to zero as at 1 October 2004 and adjusted against retained earnings. The Company has under AASB 127: ‘Consolidated and Separate Financial Statements’, accounted for its investment in controlled entities at cost. On transition this involved the reversal of revaluations under previous AGAAP and a review for impairment. As a result, the $384 million asset revaluation reserve was reset to zero as at 1 October 2004 and adjusted by decreasing investments in controlled entities by $457 million and decreasing retained earnings by $73 million (refer Table 1). (vii) Taxation Change in methodology. Immaterial impacts. Under AASB 112: ‘Income Taxes’, a balance sheet method of tax effect accounting has been adopted, replacing the income statement approach previously used by the Group. Income tax expense comprises current and deferred taxes, with income tax expense recognised in the Income Statement, or recognised in equity to the extent that it relates to items recognised directly in equity. Deferred tax is calculated using the balance sheet method by determining temporary differences between the carrying amount of assets and liabilities for ﬁ nancial reporting purposes and the tax base of those assets and liabilities as used for taxation purposes. At 1 October 2004, a reduction to deferred tax liabilities of $18 million (Company: $7 million) was recognised with a corresponding increase of $16 million (Company: $5 million) to retained earnings and an increase to share capital of $2 million (Company: $2 million) representing share issue costs previously offset against share capital (refer Table 1). (viii) Software reclassiﬁ cation Reclassiﬁ cation only. On transition to AIFRS, capitalised software assets were reclassiﬁ ed from premises and equipment to a separately identiﬁ able intangible asset. This resulted in a reclassiﬁ cation of $435 million (Company: $380 million) as at 1 October 2004 (refer Table 1). The amount reclassiﬁ ed decreased by $48 million (Company: $26 million) as at 30 September 2005 (refer Table 3). (ix) Derivatives reclassiﬁ cation Reclassiﬁ cation only. At 1 October 2004, there was a reclassiﬁ cation of $4.5 billion (Company: $3.7 billion) from other assets and $5.7 billion (Company: $3.9 billion) from payables and other liabilities, to the new AIFRS Balance Sheet line items of derivative ﬁ nancial assets and derivative ﬁ nancial liabilities respectively (refer Table 1). (x) Other The comparative AIFRS year ended 30 September 2005 Income Statement contains minor leasing and tax remeasurement adjustments together with the impact of securitisation and deﬁ ned beneﬁ t schemes adjustments. The Balance Sheets, as reﬂ ected in Tables 1 and 3 also contain other minor remeasurements. AIFRS adjustments with effect from 1 October 2005 (refer Table 4) (a) Credit loss provisioning Initial increase in retained earnings. Substantial volatility in future earnings. 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 using the original effective interest rate. As this discount unwinds during the period between recognition of impairment and recovery of the written down amount, it is recognised in the Income Statement as interest income. (iv) Securitisation Additional assets/liabilities recognised for the Group. Immaterial impact on net proﬁ t. AIFRS has introduced new requirements for the recognition of ﬁ nancial assets, including those transferred to special purpose entities 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 resulted in an increase in assets and liabilities recorded on the Balance Sheet of $5 billion as at 1 October 2004 for the Group (refer Table 1). For the comparative AIFRS year ended 30 September 2005, the Group recognised a decrease of $388 million in both assets and liabilities, reﬂ ecting the net impact of repayment and securitisation of new assets during the year (refer Table 3). With special purpose entities controlled by the Group being consolidated, some assets and liabilities (mainly investment securities and net loans and advances) were transferred to due to and due from controlled entities in the Company’s Balance Sheet (refer Tables 1 and 3). The impact on the Income Statement for the Group is that income and expenses increased to recognise the income and expense items recorded within these vehicles, with the overall impact on net proﬁ t being immaterial. (v) Foreign currency translation reserve Initial increase in retained earnings. No change to shareholders’ equity. 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 resulted in an increase in retained earnings of $218 million (Company: $233 million) (refer Table 1). (vi) Asset revaluation reserve Initial increase in retained earnings. No change to shareholders’ equity for the Group. Decrease in shareholders’ equity for the Company. The Group’s asset revaluation reserve under previous AGAAP related to revaluations of land and buildings. 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’s asset revaluation reserve of $31 million was reset to zero as at 1 October 2004 and adjusted against retained earnings (refer Table 1). 91 Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) (continued) (a) Credit loss provisioning (continued) The general provision in the Balance Sheet was 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 identiﬁ ed 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 previous AGAAP 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 previous general provision, comfortably falls within the probable range of losses that have been incurred but not identiﬁ ed in our portfolio. On adoption of AIFRS, the previous Economic Loss Provisioning (ELP) charge to proﬁ t was 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: at 1 October 2005, there was an increase of $1 million (Company: decrease of $4 million) to retained earnings relating to individual provisions on impaired exposures as a result of the net impact of including expected interest cash ﬂ ows in the calculation of the individual provision and discounting estimated future cash ﬂ ows; at 1 October 2005, the collective provision was $288 million (Company: $238 million) less than the AGAAP general provision. After tax, this resulted in an increase to retained earnings of $206 million (Company: $167 million) and a decrease in the foreign currency translation reserve of $23 million (Company: nil) at 1 October 2005; individual provisions and movements in the collective provision are charged directly to the Income Statement, driving increased earnings volatility; and movements in the collective provision are driven by changes in portfolio size, portfolio mix, credit risk and economic cycles. (b) Fee revenue – ﬁ nancial service fees recognised as an adjustment to yield Initial reduction in retained earnings. Immaterial impact on net proﬁ t. Under AASB 139: ‘Financial Instruments: Recognition and Measurement’, fee income (such as loan approval fees) integral to the yield of an originated ﬁ nancial instrument (such as loans and advances measured at amortised cost), net of any direct incremental costs, are capitalised and deferred over the expected life of the ﬁ nancial instrument. On 1 October 2005, certain fees that have previously been recognised in the Income Statement, were deferred and recognised against net loans and advances in the Balance Sheet with a corresponding reduction to retained earnings of $276 million (Company: $196 million) after tax. The annual impact on net proﬁ t from this change is not material. However, there was an increase in interest income (offset by a reduction in fee income) and a reclassiﬁ cation to interest earning assets of customer’s liabilities for acceptances of $13.4 billion for the Company and the Group. (c) Derivative ﬁ nancial instruments, including hedging Initial reduction in retained earnings. Volatility in future earnings. New assets and liabilities recognised. At 1 October 2005, recognition of the fair value of derivatives relating to securitisation vehicles and structured ﬁ nance transactions reduced retained earnings by $78 million (Company: $68 million). The Group continues to evaluate hedging relationships and effectiveness for certain structured ﬁ nance transactions, which introduces volatility within the Income Statement. AIFRS permits hedge accounting (if certain criteria are met) for fair value hedges, cash ﬂ ow hedges and hedges of investments in foreign operations. Fair value and cash ﬂ ow 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. At 1 October 2005, the Group designated certain fair value and cash ﬂ ow hedges and ﬁ nancial liabilities as fair value through other income in the proﬁ t and loss, resulting 92 ANZ Full Financial Report 2006 in an increase in net assets of $86 million (Company: decrease of $52 million) represented by a decrease in retained earnings of $75 million (Company: $63 million), and an increase in reserves of $161 million (Company: $11 million). (d) Financial instruments classiﬁ cation and measurement Certain assets reclassiﬁ ed and measured at fair value. Initial decrease in retained earnings. Immaterial impact on net proﬁ t. Under AIFRS, certain ﬁ nancial assets of the Group previously carried at amortised cost were either: reclassiﬁ ed as available-for-sale assets, resulting in measurement at fair value with movements being taken to an available- for-sale equity reserve. This resulted in an available for sale reserve at 1 October 2005 of $17 million (Company: $11 million); or reclassiﬁ ed as ﬁ nancial assets held at fair value through the proﬁ t and loss, with movements in fair value through other income in the proﬁ t and loss resulting in a decrease in retained earnings at 1 October 2005 of $3 million (Company: nil). All derivative ﬁ nancial instruments, including those used as hedging instruments, are measured at fair value and recognised in the Balance Sheet. This requires an adjustment to reﬂ ect the market value of counterparty risk in the fair value of derivatives, which resulted in a decrease in retained earnings of $29 million (Company: $28 million) at 1 October 2005. (Under AGAAP, counterparty risk was notionally allowed for as part of the general provision.) Financial instruments are measured under AIFRS at bid or offer prices rather than the previous AGAAP use of mid prices. On 1 October 2005, this change in measurement resulted in a decrease in retained earnings of $5 million (Company: $4 million). (e) Classiﬁ cation of hybrid ﬁ nancial instruments Reclassiﬁ cation of ANZ StEPS from equity to debt. Reduction in net proﬁ t. Under AASB 132: ‘Financial Instruments: Disclosure and Presentation’, ANZ StEPS, a hybrid Tier 1 instrument treated as equity under previous AGAAP, was reclassiﬁ ed as debt. Prepaid issue costs, offset against the preference share capital balance under previous AGAAP, were capitalised and amortised to interest over a ﬁ ve year period from the date of issue. Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) (continued) At 1 October 2005, the Company and the Group’s loan capital increased by $1 billion representing the transfer of $987 million from preference share capital to loan capital, capitalised prepaid issue costs of $11 million, a decrease in the deferred tax asset of $4 million and a decrease in retained earnings after tax of $6 million representing amortisation of prepaid issue costs. Ongoing distributions to the holders of ANZ StEPS will be treated as an interest expense in the Income Statement rather than as dividends under previous AGAAP. (f) Accounting for INGA Initial reduction in retained earnings and increase in notional goodwill for the Group. Reduction in earnings volatility. Under AASB 131: ‘Interests in Joint Ventures’, and in line with previous AGAAP, the Group is required to equity account for its interest in INGA. The adoption of AIFRS by INGA resulted in the following signiﬁ cant measurement and recognition differences to previous AGAAP: reclassiﬁ cation and measurement of shareholder investments as available-for- sale assets. This change in measurement results in a reduction in investment return volatility experienced by INGA, as only realised gains and losses are reported in its net proﬁ t; 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 (total impact is a decrease to retained earnings of $107 million) for the Group; initial entry fee income previously taken upfront is deferred and amortised to income over time (total impact is a decrease to retained earnings of $23 million for the Group); and other sundry items (total impact is a decrease to retained earnings of $16 million for the Group) Under AIFRS, the excess of the market value over net assets (EMVONA) for INGA’s life insurance controlled entities is no longer recognised. Accordingly, an adjustment has been made to reclassify $72 million from intangibles to notional goodwill for the Group. The Group’s 49% share of INGA’s net AIFRS adjustment is a decrease of $146 million to retained earnings and an increase of $8 million to the available-for-sale reserve, resulting in a reduction in the carrying value of the Group’s interest in INGA of $138 million as at 1 October 2005. Explanation of material AIFRS adjustments to the AGAAP cash ﬂ ow statement as at 30 September 2005 Various assets and liabilities (principally loans and advances and deposits and other borrowings) which were classiﬁ ed as investing or ﬁ nancing cash ﬂ ows, are now reclassiﬁ ed as operating cash ﬂ ows under AIFRS. The Company and the Group’s net cash position has not changed. There are no other material differences between the cash ﬂ ow statement presented under AIFRS and that presented under previous AGAAP. 93 Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) (continued) Reconciliation tables References are to the notes on pages 90 to 93. TABLE 1: BALANCE SHEET AS AT 1 OCTOBER 2004 Consolidated Assets Liquid assets Due from other ﬁ nancial institutions Trading securities Derivative ﬁ nancial instruments Investment securities Net loans and advances Customer’s liability for acceptances Regulatory deposits Shares in associates and joint venture entities Deferred tax assets Goodwill and other intangible assets Other assets Premises and equipment Total assets Liabilities Due to other ﬁ nancial institutions Deposits and other borrowings Derivative ﬁ nancial instruments Liability for acceptances Income tax liabilities Payables and other liabilities Provisions Bonds and notes Loan capital Total liabilities Net assets Equity Ordinary share capital Preference share capital Reserves Foreign currency translation reserve Asset revaluation reserve Share options reserve Other reserves Total reserves Retained earnings Share capital and reserves attributable to shareholders of the Company Minority interests Total equity AGAAP1 $m Deﬁ ned beneﬁ t superannuation schemes note (ii) $m Share based payments note (iii) $m 6,363 4,781 5,478 – 7,746 204,962 12,466 176 1,960 1,454 3,269 9,158 1,532 259,345 7,349 168,557 – 12,466 1,914 14,212 845 27,602 8,475 241,420 17,925 8,005 987 218 31 – 330 579 8,336 17,907 18 17,925 – – – – – – – – – 57 – 2 – 59 – – – – – 200 – – – 200 (141) – – – – – – – (141) (141) – (141) – – – – – – – – – – – – – – – – – – 24 – – – – 24 (24) (64) – – – 44 – 44 (4) (24) – (24) Securitisation vehicles note (iv) $m 2 – – (8) 2,797 2,144 – – – 2 – 89 – 5,026 – 5,037 (2) – – (6) – – – 5,029 (3) – – – – – – – (3) (3) – (3) 1 Reported ﬁ nancial position as at 30 September 2004. 2 Other includes $39 million relating to the reclassiﬁ cation of legacy foreign currency translation and asset revaluation balances at 1 October 2004 and goodwill adjustments (note(i)). 94 ANZ Full Financial Report 2006 Other2 note (x) $m – – – – – – – – 9 1 (5) – – 5 – – – – 1 50 – – – 51 (46) – – – – – – – (46) (46) – (46) Total AIFRS adjustments $m 2 – – 4,448 2,797 2,144 – – 9 60 430 (4,365) (435) 5,090 – 5,037 5,654 – 7 (5,412) – – – 5,286 (196) (62) – (218) (31) 44 – (205) 71 (196) – (196) AIFRS $m 6,365 4,781 5,478 4,448 10,543 207,106 12,466 176 1,969 1,514 3,699 4,793 1,097 264,435 7,349 173,594 5,654 12,466 1,921 8,800 845 27,602 8,475 246,706 17,729 7,943 987 – – 44 330 374 8,407 17,711 18 17,729 Effect of transition to AIFRS Resetting notes (v) & (vi) $m Taxation note (vii) $m – – – – – – – – – – – – – – – – – – – – – – – – – – – (218) (31) – – (249) 249 – – – – – – – – – – – – – – – – – – – – – (18) – – – – (18) 18 2 – – – – – – 16 18 – 18 Software reclassiﬁ cation Derivatives reclassiﬁ cation note (viii) $m – – – – – – – – – – 435 – (435) – – – – – – – – – – – – – – – – – – – – – – – note (ix) $m – – – 4,456 – – – – – – – (4,456) – – – – 5,656 – – (5,656) – – – – – – – – – – – – – – – – 95 Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) (continued) Reconciliation tables (continued) References are to the notes on pages 90 to 93. TABLE 1: BALANCE SHEET AS AT 1 OCTOBER 2004 (CONTINUED) The Company Assets Liquid assets Due from other ﬁ nancial institutions Trading securities Derivative ﬁ nancial instruments Investment securities Net loans and advances Customer’s liability for acceptances Due from controlled entities Regulatory deposits Shares in controlled entities and associates Deferred tax assets Goodwill and other intangible assets Other assets Premises and equipment Total assets Liabilities Due to other ﬁ nancial institutions Deposits and other borrowings Derivative ﬁ nancial instruments Liability for acceptances Due to controlled entities Income tax liabilities Payables and other liabilities Provisions Bonds and notes Loan capital Total liabilities Net assets Equity Ordinary share capital Preference share capital Reserves Foreign currency translation reserve Asset revaluation reserve Share options reserve Other reserves Total reserves Retained earnings Total equity AGAAP1 $m 3,744 2,537 4,783 – 6,117 133,767 12,466 7,338 144 11,517 737 74 5,751 826 189,801 5,860 99,811 – 12,466 9,544 1,251 10,890 618 25,034 7,680 173,154 16,647 8,005 987 233 415 – 11 659 6,996 16,647 Deﬁ ned beneﬁ t superannuation schemes note (ii) $m Share based payments note (iii) $m Securitisation vehicles note (iv) $m – – – – – – – – – – 57 – – – 57 – – – – – – 200 – – – 200 (143) – – – – – – – (143) (143) – – – – – – – 2 – – – – – – 2 – – – – – 21 – – – – 21 (19) (64) – – – 44 – 44 1 (19) – – – (20) (196) (136) – 346 – – 2 – 93 – 89 – – (2) – 105 – (14) – – – 89 – – – – – – – – – – 1 Reported ﬁ nancial position as at 30 September 2004. 2 Other includes $42 million relating to the reclassiﬁ cation of legacy foreign currency translation and asset revaluation balances at 1 October 2004 and goodwill adjustments (note(i)). 96 ANZ Full Financial Report 2006 Other2 note (x) $m – – – – – – – (5) – – 1 (6) 1 – (9) – – – – – – 52 – – – 52 (61) – – – – – – – (61) (61) Total AIFRS adjustments $m – – – 3,718 (196) (136) – 343 – (457) 60 374 (3,644) (380) (318) – – 3,922 – 105 14 (3,686) – – – 355 (673) (62) – (233) (415) 44 – (604) (7) (673) AIFRS $m 3,744 2,537 4,783 3,718 5,921 133,631 12,466 7,681 144 11,060 797 448 2,107 446 189,483 5,860 99,811 3,922 12,466 9,649 1,265 7,204 618 25,034 7,680 173,509 15,974 7,943 987 – – 44 11 55 6,989 15,974 Effect of transition to AIFRS Taxation note (vii) $m – – – – – – – – – – – – – – – – – – – – (7) – – – – (7) 7 2 – – – – – – 5 7 Resetting notes (v) & (vi) $m – – – – – – – – – (457) – – – – (457) – – – – – – – – – – – (457) – – (233) (415) – – (648) 191 (457) Software reclassiﬁ cation Derivatives reclassiﬁ cation note (viii) $m – – – – – – – – – – – 380 – (380) – – – – – – – – – – – – – – – – – – – – – – note (ix) $m – – – 3,738 – – – – – – – – (3,738) – – – – 3,924 – – – (3,924) – – – – – – – – – – – – – – 97 Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) (continued) Reconciliation tables (continued) References are to the notes on pages 90 to 93. TABLE 2: INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2005 Effect of transition to AIFRS Consolidated Total income Interest income Interest expense Net interest income Other operating income Operating income Operating expenses Proﬁ t before provision for credit impairment and income tax Provision for credit impairment Proﬁ t before income tax Income tax expense Proﬁ t for the year Proﬁ t attributable to minority interests Proﬁ t attributable to shareholders of the Company AGAAP Goodwill amortisation Share based payments Other1 Total AIFRS adjustments note (i) note (iii) note (ii) & (x) $m 20,979 17,427 (11,629) 5,798 3,552 9,350 (4,515) 4,835 (580) 4,255 (1,234) 3,021 (3) 3,018 $m 45 – – – 45 45 179 224 – 224 – 224 – 224 $m – – – – – – (80) (80) – (80) 17 (63) – (63) $m 273 292 (272) 20 (19) 1 (2) (1) – (1) (3) (4) – (4) $m 318 292 (272) 20 26 46 97 143 – 143 14 157 – 157 AIFRS $m 21,297 17,719 (11,901) 5,818 3,578 9,396 (4,418) 4,978 (580) 4,398 (1,220) 3,178 (3) 3,175 1 Mainly relates to the impact of additional securitisation vehicles brought onto Balance Sheet. 98 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) (continued) Reconciliation tables (continued) References are to the notes on pages 90 to 93. TABLE 2: INCOME STATEMENT FOR THE YEAR ENDED 30 SEPTEMBER 2005 (CONTINUED) Effect of transition to AIFRS The Company Total income Interest income Interest expense Net interest income Other operating income Operating income Operating expenses Proﬁ t before provision for credit impairment and income tax Provision for credit impairment Proﬁ t before income tax Income tax expense Proﬁ t for the year AGAAP $m 14,042 10,946 (7,646) 3,300 3,096 6,396 (3,064) 3,332 (388) 2,944 (717) 2,227 Goodwill amortisation Share based payments Other1 Total AIFRS adjustments note (i) note (iii) note (ii) & (x) $m – – – – – – 8 8 – 8 – 8 $m (7) – – – (7) (7) (71) (78) – (78) 17 (61) $m 2 2 (2) – – – 1 1 – 1 – 1 $m (5) 2 (2) – (7) (7) (62) (69) – (69) 17 (52) AIFRS $m 14,037 10,948 (7,648) 3,300 3,089 6,389 (3,126) 3,263 (388) 2,875 (700) 2,175 99 Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) (continued) Reconciliation tables (continued) References are to the notes on pages 90 to 93. TABLE 3: BALANCE SHEET AS AT 30 SEPTEMBER 2005 Consolidated Assets Liquid assets Due from other ﬁ nancial institutions Trading securities Derivative ﬁ nancial instruments Investment securities Net loans and advances Customer’s liability for acceptances Regulatory deposits Shares in associates and joint venture entities Deferred tax assets Goodwill and other intangible assets Other assets Premises and equipment Total assets Liabilities Due to other ﬁ nancial institutions Deposits and other borrowings Derivative ﬁ nancial instruments Liability for acceptances Income tax liabilities Payables and other liabilities Provisions Bonds and notes Loan capital Total liabilities Net assets Equity Ordinary share capital Preference share capital Reserves Foreign currency translation reserve Asset revaluation reserve Share options reserve Other reserves Total reserves Retained earnings Actuarial gain on deﬁ ned beneﬁ t plans Total retained earnings Share capital and reserves attributable to shareholders of the Company Minority interests Total equity AGAAP1 $m 11,600 6,348 6,285 6,531 6,941 230,952 13,449 159 1,872 1,337 2,898 6,153 1,441 295,966 12,027 185,693 7,008 13,449 1,797 7,380 914 39,073 9,137 276,478 19,488 8,074 1,858 (225) 31 – 330 136 9,393 – 9,393 19,461 27 19,488 1 October 2004 AIFRS adjustments From Table 1 $m Goodwill note (i) $m Deﬁ ned beneﬁ t superannuation schemes note (ii) $m 2 – – (8) 2,797 2,144 – – 9 60 430 91 (435) 5,090 – 5,037 (2) – 7 244 – – – 5,286 (196) (62) – (218) (31) 44 – (205) 71 – 71 (196) – (196) – – – – – – – – 45 – 179 – – 224 – – – – – – – – – – 224 – – – – – – – 224 – 224 224 – 224 – – – – – – – – – (13) – 6 – (7) – – – – 3 (34) – – – (31) 24 – – – – – – – (1) 25 24 24 – 24 1 Derivative ﬁ nancial assets of $3.7 billion have been reclassiﬁ ed from other assets and derivative ﬁ nancial liabilities of $4.2 billion have been reclassiﬁ ed from payables and other liabilities, to the new AIFRS balance sheet line items of derivative ﬁ nancial assets and derivative liabilities respectively. In addition derivative ﬁ nancial assets and liabilities not intended to be settled on a net basis have been grossed up by $2.8 billion compared to the 30 September 2005 reported previous AGAAP Balance Sheet to enhance comparability. 100 ANZ Full Financial Report 2006 Effect of transition to AIFRS Share based payments note (iii) $m Securitisation vehicles Software reclassiﬁ cation note (iv) $m note (viii) $m Other note (x) $m – – – – – – – – – 5 – – – 5 – – – – (12) 16 – – – 4 1 41 – – – 23 – 23 (63) – (63) 1 – 1 (1) – – (12) 304 (606) – – – – – (73) – (388) – (408) – – 4 16 – – – (388) – – – – – – – – – – – – – – – – – – – – – – – – (1) (4) – (5) – – – – 2 (4) – – – (2) (3) – – – – – – – (3) – (3) (3) – (3) – – – – – – – – – – (48) – 48 – – – – – – – – – – – – – – – – – – – – – – – – – 101 Total AIFRS adjustments $m 1 – – (20) 3,101 1,538 – – 54 52 560 20 (387) 4,919 – 4,629 (2) – 4 238 – – – 4,869 50 (21) – (218) (31) 67 – (182) 228 25 253 50 – 50 AIFRS $m 11,601 6,348 6,285 6,511 10,042 232,490 13,449 159 1,926 1,389 3,458 6,173 1,054 300,885 12,027 190,322 7,006 13,449 1,801 7,618 914 39,073 9,137 281,347 19,538 8,053 1,858 (443) – 67 330 (46) 9,621 25 9,646 19,511 27 19,538 Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) (continued) Reconciliation tables (continued) References are to the notes on pages 90 to 93. TABLE 3: BALANCE SHEET AS AT 30 SEPTEMBER 2005 (CONTINUED) The Company Assets Liquid assets Due from other ﬁ nancial institutions Trading securities Derivative ﬁ nancial instruments Investment securities Net loans and advances Customer’s liability for acceptances Due from controlled entities Regulatory deposits Shares in controlled entities and associates Deferred tax assets Goodwill and other intangible assets Other assets Premises and equipment Total assets Liabilities Due to other ﬁ nancial institutions Deposits and other borrowings Derivative ﬁ nancial instruments Liability for acceptances Due to controlled entities Income tax liabilities Payables and other liabilities Provisions Bonds and notes Loan capital Total liabilities Net assets Equity Ordinary share capital Preference share capital Reserves Foreign currency translation reserve Asset revaluation reserve Share options reserve Other reserves Total reserves Retained earnings Actuarial gain on deﬁ ned beneﬁ t plans Total retained earnings Total equity AGAAP1 $m 7,191 3,452 5,309 6,047 5,407 153,461 13,449 8,309 113 12,551 754 66 2,832 849 219,790 9,029 113,089 6,324 13,449 11,600 1,487 5,247 650 32,739 8,452 202,066 17,724 8,074 1,858 20 415 – 11 446 7,346 – 7,346 17,724 1 October 2004 AIFRS adjustments From Table 1 $m Goodwill note (i) $m Deﬁ ned beneﬁ t superannuation schemes note (ii) $m – – – (20) (196) (136) – 343 – (457) 60 374 94 (380) (318) – – (2) – 105 14 238 – – – 355 (673) (62) – (233) (415) 44 – (604) (7) – (7) (673) – – – – – – – – – – – 8 – – 8 – – – – – – – – – – – 8 – – – – – – – 8 – 8 8 – – – – – – – – – – (13) – – – (13) – – – – – – (37) – – – (37) 24 – – – – – – – 1 23 24 24 1 Derivative ﬁ nancial assets of $3.2 billion have been reclassiﬁ ed from other assets and derivative ﬁ nancial liabilities of $3.5 billion have been reclassiﬁ ed from payables and other liabilities, to the new AIFRS balance sheet line items of derivative ﬁ nancial assets and derivative liabilities respectively. In addition derivative ﬁ nancial assets and liabilities not intended to be settled on a net basis have been grossed up by $2.8 billion compared to the 30 September 2005 reported previous AGAAP Balance Sheet to enhance comparability. 102 ANZ Full Financial Report 2006 Total AIFRS adjustments $m – – – (20) (106) (100) – 316 – (461) 52 356 1 (354) (316) – – (2) – 94 5 225 – – – 322 (638) (21) – (233) (415) 67 – (581) (59) 23 (36) (638) AIFRS $m 7,191 3,452 5,309 6,027 5,301 153,361 13,449 8,625 113 12,090 806 422 2,833 495 219,474 9,029 113,089 6,322 13,449 11,694 1,492 5,472 650 32,739 8,452 202,388 17,086 8,053 1,858 (213) – 67 11 (135) 7,287 23 7,310 17,086 Effect of transition to AIFRS Share based payments note (iii) $m Securitisation vehicles Software reclassiﬁ cation note (iv) $m note (viii) $m Other note (x) $m – – – – – – – 2 – – 5 – – – 7 – – – – – (12) 16 – – – 4 3 41 – – – 23 – 23 (61) – (61) 3 – – – – 90 36 – (29) – – – – (97) – – – – – – (11) – 11 – – – – – – – – – – – – – – – – – – – – – – – – – (4) – – 4 – – – – – – – 3 (3) – – – – – – – – – – – – – – – – – – – – – – – – – – – (26) – 26 – – – – – – – – – – – – – – – – – – – – – – – – 103 Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) (continued) Reconciliation tables (continued) References are to the notes on pages 90 to 93. TABLE 4: BALANCE SHEET AS AT 1 OCTOBER 2005 Consolidated $m $m AGAAP1 30 September 2005 AIFRS adjustments From Table 3 Assets Liquid assets Due from other ﬁ nancial institutions Trading securities Derivative ﬁ nancial instruments Available-for-sale assets Investment securities Net loans and advances Customer’s liability for acceptances Regulatory deposits Shares in associates and joint venture entities Deferred tax assets Goodwill and other intangible assets Other assets Premises and equipment Total assets Liabilities Due to other ﬁ nancial institutions Deposits and other borrowings Derivative ﬁ nancial instruments Liability for acceptances Income tax liabilities Payables and other liabilities Provisions Bonds and notes Loan capital Total liabilities Net assets Equity Ordinary share capital Preference share capital Reserves Foreign currency translation reserve Asset revaluation reserve Share options reserve Cashﬂ ow hedging reserve Available-for-sale reserve Other reserves Total reserves Retained earnings Actuarial gain on deﬁ ned beneﬁ t plans Total retained earnings Share capital and reserves attributable to shareholders of the Company Minority interests Total equity 11,600 6,348 6,285 6,531 – 6,941 230,952 13,449 159 1,872 1,337 2,898 6,153 1,441 295,966 12,027 185,693 7,008 13,449 1,797 7,380 914 39,073 9,137 276,478 19,488 8,074 1,858 (225) 31 – – – 330 136 9,393 – 9,393 19,461 27 19,488 1 – – (20) – 3,101 1,538 – – 54 52 560 20 (387) 4,919 – 4,629 (2) – 4 238 – – – 4,869 50 (21) – (218) (31) 67 – – – (182) 228 25 253 50 – 50 Credit loss provisioning note (a) $m – – – – – – 289 – – – (105) – – – 184 – – – – – – – – – – 184 – – (23) – – – – – (23) 207 – 207 184 – 184 Fee revenue note (b) $m – – – – – – (382) – – – 121 – (15) – (276) – – – – – – – – – – (276) – – – – – – – – – (276) – (276) (276) – (276) Derivative accounting including hedging note (c) $m – – – 275 1 (11) (214) – – – 49 – (11) – 89 – (70) 35 – 54 4 – (7) 65 81 8 – – – – – 162 (1) – 161 (153) – (153) 8 – 8 1 Reported ﬁ nancial position as at 30 September 2005. Derivative ﬁ nancial assets of $3.7 billion have been reclassiﬁ ed from other assets and derivative ﬁ nancial liabilities of $4.2 billion have been reclassiﬁ ed from payables and other liabilities, to the new AIFRS balance sheet line items of derivative ﬁ nancial assets and derivative liabilities respectively. In addition derivative ﬁ nancial assets and liabilities not intended to be settled on a net basis have been grossed up by $2.8 billion compared to the 30 September 2005 reported previous AGAAP Balance Sheet to enhance comparability. 2 Includes goodwill adjustments (note(i)). 104 ANZ Full Financial Report 2006 Effect of transition to AIFRS Effect of transition on adoption of AASB 4, AASB 132 and AASB 139 Financial instruments remeasurement Reclassiﬁ cation of StEPS Accounting for INGA Other2 note (d) $m – – (112) (42) 11,153 (10,031) (1,129) – – – – – (38) – (199) – – 6 – (20) (131) – – – (145) (54) – – – – – – (17) – (17) (37) – (37) (54) – (54) note (e) $m – – – – – – – – – – (4) – 11 – 7 – – – – – – – – 1,000 1,000 (993) – (987) – – – – – – – (6) – (6) (993) – (993) note (f) $m – – – – – – – – – (138) – – – – (138) – – – – – – – – – – (138) – – – – – – 8 – 8 (146) – (146) (138) – (138) $m – – – – – – – – – – 3 (15) (2) – (14) – – – – (9) (1) 16 – – 6 (20) – – – – – – – – – (20) – (20) (20) – (20) 105 Total $m – – (112) 233 11,154 (10,042) (1,436) – – (138) 64 (15) (55) – (347) – (70) 41 – 25 (128) 16 (7) 1,065 942 Total AIFRS adjustments $m 1 – (112) 213 11,154 (6,941) 102 – – (84) 116 545 (35) (387) 4,572 – 4,559 39 – 29 110 16 (7) 1,065 5,811 (1,289) (1,239) – (987) (23) – – 162 (10) – 129 (431) – (431) (1,289) – (1,289) (21) (987) (241) (31) 67 162 (10) – (53) (203) 25 (178) (1,239) – (1,239) AIFRS $m 11,601 6,348 6,173 6,744 11,154 – 231,054 13,449 159 1,788 1,453 3,443 6,118 1,054 300,538 12,027 190,252 7,047 13,449 1,826 7,490 930 39,066 10,202 282,289 18,249 8,053 871 (466) – 67 162 (10) 330 83 9,190 25 9,215 18,222 27 18,249 Notes to the ﬁ nancial statements 51: Impact of Adopting Australian Equivalents to International Financial Reporting Standards (AIFRS) (continued) Reconciliation tables (continued) References are to the notes on pages 90 to 93. TABLE 4: BALANCE SHEET AS AT 1 OCTOBER 2005 (CONTINUED) The Company Assets Liquid assets Due from other ﬁ nancial institutions Trading securities Derivative ﬁ nancial instruments Available-for-sale assets Investment securities Net loans and advances Customer’s liability for acceptances Due from controlled entities Regulatory deposits Shares in controlled entities and associates Deferred tax assets Goodwill and other intangible assets Other assets Premises and equipment Total assets Liabilities Due to other ﬁ nancial institutions Deposits and other borrowings Derivative ﬁ nancial instruments Liability for acceptances Due to controlled entities Income tax liabilities Payables and other liabilities Provisions Bonds and notes Loan capital Total liabilities Net assets Equity Ordinary share capital Preference share capital Reserves Foreign currency translation reserve Asset revaluation reserve Share options reserve Cashﬂ ow hedging reserve Available-for-sale reserve Other reserves Total reserves Retained earnings Actuarial gain on deﬁ ned beneﬁ t plans Total retained earnings Total equity AGAAP1 $m 7,191 3,452 5,309 6,047 – 5,407 153,461 13,449 8,309 113 12,551 754 66 2,832 849 219,790 9,029 113,089 6,324 13,449 11,600 1,487 5,247 650 32,739 8,452 202,066 17,724 8,074 1,858 20 415 – – – 11 446 7,346 – 7,346 17,724 30 September 2005 AIFRS adjustments From Table 3 $m – – – (20) – (106) (100) – 316 – (461) 52 356 1 (354) (316) – – (2) – 94 5 225 – – – 322 (638) (21) – (233) (415) 67 – – – (581) (59) 23 (36) (638) Credit loss provisioning note (a) $m – – – – – – 234 – – – – (71) – – – 163 – – – – – – – – – – – Fee revenue note (b) $m – – – – – – (283) – – – – 87 – – – (196) – – – – – – – – – – – Derivative accounting including hedging note (c) $m – – – (11) – – (42) – 1 – – 23 – – – (29) – – 56 – – (27) – – (7) 69 91 163 (196) (120) – – – – – – – – – 163 – 163 163 – – – – – – – – – (196) – (196) (196) – – – – – 11 – – 11 (131) – (131) (120) 1 Reported ﬁ nancial position as at 30 September 2005. Derivative ﬁ nancial assets of $3.2 billion have been reclassiﬁ ed from other assets and derivative ﬁ nancial liabilities of $3.5 billion have been reclassiﬁ ed from payables and other liabilities, to the new AIFRS balance sheet line items of derivative ﬁ nancial assets and derivative liabilities respectively. In addition derivative ﬁ nancial assets and liabilities not intended to be settled on a net basis have been grossed up by $2.8 billion compared to the 30 September 2005 reported previous AGAAP Balance Sheet to enhance comparability. 2 Includes goodwill adjustments (note(i)). 106 ANZ Full Financial Report 2006 Effect of transition to AIFRS Effect of transition on adoption of AASB 4, AASB 132 and AASB 139 Financial instruments remeasurement note (d) $m – – (112) (38) 6,434 (5,301) (951) – – – – 5 – 41 – 78 – – 5 – – (13) 129 – – – 121 (43) – – – – – – (11) – (11) (32) – (32) (43) Reclassiﬁ cation of StEPS note (e) $m – – – – – – – – – – – (4) – 11 – 7 – – – – – – – – – 1,000 1,000 (993) – (987) – – – – – – – (6) – (6) (993) Other2 $m – – – – – – – – – – – 1 (15) (2) – (16) – – – – – (9) (23) 15 – – (17) 1 – – – – – – – – – 1 – 1 1 107 Total $m – – (112) (49) 6,434 (5,301) (1,042) – 1 – – 41 (15) 50 – 7 – – 61 – – (49) 106 15 (7) 1,069 1,195 (1,188) – (987) – – – 11 (11) – – (201) – (201) Total AIFRS adjustments $m – – (112) (69) 6,434 (5,407) (1,142) – 317 – (461) 93 341 51 (354) (309) – – 59 – 94 (44) 331 15 (7) 1,069 1,517 (1,826) (21) (987) (233) (415) 67 11 (11) – (581) (260) 23 (237) AIFRS $m 7,191 3,452 5,197 5,978 6,434 – 152,319 13,449 8,626 113 12,090 847 407 2,883 495 219,481 9,029 113,089 6,383 13,449 11,694 1,443 5,578 665 32,732 9,521 203,583 15,898 8,053 871 (213) – 67 11 (11) 11 (135) 7,086 23 7,109 (1,188) (1,826) 15,898 Notes to the ﬁ nancial statements 52: Events Since the End of the Financial Year On 1 September 2006, the Group announced that it had agreed to sell Esanda Fleetpartners in Australia and New Zealand to Nikko Principal Investments Australia, the Australian private equity arm of Nikko Cordial Corporation for approximately $380 million. The proﬁ t after tax on sale is anticipated to be approximately $130 million. This sale was completed during October 2006. Esanda Fleetpartners contributed approximately $20 million to the Group’s net proﬁ t after tax for the year ended 30 September 2006. There have been no other signiﬁ cant events from 30 September 2006 to the date of this report. 108 ANZ Full Financial Report 2006 Notes to the ﬁ nancial statements This page has been left blank intentionally 109 Directors’ Declaration The directors of Australia and New Zealand Banking Group Limited declare that: a) in the directors’ opinion, the ﬁ nancial 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 ﬁ nancial position of the Company and of the consolidated entity as at 30 September 2006 and of their performance as represented by the results of their operations and their cash ﬂ ows, for the year ended on that date; and b) in the directors’ opinion, the remuneration disclosures that are contained on pages 70 to 91 of the Remuneration Report in the Directors’ Report located in Part 2 of 2 of the Company’s Concise Annual Report 2006 comply with Australian Accounting Standard AASB 124 “Related Party Disclosures” when read in conjunction with class order 06/50 issued by the Australian Securities and Investments Commission; and c) the directors have received the declarations required by section 295A of the Corporations Act 2001; and d) 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; and e) the Company and certain of its wholly owned controlled entities (listed in note 45) 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 1 November 2006 John McFarlane Chief Executive Ofﬁ cer 110 ANZ Full Financial Report 2006 Independent audit report to the members of Australia and New Zealand Banking Group Limited SCOPE We have audited the ﬁ nancial report of Australia and New Zealand Banking Group Limited (“the Company”) for the ﬁ nancial year ended 30 September 2006, consisting of the income statements, statements of recognised income and expense, balance sheets, statements of cash ﬂ ow, accompanying notes 1 to 52 and the directors’ declaration set out on pages 2 to 110. The ﬁ nancial report includes the consolidated ﬁ nancial 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 ﬁ nancial year. We have audited the disclosures made by the Company, as permitted by the Corporations Regulations 2001, about the remuneration of directors and executives (“remuneration disclosures”), including those required by Australian Accounting Standard AASB 124 Related Party Disclosures, under the heading “Remuneration report” on pages 70 to 91 of the director’s report and not in the ﬁ nancial report. The Company’s directors are responsible for the ﬁ nancial report and the Remuneration report. The directors are also responsible for preparing the relevant reconciling information regarding the adjustments required under the Australian Accounting Standard AASB 1 First-time Adoption of Australian equivalents to International Financial Reporting Standards. We have conducted an independent audit of this ﬁ nancial report and the remuneration report in order to express an opinion on them to the members of the Company. Our audit has been conducted in accordance with Australian Auditing Standards to provide reasonable assurance whether the ﬁ nancial report is free of material misstatement and the remuneration disclosures comply with AASB 124. Our procedures included examination, on a test basis, of evidence supporting the amounts and other disclosures in the ﬁ nancial report and the remuneration report, and the evaluation of accounting policies and signiﬁ cant accounting estimates. These procedures have been undertaken to form an opinion whether, in all material respects, the ﬁ nancial report is presented fairly in accordance with Australian 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 ﬁ nancial position, and performance as represented by the results of their operations and their cash ﬂ ow and whether the remuneration disclosures comply with Australian Accounting Standard AASB 124. The audit opinion expressed in this report has been formed on the above basis. AUDIT OPINION In our opinion: (1) the ﬁ nancial 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 ﬁ nancial position as at 30 September 2006 and of their performance for the year ended on that date; and ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and b) other mandatory ﬁ nancial reporting requirements in Australia; and (2) the Remuneration report on pages 70 to 91 of the director’s report complies with Australian Accounting Standard AASB 124 Related Party Disclosures. KPMG Melbourne, Australia 1 November 2006 Michelle Hinchliffe Partner 111 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 individual and collective provisions. At 30 September 2006 United Kingdom China USA At 30 September 2005 USA United Kingdom China Governments and other ofﬁ cial institutions $m Banks and other ﬁ nancial insitutions $m Other commercial and industrial $m 19 4 14 158 94 4 2,231 3,166 2,753 3,671 2,192 2,393 2,685 372 459 878 2,320 159 Total $m 4,935 3,542 3,226 4,707 4,606 2,556 2: Certiﬁ cates of Deposit and Term Deposit Maturities The following table shows the maturity proﬁ le of the Group’s certiﬁ cates of deposit and term deposits in excess of $100,000 issued at 30 September 2006. % of Group’s assets 1.5 1.1 1.0 1.6 1.5 0.8 Total $m 16,650 21,471 38,121 3,426 17,975 21,401 3,147 9,625 12,772 Between 3 months and 6 months $m Between 6 months and 12 months $m 1,526 2,287 3,813 295 3,167 3,462 87 438 525 556 1,481 2,037 349 2,274 2,623 504 429 933 After 1 year $m 8,020 126 8,146 69 1,758 1,827 17 175 192 7,800 5,593 10,165 72,294 Australia Certiﬁ cates of deposit Term deposits New Zealand Certiﬁ cates of deposit Term deposits Overseas Markets Certiﬁ cates of deposit Term deposits Total Less than 3 months $m 6,548 17,577 24,125 2,713 10,776 13,489 2,539 8,583 11,122 48,736 112 ANZ Full Financial Report 2006 Financial information 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 ﬁ nancial institutions Australia New Zealand Overseas markets Investments in public securities and AFS Australia New Zealand Overseas markets Customer’s liability for acceptances Australia New Zealand Overseas markets Loans, advances and bills discounted Australia New Zealand Overseas markets Other interest earning 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 ﬁ nancial institutions Australia New Zealand Overseas markets Commercial paper Australia New Zealand Overseas markets Borrowing Corporation debt Australia New Zealand Customer ‘s liability for acceptances Australia Overseas markets Loan capital, bonds and notes Australia New Zealand Overseas markets Other interest bearing liabilities Australia New Zealand Overseas markets Intragroup liabilities Australia New Zealand Change in interest expense Intragroup elimination Change in net interest income Volume $m Rate $m 2006 over 2005 Change due to Other $m 31 – 58 302 15 (4) – – – 1,243 350 25 108 91 51 80 2,350 (80) 2,270 196 52 104 37 (15) 1 220 27 4 145 15 55 174 (101) 35 (12) (6) – – 405 341 – 48 33 35 (3) 32 1,822 (80) 1,742 528 (2) 20 42 55 34 38 – – – 564 232 185 99 30 21 149 1,467 (149) 1,318 123 128 159 30 29 6 99 63 5 (8) (1) 85 20 50 127 16 11 – – 134 27 3 (195) (40) (16) 186 14 1,055 (149) 906 412 113 – – – – – – 958 – 11 – – – – – – – 969 – 969 – – – – – – – – – – – – – – – – – 799 10 – – – – – – – – 809 – 809 160 Total $m 29 20 100 357 49 34 958 – 11 1,807 582 210 207 121 72 229 4,786 (229) 4,557 319 180 263 67 14 7 319 90 9 137 14 140 194 (51) 162 4 5 799 10 539 368 3 (147) (7) 19 183 46 3,686 (229) 3,457 1,100 2005 over 2004 Change due to Volume $m Rate $m Total $m 12 (2) 7 195 (45) (6) – – – 1,620 1,034 (34) 45 21 81 (28) 2,900 28 2,928 458 280 (43) 25 26 – 175 71 2 – 4 22 115 58 (3) 123 2 – – 481 190 – 43 82 2 7 43 2,163 28 2,191 737 1 13 40 5 28 11 – – – 158 336 74 (62) 83 (19) 133 801 (133) 668 79 241 130 36 53 – 75 85 2 1 13 67 15 80 100 24 13 – – 82 24 1 (129) (64) (2) (2) 57 981 (133) 848 (180) 13 11 47 200 (17) 5 – – – 1,778 1,370 40 (17) 104 62 105 3,701 (105) 3,596 537 521 87 61 79 – 250 156 4 1 17 89 130 138 97 147 15 – – 563 214 1 (86) 18 – 5 100 3,144 (105) 3,039 557 Financial information 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, ﬁ shing and mining Business service Construction Entertainment, leisure and tourism Financial, investment and insurance Government and ofﬁ cial institutions Lease ﬁ nance Manufacturing Personal1 Real estate – commercial3 Real estate – mortgage4 Retail and wholesale trade Other Overseas Agriculture, forestry, ﬁ shing and mining Business service Construction Entertainment, leisure and tourism Financial, investment and insurance Government and ofﬁ cial institutions Lease ﬁ nance Manufacturing Personal2 Real estate – commercial3 Real estate – mortgage4 Retail and wholesale trade Other Loans and advances $m 7,079 4,882 3,757 4,408 4,795 52 2,580 7,050 15,579 10,229 100,362 9,811 9,923 180,507 11,898 836 627 1,437 3,109 893 600 4,553 3,692 5,276 37,944 2,677 5,589 79,131 2006 Individual5 provision for credit impairment $m 2005 Loans and advances $m Speciﬁ c5 provision $m 15 13 4 5 2 – 12 59 28 2 19 31 23 5,626 4,151 3,270 3,861 4,924 65 2,854 6,087 13,702 10,970 89,909 9,074 8,796 20 12 3 3 4 – 2 32 26 4 9 17 18 213 163,289 150 3 – – – 8 – – 26 21 – 2 – 6 66 10,868 796 766 1,096 2,356 604 772 4,474 3,101 4,666 35,336 2,518 5,862 73,215 1 2 1 6 13 – – 26 17 2 8 13 17 106 256 Total portfolio 259,638 279 236,504 1 Loans and advances exclude acceptances. 2 Personal includes consumer lending except for lease ﬁ nance facilities and those facilities secured by a mortgage. 3 Real estate commercial includes all business lending relating to commercial property. 4 Real estate mortgage includes all consumer lending secured by a mortgage. 5 Individual provision for credit impairment/speciﬁ c provisions above relate to on balance sheet exposures. Individual provisions in respect of off balance sheet facilities were $7 million in 2006 and $17 million in 2005. 114 ANZ Full Financial Report 2006 Financial information 5: Provisions for Credit Impairment – Industry Analysis i) Total write-offs by industry Australia Agriculture, forestry, ﬁ shing and mining Business service Construction Entertainment, leisure and tourism Financial, investment and insurance Lease ﬁ nance Manufacturing Personal1 Real estate – commercial2 Real estate – mortgage3 Retail and wholesale trade Other New Zealand Overseas Total write-offs ii) Total recoveries by industry Australia Agriculture, forestry, ﬁ shing and mining Lease ﬁ nance Manufacturing Personal1 Real estate – commercial2 Real estate – mortgage3 Retail and wholesale trade Other New Zealand Overseas Total recoveries Net write-offs Ratio of net write-offs to average loans and acceptances 1 Personal includes all consumer lending except for lease ﬁ nance facilities and those facilities secured by a mortgage. 2 Real estate – commercial includes all business lending relating to commercial property. 3 Real estate – mortgage includes all consumer lending secured by a mortgage. 2006 $m 2005 $m (1) (10) (5) (3) – (1) (11) (264) (1) (5) (10) (20) (68) (22) (421) 3 – 6 53 1 – 12 16 19 17 127 (294) 0.1% (20) (20) (2) – (1) (14) (16) (209) (2) (4) (29) (43) (102) (109) (571) – 1 – 50 1 – 1 3 19 39 114 (457) 0.2% 115 Financial information 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 Weighted average interest rate at end of year Commercial paper – ANZ (Delaware) Inc. Commercial paper – other Maximum amount outstanding at any month end during year Commercial paper – ANZ (Delaware) Inc. Commercial paper – other Average amount outstanding during year Commercial paper – ANZ (Delaware) Inc. Commercial paper – other Weighted average interest rate during year Commercial paper – ANZ (Delaware) Inc. Commercial paper – other 1 Information not restated to include short term borrowings of subsidiaries consolidated on adoption of AIFRS. 2006 $m 20051 $m 2004 $m 6,630 14,120 6,373 14,634 7,068 11,712 5.35% 6.16% 7,528 19,018 7,373 17,173 4.51% 6.43% 3.66% 6.40% 6,822 14,925 5,915 13,072 2.71% 6.26% 1.68% 5.41% 7,068 18,387 6,485 12,588 1.14% 5.53% 116 ANZ Full Financial Report 2006 Financial information 7: Capital Management 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, carrying the highest capital elements, and Tier 2, which has lower capital elements but still adds to the overall strength of the entity. Tier 1 is divided into ‘Fundamental’ and ‘Residual’ capital, and Tier 1 deductions. ‘Residual’ capital covers hybrid Tier 1 instruments with limits restricting the volume that can be counted as Tier 1 capital. Tier 2 capital is divided into Upper and Lower Tier 2 capital; with Lower Tier 2 capital being dated subordinated debt. Limits apply to the volume of Tier 2 and Lower Tier 2 that can be counted as capital for prudential purposes. Further, in calculating the total capital, deductions are taken for any strategic holdings of other banks’ capital instruments and investments in entities engaged in life insurance, funds management and securitisation activities. APRA introduced new prudential capital standards as at 1st July 2006 which contain various transitional rules which run through to different dates in 2008 and 2010 to coincide with Basel II implementation. The measurement of risk weighted assets is based on: a) a credit risk-based approach wherein risk weightings are applied to balance sheet 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. Qualifying Capital Tier 1 AIFRS equity and minority interests Reclassiﬁ cation of preference share capital Accumulated retained proﬁ ts & reserves of insurance, funds management and securitisation entities and associates Deferred fee revenue2 Cash ﬂ ow hedging reserve Dividend3 Other adjustments Fundamental Tier 1 capital Innovative Tier 1 capital instruments Gross Tier 1 capital Deductions Unamortised goodwill & other intangibles Capitalised software Capitalised expenses4 Deferred tax assets5 Investments in ANZ Lenders Mortgage Insurance Other adjustments Transitional Tier 1 capital relief Tier 1 capital Tier 2 Asset Revaluation Reserve Eligible component of post acquisition earnings and reserves in associates and joint ventures Perpetual subordinated notes General reserve for impairment of ﬁ nancial assets6 Transitional Upper Tier 2 capital relief Upper Tier 2 capital Subordinated notes7 Tier 2 capital Deductions Investment in funds management, life insurance & securitisation entities Investment in joint ventures with ING8 Investment in other Authorised Deposit Taking Institutions and overseas equivalents Other Total deductions Total qualifying capital Footnotes 1-8 refer to page 118. 117 Consolidated 2006 $m 20051 $m 19,906 (871) 19,538 (1,858) (289) 343 (227) (1,267) (22) (213) – – (1,077) (81) 17,573 3,342 16,309 3,301 20,915 19,610 (3,996) (397) (569) (290) (31) 9 716 (3,902) – (524) – (27) – – 16,357 15,157 – 31 184 401 1,344 17 1,946 8,177 10,123 86 526 370 91 1,073 – 394 1,448 – 1,873 6,701 8,574 84 528 159 13 784 25,407 22,947 Financial information 7: Capital Management (continued) Adjusted common equity Tier 1 capital Less: Innovative Tier 1 capital instruments Transitional Tier 1 capital relief Deductions Adjusted common equity (ACE)9 Capital adequacy ratios Tier 1 Tier 2 Deductions Total Adjusted common equity Risk Weighted Assets 16,357 3,321 716 1,073 15,157 3,233 – 784 11,247 11,140 6.8% 4.2% 11.0% -0.4% 6.9% 3.9% 10.8% -0.3% 10.6% 10.5% 4.7% 5.1% 240,219 219,573 1 Calculated in accordance with Australian Prudential Regulation Authority requirements effective at this date. 2 Includes fees deferred under AIFRS forming part of loan yields. Value at September 2006 is pre tax, as allowed under the current prudential standard. 3 Relates to dividend not provided for. 4 Comprises loan and lease origination fees, capitalised securitisation establishment costs and costs associated with debt raisings. 5 Deferred tax assets (excluding the component relating to the collective provision) attributable to operations in countries outside Australia. 6 Net of attributable deferred tax asset. 7 For capital adequacy calculation purposes, subordinated note issues are reduced by 20% of the original amount over the last four years to maturity. 8 Joint ventures with ING in Australia and New Zealand. 9 Tier 1 capital, less Innovative Tier 1 capital instruments (converted at balance date spot rates), less transitional Tier 1 capital relief and deductions. Balance Sheet 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 assets1 Claims on approved banks and local Governments Advances secured by residential mortgages eligible for 50% risk weighting Other assets – credit risk Total balance sheet assets – credit risk Trading assets – market risk Impact of adoption of AIFRS Total balance sheet assets Assets 2006 $m 2005 $m Risk weighted assets 2006 $m 2005 $m 35,246 19,584 131,134 138,119 324,083 11,688 n/a 25,941 16,054 118,895 127,204 288,094 7,872 4,919 – 3,917 65,567 138,119 207,603 n/a n/a – 3,211 59,448 127,204 189,863 n/a – 335,771 300,885 207,603 189,863 Off balance sheet exposures2 Direct credit substitutes Trade and performance related items Commitments Foreign exchange, interest rate and other market related transactions Contract/notional amount Credit equivalent Risk weighted assets 2006 $m 2005 $m 2006 $m 2005 $m 2006 $m 2005 $m 7,588 9,657 7,588 9,657 5,432 7,337 14,788 98,554 13,175 87,319 6,470 17,030 5,683 14,017 5,657 14,611 4,953 12,249 1,169,553 782,380 18,010 12,309 5,240 3,681 Total off balance sheet exposures – credit risk 1,290,483 892,531 49,098 41,666 30,940 28,220 Total risk weighted assets – credit risk Risk weighted assets – market risk Total risk weighted assets 238,543 218,083 1,676 1,490 240,219 219,573 1 Includes $1,938 million (September 2005: n/a) in assets of subsidiaries consolidated on adoption of AIFRS excluded for risk weighting calculations for Australian Prudential Regulation Authority reporting purposes. 2 Excludes off balance sheet exposures in subsidiaries consolidated on adoption of AIFRS as required by Australian Prudential Regulation Authority. 118 ANZ Full Financial Report 2006 This page has been left blank intentionally 119 Glossary AIFRS – Australian Equivalents to International Financial Reporting Standards. Collective provision is the provision for Credit Losses that are inherent in the portfolio but not able to be individually identiﬁ ed; presently unidentiﬁ ed impaired assets. A collective provision may only be recognised when a loss event has already occurred. Losses expected as a result of future events, no matter how likely, are not recognised. 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 proﬁ t 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. Group Centre division includes Operations, Technology and Shared Services, Treasury (funding component), Group People Capital, Group Strategic Development, Group Financial Management, Group Risk Management, Capital Funding and Group Items. Impaired assets are those whose carrying value is greater than the amount expected to be recovered over its life. More speciﬁ cally, in relation to loans or other credit facilities, impairment may arise where there is reasonable doubt about the collectability of interest, fees (past and future) or principal outstanding, or where the concessional terms have been provided because of the ﬁ nancial difﬁ culties of the customer. Income includes external interest income and other external operating income. Individual provision charge is the amount of impairment on those loans and advances assessed for impairment on an individual basis (as opposed to on a collective basis). It takes into account expected discounted cash ﬂ ows over the lives of those loans and advances. Institutional is a division encompassing businesses that provide a full range of ﬁ nancial services to corporate and institutional customers in all geographies: Institutional & Corporate Relationships - manages customer relationships and develops ﬁ nancial services solutions and strategies for Business Banking clients with funds under management (“FUM”) in excess of A$50,000, for Corporate clients with FUM in excess of A$10 million and for Institutional clients with FUM in excess of A$150 million in Australia and New Zealand and, for global corporate clients with whom ANZ Australia has an existing customer relationship, in the United Kingdom, United States and Asia. Debt and Transaction Services - combines managing Institutional and Corporate’s balance sheet with a particular focus on credit quality, diversiﬁ cation and maximising risk adjusted returns. Also provides cash transaction banking management, trade ﬁ nance, international payments, clearing and custodian services principally to institutional and corporate customers. Markets - provides foreign exchange and commodity trading sales-related services to corporate and institutional clients globally. In addition, the business provides origination, underwriting, structuring and risk management services, advice and sale of credit and derivative products globally. Corporate & Structured Financing - provides complex ﬁ nancing and advisory services, structured ﬁ nancial products, leasing, private equity ﬁ nance, project ﬁ nance, leveraged ﬁ nance and infrastructure investment products. Personal and Private Banking Asia - provides banking services in selected Asian geographies. Net advances include gross loans and advances and acceptances less income yet to mature and allowance for credit impairment. 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. Net non-interest bearing items, which are referred to in the analysis of interest spread and net interest average margin, includes shareholders’ equity, impairment of loans and advances, deposits not bearing interest and other liabilities not bearing interest, offset by premises and equipment and other non-interest earning assets. Non-performing loans are included within interest bearing loans, advances and bills discounted. Net tangible assets equals share capital and reserves attributable to shareholders of the Group less preference share capital and unamortised intangible assets (including software). New Zealand Businesses includes the following businesses: ANZ Retail - operating under the ANZ brand in New Zealand provides a full range of banking services to personal and small business banking customers. NBNZ Retail - operating under the National Bank brand in New Zealand, provides a full range of banking services to personal and small business banking customers. Corporate Banking in New Zealand - incorporates the ANZ and National Bank brands and provides ﬁ nancial solutions through a relationship management model for medium-sized businesses with a turnover up to NZD100 million. Rural Banking in New Zealand - provides a full range of banking services to rural and agribusiness customers. Central support - includes Operations, Technology, Treasury, ANZ’s 49% stake in ING New Zealand, Risk Management, People Capital, Financial Management and Property New Zealand. UDC - provides motor vehicle and equipment ﬁ nance, operating leases and management services, ﬂ eet management services, and investment products. Non Performing loans comprise loans where there is reasonable doubt about the collectability of interest, fees (past and future) or principal outstanding, or where the concessional terms have been provided because of the ﬁ nancial difﬁ culties of the customer. Operating expenses exclude the provision for impairment of loans and advances charge. Operating income in business segments includes equity standardised net interest and other operating income. 120 ANZ Full Financial Report 2006 Total advances include gross loans and advances and acceptances less income yet to mature (for both as at and average volumes). Loans and advances classiﬁ ed as available for sale are excluded from total advances. Unproductive facilities comprise off balance sheet facilities (such as standby letters of credit and guarantees to third parties) and undrawn on balance sheet facilities where the customer’s status is deﬁ ned as impaired. Glossary 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-ofﬁ ce processing, and the provision of other essential shared services to the Group, including property, people capital operations, procurement and outsourcing. 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. Partnerships & Private Bank is responsible for ANZ’s partnerships with other institutions in Australia and Asia, along with ANZ’s Private Bank business, and includes the following: INGA includes the equity accounted earnings from ANZ’s 49% stake in ING Australia Ltd, a joint venture between ANZ and ING. International Partnerships - ANZ continues to develop a portfolio of strategic retail partnerships in Asia. ANZ currently has partnerships in Indonesia with PT Panin Bank, in the Philippines with Metrobank, in Cambodia with the Royal Group, in China with Tianjin City Commercial Bank and in Vietnam with Sacombank. These partnerships are focused on leveraging ANZ Australia’s capabilities into faster growing personal and small business banking markets via the established client bases of the local partners. Other includes Private Bank and support units within the division. Personal is a division comprised of Regional, Rural and Small Business Banking, Banking Products, Mortgages, Consumer Finance, Investments and Insurance, Esanda, Paciﬁ c Banking and a number of other areas, including the branch network and marketing in Australia. Regional & Rural Banking - provides a full range of banking services to personal customers across regional and rural Australia, and to small business and agribusiness customers in rural and regional Australia. Small Business Banking - provides a full range of banking services for metropolitan-based small businesses in Australia with funds under management up to A$50,000. Banking Products - provides transaction banking and savings products, such as term deposits, V2+, and cash management accounts. Mortgages - provides housing ﬁ nance to consumers in Australia for both owner occupied and investment purposes. Consumer Finance - provides consumer and commercial credit cards, ePayment products, personal loans, merchant payment facilities in Australia and ATM facilities. Investments and Insurance - comprises ANZ Australia’s Financial Planning, Margin Lending, insurance distribution, and Trustees businesses in addition to the equity accounted earnings from E*Trade Australia, an online broking business. Esanda - provides motor vehicle and equipment ﬁ nance, operating leases and management services, ﬂ eet management services and investment products. Paciﬁ c - provides retail and corporate banking services to customers in the Paciﬁ c Region. 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 proﬁ t and loss statement of each business unit as: 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. 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. Signiﬁ cant items are items that have a material impact (typically > $10 million) on proﬁ t after tax, or the earnings used in the earnings per share calculation. Signiﬁ cant items also do not arise in the normal course of business and are infrequent in nature. Divestments are typically deﬁ ned as signiﬁ cant items. 121 Alphabetical Index Associates Available-for-sale Assets/ Investment Securities Average Balance Sheet and Related Interest Balance Sheets Bonds and Notes Capital Management Cash Flow Statements Certiﬁ cates of Deposit and Term Deposit Maturities Commitments Compensation of Auditors Concentrations of Credit Risk Contingent Liabilities, Contingent Assets and Credit Related Commitments Controlled Entities Critical Estimates and Judgements Used in Applying Accounting Policies Cross Border Outstandings Deferred Tax Assets Deposits and Other Borrowings Derivative Financial Instruments Directors’ Declaration Dividends Due from Other Financial Institutions Due to Other Financial Institutions 67 27 47 3 40 117 5 112 69 18 114 70 66 14 112 34 38 23 110 20 22 38 Earnings Per Ordinary Share Employee Share and Option Plans Events Since the End of the Financial Year Exchange Rates Expenses Fair Value of Financial Assets and Financial Liabilities Fiduciary Activities Financial Risk Management Glossary Goodwill and Other Intangibles Assets Impact of Adopting Australian Equivalents to International Financial Reporting Standards Impaired Financial Assets Income Income Statements Income Tax Expense Income Tax Liabilities Independent Audit Report Interest Rate Risk Interest Spreads and Net Interest Average Margins Interests in Joint Venture Entities Key Management Personnel Disclosures Liquid Assets 22 80 108 89 17 59 69 51 120 35 90 31 16 2 19 39 111 57 50 67 87 22 Loan Capital Minority interests Net Loans and Advances Notes to the Cash Flow Statements Other Assets Payables and Other Liabilities Premises and Equipment Provisions Provisions for Credit Impairment Provision for Credit Impairment – Industry Analysis Regulatory Deposits Reserves and Retained Earnings Segment Analysis Share Capital Shares in Controlled Entities, Associates and Joint Venture Entities Short Term Borrowings Signiﬁ cant Accounting Policies Statements of Recognised Income and Expense Superannuation and Other Post Employment Beneﬁ t Schemes Trading Securities Transactions with Other Related Parties Volume and Rate Analysis 41 46 30 64 36 39 36 40 32 115 33 45 61 43 33 116 6 4 75 23 89 113 122 ANZ Full Financial Report 2006 This page has been left blank intentionally 123 Notes to the ﬁ nancial statements This page has been left blank intentionally 124 ANZ Full Financial Report 2006 Australia and New Zealand Banking Group Limited www.anz.com ABN 11 005 357 522

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